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Thread: The Economics Thread

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    Cricketer Of The Year harsh.ag's Avatar
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    The Economics Thread

    Have been meaning to start this for a while now.

    Let's talk about economics - econ models, policy making... the works. Would be happy if this goes in all sorts of directions.

    Starting with a classic - Paul Krugman's Great Capitol Hill Baby-Sitting Co-op" Parable:

    The Unofficial Paul Krugman Web Page

    The Sweeneys tell the story of--you guessed it--a baby-sitting co-op, one to which they belonged in the early 1970s. Such co-ops are quite common: A group of people (in this case about 150 young couples with congressional connections) agrees to baby-sit for one another, obviating the need for cash payments to adolescents. It's a mutually beneficial arrangement: A couple that already has children around may find that watching another couple's kids for an evening is not that much of an additional burden, certainly compared with the benefit of receiving the same service some other evening. But there must be a system for making sure each couple does its fair share.

    The Capitol Hill co-op adopted one fairly natural solution. It issued scrip--pieces of paper equivalent to one hour of baby-sitting time. Baby sitters would receive the appropriate number of coupons directly from the baby sittees. This made the system self-enforcing: Over time, each couple would automatically do as much baby-sitting as it received in return. As long as the people were reliable--and these young professionals certainly were--what could go wrong?


    Well, it turned out that there was a small technical problem. Think about the coupon holdings of a typical couple. During periods when it had few occasions to go out, a couple would probably try to build up a reserve--then run that reserve down when the occasions arose. There would be an averaging out of these demands. One couple would be going out when another was staying at home. But since many couples would be holding reserves of coupons at any given time, the co-op needed to have a fairly large amount of scrip in circulation.


    Now what happened in the Sweeneys' co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple's decision to go out was another's chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.

    In short, the co-op had fallen into a recession.


    Since most of the co-op's members were lawyers, it was difficult to convince them the problem was monetary. They tried to legislate recovery--passing a rule requiring each couple to go out at least twice a month. But eventually the economists prevailed. More coupons were issued, couples became more willing to go out, opportunities to baby-sit multiplied, and everyone was happy. Eventually, of course, the co-op issued too much scrip, leading to different problems ...


    If you think this is a silly story, a waste of your time, shame on you. What the Capitol Hill Baby-Sitting Co-op experienced was a real recession. Its story tells you more about what economic slumps are and why they happen than you will get from reading 500 pages of William Greider and a year's worth of Wall Street Journal editorials. And if you are willing to really wrap your mind around the co-op's story, to play with it and draw out its implications, it will change the way you think about the world.


    For example, suppose that the U.S. stock market was to crash, threatening to undermine consumer confidence. Would this inevitably mean a disastrous recession? Think of it this way: When consumer confidence declines, it is as if, for some reason, the typical member of the co-op had become less willing to go out, more anxious to accumulate coupons for a rainy day. This could indeed lead to a slump--but need not if the management were alert and responded by simply issuing more coupons. That is exactly what our head coupon issuer Alan Greenspan did in 1987--and what I believe he would do again. So as I said at the beginning, the story of the baby-sitting co-op helps me to remain calm in the face of crisis.

    ~ Do you think I care for you so little that betraying me would make a difference ~

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    Cricketer Of The Year harsh.ag's Avatar
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    Quote Originally Posted by Ikki View Post
    This article is from the Austrian perspective, as you know, of course.

    Quoting the article:

    Recessions are a productof malinvestment, resulting from government intervention in credit markets. If thegovernment increases the money supply through credit expansion by artificiallylowering interest rates, an incentive is created for entrepreneurs to invest in toomuch production of some higher order goods and not enough production of otherlower order goods.
    The part in bold is the issue. There is no such thing as artificially lowering interest rate. The Wicksellian interest rate since the recession happened has been negative. So, as it stands, even a 0% rate of interest would not be artificially low.

    The immediate question that should come to mind is why the surplus was noteliminated by a fall in the price of baby-sitting. We do not know. Krugman does noteven bring it up!
    That's because Krugman knows, as does the entire Economics community, of the presence of downward nominal rigidities. Even the Chicago models incorporate it now.

    The article also states that monetary policy is not a good tool for fighting such recessions. It prefers liquidation of losses. In practice, that would lead to a massive financial crisis. It also proposes higher savings. But that would lead to, as it did after recession struck, great lack of demand, and make things worse.

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    International Coach Ikki's Avatar
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    It's Austrian but the critique of the flawed co-op example is that it is incredibly simplistic and does not actually reflect the free market realities Krugman proposes to denounce - or generally argue against when he talks about the expansion of the money supply. Even someone like Friedman, a Chicago school proponent, argued against the Federal reserve being able to regulate the monetary supply properly. In fact, towards the end of his career IIRC he wanted it abolished and even said that if he could get the proper conditions or a willing government he'd institute a gold standard.

