Mental vomit

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This is a post about the hangup I had in class today. This is not an authoritative post, nor necessarily an explanation of how I think government should run but instead a brief musing on a way the real world and economics COULD interact- please point out flaws in my reasoning.

We were talking about money. At this point i’m not sure where my interpretation divorce from the “official story” so bear with me.  What happens when you expand the money supply. The basic idea was that  money supply goes up, the created money temporarily having an artificial high “value” until the effects of its creation filter down, raising the price level. I don’t think that’s the end of the story however. The specific mental example I was working with was the fed try to stimulate the economy. In the model above as the fed pumps money into the economy the the effects balance out in the long run and cause no real growth in GDP. But I don’t think that’s what actually happens and I don’t think its just a long/short run dichotomy issue.  You might consider the primary actor in this situation the fed, but in reality it isn’t. Far more important then the fed are the banks, the actors that are extracting rents from being the feds money balloons. So the fed cuts interest rates and tries to get more and more money to the banks. There’s a problem for the banks here however. There’s no guarantee the increased quantity of money they’re getting from the fed is going to offset the loss from decreasing interest rates. Sure they have to play ball, if they don’t some other bank will instead. But as an institution they more keenly feel the loss caused by lower then expected interest rates then any other single actor.  So whats a profit maximizing agent to do?

My idea is that, despite what we pretend in econ class, investment is not magically laid out in some gentle spectrum of profitability, with new investments being undertaken as the interest rates fall low enough to make their ROI worthwhile. Instead its more or less laid out as a scatter graph that models the spread between risk and potential profitability. And the axis containing risk fails to have any labels. So when a change in macro economic policy causes the bank to seek new investment its going to want to seek new investment at its old rate of return, not whatever new interest rate that the market will end up balancing to at some point in the future. This incentive to maintain profits forces or at least encourages the bank to make more risky investments, at least insofar as the bank can properly evaluate risk. That’s as far as I’ve really taken the story, i’m not sure how you’d use this as a predictive test because it assumes as a tenant that banks/people are bad at evaluating risk, it works as a means of justifying state policy because if the wise people over at the fed are correct in their ascertainment that the economy is being under invested, ie not performing to potential, capital infusions to risky ventures like, say startups, should help jump start the economy because those start ups will be more able to suck up “wasted productivity” like unemployed workers then ossified companies. Capisce?

A secondary unrelated musing. We were talking about money as both a “real” and “financial” item. Real in the sense that it performs an inherently useful function, as a medium of exchange, and financial in the sense that it can earn income.  State manipulation of the money supply doesn’t affect the “real” value of money as a medium of exchange. Me being able to buy a cup of coffee for 2 bucks instead of 3 chicken eggs, lowers the costs of trade for everyone in society and the same is true if it instead costs 10 bucks.  This only breaks down during hyperinflation at which point money uses all “real” value because its no longer serves as an effective medium of exchange because I no longer trust in my ability to exchange it for something of value. Money as a vector for earning income can fluctuate in completely separation for its first value. I’m curious about money as a financial tool because frankly its not used much as such. If we hold money to be strictly bills its is seldom if ever worth it to hold onto as an “investment” or creator of income, meaning that we seldom experience deflation and so you can never buy more coffee or eggs with the same amount of paper money. So we come the long way around to the fairly obvious conclusion that the higher the liquidity of a financial implement the lower the roi, or in the terms of the discussion we’ve just been having money’s “real” value as a medium of exchange is detrimentally correlated with its viability as a “financial” asset. I feel like there should be something more to that story but I can’t quite pin it down.

P.S.- In my copious free time, I study Japanese. I find this site but both fascinating and incredibly intimidating, I wonder why there are no English equivalents that I know of.

Janky post is janky

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I think I might have written more about non economic topics then econ at this point. I’m not particularly worried about this but I do have a reason slightly disconcerting. Basically despite few/no one reading this I don’t want to put out a half finished incoherent post. I’d like anything I put up to have at least a somewhat recognizable flow and preferably a salient point or ending. This is problematic cause there’s a lot of half formed ideas in my mind that represent the totality of my thoughts on econ issues. The issues themselves, definitely interesting, my muttered ramblings, not so much.

