Saturday, November 26, 2011

Assault of Thoughts - 11/26/2011

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" -JMK

- This is a great post by David Friedman on the interest rate as the "price of money". One thing I would add that is along the lines of what he says is that you really have to think about what money is as a good. We usually say that it's a medium of exchange, a store of value, and a unit of account. So what is a loan? Well clearly if you take a loan you have access to money as a medium of exchange (which is useful because it's still a unit of account), but you don't have access to money as a store of value. Why? Because you have to give it back! It's not an asset to you, it's a liability. So what you're really trading for is the medium of exchange function of money - it's ability to be traded - it's liquidity. That's the source of the liquidity preference theory of the interest rate. Loans can be thought of as an unbundling of the medium of exchange and store of value functions of money. I think part of the discussion of liquidity preference at a time like this is confusing, though. When we talk about increases in liquidity preference during a depression, it's really the residual of a lot of other decisions. People don't want to spend because of uncertainty about their income levels and people don't want to invest because of uncertainty about demand (i.e. - low returns on that investment), so they save and keep their money relatively more liquid than they otherwise would.


- Is this post by Bob Murphy as strange to readers as it was to me? Krugman basically says "if everyone saves at once the economy can't grow as easily". Bob essentially responds "Krugman is wrong - after all if only one person saves and everyone else spends the economy can grow". Then Daniel basically responds to him "Right - but if everyone saves at once the economy can't grow as easily". Is there something I'm missing here? What is Bob talking about? He's just talking about something completely different from Krugman and thinking he's talking about the same thing, right?


- This post by David Henderson on Robin Wells also seemed strange to me (I've got some comments in it). Isn't discussion of minimum wages, the impact of regulation on investment, unions, etc. standard fare in intro economics classes? I know it is in ours at American University, and we're not exactly some arch-libertarian school! Henderson (and again David Friedman in the comments) acts like Wells is proposing a whitewashing of economics. Friedman writes "The obvious question is whether, when she teaches economics, she feels obliged to expose students to views that don't fit her own political position, since she seems to be suggesting that people who disagree with her have such an obligation." It's amazing to me that he raises that as the obvious question. I don't think there's a single economics intro course in the country that doesn't follow this basic pattern:

1. The market is efficient because of X, Y, Z
2. Government action distorts the market and makes it less efficient - standard examples include rent control, minimum wage, regulations, and granting monopoly privileges (I challenge someone to show me a freshman text that doesn't discuss all four of these) - all the stuff that Henderson raises in his post.
3. Final exam.

That's what an intro student gets. If you continue, you get a lot more context, caveats, uncertainties - the sort of stuff that Robin Wells is suggesting we emphasize more earlier on. I agree with her. I personally think that an intro student should learn the basic market efficiency and government distortions material - the standard intro presentation. But I agree with Wells that to the extent we can hint at the complexities of the situation we should. I don't understand what Henderson and Friedman are concerned about here. They act as if intro economics courses gloss over market efficiency and government distortion, when that's essentially what these courses are about.

8 comments:

  1. Dude has obviously never looked at the Krugman and Wells textbooks. Even the Macro edition of the textbook has the first five chapters dedicated to your 1-3 sequence.

    I usually skip most of it.

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  2. My econ 101 textbook used the Krugman and Wells book. Knowing nothing else of the authors, I came away from it with the impression that the authors were moderate right-wingers, supporting intervention in the market in some special cases, but general cautioning against it. (This was 1999: at the time cap and trade was considered a "conservative" approach to environmental policy.) When Krugman started as a columnist for the Times the next year, I was shocked that the textbook's author was actually a card-carrying liberal.
    -Will

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  3. Hey Daniel, I know you weren't trying to be misleading, but I think blogging etiquette would insist that you not put quotations marks and italics on words that the alleged author didn't actually write. It sure looks like you are quoting me directly in this post, when those are your words, not mine.

    Yes, if you paraphrase what Krugman and I are both saying, then there is no contradiction. But if I paraphrase what I think he and I are saying, then there is a contradiction. So when you are going to disagree with me, it's important that you don't paraphrase my position within quotation marks.

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  4. Sorry -
    I do actually try to have a system here. I write direct quotes in blue (or bolded - for some reason when I post from Firefox it won't print in blue), and when I italicize it's hypothetical/paraphrase... which I know looks really bad because I quoted Friedman but italicized it in this particular case (I'll change that back). Usually I think it's quite clear from context what is a direct quote and what isn't.

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  5. I added words to make it perfectly clear I'm writing a hypothetical/paraphrase/oversimplification. Those are very useful to frame an argument so I'll continue to write like that, but I'll try to be more careful about being clear when I'm doing that.

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  6. I don't know why youve had such a tough time figuring out Murphy's post. You seem intent on reading it as talking about whether reducing debt is a good idea or not when it's really about whether reducing debt reduces income as a matter of mere 'arithmetic' like Krugman has suggested in this post and others. It's focused on whether krugman's presentation of the keynesian argument is accurate, not whether the keynesian argument itself is correct.

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  7. teqzilla - I understand Bob's argument fine. What I'm trying to point out to him is that he's changing the assumptions, which doesn't prove anything.

    Yes, Krugman's conclusions are contingent on his assumptions. So?

    Krugman was talking not just about everyone reducing all debts - but also SAVING more (note what Krugman cites about reducing spending) - at once. Bob comes along and talks about a completely different scenario.

    He ought to either say "I'm considering a completely different scenario" to which I'd say "fine - but don't call Krugman wrong - he's agree with you in THAT scenario", or he ought to provide an example that uses the same scenario - everybody reducing their spending at once.

    Instead he's telling us that if one person reduces spending and pays off debts but other people increase spending, then total spending doesn't have to increase.

    Well of course - I think we all knew that already.

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  8. So what you're really trading for is the medium of exchange function of money

    What you're really trading for is time. You are buying an opportunity to spend money sooner than you normally would.

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