I saw a video from this professor making the rounds on some of my favorite blogs, and since philosophers rarely get re-posted to such places, i thought i would go ahead and re-re-post.

http://home.sprynet.com/~owl1/irrationality.htm

As usual, i have trouble with the usage of the notion of rationality/irrationality here, but i find it to be an interesting topic.  Listening to most people discuss politics is like listening to teenagers discussing what is the best band, and that does seem very strange because it should be important in a way that “best rock band” is not.

In another sense, however, it is not at all surprising.  My graduate schooling was in analytic philosophy and i can honestly say that i can’t think of anyone from my class, nor the classes above and below me, who changed their position significantly on any of the main philosophical opinions which they had when they entered the program, and to those i still speak to they have pretty much the same views still today … they are just much much better at arguing for those positions (“better” when judged via analytic criteria, that is).  So … if even the smart kids in the room studying exactly the topics that should lead them to question their beliefs … if even they never change their beliefs …

Me?  Neither.  But i entered a nihilist, so i would have had to have gained a metaphysical ground upon which to stand in order to have changed.

Actually, a few, myself included, just flat out changed areas of interest and moved to where they had less skin already in the game.  Maybe that is the next best option.

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It is difficult to put together a cohesive political theory when one is a nihilist.  This is probably unsurprising.  The rolling of eyes and the pained facial expressions when others speak of politics, this is easy enough.  But when one gets queried oneself and the only reply one can muster is, “well … it’s complicated.” …

Certainly any form of the phrase “we hold these truths to be self evident” is a non starter.

So i scan a lot of history and i scan a lot of the social and cognitive sciences.  I pull from these what i am able, but they are, alas, the least “mature” of sciences.  My faith in them is small.  But they are the only tools available.

Complexity is an issue in the problem itself, though, not just in the answers.  That itself is a clue.  Take the economy, for example.  (“The economy”, a terrible start right there, it should be plural).  I do not recall the source but there is a saying that the economy more closely resembles and ecosystem than it does a large machine.  If one accepts this statement as likely then many important points can be derived.  Most of all, one should be very cautious when trying to fix it.  It can be made worse.  In fact, it is possible that most tinkering not only doesn’t fix the issue at hand, but causes others.  (I personally think that it is a fairly robust ecosystem, in the metaphor … rabbits introduced aren’t likely to run roughshod. )

Politics is less a machine even than economics, at least than micro economics.  In micro there are at least some legitimate equations, and first and second derivatives have some concrete meanings.  By the time we move on to politics, and macro economics, even those small threads are gone.

And so, to this extent, i do fit in on this blog politically.  I am extremely wary of big fixes, especially the quick and easy ones.  When someone complains of how much money some CEOs make or some big oil company my first instinct is not rage, but to question how that compares with other industries, and if there is a difference, to ask why that is so.

There is the story of a city planner who took over the planning job of … we’ll say London.  One day his staff comes to him and says they’ve found a gate they want to remove.  Its in the way and no body can conceive of why the gate is there.  The planner immediately tells them they are not to touch the gate.  Until they can answer that question, “why is it there?”, it should be left there.  This is a famous tale and i my quick Google search was not able to track the origin.  The money quote goes something like, “It wasn’t built by madmen in the middle of the night.  It was built by a probably rational man for a specific reason.”  That reason my well be archaic now, but it best be understood before tinkering.

“Dispersed knowledge” is another idea that i share, likely, with all the other bloggers on this site.  No matter how smart and efficient is your team, making macro economic or broad political decisions in a manner that “beats the market” (so to speak) is unlikely in almost all cases.  This is not a fault of the decision maker, it is a reflection of how information exists in the world … fluidly and dispersed.  For any major national decision, by the time enough information is gathered and analyzed to make the decision properly, the time to make the decision is long passed.

These are two of my pillars.  If government is to make positive and effective decisions, in light of these two ideas, those decisions must be micro, marginal and local.

That last word, “local”, makes for interesting discussions when the members of this blog are in one room.  When the topic is local, rather than federal (or even state), some of us become far more lenient on the people’s use of their government to do things.  Part of it is the converse of what i have stated above, it is more doable.  The other side of the coin is the ability to exit the situation more easily (which is a more difficult topic, and for another day).

Summary:  This Nihilist just does not trust that we know enough about what we are doing.  When the topics can be analyzed and discussed and still timely implemented (cases which are almost always micro, marginal and local) i hold a pretty open and pragmatic mindset about what is permissible (that is, what the people have a moral right to instruct their government to do on their behalf).  Though they are resilient, i fear that the political arena and the macro economy are more easily damaged by changes, than they are helped.  Humans, as social creatures, got to where we are in light of evolutionary prods and a good 5000+ years of trial and error history (read: Hegel’s “slaughter bench”).  We should not take lightly the good of what is in place … but obviously note, as well, that we are still far from the ideal … we are merely “workable”.  Experimentation is good, including political and macro economic experimentation.