Take the recent debate over explications of current unemployment. Fascinating stuff. But I can’t add or critique anything any of these guys are saying because I don’t trust my understanding of it enough.

Another example would be today’s discussion of basic Keynesian economics. On a good day I have it all straight. At the very least I have all the pieces of the major economic theories memorized. But occasionally slide around and get garbled up within each other. So while I at least recognized everything we were talking about in class my thoughts, such as they were, devolved into trails of inconclusive reasoning.

“What about doubt….. hmm how would a species currency change things over a fiat currency… holding MS constant would mean… i’m not sure anymore… money is constant so if money demand falls the roi on investment falls and investment falls? Which means gdp falls? How does money demand fall exogenously of the model anyway?? More interestingly how does the credibility of the commitment to a constant MS change market actors decisions? Would a change to a gold standard be different then the fed merely saying they intend to hold MS constant?”

Is a relatively accurate partial transcript of my thoughts during class. I like to think I can reach solid conclusions giving time to think about things but who knows how long that will take. But reaching that point takes a lot of running around like a chicken with its head cut off. Does everyone else think only in perfectly formed economic constructs?

Economics is BS

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BS standing for Bachelors of Science of course. As you may or may not be aware an Econ major at UMW confers a Bachelor’s of Science upon its bearer. Interestingly enough this is not the case at all or even most university. At their discretion some universities instead award a bachelor’s of arts for econ related study. This begs some questions, at least to me: What’s the difference between a BA and a BS, which is better, and is what UMW does really a BS.

I suppose I should mention that this entire discussion is framed by the conversation I had in class yesterday. Specifically what good does a college education do a person? The answer as cited in class was not terribly much overall, at least for most of its students. I think ideally, in the best of all possible worlds education gives an individual the tools they need to best handle life. Now obviously that’s a goal open to a wide gamut of interpretation, but bearing with me for the moment, here’s a possible dichotomy.

A Bachelor’s of Science teaches you how to do things and to know things. A chemistry student knows a lot about titration and the periodic table of elements, an engineering student a lot about gravity and fluid mechanics, A mathematicians a lot about….. err mathy stuff. But for these career paths the knowing of that specialized knowledge is the end goal, with it they are fully employable in their chosen field because they have knowledge that is difficult and onerous to acquire and thus in limited supply. Education, when it “succeeds”, succeeds because its grants the individual a comparative advantage that they can use to find employment.

Compare this to a Bachelor’s of Art. You know, fine, prestigious, and of course lucrative fields like say, I dunno, actor or philosopher. Your college education here is not necessarily helping you get hired. It’s not likely to directly contribute to your annual income. But that doesn’t make it worthless. The “arts” or humanities, whatever you wish to call them, aren’t focused on what you know or do but rather how you know or do. Having an English degree is valuable, not because you can quote Shakespeare but because reading Shakespeare in such depth has giving you a greater understanding and appreciation for the value of words. To put it economic terms your prospective life utility has increased both because the ancillary benefits of studying Shakespeare are a marketable skill but more importantly because you’ve increased the amount of utility you get from a low cost activity (reading.)

Now I’m arbitrarily labeling these two takes on education as representing BA’s and BS’s though I don’t think its an unfair comparison. But I think the dichotomy is useful for framing the issue. You can teach any field of inquiry around either of the axioms. If you really really wanted you could make a philosophy course about memorizing dates of famous philosophers and being able to list off their arguments. I think this would be sad. But in a better world I think you would more often find engineering being taught as an adventure, an inquiry into the world of material science where the goal is not to memorize the formula’s but to understand the system.

To bring the circle around to economics, an economics program could be formulated in two ways. You could start it by requiring students to take enough math so they could really understand the high level theories. They would take their course learn the cutting edge theories and be able to apply their statistic jutsu at any number of lucrative jobs. Education would be succeeding. But that’s not how they teach Econ at UMW. Instead the students are asked to explicate a simple question “how does the world work?” The answers and the scary maths follow after. By teaching it in a way that forces students to keep asking questions, to see the answers to the questions as an ends into themselves makes the UMW econ program very different from the other and I think better.

