economics - where to begin?

economics.."Scarce" or limited resources in the world force people (who have unlimited needs and wants) to make choices based on cost and satisfaction. These choices are best met in a *free market*place with *perfect competition* The market place is where buyers (or consumers) and sellers (or producers) come together to agree on a price ie where demand from buyers = supply from producers = price of a good or service.

Theres a whole heap of science based formulas that can be applied to the free market model, none of which are any good in real life cause there is never perfect competition because humans dont always act on price alone and governmentsts impose rules and regulations etc etc. Hope that helps I wouldnt trust anything Ive just said until someone else confirms Ive got those basics right cause its all off the top of my( admittedly big) head about ten years ago at school, funny the crap that stays there though.

(marx is even worse than me at keeping it brief once he gets going, but he is good on the diff between value and price)

another flaw with the free market model is that unless everyone starts at the same point, those in first have a crushing advantage in re opportunities to distort markets in their favour (esp.once information becomes a commodity)

one solution — taking adam smith's theory seriously as an ideal — wd be to have a periodic recalibration, where everyone was stripped of all their property and placed at the same starting line every [xx] years: expect some squeaking from foax in the bigger houses though...

*sigh* I still love the perfect competition diagram.

now there's something I'd like to 'read'. at least try. but i doubt I'd get three month holidays again (education is over, work has started).

unless I'm sacked, of course.

Also, if you can handle it seek out John Maynard Keynes' General Theory (if you can "handle" it because it's tough reading, even for econ. majors). If you want something more easily readable, Lester Thurow, Robert Reich, and Paul Kuttner are all pretty good bets.

Greenspan Tattoos 'Fed Life' Across Abdomen

I know very little about economics and the history thereof, but here's a question... has any socialist or even capitalist country ever had state-run banks? How'd that go?

I thought of this randomly while thinking about how I hate every fucking bank in Canada and how they're all the worst option ever, and then I thought "if they're going to rip me off they could at least use it to give me more healthcare, instead of filling some rich fux pockets!"

and to repeat: "I know very little about economics and the history thereof"

Why are you asking a bunch of non-experts? Clearly you should ask an economist. Just don't trust him/her to tell you everything since they've probably never experienced the economy.

Uhh... I don't know how I'm supposed to respond to that. Other than that I don't know any economists.

It was a joke. The ADD thread in one post.

I got the tone, I just wasn't clear on the tone (couldn't tell if it was "LOL" or "STFU WILL")

I got the reference, I just wasn't clear on the tone (couldn't tell if it was "LOL" or "STFU WILL")

Lots of countries have state-run banks, including India and China.

LOL

I try to cut back on the smileys lest I'm mistaken for Ned.

I would highly recommend Naked Economics to anyone who (like me) knows absolutely nothing about the subject. It was a very good primer. I feel like I'm at least 5% knowledgable about the subject now.

any secondary school (um, fifteen year olds) book on macroeconomics should be fine for an overview

I don't remember ever studying economics in HS. I feel robbed.

okay

^^^^ Useless.

-- Deric W. Haircare, you are a stupid fucked-up piece of shit and ought to be banned. There's not a post of yours I've read that added anything to the conversation, you got no data, no information, I don't even know who you are or where you're from, and you're not even funny. On top of that you can't even amage to post a WDYLL photo proving that you have cleavage and a cute smile. You're worthless. The posters you criticize might have their fair share of predictable faults, but at least none of them is being a complete and utter fucking dullard.

Thank god I've got two things keeping me on this board.

o noes they're stuck to the computer?

Economics and verbal beatdowns?

cock like a stallion and an iron will

OUI, I have to carry around an air compressor for the hydraulics I built to keep my cock up. Monster cock gets in the way sometimes.

(shellac reference. Or is it? *GIANT WINK*)

Do you have to pump the compressor? I imagine you sitting in a meeting with a little pump in your pocket, and it's totally quiet at one end of the table, and then everyone looks around when they hear "phew phew phew" and you look around too just to act like it's not you. Right? Right?

Hahaha, yeah. This damn wang also means I have to pay for two seats on a plane, one for me, and one for my epic uncut moleskine curled up all like a butterfly proboscis but sitting there with the air compressor lest a change in temperature or an attractive passenger or a fond memory or any fool thing makes BONERB. THEN, fuck, I gotta support the thing, and I get all lightheaded from sudden blood flow out of my upper body (ps my heart is like the size and speed of two humping chihuahuas).

Abbott that story really scared me. Tuck me in?

Shit I don't know where my head is forget that last part.

I don't have any happy stories.

I'm sort of imagining a baby alien with titanium teeth. Very impressive.

I took an economics class in high school and got an A, but only because I was good at memorizing the terms and basic principles and because all the quizzes were multiple-choice. Otherwise, economics is something that I just cannot wrap my head around. Like, I was a pretty good history student, too, until we got around to anything that involved tariffs and then I was like, "Durrrr, what?"

My high school econ class was taught by a football coach who looked like a really solemn Ken doll. The main things I remember:

1. He had us write a one-page reply every class to an inspirational quote on the board, the kind coaches like. He didn't like any of my replies, so eventually I just started writing about other inspirational quotes. "Wow, 'a journey of a thousand miles begins with a single step.' That's really true. You're finally beginning to catch on to this class."

2. Playing "Communist Monopoly," where we were given random, equal amounts of property squares and had to move pieces around the board paying people, not trading anything. Then at the end of the game (kind of randomly truncated), we had to evenly divide our winnings. "And that's how Communism works! As you can see, it's tedious and boring."

As far as books abt econ, I liked The Undercover Economist. Of course, since it came out after Freakanomics, the jacket has all this stuff like "just like Freakanomics!" But unlike Freakanomics, you actually learn about theory/principles/ideas of economics, and not just a bunch of "how can we connect gallons of strawberry ice cream purchased with how Kennedy started the space program?"

OMG: I don't know if I even want to stifle my "Communist Monopoly" laughter and be a pedant about it, but he could have gone much further: I think technically the teacher would control all the hotels, place them however he wanted, and you would have to keep your piece in one spot, getting paid in small, periodic increments. (If you wanted to move to another, more prosperous square, you would have to fill out various forms and submit them to the teacher, requesting permission.)

Also in capitalist monopoly there should technically be one player who doesn't get $200 for passing go, unemployment being a fixed structural feature of the economy that prevents inflation from damaging the other players' earnings. (Also you'd have to be locked up for a week and playing for sandwiches and bottled water.)

In Capitalist Monopoly, of course, two out of nine players get a long head-start during which they buy up most of the properties and then make up a bunch of arcane rules you can't follow

has larry gonick not written a book about this?

I only realized recently that the various pieces are meant to represent wealth / poverty that way! They were just too pussy about capitalism to actually start the sports car out with more cash than the thimble.

I never thought of it that way - but wait, so the town car is the capitalist, the thimble is the laborer/craftsman, the wheelbarrow is the farmer, the dog is the, uh, running dog?

wheelbarrow 4 life

I am listening to some Teaching Company lectures on Economics right now, and it is mostly filling in some gaps in my Econ 101 understanding, and it is generally going well, but the lecture on the trade balance made my head spin.

-- Deric W. Haircare, you are a stupid fucked-up piece of shit and ought to be banned. There's not a post of yours I've read that added anything to the conversation, you got no data, no information, I don't even know who you are or where you're from, and you're not even funny. On top of that you can't even amage to post a WDYLL photo proving that you have cleavage and a cute smile. You're worthless. The posters you criticize might have their fair share of predictable faults, but at least none of them is being a complete and utter fucking dullard.

Oh, are you referring to all 30 or so posts I've made on this board? I have no idea what could've possibly inspired this much bile, but you can seriously go fuck yourself straight to death.

ugh, Macroeconomics in HS was brutal. We had a real teacher, but he got all his lesson plans and videos from some 'winger free market group and refused to teach anything but.

x-post

And if you'd like to point out examples of whatever the fuck straw man bullshit you're even talking about, that'd be great.

Macroeconomics is fun. I'm currently taking a Macro class for my M.B.A. degree. It's not as bad as I expected.

(from way upthread)

Inflation/Deflation exist because money has no intrinsic value, even gold. Money is only worth what people are able to give you for it. This is evidenced by the prices people will charge for things. The natural tendency is for people to try and increase prices but this only serves to reduce the value of money because the value to a person of, say, a loaf of bread remains pretty much the same...

I think I'm getting this, except why is it natural that businesses will gradually charge higher and higher prices over time (thus causing inflation in the long run)? Does this have to do with the increasing money supply?

"because people are greedy bastards"

http://www.mospaw.com/monopoly/token-iron.jpg IRON OUT INEQUALITY http://www.mospaw.com/monopoly/token-iron.jpg

WTF is the cannon supposed to represent? Unbridled phallic agression?

Having not studied economics much formally, I'd venture a guess that businesses are probably likely to raise prices for legit reasons but then not drop them down again (as much) unless they really need to. Like I wouldn't be surprised that if the coffee price goes up 10%, Starbucks would raise its prices accordingly, but then if coffee went back down to where it was, Starbucks would either keep prices the same or drop them less than proportionally. Just a hunch.

<i>I think I'm getting this, except why is it natural that businesses will gradually charge higher and higher prices over time (thus causing inflation in the long run)? Does this have to do with the increasing money supply?</i>

The general idea these days is that economies have cycles, and they grow towards full capacity. As they do this, it becomes harder and harder for companies to keep their good workers, because their labour is more in demand. So the companies have to pay the workers more. This has two effects:
1. People have more money, so are willing to spend more money on stuff
2. (Some) companies have higher costs, and so must raise their prices to avoid closing down.

You can substitute labour for dudes who make factories, gold, oil, whatever. Eventually someone stops buying stuff (or central banks who are concerned with inflation put up interest rates, which makes you have to pay more on your mortgage and gives you less money to spend on DVDs, and also discourages business from investing in things and making bigger factories), and the economy slows down and goes into the recession phase. Rinse and repeat.