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The heart of the Keynesian critique of 19th century neo-classical economics is this:  the assumption that the natural state of an economy is to tend toward full employment of its resources is a weak assumption, that there can be very long periods of vast idle resources.  A quick glance of economic history suggests that this is likely the case.

One does not need to   accept the Keynesian prescription to find this concern legitimate.  (In fact, the neo-classical reply is often, “OK, I accept your analysis of the problem, but your fix is not a fix, and rather makes the problem worse.”)

Of course, one can accept that such conditions of long-term underemployment can, and have, existed and that intervention can/could have made them better, without agreeing that all or most (or more than a very few) such cases exist.  (Scott Sumner quips somewhere, when being accused of Keynesianism, that the Keynesian analysis is every once in a while correct … about twice every hundred years, something like a stopped clock.)

… points to be debated.

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Finale …

The previous post spoke of rates of change.  One of the two major problems with allowing monetary/credit driven deflationary pressure in 2008 (and to some extent still today, especially if European banks start going belly-up causing more of the same) is pulled from that discussion.  Such deflation is bad because it would be a major change to get there.  We fear the change in the rate of inflation if it turns quickly negative.

I’ll second major issue is “real interest rates”, and this is an endemic problem with deflation.  In response to the above paragraph we can say, “Okay, but let’s say we moved to deflation slowly.  Once we learned the different coping mechanisms (demanding from your boss a raise by having your salary cut only 3% in a 5% deflation economy … seems weird, but not intrinsically so), then we would be fine?”

In Econ 101 we learn about inflation being good for debtors and bad for creditors, and deflation vice versa.  IN the real world, however, the creditors have a coping mechanism.  If the inflation rate is 5%, and you want to borrow money from me, I’m going to charge you, say, 7.5%.  That is, when you accept the money, you are also accepting that you are going to pay the inflation rate plus a 2.5% real interest rate on that money.  I, as the loaner, am not being hurt by the inflation rate.  No one is, really, so long as that rate is a stable 5% that we can all count on.  The real interest rate for any particular loan is just tacked on to the interest rate.  The same is true for raises at work.  Maybe i get a 10% raise in some year in that economy, but it is really just a 5% raise.

It is hard to see how this clears in the 5% deflation economy.  If i have the money stuffed in my mattress, i’m making a real rate of return of 5% without doing a thing.  If you want to borrow that money from me, you need to make a better offer than that, paying me a real interest rate of 7.5%.

Borrowing money is very expensive in a deflationary economy.  The deflationary economy doesn’t just favor savers to debtors, it favors savers to those who need capital to get their businesses off the ground as well.

There is a third category of retort to the idea of a deflationary economy has less sway over me, though it is probably the most common retort:  wages are sticky in one direction.  The idea makes intuitive sense, but i’d have to see real historical (macro) evidence of it.  What evidence i have seen is non-committal, or even negative.  I suspect that there are some goods, however, that are price sticky in one direction.  I’ll have to think more on that, and do some research, and see if i can find some examples.  Off the top of my head … monopoly markets, maybe, including the quasi monopoly market of branded goods like soda.  We have to think in terms of real returns on investment, however, not nominal returns, so i need to think more about that.

[fin]

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The first post on this topic discussed a case where deflation is good.  I’m going to start off this post in a similar vein, introducing a case where inflation is good.  This will be a case of credit based inflation.

Imagine a place where credit does not exist.  The people inhabiting this land are rational and economically conservative, and so they keep good piles of money around in case there is an emergency.  I’ll just go ahead and mandate that in this particular economy $5000 is a good emergency fund.

One day one of the clever people in this country conceives of the idea of credit.  He walks into their congress, they all love the idea, and hours later there is a law.  Everyone suddenly has 5k of credit to use in emergencies.  Suddenly, there is no need to keep those $5000 of liquid assets around, and so the people start putting that money to better use.  Some spend like drunken shoppers, others move the money to long term investments, whatever, it does not matter.  The point is, the availability of unused credit, by its mere existence, just kicked off real monetary inflation.  This is a good thing, really, all that money held up in rainy day funds was not being used efficiently, but it causes inflationary pressure none-the-less.

Once again, inflation here is simply the tool the economy uses to return its ration of purchasing ability to goods availability back to equilibrium.  This is neither good nor bad, but is the root cause that makes it so.

Something like this did, of course, happen over history.  The common man today has far more credit available to them than did his ancestors.  It did not happen all at once, and there are diminishing returns as the dollar amounts go up, but the effect is real, and it is considered a good thing, economically, that we do all have this credit.