    Pretty sure the point is that it is artificial. Meaning that whatever it is set as, high or low, is not a reflection of the actual dictates of the market. "downward nominal rigidities" doesn't even begin to explain the fact that Krugman does not address that when you want a particular good or service to be used the oversupply isn't only taken care of just by printing more coupons (or money in a larger world example). In the real world, there's the very possibility of the oversupply being taken care of due to falling prices - or even alternatives becoming attractive. That's the inherent, and very obvious, flaw in looking at the economy through a coupon system with 1 service being accounted for.

    No, it wouldn't lead to a massive financial crises (bearing in mind, it depends how you define that). Next you'll tell me the free market caused the great depression.

    Last edited by Ikki; 29-09-2015 at 10:23 AM.


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    Cricketer Of The Year harsh.ag's Avatar
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    Quote Originally Posted by Ikki View Post
    It's Austrian but the critique of the flawed co-op example is that it is incredibly simplistic and does not actually reflect the free market realities Krugman proposes to denounce - or generally argue against when he talks about the expansion of the money supply. Even someone like Friedman, a Chicago school proponent, argued against the Federal reserve being able to regulate the monetary supply properly. In fact, towards the end of his career IIRC he wanted it abolished and even said that if he could get the proper conditions or a willing government he'd institute a gold standard.
    Milton got a lot of things wrong, as do most economists But it's a little strange to invoke his name as a proponent against modern monetary policy, since it's the Freidman k-percent rule which states that "money supply should be increased by the central bank by a constant percentage rate every year, irrespective of business cycles."

    If he did change his mind in favor of a gold standard later on, I don't know about that. Gold standard creates more problems than it solves.

    Quote Originally Posted by Ikki View Post
    Pretty sure the point is that it is artificial. Meaning that whatever it is set as, high or low, is not a reflection of the actual dictates of the market. "downward nominal rigidities" doesn't even begin to explain the fact that Krugman does not address that when you want a particular good or service to be used the oversupply isn't only taken care of just by printing more coupons (or money in a larger world example). In the real world, there's the very possibility of the oversupply being taken care of due to falling prices - or even alternatives becoming attractive. That's the inherent, and very obvious, flaw in looking at the economy through a coupon system with 1 service being accounted for.
    a) The "actual dictates of the market" since the recession has been a negative nominal interest actually. So, as I said, even a 0% interest rate is not artificaly low. If anything, it is artifiicaly high, since the central bank cannot lower the interest rate below 0 (or at least not much).

    b) Krugman was using the parable to refer to the entire economy, and hence the downward nominal rigidity is a very important thing. The reason he took the Co-op example was because there was no way to lower the prices of the scrips except for by inflation (issuing more scrips). This is because there wasn't a producer (as traditionally taken for a good) who could lower the prices.

    Of course Krugman knows that in a normal microeconomic good market, prices would fall with oversupply He has a Nobel for god's sake.
    Last edited by harsh.ag; 29-09-2015 at 10:52 AM.

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    What is it with libertarians and monetary policy/banking? Never seen a group of people think they know so much about a subject they know so little about.
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    International Coach Ikki's Avatar
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    Quote Originally Posted by harsh.ag View Post
    Milton got a lot of things wrong, as do most economists But it's a little strange to invoke his name as a proponent against modern monetary policy, since it's the Freidman k-percent rule which states that "money supply should be increased by the central bank by a constant percentage rate every year, irrespective of business cycles."

    If he did change his mind in favor of a gold standard later on, I don't know about that. Gold standard creates more problems than it solves.
    Yes, I don't think Milton was ever in favour of a Fed and the idea of proposing a formula increase annually was his self-admitted cop-out to steer government towards a solution. Much like his ideas on negative income tax.

    a) The "actual dictates of the market" since the recession has been a negative nominal interest actually. So, as I said, even a 0% interest rate is not artificaly low. If anything, it is artifiicaly high, since the central bank cannot lower the interest rate below 0 (or at least not much).
    Which market dictates the interest rate without the interference of government?

    b) Krugman was using the parable to refer to the entire economy, and hence the downward nominal rigidity is a very important thing. The reason he took the Co-op example was because there was no way to lower the prices of the scrips except for by inflation (issuing more scrips). This is because there wasn't a producer (as traditionally taken for a good) who could lower the prices.

    Of course Krugman knows that in a normal microeconomic good market, prices would fall with oversupply He has a Nobel for god's sake.
    And yet among all the economists I lend time to read - and I'm not making myself out to appear like a scholar as it is more of a hobby of mine - he tends to appear the least consistent. Especially since he allows so much of his political leanings to pollute his ideas.