I didn't read the whole thread so someone has probably already said this.

fuck u lack of html

Also after you have read the economics books aimed at people who have no idea about economics (the undercover economist etc) and you want a bit more detail, the best textbook author by far is Greg Mankiw.

Having not studied economics much formally, I'd venture a guess that businesses are probably likely to raise prices for legit reasons but then not drop them down again (as much) unless they really need to. Like I wouldn't be surprised that if the coffee price goes up 10%, Starbucks would raise its prices accordingly, but then if coffee went back down to where it was, Starbucks would either keep prices the same or drop them less than proportionally. Just a hunch.

This is called sticky prices. Oil/petrol in particular has this effect. Pricing in perfect competition should not be sticky.

it's one of my true regrets in this life, that i decided to change my undergrad major from poli sci/economics to poli sci/english. of course, that my economics grads weren't all that hot had something to do with that decision ;__;

and oh yeah, micro/macro weren't all that brutal as classes -- at least not the intro level classes. the intermediate micro/macro classes (i.e., the stuff that econ majors had to take at my school) were a bit more quant-oriented than the intro stuff, but the math wasn't all that bad (though one had to take calculus in order to be able to take intermediate micro/macro in the 1st place).

the REAL bitch of a class for econ majors was econometrics -- that was the shit that made me drop economics as a major.

Economics is equally bad when it tries too hard to be a science and when it tries too hard to be a liberal art

Science as w/ Marx?!

Seriously in need of a crash-course after I finish vol 1 of 'Kapital'. I suppose Smith is the obvious.

No, like more recent economics that dresses itself in excessive math and modeling to disguise its inability to forecast certain things accurately.

Can someone explain how oil keeps getting more expensive in Europe while the dollar keeps getting less expensive? Shouldn't these two, like, cancel each other out at least a little bit?

Do these oil companies really think we're going to just keep on (oh wait, we are, aren't we? oh well, they win.)

Well the price of oil is outpacing the dollar. Oil went up by $3 a barrel in the last week, while today the dollar has dropped by one cent against the pound.

Has this been the case during the last, say, six months? Because I had the impression that in the long run, it didn't feel that way.

Yeah, basically, we've been cusioned from the effects of the rise in oil price somewhat.

Oh. I thought we were being had.

The internet says that since 2001 the exchange rate has changed from $1.45 to the pound, to $2.06 to the pound, so the value of the dollar has fallen by maybe a third. Over the same period the price of oil has risen from about $25 a barrel to about $90 a barrel, nearly three to four times higher.

I think the oil price was a bit higher than that, but what you're basically saying is correct: the dollar hasn't fallen anywhere near enough for the current price to have parity with 2000 prices.

Okay, want an intro on Keynesian economics, pref covering its use in the FDR and the modern eras

as close to a textbook definition as i can muster off top of the dome: keynesian economic theory posits that in times of recession (decreased aggregate demand), government can pick up the slack using economic stimulus. so things like FDR-style public works projects could be interpreted as keynesian economic stimulus since government is spending in the observed absence of private spending. the theory goes that absent any government intervention, the private economy would stagnate or otherwise take longer for aggregate demand to recover and than injection of government spending would help increase the velocity of spending and perhaps reignite the yoga flame of private investment and employment.

at some point "keynesian" came to be interpreted as government spending of any kind (which is rong). the risk of spending too much govt money during economic expansion is the crowding out effect which has the govt demanding too much of the available dollars for private investment to generate more efficient growth, thus stifling said growth!

i guess keynesian or other fiscal policies kind of fell out of favor ca. the recession of the early 80s which was combated with monetary policy of the fed (more associated w/ milton friedman iirc). keynes became new hotness again recently because we already had p low interest rates so there wasn't much stimulus to be gained from that.

does economics ever just...click? i hate not understanding big news stories.

i'm in basically the same position as toby at the start of this thread except i've actually tried reading and studied it at university for a year, to basically no avail. it goes beyond mere lack of knowledge, which can be solved with information and learning, into just sheer total incomprehension and bafflement at how to get to a place of understanding. i have no idea what even the child's-level explanations of inflation upthread mean. seriously what is the key to getting it? this is literally the only subject that makes me feel this thick. (apart from certain branches of cultural theory but at some point i realised those were total bollocks anyway and stopped beating myself up over it.)

or should i just accept that, like, i don't have the right brain to understand economics? i don't beat myself up for not understanding physics, i never see anyone feel bad about not enjoying literature. it's only cuz economics interacts with politics and current affairs that i ever feel the lack.

i took two economics classes in college, got As in both, have read a couple books on economics on my own, and i feel like i'm starting over every time i try to think about the subject. i think the difficulty largely comes from the way it mixes incredibly airy, abstract concepts with real-world figures and statistics -- you have to think in two different 'modes' at once.

the other challenging thing about economics that you don't get so much with other sciences is that there are several schools of thought, and they all start from completely different places, so depending on what commentator you're reading you get a completely different version of what's going on (e.g., economists from different schools won't agree on the cause of a recession).

i found this pretty lucid and interesting: http://www.amazon.co.uk/Long-Short-Investment-Normally-Intelligent/dp/0954809327/. it's kind of about personal investing rather than macroeconomics, but he has to go through some of the big and fundamental stuff before he gets into, e.g. the markets.

the investing/markets stuff in that book is uk-centric btw.

http://www.guardian.co.uk/commentisfree/2011/aug/05/financial-greek-debt-market-eurozone

this fn guy used to edit the new statesman (well known left-wing magazine) and among other things hired johann hari and put on the cover an image of the star of david impaling the union jack. anyway, he admits to being ignorant of economics. which is fine, because why should the editor of a major political magazine understand economics.

How many editors of news outlets understand it? Or politicians and civil servants?

i think it is kind of impossible not to feel this way at least to some degree unless u are just really stubborn & probably explicitly ideological and think u have it all figured out, or have like a masters degree. i think the reason is the econometric arguments economists use when debating empirics are thoroughly inaccessible to just about everyone in the world, & when translating them into plainspeak a lot of the essence of the argument is lost, which results (ime) in a vertiginous read, especially when reading conflicting viewpoints. it feels as if there's no common logical interpretation of data grounding the debate, and without a strong familiarity with systems of models economists use the whole "this went up, causing that to go down" is very confusing. think this is partly due to conspiratorial ~special interests~ legitimizing supply side arguments (that are often shrouded in fancy complicated theory & econometrics) but also just bc economics is not very advanced as a field yet

my advice is pick a couple writers you feel are reasonable & follow them. paul krugman does
a pretty good job explaining concepts every time they come up on his blog, tone a bit 2 strident though

think this is partly due to conspiratorial ~special interests~ legitimizing supply side arguments (that are often shrouded in fancy complicated theory & econometrics)

& thereby prolonging an unnecessary debate abt basic macro policy

but also just bc economics is not very advanced as a field yet

I think this is a strange way of looking at it. economics is prob the most advanced social science - but it's ultimately a social science, which means there isn't going to be 'a right answer' a lot of the time.

are the economic models that drive "policy" really the most advanced and up-to-date (whichever ideological interest they seem to serve) or is still REALLY just Keynes vs. Hayek? I have had a sneaking suspicion that what's up with the economy is pretty much over everyone's head (or at least over the head of anyone in a position to do something about it). not sure we even have a good model for what's actually "going on" at any given moment.

hayek is a fckn loser

(apart from certain branches of cultural theory but at some point i realised those were total bollocks anyway and stopped beating myself up over it.)

same is true of much economics, no?

larry summers mentioned that when in office he used is-lm models - stuff taught to undergrads but considered to simplistic to even be touched on the graduate level - as his reference point.

when it comes to fiscal policy, you can be pretty certain that models have nothing to do w/ anything.

i've always taken a relatively ignorant Marxist sorta view (every response to a "crisis" is basically laying the groundwork for the next "crisis," ad infinitum) but it has seemed from my layman's perspective (and not really reading the ultra-technical stuff) that the basic theoretical models are still derived from a reaction to the Depression--ie, that our idea of what the Economy is and how it behaves is historically static since the advent of Capitalism.

using metaphors to explain economics actually makes things worse, i've realised

god i can't even get three fucking paragraphs into an apparently "very clear" galbraith article without the words starting to swim

i like what flopson says a few posts above but how, if it's so hard, are so many people apparently so comfortable with the subject? not all of whom have masters degrees and not of all whom are actually that smart outside of understanding economics

"they're just bullshitting" yeah yeah i've heard that but i can't even get to the basic level of comprehension necessary to bullshit

lex how comfy are you with diagrams, models and algebra -- what yr describing sounds like classic maths anxiety, where ppl perfectly capable of grasping something complex and practical get thrown back into classroom nerves by bad association

it totally is that, it feels completely irrational and panicky.

maths was a weird one, i ended up with an A at A-level without ever really understanding it (and at intervals this blew up into freakouts that my #chinesetigermother remedied with EXTRA TUITION) - the big exception was algebra which i clicked with right from the start and never felt uncomfortable with right up to A-level pure maths.

i'm not that comfortable with diagrams or models, they feel like simplified metaphors that disguise the ACTUAL THING from being understood (i don't know what this ACTUAL THING is w/r/t economics, at all)

i somewhat agree that metaphors for economics are a problem, actually: the way money works is not "like" other things, and you have to get a grip on its own models -- or better still competing systems of models -- to grasp why not :(

and that galbraith piece is not AT ALL entry-level: it assumes a lot of prior knowledge of terms, and intuited effects (right and wrong), and a working knowledge of US politics (the last you probably have)

haha bad association, yeah well my year studying economics at oxford was a disaster (jesus i still can't believe i received such useless tuition at a supposedly elite institution)

One of the things that is frustrating in political discussion re:economics is the reification of "the deficit" as this thing which must be appeased at all costs, plus the fact that money is created in the form of debt so paying off debt would remove money from circulation which would cause huge deflation, no?

yet "we cannot continue to spend what we haven't earned" continues as a thing, when surely the opposite is true - capitalism requires we spend what we haven't earned yet

http://www.amazon.co.uk/Grip-Death-Slavery-Destructive-Economics/dp/1897766408

Despite the rather lurid title this is a readable and interesting book - esp re:debt - interested in others views on it if they have read