Writers and meglomania

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One thing I’ve noticed in my writing is that I like to use a lot of qualifiers. In my last post “probably” “I think” and “might” all show up with far greater frequency then is probably aesthetically permissible and that’s after I combed through and edited .  I just did it again. “Probably aesthetically permissable.”  As a reader and from having it yelled at me countless times I know (probably) that its more correct to drop the qualifier. It makes the sentence shorter, makes me sound more authoritative, and doesn’t really change the meaning of the sentence much. Nevertheless I continue to use qualifiers liberally.

Is it because I’m not confident enough in my fact/opinions? It seems to me that “serious” bloggers seldom if ever use these hedges. They state their opinions as if they were fact and move on. Are that that self confident? Is it merely a quirk of writing style?  I’d like to note at this point that qualifiers make a poor argument and since most people blogging these days are trying to make an argument (“my view of interpreting the world is the correct one”) maybe that has something to with their disappearance.

Insight and reading

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So I’ve been looking around at what blogs I read and what they do, for inspirational purposes.  Here are two good examples: Marginalrevolution.com and Ezra Klein.

These sites serve two purposes for me as a reader. First they aggregate interesting links so I don’t have to read every site on the internet. However since I’m already taking advantage of services provided by people like these I don’t think I can, or  for that matter, have a large desire to replicate this type of service.

These two specific blogs, while certainly not alone, do something else that’s important. They tell me how to think. Or to put it less bombastically they shape the way I think about  a topic. Its not that I don’t try to think critically about issues or engage in them on my own time. But reading other peoples opinions on things, other peoples paths of reasoning to get to their conclusion, is if nothing else interesting and I think insightful.

It’s a little hard to explain without an example so lets discuss the recent shooting in Tuscon. I read the initial reports, felt bad about humanity for a day but it never really occurs to me to put it in a larger context. By contrast here’s Ezra Klein’s initial take on the tragedy. He quickly places the slaying as part of a larger story or rather, showing how it emblematic trends in the world at large. In the example linked he’s talking about how truly valuable our remarkably violence free politically system is. I was aware of both events. I even agree mostly with his conclusion. And I think that its the ability to string together events and conclusions into a coherent narritive with a point that make blogs like his easy, interesting and informative to read.

I’m calling the above linking of events and motives insight. It makes me think of those events in a different more interconnected way and that’s valuable to a degree. But I’m also wary of it. I like to think I could write like that. “insightfully” describing the days news from the ideological standpoint of a college student or “insightfully” criticizing someone else’s article (e.g Krugman’s) because I put different valuations on various events or interactions between events that make the story they’re trying to tell  seem incomplete, silly, or just plain wrong. I can do that. I have done that. I’ll probably do that more.

But I don’t think that kind of style is really ideal for the intellectual development of both myself and the general community. I can read a great analysis and keep it locked in my head in limbo, a kind of meta-data about whatever issue that I can pull out to make judgments about the related event. But the nature of writing that kind of analysis means I’m telling a story, an argument if you will. By doing so I feel like I lock myself into one viewpoint, one way of understanding the issue. And I’d be poorer for it.

I’ll probably just dance around this problem. I can do it, I have years of practice as a sophist. But its important, I think, to realize the effect this kind of blogging system can have on our writing and thinking. When I read the papers we have assigned for class, I read them looking for things to criticize, so I can write about them. I’m forcing myself to have thoughts and opinions. Maybe this is a good thing. Its makes me more “engaged” in the reading then I otherwise would be. But I think it also has some pernicious tendencies. I look for negative or sometimes overly positive things to say about the work. After all I’m trying to fit the pieces of the paper into my narrative, e.g. “Krugman’s piece on the state of Macro is bunk because…..” I might not think that’s actually true but I’m still going to write as if its so because that what makes the post (or paper or essay) “easy, interesting, and informative to read.” Its much harder, I think, to write a good paper that full of qualifiers and half measures then it is to write a polemic, even if the wishy washy paper happens to me more accurate. When we’re encouraged to write in a manner that fosters strong, clashing opinions, we’re encouraged to think in the same manner and that, I think, is bad.