    I'm aware that dnr may be an important thing; but it's not the main issue here and at some point someone is going to want something rather than sticking with nothing. The co-op example has been shredded a lot of times because it's Krugman's iconic article for advocating the expansion of money supply via the government. And using such a simplistic example and forgetting to even consider the fact that in a normal economy others will let the price move or even seek alternatives just damns it all. IMO it shouldn't be taken seriously by even those that agree with Krugman in general.

    The point of a simple analogy is to show how things could work and explain it in a way that is easily digested. It's quite baffling then to ignore the very simple and easy solution that can be applied to an even more complex model - like the real world economy. I'd give most economists the benefit of the doubt, Krugman seems to abuse the trust readers put in his words too often by mischaracterising the opposition or the relevant particulars.

    I will get to this in a few minutes. Milton has many of those facts wrong. Have written on this before.
    But Milton won a Nobel prize on this Didn't Bernanke also come out and admit he was right just a few years ago as well?

    Anyway, I didn't want to start a to-and-fro with this. I can see where it's headed and I honestly don't have the time or energy to debate these topics anymore (even if I had the intellect). I just thought it funny you started off with that article. Sort of planting a flag. I'm just planting mine next to yours .
    Last edited by Ikki; 29-09-2015 at 11:05 AM.

  8. #8
    Cricketer Of The Year harsh.ag's Avatar
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    Quote Originally Posted by Ikki View Post
    No, it wouldn't lead to a massive financial crises (bearing in mind, it depends how you define that). Next you'll tell me the free market caused the great depression.

    So I don't know what you are trying to say now. From your other points, it seems you are arguing against a monetary policy intervention of increasing money supply to counter financial crisis. Milton here is saying that the Fed should have massively increased the money supply, as they should have of course.

    And I would say, the financial crisis of the 1920s was created by the private sector. But Milton is right in saying that the Great Depression was caused by the Fed by its failure to act.
    Last edited by harsh.ag; 29-09-2015 at 11:08 AM.

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    Cricketer Of The Year harsh.ag's Avatar
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    Quote Originally Posted by Ikki View Post
    a) Which market dictates the interest rate without the interference of government?
    b) But Milton won a Nobel prize on this Didn't Bernanke also come out and admit he was right just a few years ago as well?
    a) Don't know what this means.

    b) I thought this was some other video. Milton is absolutely right in this one. See above post.

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    Quote Originally Posted by harsh.ag View Post
    So I don't know what you are trying to say now. From your other points, it seems you are arguing against a monetary policy intervention of increasing money supply to counter financial crisis. Milton here is saying that the Fed should have massively increased the money supply, as they should have of course.

    Btw, the financial crisis of the 1920s was created by the private sector. But Milton is right in saying that the Great Depression was caused by the Fed by its failure to act.
    I'll reply to this to answer the confusion. A lot of people on your side of the pond might take this video as an endorsement for monetary supply. It's not. He's in effect saying that the federal government is a flawed idea with flawed people working on it; who could not possibly know how to regulate the money supply for the whole economy (which is why he took to advancing a formula for increase). He's not as aggro on the gold standard or abolishing the fed (as the Austrians) in general at this stage of his career but through reading his works and listening to his interviews you can see he has reluctantly admitted his idea was destined for failure because he miscalculated the cost for this annual inflation with reference to other factors. I recall reading that if he could ever persuade a government to actually implement a gold standard he would, under certain conditions, but find the government, I guess?

    With his ideas on government and the economy in general I guess it was inevitable that he'd come to that persuasion but even at the time of that video he was not a pro-Fed kind of guy - definitely wasn't an advocate for the kind of policies Krugman advocates. The point is not that there will not be crises; but that they won't be allowed to be ballooned or propped up by the hand of government.

    His video points to private sector creating a crises (and look, there will always be due to ignorance or greed) but as he says: it is because of the government that a 'garden variety' recession turns into a full blown great depression. He's not advocating interference, he's just showing what went wrong when it was expected to and how bad it got - and yet, the myth pervades that the government was the cure for the great depression.
    Last edited by Ikki; 29-09-2015 at 11:19 AM.

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    Quote Originally Posted by Ikki View Post
    I'll reply to this to answer the confusion. A lot of people on your side of the pond might take this video as an endorsement for monetary supply. It's not. He's in effect saying that the federal government is a flawed idea with flawed people working on it; who could not possibly know how to regulate the money supply for the whole economy (which is why he took to advancing a formula for increase).
    But the Fed did get it right this time. And stopped another Great Depression from happening.

    Quote Originally Posted by Ikki View Post
    The point is not that there will not be crises; but that they won't be allowed to be ballooned or propped up by the hand of government.