This is a very well written and very concise primer, I highly recommend it.

http://www.amazon.co.uk/Concise-Guide-Macroeconomics-Managers-Executives/dp/1422101797/ref=sr_1_1?s=books&ie=UTF8&qid=1313584460&sr=1-1

the reification of "the deficit" as this thing which must be appeased at all costs

one of the reasons i feel i can't argue fully about ~our current politics~ is that i have no idea how scary the deficit is, or should be, and i assume everyone on both sides is just lying

lex this is a pretty great little film about debt and modern economics. if you have 45 mins available at some point i really recommend it.

https://www.youtube.com/watch?v=Dc3sKwwAaCU

my maths experience was similar: i can be taught to deploy any set of formulae and system of rules of deployment, and get excellent marks -- i actually associate this with my skill at proofreading, it's a mix of excellent visual memory and conentrated precision -- but i never felt i "understood" anything after calculus

it was only once i was teaching maths to 13-yr-olds that i began to realise this is what "understanding" maths pretty much is: there is no ultimate there there to be touched or tasted or smelt, and people who "get it" just have a far wider palette of techniques of rival systems of models they can bring into play, and plus an intuitive sense of where "likeness" operates (as in, this model is "like the situation" bcz x, that model is "not like the situation" bcz y)

x-post: absolutely re reification, it's the curse of the discipline in ANY of its political forms

ed that is one of the actual textbooks we used at oxford! it...got me nowhere :(

[one of the reasons i feel i can't argue fully about ~our current politics~ is that i have no idea how scary the deficit is, or should be, and i assume everyone on both sides is just lying

― lex pretend, Wednesday, August 17, 2011

Want to read more here about Andrew Jackson and 1837 - when the US actually paid off its debt (for the only time in history?) - and what followed wasn't so good, right?

but not sure what the best thing to read on that is!

i can be taught to deploy any set of formulae and system of rules of deployment, and get excellent marks

where this led to freakouts was when this suddenly stopped being true and this cruise control mode, like, crashed into a tree - it felt like there was no "deeper understanding" to fall back on and work things out logically when things went wrong because i hadn't been doing that anyway.

there is no ultimate there there to be touched or tasted or smelt

hmmmmmm i think this makes it less likely that i'll understand economics but more likely that i won't feel bad about it

i was recently recommended "finance: plain and simple -- what you need to know to make better financial decisions" by sebastian nokes, which was said to cut through a lot of the jargon-y bullshit (it's aimed at small business-y people intimidated to financial advisor types), and to lay out a lot of "what they're actually saying" versus "what they're disguising and obfuscating")

however, since i bought it my time and focus have not exactly been my own, w/martin, and w/riots, and w/a vital life-changing career interview next week (if i don't make a fool of myself and no one else is better), so i have barely started it

yes i didn't get freak-outs, i just gradually lost interest in pursuing it at university level (haha bcz CORRECT CHEATS not HANDED ME ON A PLATE i suspect): twice i got excellent marks on a paper by spending the days before frantically memorising formulae and proofs in an area new to me, and just as quickly forgetting everything i'd absorbed after the exam was over

I hate the term "fiat money"

xpost to hand's video

yah seriously.

not surprised to see sanpaku use it tbh.

Ed yes that video has a suspicious goldbuggist undercurrent to it, but I think it does a good job making sense of things

agreed. I prefer "unit of exchanged" or "shared fiction" to "fiat money". Money only has value with the content of the people, otherwise they stick it in Gold or other assets.

...

what on earth does that mean?

http://www.threadbombing.com/data/media/2/paulownsmccain.gif

i don't entire understand ed's second sentence either: does "content" mean "that which is contained" or "happy approval" -- it's true that value requires a big element of agreement, including the explicit agreement to agree, but it also includes necessarily disagreement -- if people didn't want things in different degree, "they" (ie we) wouldn't need to explore systems of exchange, and ways to stabilise how these exchange rates operate (should a beer costs more than a potato etc), and also to render them fluid when needed too

i think it means: when everyone is too anxious to negotiate about value in good faith, relative to their immediate situation, on an assumption of shared givens and (moral) values, they flee to hoarded piles of value-that-never-changes (which gold has long been a symbol of): but actually its value does change, so this is a phantom

actually most of the issues we face relate ultimately to predictions made -- and how they get made -- about what people WILL want: and how to facilitate, or indeed not facilitate, this

haha we are all mccain now :\

i think it's a typo and he means "consent".

basically people who aren't comfortable using "fiat money" and "money" as synonyms tend to be nuts.

WRT the OP, I started the last decade largely ignorant of academic economics, but made my way through a std text (samuelson?) with the aid of Steve Keen's Debunking Economics. Being aware of the numerous unjustified assumptions behind neoclassical microeconomics will make the parlous state of mathematical econ as a predictive tool evident.

On a similar debunking note, I've just started Ian Fletcher's Free Trade Doesn't Work: What Should Replace It and Why, which, while a serious work for laymen by a proper academic, is just $0.99 on Kindle.

lex, galbraith's more famous dad has written some very accessible books about modern economics which are actually great fun to read. The Affluent Society is probably my favorite but there's also The Great Crash, about 1929.

http://www.amazon.co.uk/Affluent-Society-Updated-Introduction-Business/dp/0140285199

"Money: whence it came and where it went" <-- best title evah, and jgk is an extremely funny writer, but i still think you have to be ready with a notepad to look stuff up quite often (and be aware that there's a reason such a lucid writer stopped being someone mainstream economists read and believed)

(i'd say that reason isn't that he was wrong; but THEY would -- and the technicalities of this disagreement have to be understood, as well as the politics)

Attempting to explain the causes of the financial crisis to the Lex in the pub was really frustrating but also illuminating because he kept asking really pertinent questions like "why were they doing that? Isn't that really stupid? What happens when these people can't pay?". Clearly knowing nothing about the subject is an advantage.

nothing wrong w/ a neophyte asking neophyte questions. esp. since the folks "knowledgeable" about economics are the ones who got us into the economic pickle we're in and are incapable of getting us out of it.

i'd recommend an Intro to Econ. textbook -- Samuelson and Nordhaus was standard when i was an undergrad during the late 80s/early 90s, so if they still use that that would be the one i'd get. also, seek out robert heilbroner's the worldly philosophers for a readable synopsis of economists from Adam Smith up to John Maynard Keynes.

heilbroner's book is devoid of math, BTW, if anyone has a phobia about math in economics.

tad llamasfur! you said exactly the same eight years ago on this very thread

it's still true, though!!

heilbroner book has nothing to say about Milton Friedman, rational expectations or neo-Keynesianism though.

If we're posting videos, Chris Martenson's 3 hour Crash Course is a useful primer on the absurdity of limitless economic growth on a finite planet.

https://www.youtube.com/watch?v=XnXZzx9pAmQ

I've seen that before, its a good video

oh wait that might be something else

Chris Martenson, or Chris Martenson PhD as he prefers to be known, seems like a crank tbh. this from his about page...

First of all, I am not an economist. I am trained as a scientist, having completed both a PhD and a post-doctoral program at Duke University, where I specialized in neurotoxicology. I tell you this because my extensive training as a scientist informs and guides how I think. I gather data, I develop hypotheses, and I continually seek to accept or reject my hypotheses based on the evidence at hand. I let the data tell me the story.

is the classic "now i admit i have no training in this area in this but i am better than all the experts and here's why" flase humility of the crank.

but regardless of that, and FAO lex, neo-malthusianism is really not a good place to start for someone to learn about macroeconomics.

lol "fiat currency"

seriously.

i'm a non-expert in economics, too. but i have some knowledge of crackpots ... and very strong evidence that one is dealing with a crackpot is when one encounters someone ranting about "fiat money."

if youre only interested in economics as it pertains to policy why not just find a couple of good economic/policy blogs whose writing you like and just follow along? over time im sure youd get enough of the 'basics' to achieve something like fluency imo w/o having to try to 'get' models and most of those dudes are p good about linking stuff for further/deeper reading

fiat money is the new pimp towncar

fiat money cars look like something out of a 1950s Fellini movie ...

http://www.philseed.com/images/fiat-600-1956.jpg

Criticism noted. I still think Martenson is OTM WRT resource constraints being the most important economic change for the rest of our lifetimes. Even The Economist is hedging here.

what if Mr Ehrlich had taken up Mr Simon’s 1990 offer to go “double or quits” for any future date? All five have risen in price since the rematch was proposed. Furthermore, Jeremy Grantham of GMO, a fund-management group, points out that Mr Ehrlich would have won the original bet were it recalculated today (he is still alive; Mr Simon died in 1998). An equally weighted portfolio of the five commodities is now higher in real terms than the average of their prices back in 1980 (see chart).

The Cornucopians might argue that today’s metals prices are due to the buoyancy of demand in the developing world rather than any cataclysmic shortages in supply. But the Malthusians might retort that man’s famed ingenuity has not stopped prices from rising in real terms over an extended period. Place your bets.

i don't think you have to be a malthusian to argue that the standard "growth model" of constant 3% year-on-year increases in output is unsustainable

Thermodynamics indicates our skin will boil in about 400 years at just 2.3% growth.

Also, FWIW, I'm amused that Morgan Stanley's economics dept under Stephen Roach requires new hires to have spent at least 3 years in the real world to help overcome academic "brainwashing".

economics - where to end?

if youre only interested in economics as it pertains to policy why not just find a couple of good economic/policy blogs whose writing you like and just follow along?

because i don't understand them! the "basics" have eluded me over a decade of trying, including a year spent studying them at oxford. i think part of the reason is that i'm not very trusting of what i read, and i can't take ANY economics specialist at face value because they all argue opposite things. how the fuck do i know which ones are right?

i'm appreciative of all the book suggestions but i think at this point some actual hand-holding is required. let's just take the opening para of the galbraith article

In early January 2009 two White House-bound economists — Christina Romer and Jared Bernstein — predicted that if the stimulus bill were passed, unemployment would peak at 8% by midyear and then start coming down. If there were no stimulus, they said, joblessness might hit 9% and not peak until 2010.