At least until so many people use it poorly so as to create a different problem.  But that would never happen.  :)

Anyway …

The converse of these good cases of inflation and deflation can also be stated.  A credit crunch leads to a flight to liquidity leads to strong deflationary pressure.  Things that decrease productivity, whether that be government regulations or a perceived increase in the value of leisure time, provide inflationary pressure.

Similar stories can be told about monetary and velocity inflation/deflation.

The current economic troubles, and the reason why deflation is fared so by neo-monetarists, is precisely because of the pressure that is causing it … financial industry tumult and credit crunch followed by a flight to liquidity.  It is a specific set of events that cause the concern, rather than, say, a general theory about deflation (in this case) or inflation providing its own impetus and spiraling out of control.  The question/concern is … and here i’m going to use a phrase you’ll see in a lot of my posts, about all subjects … “what is doing the work?”

And, of course, a monetarist is also going to think that they have the perfect solution.  Credit and money are substitute goods.  They are not perfect substitutes, to use an economic technical term, but they are to a high degree substitutable.  Hammer in hand … we see a nail there.  Off-set credit push defaltionary pressure with inflation push monetary pressure.

I leave that small statement as it is.  The impetus for this post was a question about why a neo-monetarist was so afraid of deflation in late 2008 and early 2009.  There are people that think and write about that for a living and are far more capable of handling the detailed arguments … but i think this at least gives the general framework of that thinking.

I want to talk a bit about one more inflation/deflation nuance, however.

While we generally talk about the “rate” of inflation (or deflation), it is really not the 1st derivative that we fear most, it is the 2nd derivative.  A stable rate, even a high one, is predictable, and people and plan and adjust accordingly.  It is the change in the rate that really throws things off, to the extent that that change is unpredictable.  (Part of the “death spiral” notion of inflation/deflation comes from this. i believe).  In fact, to the extent that inflation/deflation is simply a tool by which a market returns to equilibrium, it is self correcting … as is any market … in the long run.

I will have one more post on this subject.  That post will specifically cover a few of the issues that can arise from deflationary pressure, especially in the financial industries.

[to be continued]

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The topic which brought me here to blog is “deflation”.  So in Paul Erdős fashion, allow me to jump right in.

1) Neither inflation nor deflation are inherently bad.  They are the means by which a market returns to equilibrium when there has been some change in the “ability to purchase” side of the equation against the “number of goods available” side of the equation.  In most cases it is the effects of the drivers of the change that makes inflation/deflation good or bad.  In a perfectly frictionless market neither inflation nor deflation would have any negative consequences.  (Frictionless = land, labor and capital are all perfectly mobile and instantaneously so, all contracts are continuously and instantaneously updated by parties with perfect information, etc.)  In the real world there is friction, lots of it.  It is the friction that hurts (some) people (and helps others).

2) Inflation/deflation is not just one thing, there are kinds.  The lists of how many kinds are legion, i’ll use four kinds here.  Monetary, Credential, Velocity and Productivity.  Each of these kinds affects the ratio of “ability to buy” versus “available to buy” in some way.

Monetary:  The actual amount of money in circulation changes

Credential:  The ability to purchase goods without the direct use of maney changes

Velocity:  The speed at which a given amount of money changes hands changes

Productivity:  The ability to make more (or less) product with the same amount of inputs changes

This list is certainly not authoritative, but it should get the point across … and it has the elements required to talk about all this in relation to our current economic woes, eventually.

3) I’m going to move, now, to talk about cases where each of these categories is either good or bad, generally conceived.  I’ll start with an example of good deflation, productivity inflation.  If some change in technology allows for me to suddenly produce twice as many widgets with the same amount of land, labor and capital inputs, then in the widget market there is going to be a sudden change in the ability to purchase widgets versus the number of widgets available for purchase.  Deflation, here, would be this widget market returning to equilibrium … widgets get much cheaper.  In the real world this is like the consumer electronics market, things getting better and cheaper and we don’t call it deflation, we call it good.

3b) The term “the economy” does not pick anything out in my economic ontology.  There are many markets, some large, some small, some isolated, some integrated, one good may be part of many markets.  The number of markets may be uncountable.  The lines dividing them are usually intrinsically blurry (none are natural kinds?).

3c) Note the potential spill-over effects from even this simple case.  Perhaps i do not make more widgets with the new technology, but make the same amount as before with half the inputs.  In that case i am affecting all non-widget markets rather than the widget market.  Or even when i do affect the widget market, the widget buyers now save money and that increases their buying power in non widget markets.  In the real world, productivity deflation can cause real inflationary pressures in other markets … will do so, unless the purchasing of widgets exactly offsets the technology induced price change.

4) The three-body problem shows up everywhere, and usually quickly, in macro analysis.  Macro is complicated and convoluted.

Some initial things to think about …

[to be continued]

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