    His video points to private sector creating a crises (and look, there will always be due to ignorance or greed) but as he says: it is because of the government that a 'garden variety' recession turns into a full blown great depression. He's not advocating interference, he's just showing what went wrong when it was expected to and how bad it got - and yet, the myth pervades that the government was the cure for the great depression.
    Dude, there is absolutely no way the private sector will correct itself after a massive financial crisis. There will be years and years of high unemployment after the massive monetary contraction. If you are okay with that, then that's a whole different thing altogether.

    On the one hand you say the lack of Fed action caused the Great Depression, and on the other hand you say there is no need for any Fed action because somehow the gold standard will make everything alright (please tell me how).

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    Quote Originally Posted by harsh.ag View Post
    But the Fed did get it right this time. And stopped another Great Depression from happening.

    Dude, there is absolutely no way the private sector will correct itself after a massive financial crisis. There will be years and years of high unemployment after the massive monetary contraction. If you are okay with that, then that's a whole different thing altogether.

    On the one hand you say the lack of Fed action caused the Great Depression, and on the other hand you say there is no need for any Fed action because somehow the gold standard will make everything alright (please tell me how).
    I think the reason you're asking these questions is not because you don't understand the free market arguments but that you're not looking at it from that angle comprehensively.

    You might think that you've staved off a great depression when the proponents against the monetary policy of the previous governments would just see it as staving off the inevitable, temporarily. Is it surprising that economic activity will pick up after you've pumped 100s of billions of dollars into the economy? Not really. It's only in the long term do you see whether it was invested properly or not. And odds are that when you can get something cheaply, you will overshoot and fail - especially, when it's not your money/easy credit. You might do well in the casino one night, but to go this way as a matter of policy is nuts.

    Of course the private sector will correct itself after a financial crises. What do you think businesses do? Stand still? You fail, your competitor buys you out and on you go. You reward the diligent and the intelligent. Quicker or slower will depend on the crises; but at least you stop the rot instead of putting a bandage on it and letting it get worse.

    When you are bailing out industries all you're doing is giving them more money to gamble with. If they're not at all responsible for malinvestment, then why be careful in the long run? Why should the competitors care as well? That's where you get a huge bubble with everyone in an industry doing the wrong thing. And that's looking at it and giving them the benefit of the doubt in that they're just greedy (instead of being greedy and corrupt). When you give government that kind of power, do you not think other industries will vie for that printing press?

    The point of the gold standard is not that there will never be a recession. It's that the money supply can't be manipulated and businesses (and people) have to be careful in their activities. It's the difference between a debit card and a credit card. What more, it acts as a safeguard for government devaluing your earnings - as Friedman put it, to tax you in a hidden way. The gold standard is not a tool for fixing a great depression; it's so that it makes it less likely for monetary policy to abuse it's power and create more bubbles.

    ----

    Anyway, aside from that: what do you think of bitcoin?
    Last edited by Ikki; 29-09-2015 at 02:16 PM.

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    Cricketer Of The Year harsh.ag's Avatar
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    Quote Originally Posted by Ikki View Post
    Of course the private sector will correct itself after a financial crises. What do you think businesses do? Stand still? You fail, your competitor buys you out and on you go. You reward the diligent and the intelligent. Quicker or slower will depend on the crises; but at least you stop the rot instead of putting a bandage on it and letting it get worse.
    Okay, how? If the credit channel is broken, and people are increasing their savings (thus reducing demand for things), and there is no fiscal stimulus, how exactly is the private sector going to heal itself?

    As far as I know, the only way this happens is with massive deflation. And you know what comes with massive deflation - massive pain. The debtors' balance sheet deteriorates even further, leading to over savings - the debt-deflation trap. Also everyone in general is less willing to borrow during deflationary times. And for wages to fall in line with prices, there has to be massive unemployment. Only pain lies in this process.

    Quote Originally Posted by Ikki View Post
    Anyway, aside from that: what do you think of bitcoin?
    Dark web currency facilitating illegal transactions was always destined to rise Although I think its built in deflationary bias will render it far less useful as time goes by. Probably be replaced by some other coin of the same variety, perhaps several others.

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    You need free markets to generate the wealth, then governments to ensure that the wealth is redistributed throughout society evenly, equitably, and to the poorer people who need it most. Free markets cannot do this, and Governments are not very good at it, but they are best mechanism we have.

    The redistribution of wealth is essential to maintain the quality of life for everyone. Obviously the poorer benefit because they are less poor, but the rich also benefit because they are not forced to live in gated communities and worry whether they can safely walk to the corner store, or go out at night.

    Well funded Government housing, hospitals, and schools not only care for and educate the less fortunate, but also maximise everyones freedom by reducing the general level of violence within society.

    That's my take on economics.
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    i keenly await pews' clash with the rest of cricketweb.net/forum over this topic
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