- what actually is a stimulus? is it printing more money? if it's so helpful why don't we do it all the time? if it's so helpful why wait til now to do it? surely printing more money devalues the currency? I DON'T UNDERSTAND

- why is it helpful? why would it stop unemployment? why didn't it? are the 8% and 9% figures plucked out of thin air? given that those figures are apparently wrong, might they as well have been plucked out of thin air? why did anyone believe them in the first place?

"fiscal stimulus" means the government spending money in an effort to get people working and to get money flowing around the economy (because those newly hired people are now making wages and will spend that money in stores. there is a knock-on effect also: when those newly employed people spend money they will also be paying taxes on it, which allows the govt to make some of its money back.)

if it's so helpful why don't we do it all the time?

good question. short answer is that governments are already overloaded in debt.

the 8% and 9% figures were guesses based on past recoveries. people believed them because past recoveries made those number seem sensible. the main point galbraith is making in this article is that this recession is not like past recessions, so those predictions didn't pan out.

A stimulus is anything that might stimulate economic growth, so yeah it might be printing more money or it might be tax cuts or it might be an increase in public spending.

surely printing more money devalues the currency?

You don't literally print money, central banks will put more money into the financial system that can be borrowed by other banks and used to free up the amount of money they can use for other things. This may or may not lead to inflation and devaluation of currency, but economists are divided on whether or not that's actually the case.

Any stimulus that leads to economic growth should, theoretically, lead to increased business confidence and increased consumer confidence, "we're coming out of a recession" etc. So businesses are more likely to invest and employ people. Doesn't always work out that way.

are the 8% and 9% figures plucked out of thin air? given that those figures are apparently wrong, might they as well have been plucked out of thin air? why did anyone believe them in the first place?

Part of the problem is that economics isn't an exact science but people act like it is.

Too much of this stuff is wrapped up in mystification and insider jargon, and it doesn't have to be, unless you are trying to set up shop as an economist. Some day I will have to write a simple 30 page pamphlet, or the website equivalent, that breaks down the fundamental concepts of economics in terms so simple that it will allow ordinary people to read the financial news and figure out what parts are worth paying attention to and what's just pure shite.

so it's creating jobs out of nowhere rather than creating money out of nowhere? those don't sound like very...real jobs. like surely a job corresponds to whether there's work to be done, not anything else.

so this sounds like a vicious cycle - a stimulus is only needed when the economy's gone shit, but isn't govt debt the reason it's shit, and govt debt is the reason a stimulus isn't usually possible?

xps to tracer

You don't literally print money, central banks will put more money into the financial system that can be borrowed by other banks and used to free up the amount of money they can use for other things.

the entire concept of an economy based on everyone apparently borrowing money off each other terrifies me. isn't this, like, the opposite of good personal finance.

Any stimulus that leads to economic growth should, theoretically, lead to increased business confidence and increased consumer confidence

i've noticed economists throw around the word "confidence" like it's a quantifiable, meaningful thing that can be measured, like the amount of water i have in my glass here. but that's bollocks! surely spending confidence goes up and down from day to day and also totally randomly? or is that just mine?

i don't think you have to be a malthusian to argue that the standard "growth model" of constant 3% year-on-year increases in output is unsustainable

also tracer what on earth does this mean

(i know about malthus, the rest of it)

I don't know, most jobs are only "real" for as long as an employer decides they're necessary. A lot of jobs aren't really very concrete unless you're something that's absolutely necessary to the country like a doctor or a street cleaner, and even then they might need different numbers of them at different times.

Government debt isn't usually the reason an economy's shit though - economic problems tend to start in the private sector, as it the case in what we're going through now. If governments save money during the boom, then they're in a better position to a) cope with declining tax revenues without cutting spending and b) actually raise public spending to offset declining business or consumer spending. Obviously our governments spent a lot of money during the boom, some on worthwhile things, others less so (like killing loads of people in foreign countrie, which is kinda expensive). And of course we ended up borrowing and spending a fuckton of money to bail out failing banks.

not out of nowhere, out of public investment. projects that congresspeople have been trying to push through for years, desperately needed infrastructure improvements, regulatory agency staff, military bases, dams, whatever. as galbraith notes in an earlier article about the US fiscal stimulus, 'The bill tilted toward "shovel-ready" projects like refurbishing schools and fixing roads, and away from projects requiring planning and long construction lead times, like urban mass transit.'

yes, this increased the budget deficit. but no, govt debt wasn't the reason the economy went to shit in the United States, predatory lending practices and sheer duplicity by banks is why it went to shit.

xpost

xxp the basic idea is that, whatever the starting point, 3% growth every year quickly adds up to growth so rapid that you use up all the resources available.

the entire concept of an economy based on everyone apparently borrowing money off each other terrifies me. isn't this, like, the opposite of good personal finance.

There's nothing wrong with borrowing money as long as you can pay it off. Problems arise when you lend to people or countries that can't, and the western world built a ridiculous edifice allowing them to offload the risk of lending to those people. Except it didn't work, and the edifice collapsed.

But actually if people stopped lending money altogether then no more money would be created through interest, so there'd be the same amount of money among a growing population (ie less to go round).

money isn't just created through interest, it's created every time somebody asks the bank for a loan! if you want a £2000 loan, that's £2000 that just magically appears from nothing, right into your bank account. then the £2000 (plus interest) appears in the bank's balance sheet as an "asset" (though really just a promise) that can be traded, sold, etc. i agree with lex that there is somethign fundamentally frightening and wrong-feeling about this.

i just don't see the logic behind a stimulus being needed most when the government is least able to afford it? why weren't these "desperately needed" projects done when the govt had money? also how does the debt get paid off?

There's nothing wrong with borrowing money as long as you can pay it off

but you don't know who'll be able to pay it off. if they don't have the money now why would they have it in the future.

is macro-economics actually the OPPOSITE of personal finance????

ssshh! Don't tell any of the GOP candidates running on the concept that taming the economy is like balancing a checkbook.

so it's creating jobs out of nowhere rather than creating money out of nowhere?

lex, you must clear your mind of cant, as Dr. Johnson was fond of saying. A job is just a person engaging in some kind of presumably productive activity. If you have a person with a few skills and something useful that needs to be done, then you have everything needful for creating a job "out of nowhere".

Both of those two elements for jobs exist out there in massive quantitites. They are almost as common as air. What's missing in most instances is the money to compensate the workers for doing that work. Because money, rightly considered, is just a marker for productive activity, then the very fact of one's being productive in some sense calls money into being, "out of nowhere", if you like.

The real trick is figuring out what anything is worth in terms of money. That's where the real smoke and mirrors come into play.

okay so it IS creating money out of nowhere

this is a conceptual hurdle for me

Actually I really do recommend reading Galbraith's "Money", because the history of banking as a technical craft is pretty relevant: including the extent to which it's always the most recent problem but one that everyone is overcompensating for.

but you don't know who'll be able to pay it off. if they don't have the money now why would they have it in the future.

not in absolute sense. but that's why banks have loan examiners and such ... if they're doing their job correctly, they check to see what the borrower is going to use the money for, if it (and other economic activities the borrower is engaged in) are sufficient to pay off the principal, the borrower's past history (any defaults or bankruptcies or delinquencies), etc. and if they determine that the borrower is creditworthy, they add an interest rate commiserate to the level of risk involved in lending the money. even then, of course, some creditworthy borrowers can go bust.

hee, lex sounds like a republican

I think a lot of the confusion about macroeconomics is due to the fact that there is not a lot of consensus overall. You have a massive divide between the Keynesians and the Neoclassical school, and they seem to agree on very little. For example, Keynesians will tell you stimulus is a good idea in certain situations, whereas from the Neoclassical view, stimulus is useless or even detrimental.

xps re: "frightening"

That's probably because you think of money as somehow being concrete. So, try this exercise: take a piece of currency out of your pocket and look at it. That is a concrete object called money. What is it you are holding? A piece of paper. That should help clue you in. It's all unreal, just a marker, a chit, a promise. It works because we think it works, so it does work.

if i realise how unreal it is THAT IS WHEN I STOP THINKING IT WORKS

jesus christ this is why my libertarian friend always goes on about silver isn't it

i just don't see the logic behind a stimulus being needed most when the government is least able to afford it? why weren't these "desperately needed" projects done when the govt had money? also how does the debt get paid off?

the theory is that during boom years the government runs a surplus which is used for fiscal stimulus in moments when private demand slumps. in the United States, amazingly, this actually happened: there was a surplus at the end of the Clinton administration. and then Bush pissed it away in massive tax cuts and two wars. it's difficult not to wonder how things might be different now had the US not squandered this surplus.

the usual story is that the government fails to store up its seedcorn in the good years. but even then, stimulus (resulting in bigger govt debt) is sometimes the only way to knock an economy out of its slump. this certainly looks to be the case now. wages have stagnated even as the price of food and oil has risen, so people can't afford to buy much stuff. the cost of borrowing money is already at a historic low and can't go any further, so nothing can be done in that respect to further encourage people or businesses to take out loans. there is simply not enough demand. companies are sitting on vast piles of cash because why should they open more factories and provide more jobs if demand is already weak? the proponents of fiscal stimulus would say it's now the government's role to step in and provide the missing demand in the form of big projects that get people working and spending.

so how does that new, further debt get paid off? well, governments are huge entities and usually survive to the next round. they can find a way. in fact, some would argue that without government spending to stimulate demand, future growth prospects will be very bleak - leading to much lower tax revenues and actually making it more difficult for governments to pay off their debts!

in the meantime, while governments dither, an entire generation is looking at extremely limited employment prospects.

xp

Yes, but silver is just as much a mind fuck as paper is. It ain't nothin' but a hunk of useless metal.

it's not ENTIRELY true that money is totally unreal. in the USA, currency is backed by the "full faith and credit" of the US government. as long as the government can levy taxes and there are sufficient assets subject to American tax jurisdiction that can pay those taxes, then the value of American currency is "real." this is one of the reasons why the Congress's recent fucking around with the debt ceiling was such a big deal and was so reckless ... one political party took increased taxes off of the table completely.

you can base currency on ANY commodity ... gold is the usual hobby horse, but it could be silver or anything else. you could peg a country's currency on coffee beans. there's nothing more magical about gold or silver than coffee beans. precious metals are just as subject to supply and demand as any other commodity.

haha lex if you want to really combine your two academic bugbears you could try reading the economics section of "the order of things" by foucault where he goes into the semiotics of money o_O

A promise is a promise: it's not unreal, even if it's not a physical and unavoidable force. It's a matter of negotiation and practicality; the economy is the aggregate effect of a huge number of promises (some negotiated in very bad faith; others rather impractically). The total value of money reflects the total agreed value of these promises -- the good promises, not the bad ones. If the notes in circulation -- for a variety of reasons -- deviate a great deal from this total value of money, upwards OR downwards, then bad effects can happen: a liquidity crisis (not enough money circulating) or a devaluation (too much). A valid government stimulus provides money that has, for whatever reason, gone missing from the economy: it's not inventing it so much as teleporting it.