Long article is long.

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So my first impression of the Krugman article is its long. and detailed. and hits so many points that I don’t want to try and cover them because I’ll miss some and there all worth talking about.  So my plan is to focus on one and then if I read someone else have an interesting take on another I’ll come back and muse on it some more.

The idea I’m talking about is the idea that beautiful math is one of the root causes behind economists missing the boat about the whole “giant bubble” thing. I have two takes on this. First who can blame them? As economist and as humans we really, really want to understand things about how are world works. We had a model. It was complicated. Difficult. Unwieldy. We worked hard to understand it. We had a lot vested in this thing, firstly because we really wanted to understand things and secondly because we worked really hard to do so. The world wouldn’t be so unfair as to have it be wrong. I’m not sure if that makes sense to anyone but me, but suffice to say I can totally empathize with Krugman’s point about us being led astray by the model and its sexy maths.

That being said I do think Krugman’s (and my) explanation of math instead of vice being the reason economist got it wrong might be wrong. I don’t have objective evidence of this, I haven’t taken a poll of all the economist in the US. But it seems to me that the explanation “economist got it wrong because they were led astray by the beauty and intellectual rigour of the model” is itself a beautiful lie economists want to believe. At least in the circle’s of economist majors being totally concerned with only intellectual pursuits is high status behavior. Being an intellectual that ignores the world is at least on some level a positive thing to believe about yourself. It ignores other more tawdry explanations, like, not wanting to exert effort to learn and entertain a new theory, punitive backlash in the economics culture for proposing a theory that goes against the accepted view, gaining rents from the current situation and not wishing to change that.

I do think that there is/was a certain level of entrancement with the idea of being able to explain everything through models but that very concept seems flattering to the individuals involves which makes me skeptical of whether its true or not.

I guess I didn’t realize what economics was

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Read the article from the Economist.  A lot of seemed like common sense or general knowledge, for instance the bit about economist having caveats about the free market being efficient. Despite being fairly certain I read it before its hard to tell if this feeling is shaped by the fact that around two years have passed since “recession” started and we’ve re-internalized alot of the truism or if it was a little simplistic when it was first published.

What I liked: “Economics is less a slavish creed than a prism through which to understand the world.”

What I didn’t like and probably didn’t understand: “Economists need to reach out from their specialised silos: macroeconomists must understand finance, and finance professors need to think harder about the context within which markets work.” It has never really occurred to me to consider these two fields as distinct entities. Or rather finance professors are the ones that deal with boring, pedestrian questions like how to get enough money where as macro-economist are the ones that get to look at everything including the finance professors purview.  The idea that an econ professor wouldn’t or shouldn’t have to know about financial markets seems laughable to me which is I guess part of the point the article is making, I’m just not sure if that point is legitimately banal or if the passage of time just makes it seem so.

Jumping in with both feet

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Writing is an interesting exercise. Seldom does anyone talk in a similar manner in real life. Its distinctively, deliberately depersonalized. I’m not talking to you, the specific faceless reader who happens to be reading this post. I’m talking to you the generalized faceless reader who could be reading this post. And I find that strange and vaguely disconcerting. No one really ever speaks completely devoid of the context into which the listener will receive their words. And, to be fair, the same is true for this blog. In all likelihood the only people that will ever read it our those I met in class today and some of Professor Greenlaw’s friends.  But the fact remains that there’s a certain awkwardness, a certain formality that permeates the act of writing.

So to start off I’d like to make an allowance for myself and my writing style. When I talk with my friends about a paper I just talk. I’ll say this “this bothers me” and then try and expound on whatever it is that bothers me. There’s feedback, we’re reminded of other things that struck us as odd, and we eventually reach some sort of conclusion or at least greater understanding the text then we had before.  After these conversations, or, lacking a friend with a similar background available, an argument with myself, that I start to write papers. Its a lot of work sorting through my thoughts, organizing them in a manner that easily comprehensible to the casual reader, making it coherent and cohesive. I would like for ever blog post to be of that quality but if I’m to use this as frequently as I believe its intended I’m not sure if that will be possible. You’ve been forewarned.


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