This total value is VERY HARD INDEED to calculate: not least because routine economic calcalution omits all kinds of productive activities which are hard to monetise. And also because many of the people making the calculations are somewhat fudging them to help their firm; or their party; or their kids, or their class, or whatever.

i think this thread has caused me an actual internal crisis, my mind is broken. what with the revelation that apparently i am instinctively right-wing economically and then all this "it's not real!!!" stuff on top of that, the way i see it i have two options

i) move to a hut in the wilderness and learn to grow vegetables and become ENTIRELY SELF-SUFFICIENT and just opt out of this terrifying and unsustainable edifice
ii) NEVER THINK ABOUT ANY OF THIS EVER AGAIN

The greatest harm done by high deficits, however, cannot be put into an economist's computer. This is the psychological impact on the battle against inflation. The average American consumer may not be well versed in the fine points of economic theory, but he is worried about anyone, whether it be an individual family or the Government, who spends more than he earns.

"The Great Deficit Dilemma", Time Magazine, Feb 15, 1982

http://www.time.com/time/printout/0,8816,925278,00.html

mark if i couldn't tell whether a promise being made to me was good or bad i'd have to assume it was bad. why would you ever take the risk otherwise?

$$

learn to cook vegetables? most of them taste nasty raw

i actually like most raw vegetables

how do you grow houmous to go with them?

you'd need access to the vast hummus shoals in the north sea

all it comes down to is work - currency is made by work. Unemployment = less work, less real economic power in a society

Lex yr position is not "instinctively right wing" because the US right has done a complete 180 on many of these issues of late and a lot of the UK right has positively encouraged households and countries to get into.huge amounts of debt in the past. The Right is divided here.

mark if i couldn't tell whether a promise being made to me was good or bad i'd have to assume it was bad. why would you ever take the risk otherwise?

well, you try to winnow out the bad risks from the start. (our current economic mess stems from the fact that the banks WEREN'T doing that). when that fails, you resort to bankruptcy court and debtor/creditor laws.

Much of the centralisation of banking and so on has been done -- at least on the pretext -- that promises from now on get to be kept: a bank note is in fact a promisory note (english ones actually state "I promise to pay the bearer etc etc"). The buzzword in modern banking has been "securitisation": same idea, that risk is structured away. But the outsourcing of judgment -- which is what has also largely meant -- comes at a massive price, whether you blame this on incompetence, or greed, or rashness, or dishonesty, or all of these. And sometimes things intervene, and promises become hard to keep.

I wonder what would happen if there was one world currency - the eartho

you'd have what's going on in Europe right now ... only on a global scale.

(our current economic mess stems from the fact that the banks WEREN'T doing that)

if they couldn't do that what is the point in...any of this

Nevertheless, yes, promises are perilous: and if we agree that we agree to agree on such-and-such now, that this activity is an acceptable exchange for this item (or note to the value thereof), what do we do when payday comes and all the world is a different shape?

^^^times the number of potential agreements made or makeable by the number of people on the planet in the relevant timespace!

all it comes down to is work - currency is made by work. Unemployment = less work, less real economic power in a society

my ultimate and sole ambition is for a life of leisure :(

lex - then build up a bunch of money in your bank and retire

lex the relevant vetting didn't happen because more loans meant more money.

and perversely, the riskier the loan the more money could be obtained by trading it! investment banks started heaping enormous pressure on their staff to find better "yields" on assets they traded - risky loans offered just that. the banks thought they could contain the risk with a lot of fancy footwork, and they had computer models that reassured them, and besides, the housing market was just steamrollering through everything and had been for years...

(our current economic mess stems from the fact that the banks WEREN'T doing that)

if they couldn't do that what is the point in...any of this

― lex pretend, Wednesday, August 17, 2011 1:12 PM (56 seconds ago) Bookmark

well, and this grossly simplifies it, you have someone (the government, rating agencies, shareholders and investors, internal compliance people) looking over the shoulders of the people who are lending out money to make sure that they aren't being reckless. the missing part of my above analysis is that the folks who were supposed to supervise this (the ratings agencies in particular) weren't doing so properly.

- what actually is a stimulus? is it printing more money? if it's so helpful why don't we do it all the time? if it's so helpful why wait til now to do it? surely printing more money devalues the currency? I DON'T UNDERSTAND

- why is it helpful? why would it stop unemployment? why didn't it? are the 8% and 9% figures plucked out of thin air? given that those figures are apparently wrong, might they as well have been plucked out of thin air? why did anyone believe them in the first place?

ok i realize other ppl have responded but maybe my own take will help:

- 'stimulus' just refers to a policy or typically set of policies that is intended to 'stimulate' demand in an economy. this can either be through fiscal policy (govt spending and taxation) or monetary policy (interest rates/money supply). it almost never refers specifically to directly increasing the money supply by printing money because history shows that tends to make things worse.

- in the current us case both fiscal policy (cutting payroll taxes, increasing government spending, increased unemployment benefits &c) and monetary policy (quantitative easing) were used to prop up demand in the economy after the financial crisis. at a very basic level keynesians argue that this is helpful because its helping aggregate demand (and thus jobs and thus growth and thus revenue) stay close to where it 'naturally' is and that the spending is economically justifiable because it has a 'multiplier' effect i.e. for every dollar the government spends its getting M times that amount in value. you can think of this has a sort of ripple effect from the initial investment in say building a bridge, which in turn employs 100 people who then create demand for other goods and services and so on

- as o.nate points out there is quite a bit of conflict over whether this is actually true. a neoclassical economist would argue that government spending simply crowds out private demand rather than adding to aggregate demand in the economy as a whole.

- even under keynes you only use these policies when the economy is growing less than its 'natural' rate, if things are going fine than you dont get the same multiplier effect because demand is coming from elsewhere (fdi, private demand &c)

- also there are multiple real world problems w/increasing govt spending from the time lag btw approving spending and actually getting it into the economy to political maneuvering that prevents spending from going to the most efficient places but instead political valuable or salable places e.g. wind turbines over bridge construction.

- i dont want to talk to much about monetary policy (cuz lol) but decreasing the value of a nations currency during a recession is actually p good for lots of people. first it makes the real cost of the nations exports and helps improve trade balances but it also decreases the real value of debts for households. obv this is bad for ppl holding debts but considering the level of indebtedness in the us depreciation isnt de fact a bad thing!

- the 8-9% figure is based on some macroeconomic models that will have used historical data to test their ability to predict the effect of various changes in the economy. fwiw ive seen some convincing arguments that problem wasnt that 'the stimulus' was ineffective in stopping unemployment rising so much as that the severity of the decrease in growth was underestimated and that the stimulus simply wasnt large enough to combat that, not that the models or the policy itself was worthless

you also have to build in the somewhat complicating factor that -- esp. in the US -- the economy has often grown fastest when the arrangement was most lawless: in the early 19th century anyone could set up their own bank and issue their own notes, and sometimes these circulated, getting dirtier and more ragged, long after the bank (which was two hundred miles away) had gone under. The east coast was respectable and button-up, but the frontier needed a more rough-and-ready system.

This accountant-versus-pirate ecology runs pretty deep in US socio-political DNA: both always there, both kinda needed. Nor do the two categories map easily onto US political divisions.

this is why financial sector deregulation has been such a dud (and calls to further deregulate or even to maintain the status quo are so misguided). if governmental agencies charged with oversight of the financial markets (dunno what the equivalent in the UK would be, but in the USA you have the Securities and Exchange Commission, various federal and state agencies that regulate banks and insurance companies, even the IRS to some extent) hadn't been either negligent or complicit in letting the financial sector essentially do what it wanted during the 2000s (hell, you could go back to the late 1970s), was more aggressive in ferreting out fraud and if the laws and regulations had been updated to account for new financial players and instruments (e.g., if there were more oversight of hedge funds or the rating agencies) then the lion's share of the mess could've been avoided altogether.

Most of the ever-growing complexities of economics and finance are the result of endlessly painstaking efforts by armies of experts seeking to identify and quantify risks in a given set of investments, hich are then offset by endlessly painstaking efforts by armies of experts seeking to maximize returns by any means possible.

also (and lol this thread) id divide 'understanding macroeconomics' into two distinct types of arguments: there are basic foundational arguments about how variables work together w/in a model e.g. what the relationship btw interest rates and inflation is or supply and demand which can be mapped and understood p simply and have lots of data to back up assertions and 'predictive' arguments about what the effect of change of a variable in a model will be on the model as a whole which tend to be both more complex and less certain. understanding the first is to some extent a laudable and realistic goal understanding the latter is kind a '...' imo for the most part

Galbraith: "By affirming solemnly that prosperity will continue, it is believed, one can help insure that prosperity will i fact continue. Especially among businessmen the faith in the efficiency of such incantation is very great."

and perversely, the riskier the loan the more money could be obtained by trading it! investment banks started heaping enormous pressure on their staff to find better "yields" on assets they traded - risky loans offered just that. the banks thought they could contain the risk with a lot of fancy footwork, and they had computer models that reassured them, and besides, the housing market was just steamrollering through everything and had been for years...

ok i don't understand this post. what is an "asset" in this context?

really have to leave house now and haven't taken in anything after that but when i was in the shower it also occurred to me, what is this talk of quantifying and measuring risk? you can't do that. it's like confidence. it's unpredictable. measuring it seems like a fool's game.

interest rates. i don't understand those either. i remember trying to learn about them at university but my brain is just going BUHHHH?

you guys need to spend more time explaining the basic concepts - until he gets what 'money'/'gdp'/etc really means you're gonna be talking over him

what is this talk of quantifying and measuring risk? you can't do that. it's like confidence. it's unpredictable. measuring it seems like a fool's game.

haha risk is super calculable! its like the basis of financial economics! its just calculating probabilities! i dont know why im so exclamatory about this!

i'm not comfortable with how every post in this thread ends with "but it might not be true, in face someone else argues the opposite". how are we meant to work out which is right.

you guys need to spend more time explaining the basic concepts - until he gets what 'money'/'gdp'/etc really means you're gonna be talking over him

i am not gonna forget that i owe you a fist in the face

haha risk is super calculable! its like the basis of financial economics! its just calculating probabilities! i dont know why im so exclamatory about this!

quantifying risk = predicting the future????

i dunno if this is what lamp is getting at, but the different schools of thought regarding macroeconomic analysis are really just as much about competing political agendas and beliefs. Keynesianism in its various forms takes the view that strong fiscal policy ... and by extension, a more "activist" government at least in terms of taxing and spending ... is the key to recovery from economic downturns. Monetarism and the various forms of neoclassical economics largely eschews "activist" fiscal policy and instead espouses the more "passive" approach of manipulating interest rates and money supply (which appeals to the folks who either on principle don't like a more activist government or who would be negatively affected by robust fiscal policy).

Re: quantifying risk. It can be done in the same way that an actuary can set rates for your life insurance without knowing when or how you'll die. It comes down to statistics and finding meaningful correlations. Since there are endless variables to play around with, everyone is looking for a better set of correlations that nobody's considered yet, just like gamblers looking for a system to beat the house.

quantifying risk = predicting the future????

essentially yes. and this is what insurance companies are in the business of doing (and have been doing for centuries now).

of course, insurance companies can get it wrong too ... which is why you have reinsurance companies (the insurance company's insurance company, to oversimplify things).

lex that was not meant to be an insult I am pretty sure that you don't know what 'money' refers to in the sense people are using it here

(the large majority of people don't / it's not common sense)

this is true - the question before "economics?" should be "what is money?"!

Also this is why the thing about "paying back the debt" is a fiction because paying debt removes money from an economy - less money to spend, less goods, less jobs - that saving and paying down debt which is so good on an individual level is not good on a national level - this is why things like stimuli happen - people dont have the confidence to spend and save instead, so govt does some spending for them

fewer, not less. sorry everyone!

two workable definitions of the concept of "velocity of money," which may be useful in understanding fiscal and monetary policy.

which goes back to the criticism of "spending what we haven't earned" - which is a ludicrous criticism, thats the way money works! Its borrowed into existence, you have to spend it before you earn it by definition

http://ecx.images-amazon.com/images/I/51pqEtjrgtL._SL500_AA300_.jpg

the other book i recommended -- by sebastian nokes -- spends the first chapter explaining what an asset is: and also explaining why other definitions you will find used are SILLY RUBBISH spouted by MADMEN AND THIEVES (he doesn't quite put it like that) (sadly)

that's also why it is so hard for folks inclined to Keynesianism and strong fiscal policy have such a hard time convincing the lay public about the advantages of their proposed programs. on its face, it flies against "common sense" -- i.e., that in bad times one does not waste money, pays down debts and saves more. this is where all of this talk about "the government needs to balance its checkbook!" comes from and from which such rhetoric derives its strength. the GOP has made much political hay (and caused much economic damage) by using this misleading analysis (it is misleading because the government isn't a "household," and even in bad times households do take on increased debt [to pay for education or economically-productive products like computer software]).

overall we need an economy thats not based on everyone buying big screen tvs every month

if we're going to peddle cliches here, then a good one to think about is the cliche "you have to spend money to make money."

I think better to say "you have to take money to make money"

latham green weirdly otm

and if we're NOT going to peddle cliches, i recommend my claim about teleportation, which i suggest is a first here or anywhere else

w/ the tv comment only

think about it, everyone buys a hosue that is way over-valued in 2006, mortgage brokers sell the mortgages and make money - banks end up with a loss when reality comes back to the houseing market and so do many homeowners, but the mortgage brokers keep their money! They pretty much just took it from the other two

i think we'd be in better shape if we made TVs in the USA instead of relying on TVs made in China ... but that's another (though related) argument.

physically, for sure

think about it, everyone buys a hosue that is way over-valued in 2006, mortgage brokers sell the mortgages and make money - banks end up with a loss when reality comes back to the houseing market and so do many homeowners, but the mortgage brokers keep their money! They pretty much just took it from the other two

well, there is such a thing as a "class action lawsuit" ... and if we had a Supreme Court and state attorneys general that haven't done as much as it can to limit the effectiveness of class action suits then litigants could more easily claw back this money.

This is a blog that I like to read to get some idea of how macro-economists think:

http://www.themoneyillusion.com/

Caveat emptor: I think the author is kind of a libertarian - but at least not a boring, doctrinaire one.

how are we meant to work out which is right.

― lex pretend, Wednesday, August 17, 2011 5:34 PM (20 minutes ago) Bookmark

competing ideologically motivated interpretations of the same periods of history don't help either

this is true - the question before "economics?" should be "what is money?"!

haha i think my first undergrad econ course actually had like a chapter 1 segment on 'what is money' that also probably featured the term 'fiat money' lol

also is galbraith really widely read in england weird to see him rec'd here so much

thats not gonna set lex in the right path

galbraith got penguined i think

NO! JKG is not widely enough read he us VERY FUNNY unlike every other economist ever (except marx obv) (and veblen, who's a sociologist really).

Also this arose bcz Lex was o_O at a piece by jamie g.

"fiat money" is a real term and a real thing (and a pretty good thing IMHO). it's the people who rant about the "evils" of fiat money (almost always goldbugs or other fringe wackos) that gives discussions about it its particular repute.

Yeah i don't quite understand this antipathy to the usage of the term - just because some people rant about it. Doesn't mean the term is incorrect

one of the weird things about the current political landscape is watching conservative politicians rail against the fed + monetary policy since a) monetary policy solutions are in my mind the purview of neoclassical economics/the right and b) it seems based on a tremendous misunderstanding of the economics of money (although not, weirdly, the semiotics of money!)

i think we'd be in better shape if we made TVs in the USA instead of relying on TVs made in China ... but that's another (though related) argument.

wellllll

(apart from certain branches of cultural theory but at some point i realised those were total bollocks anyway and stopped beating myself up over it.)

same is true of much economics, no?

basically came here to say this

IIRC, the term "fiat money" is a reference to the latin Vulgate Bible, where God, in Genesis says, "Fiat lux" (meaning fairly literally "I command light" or as the KJV has it, "Let there be light"). At which point in the creaton of the universe, light came into existance, where before there was no light. Pretty clever allusion, if you ask me.

its weird to think as someone pointed out to me the other day all money really is today is numbers in a database

But modern US "conservatism" has inherited lot of Andrew Jackson's anti-centralism, hasn't it? The issue of greenbacks and the Fed, are both actually Republican creations: but they're not at all conservative in the strict sense -- they were innovations -- and in the anti-centralist Jacksonian sense.

God knows US politics is a baffling switchback ride: pirates vs accountants is the underlying dynamic, but both exist on all wings of politics.

Yes, but they are very heavily scrutinized and controlled numbers.

fiat money is currency that is backed by the full faith and credit of a government, and not (explicitly) by the government's reserves of a commodity (such as gold or silver). this is overall a good thing b/c it doesn't artificially retard economic growth and planning by pegging currency values on the value or availability of a given commodity. its drawback is that, yes, a government in a bind can turn on its printing press and spew out money like there's no tomorrow (like Weimar Germany). i think that the pluses outweigh the minuses, but some folks don't agree. such folks have lots bats in the belfry IMHO, one of them an overriding fear of "big government." by constricting the supply of money, they constrict the growth of government.

human history is pretty well littered with examples of why tying money to a commodity is a bad idea

certainly it's very hard to exchange a commodity for money if the money is tied to the commodity

That's one reason why gold was such a good choice in the dim ages past. Not only is it a stable element that can't oxidize, but it's pretty damn useless for anything but looking pretty, so making it awkward as a useful commodity was no sacrifice.

you all forget BITCOINS!!!!!

gold-pressed latinum FTW

But modern US "conservatism" has inherited lot of Andrew Jackson's anti-centralism, hasn't it? The issue of greenbacks and the Fed, are both actually Republican creations: but they're not at all conservative in the strict sense -- they were innovations -- and in the anti-centralist Jacksonian sense.

no, totally! its just that dynamic eisbaer describes upthread is like my basic lens through which i think about the politics of economic policy its totally jarring to me to see tea party types trying to reintroduce the gold standard and carping about the fed all the time, but yeah that stuff has a long tradition on the right

It's tempting to equate monetarism with conservatism and Keynesianism with liberalism, since that's how the economists in those camps tend to line up. However, the reality is actually a lot messier, since politicians aren't very consistent in their economic reasoning. For example, take Cheney's famous line: "Reagan proved that deficits don't matter". In economics circles, the notion that deficits don't matter is associated with Modern Monetary Theory and lefty types like James K. Galbraith.

how are we meant to work out which is right

Obviously politics comes into it as well - right-wing economists have different priorities to left-wing or left-leaning ones. They have different ideas of what a positive outcome would be and you have to take that into account.

But it's also impossible to know who's right until it happens because events dear boy can knock any forecast off course. Predictions don't necessarily take into account a Middle Eastern dictator doing something mental that pushes up oil prices for example.

Thanks to this thread, I started reading The Great Crash again.

Great Crash is very entertaining. Like Mark S alluded to, Galbraith has a keen mordant wit.

this

"fiat money" is a real term and a real thing (and a pretty good thing IMHO). it's the people who rant about the "evils" of fiat money (almost always goldbugs or other fringe wackos) that gives discussions about it its particular repute.

― Friedrich das Wunderhahn hat den traurigen Clownporn sehr gern (Eisbaer), Wednesday, 17 August 2011 13:08 (3 hours ago) Bookmark Suggest Ban Permalink

and this

fiat money is currency that is backed by the full faith and credit of a government, and not (explicitly) by the government's reserves of a commodity (such as gold or silver). this is overall a good thing b/c it doesn't artificially retard economic growth and planning by pegging currency values on the value or availability of a given commodity. its drawback is that, yes, a government in a bind can turn on its printing press and spew out money like there's no tomorrow (like Weimar Germany). i think that the pluses outweigh the minuses, but some folks don't agree. such folks have lots bats in the belfry IMHO, one of them an overriding fear of "big government." by constricting the supply of money, they constrict the growth of government.

― Friedrich das Wunderhahn hat den traurigen Clownporn sehr gern (Eisbaer), Wednesday, 17 August 2011 13:23 (3 hours ago) Bookmark Suggest Ban Permalink

are ridiculous

as I said it takes the consent of the population for money to have value, or you end up like wiemar germany or in the south sea bubble. Governments can decree all they like and the people in one, loud concerted voice can shout "FUCK OFF". It is the market that sets the value of money, gold, fish, or anything else for that matter.

Governments can print money the market establishes value. "Fiat" is an assenine concept when it comes to economics.

This is why goldbugs piss me off so much. Gold only buys a certain amount of work or grain or whatever. it doesn't buy the same tomorrow as yesterday. It's all barter, if ten billionaires in mumbai have a wedding this weekend then it will cost less gold to buy more grain because there will be shortage of gold. If the US prints bunch of money I will be able to buy more dollars with my euro or my gramme of gold; it's all relative. No one get's to declare anything has value because we can all turn round and say BOLLOCKS I'll only give you less.

Ed, I hope you realize that by far the largest amount of "fiat" money in circulation today was not created by the federal government, but by banks. iow, it was created by markets. But it is still "fiat" money, by all accepted definitions of that term.

In fact, the federal government has no ability to "print money" in the sense you are using the phrase; it ceded that function to the Federal Reserve Board a very long time ago. All money spent by the US federal government must come from either tax revenues or the sale of bonds or bills, which must be repaid.

The Fed, otoh, has the option of buying whatever assets it wishes to buy, using money that it creates by fiat. Whenever it buys US Treasury bonds using fiat money, this is known as monetizing the federal debt, or in layman's terms "printing money".

The Fed has been out of the habit of monetizing US debt since Volcker was chairman (crica 1980, under Carter). But the Fed has done a huge amount of it since 2008, under Bernanke, along with, I should add, monetizing hundreds of billions of dollars worth of those crappy, worthless CDOs issued by the fucking stupid market you seem to honor so much.

Runs on banks are the clearest demonstration that there is no fiat that runs where money is concerned. This may be pure semantics but the only thing of importance when money is used in a transaction is that the parties to that transaction agree that the money exchanged has a certain amount of value. No government can ascribe any kind of value to currency, be it gold or paper, value is only assigned at the moment of exchange.

It doesn't matter who or what creates the money, value is bound in agreement. Banks are only able to "create" money because a loan transaction occurs where both parties agree a value, (in line with the collective valuation of the market)

No government can ascribe any kind of value to currency, be it gold or paper, value is only assigned at the moment of exchange.

the currency has an agreed value, the value being decided at any given transaction is that of the good being exchanged

exactly

i was disagreeing with you!

When customers make a run on a bank, the one and only thing they are seeking is that same currency that you seem to think they are showing no confidence in. On the contrary a bank run is evidence that the customers have no confidence in the bank, but boundless confidence in the value of the currency they deposited there.

Imagine the contrary situation where the value of the currency has been destroyed through inflation. In such a case, the customer knows that there will be plenty of money in the bank to cover their deposit. Bank runs don't happen in those circumstances. However, whatever money a person lays their hands on is almost certain to be spent quickly, rather than put in a bank.

It appears you have a somewhat confused knowledge on this subject.

It appears you have a somewhat confused knowledge on this subject.

this is such a disgusting sentence, how can you even live with yourself after typing it?

i really don't know why you think anything i said is "ridiculous," ed. i gave the definition of what fiat money is, i didn't say that the markets don't determine the value of currency at any given point of time. if anything, untethering the value of a currency from gold (or other commodity) actually aids markets in determining the true worth of currency.

this is such a disgusting sentence, how can you even live with yourself after typing it?

bit strong imo

also, aimless OTM regarding bank runs. those are really judgments about the soundness of the financial institution and not a judgment on the soundness of the currency deposited there. or at least not if you have something like the FDIC.

I stand by the sentence. That is exactly what Ed's posts reveal to me. otoh, it appears ogmor has a delicate stomach.

pfft, he's a physician now and all

He can palp my liver, but he ought not to prescribe in this area.

it appears i have a somewhat confused stomach.

not to get name-droppy and anecdotal here, but i was actually working (as a compliance consultant) at a (now-defunct) bank which went under because of a run by its depositors right after Lehman Bros. collapsed. this institution's failure had everything to do with a lack of confidence in the institution itself, and nothing to do with a lack of confidence in American currency.

this can either be through fiscal policy (govt spending and taxation) or monetary policy (interest rates/money supply)

what does monetary policy actually involve? (i don't really understand interest rates and don't know what you mean by money supply)

(quantitative easing)

i kept going to meetings a few months ago where this was brought up as a possible solution and people always said that it wasn't because no one fully understands it. what...is it? and...why does no one understand it?

prop up demand

like "confidence" and "risk", i'm slightly confused by "demand" as a quantifiable/predictable/concrete thing. a lot of economics seems to assume that people's desires can be manipulated? it doesn't seem to allow for much human irrationality?

i had other questions (those were from lamp's big post last night) but i started writing that a few hours then had to do other shit so thought it was best if i just post those questions for now

that's also why it is so hard for folks inclined to Keynesianism and strong fiscal policy have such a hard time convincing the lay public about the advantages of their proposed programs. on its face, it flies against "common sense" -- i.e., that in bad times one does not waste money, pays down debts and saves more. this is where all of this talk about "the government needs to balance its checkbook!" comes from and from which such rhetoric derives its strength. the GOP has made much political hay (and caused much economic damage) by using this misleading analysis (it is misleading because the government isn't a "household," and even in bad times households do take on increased debt [to pay for education or economically-productive products like computer software]).

― Friedrich das Wunderhahn hat den traurigen Clownporn sehr gern (Eisbaer), Wednesday, August 17, 2011 5:51 PM (Yesterday) Bookmark Suggest Ban Permalink

this rings totally true though! it's completely counter-intuitive and i don't understand why you're right, if you are. i don't understand why the government isn't a household. and i disagree that households that are completely broke will take on debt.

also if this is the case how the hell does anyone ever expect this argument to be on the winning side?

Lamp's explained the demand bit after that though. If the economy is slowing or in recession then the government can (if it chooses) pump money into, say, infrastructure projects or construction of schools or hospitals. This creates demand for construction firms, architects, building materials, steel, whatever. The companies that provide those services are then getting work they wouldn't otherwise due to the private sector slowdown. This means they can keep workers on, or indeed hire new workers. Those people will be in a reasonably secure job for the duration of that project, if they're lucky, so they'll be more likely to spend their own cash, and so it continues through the system.

this is true - the question before "economics?" should be "what is money?"!

― post, Wednesday, August 17, 2011 6:41 PM (Yesterday) Bookmark

yeah this thread nvr took off: What does money represent?

this rings totally true though! it's completely counter-intuitive and i don't understand why you're right, if you are. i don't understand why the government isn't a household. and i disagree that households that are completely broke will take on debt.

also if this is the case how the hell does anyone ever expect this argument to be on the winning side?

No! If it's a choice between borrowing money and letting their children starve on the streets, most households would opt for borrowing the money, if they could. But a government isn't like a household because it can continue to borrow for longer and can never go bust, although it can get into a lot of trouble like eg Greece.

Also, no matter how big a government's debt or deficit is, they still need to keep the economy moving to stop tax revenues drying up even furher. If tax revenues dry up, then the debt or deficit will get bigger. So if consumers and businesses won't spend in sufficient quantities, the government has to in order to stop that happening. This is why a lot of economists are arguing that they shouldn't be austerity measures until the economy has recovered, because otherwise they'll make the situation and deficit worse not better.

i don't understand why the government isn't a household. and i disagree that households that are completely broke will take on debt.
also if this is the case how the hell does anyone ever expect this argument to be on the winning side?

The basic idea is that if a household stops spending and saves instead, then it has more money - it has taken it out of the game

But if everyone stops spending and saves money - then not only are fewer things being sold so less jobs needed, but also there is less money in the game full stop

just as money appears when loans are made...it disappears when debts are paid off.

debt is presented as a "problem" but it really isn't. Think about the amount people owe in loans and mortgages - then think about the number of people who have savings and how much they are likely to have saved. they are hardly equivalent. most people don't have tens and hundreds of thousands of savings..

Yes, it's worth mentioning that if there was no debt than virtually nothing would get done. No one would have the cash to buy a house, build a building, establish a business, anything, which means fewer jobs. No one except a few people who'd inherited money, and most of them would have had ancestors relying on debt at some point.

debt is presented as a "problem" but it really isn't. Think about the amount people owe in loans and mortgages - then think about the number of people who have savings and how much they are likely to have saved. they are hardly equivalent. most people don't have tens and hundreds of thousands of savings..

― colby, Thursday, August 18, 2011 4:00 PM (2 seconds ago) Bookmark

this sort of presents the current distribution of property and power as not a problem!

the concept of debt - not its current manifestation

But a government isn't like a household because it can continue to borrow for longer and can never go bust, although it can get into a lot of trouble like eg Greece.

so why did greece get into trouble? i don't really understand exactly what greece's trouble is or why we're not in the same trouble.

This is why a lot of economists are arguing that they shouldn't be austerity measures until the economy has recovered

but isn't the only reason austerity measures are needed BECAUSE the economy is shit?

i have no idea what "the economy is shit" even means.

debt is presented as a "problem" but it really isn't. Think about the amount people owe in loans and mortgages - then think about the number of people who have savings and how much they are likely to have saved. they are hardly equivalent. most people don't have tens and hundreds of thousands of savings..

owing tens of thousands of pounds in loans sounds like a problem to me! also i tend to thinking that mortgages are terrifying and the only way i ever want to pay for a house is if i have that amount of money in cash. you can't predict the future!

so our economy relies on

- debt
- money that isn't real
- borrowing money you don't have

WHAT THE FUCK

Once I tried to calculate how many times a dollar has to change hands every year for the US economy to be healthy, but I couldn't really figure out how to start and bogged down.

i have no idea what "the economy is shit" even means.

there's no growth, and a large gap between government revenue and government expenditure, necessitating borrowing, 'debauching the currency', etc. the second question relates to the 'household' meme. the growth question is more interesting.

The UK owes more than Greece, but we also bring more in in tax due to being a much bigger economy, so we can cope with paying off that debt. Also we are trusted by lenders to keep paying back, so they're okay with continuing to lend. The same isn't true of Greece.

owing tens of thousands of pounds in loans sounds like a problem to me!

Well the idea is that you have something (a house - a company - some shares - a big bag of diamonds) that you could sell to pay back that loan, if necessary

who are the lenders? why are we trusted? what happens if they capriciously (and UNPREDICTABLY) stop trusting us?

i wouldn't fucking trust us

also why isn't this taught in schools?

The lenders are the banks - who write the money into existence, they trust us because they know that people will work for the bulk of their lives to pay it back

If everyone wasn't in debt and didn't have to work to keep hold of their things and pay it all back...then people would take a different view of work and it wouldn't be a 40 year stretch

The lenders are banks. They trust people because a) they have enough data to know they can, or that the risk is lower than with other people, and because they have mechanisms in place to insure against the risk (some sensible, some utterly bonkers and useless as we've seen). They lend the money because they're reasonably sure they will get more back.

what happens if they capriciously (and UNPREDICTABLY) stop trusting us

This is what the credit crunch is. Lenders stopped trusting borrowers, initially banks stopped trusting other banks to be able to pay back the money they lent them, this meant banks stopped trusting the businesses they lent to, those businesses were more likely to go bust as a result, and the whole system started to collapse.

They lend the money because they're reasonably sure they will get more back

Well they also lent it because on an individual level there were personal incentives to do so - and if you know you're not necessarily going to be working for that institution when it all goes wrong, then why not? You only have to worry about what happens while you are working at that particular institution

this thread is making me oscillate between feeling really dumb and thinking everyone else is really dumb. that cessation of trust seems so obvious to me, like OF COURSE it was gonna happen. the entire system seems ridiculously flawed and fragile.

OF COURSE it was gonna happen. the entire system seems ridiculously flawed and fragile.

― lex pretend, Thursday, August 18, 2011 11:21 AM

If i take a decision at my work that will make me, personally, a lot of money over the next 3 years but will destroy my company in 10...what do i do?

And can i be trusted to regulate myself to make sure i don't make that decision

who gets to trust the banks?

or not trust them

other banks

Lex's thought processes must be much like those of a cartoon character when it realises it's run off the edge of the cliff and is standing on thin air.

Or alternatively a bit like everything we've gone through in three years except all hitting home at once.

who gets to trust the banks? or not trust them?

These are the questions that governments are wrestling with the world over.

i watched the first 10 minutes of the video tracer video and it's like an actual horror film when the main protagonist keeps going off by themselves to explore empty rooms down darkened corridors and not bothering to turn on the light

the history of modern banking seems to be

- banker does something greedy and stupid
- people find out and are briefly annoyed
- and then go "oh it's ok, never mind"

the history of modern banking seems to be

- banker does something greedy and stupid
- people find out and are briefly annoyed
- and then go "oh it's ok, never mind"

― lex pretend, Thursday, August 18, 2011

This kind of seems to have happened again quite recently!

when you all first learned about this, did you at any point have the same "THIS IS COMPLETELY MAD" reaction that i'm having, and if not why not?

I did!

the entire edifice seems optimistic to the point of stupidity

when i've finished writing this piece i am actually going to email my libertarian friend in arizona and ask her about silver

tbh it's got us pretty far. well aside from all the inequality, poverty, hunger, and death in the world.

... probably had the last three before capitalism came along

don't think it's had a monopoly on inequality either

when you all first learned about this, did you at any point have the same "THIS IS COMPLETELY MAD" reaction that i'm having, and if not why not?

You also have to think about what would happen if they suddenly stopped, which would be even worse.

what would happen if they stopped?

Businesses big and small would be unable to operate properly, the government would abruptly be unable to continue to fund a health service, police force, army, school system, whatever, a shitload of people would be made unemployed and homeless. Crime and social disorder would escalate. This explains why governments would rather get themselves into enormous debt and run up massive deficits than risk the banking sector collapsing in 2008.

There's interesting stuff about Abraham Lincoln and the funding of the US civil war here that I'd like to know more about.

http://en.wikipedia.org/wiki/Demand_Note

Like - as I understand it, for a (pretty brief) period of time the US govt issued currency directly and not via banks (because European banks wanted levels of interest Lincoln didn't want to pay?). Could do with a better explanation of what actually happened here though!

i have some questions that i thought of as i was absent-mindedly picking the nuts out of the muesli box instead of doing my work.

so the financial crisis was caused by the markets losing confidence in people's ability to pay back the money that they'd been lent. kind of like dominoes if everyone was lending to each other? (who is at the top of this pyramid, by the way?)

but...none of it is real, i learned from this thread the other day. if everyone demanded what they were owed, people wouldn't be able to pay it back ANYWAY. and that is what drives the economy? so, why is it suddenly an issue? why don't the bankers reassure themselves with this whole "none of it is real anyway" maxim that seems to underpin the whole system, and carry on as before?

i still don't understand this notion of "confidence" either - do the "markets" have some sort of monolithic hivemind on this? why can't they just snap out of it (by...governments?) if they lose confidence? what if some banks lose confidence and some don't? this whole reliance on "confidence" makes it seem like the entire system is dependent on bankers' whims and caprices.

actually what ARE the "markets"?

also what the hell is going on in this article

http://www.guardian.co.uk/politics/2011/aug/21/so-what-do-we-do-now-chancellor

what does it actually mean when it says markets plunge? why does that matter? the markets don't seem very reliable, why are we subject to their whims and moods?

There are different types of markets. Equity markets, which that article is largely referring to, are thousands of people or institutions buying and selling stakes in businesses of all kinds. If a business is "quoted" on the stock market then anyone can buy and sell a stake whenever they want.

There are long-term and short-term investors - long terms ones will buy a stake in a company hoping to realise its value (both in terms of profit share aka dividends and in being able to sell that stake off for a profit later). Long-term investors are more likely to be willing to ride out the value of their stake rising and falling according to its market value. There are also short-term investors, who buy stakes in companies hoping that stake will rapidly increase in value and they can sell it off quickly for a profit. Those people are more likely to sell quickly.

If a lot of people are buying shares, the value of a company goes up. If lots of people are selling (or pulling their money out) then the value of the company goes down, there is literally less money in it. That has consequences for the businesses ability to expand or invest. Generally speaking if markets are plunging it means that investors are (rightly or wrongly) panicked about the state of the economy and what that will mean for the companies in which they invest. Or they're short-termist and are selling that stake before it can go down in value and leave them at a loss.

If the stock market plunges, then the cumulative value of all the companies quoted on it goes down, so a lot of investors are concerned. It's not necessarily a terrible disaster, as what goes down can later come back up again, but it's a sign of declining confidence in the UK economy.

if everyone demanded what they were owed, people wouldn't be able to pay it back ANYWAY. and that is what drives the economy? so, why is it suddenly an issue?

The underlying thing here is - they don't want you to pay it all back. If i lend you £10k plus interest - i don't want you to just give me the £10k straight back, what would be the point? i want you to continue paying the interest on it each month - and you still owe ME the £10k as well. The less you pay off of that £10k the more in interest you continue to pay, so I'd rather you didn't give me back much of the actual £10k

The problem comes if you start to struggle to pay back the interest, then for me there is no point in you continuing to have that £10k anymore i might as well ask for it back and go do something else with it. Except if you're struggling with the interest, there's no way you can give me the £10k:(

But as long as you are giving me interest on the £10k I'm fine with it (and if you were ONLY paying interest, then eventually, one day you would have paid me more than 10k - and STILL owe me the 10k). Say i'm charging you 10% interest - I'm getting £1000 a year off you and my £10k is still there should i ever want it back. I'm willing to overlook the fact you don't actually have it as long as that interest continues to roll in

re: the markets - it seems totally at the mercy of people's panic and whims and herd behaviour (i assume the shareholders, if they sell, do so because they see lots of others are?). why aren't there fixed minimum terms for holding shares to prevent that panicky short-termism leading to instability?

i assume herd behaviour is the default, too - is that what people mean when they say "confidence"?

is there a point at which a business gets big enough that it's immune to the panicky stuff?

also isn't every business different...if the "markets" as a whole are plunging, does this mean the majority of businesses are suddenly going shit? surely at any given time there are always some thriving businesses.

if so many of these tenets - they don't want you to pay the loan back, they don't want full employment - are so patently bullshit, why don't people call the banks/politicians out on it?

and why did they not teach me any of this when i was studying economics at the best university in the country, lol.

in fact i've long been scandalised that politics isn't compulsory in schools, and that languages aren't compulsory from a much earlier age, and now i'm scandalised that these economic basics aren't compulsory. i believe there was an option to do economics a-level, and it was very much a niche subject like drama or design & technology, and i went to a decent school. but nothing compulsory. what is wrong with our national curriculum? why did i have to spend so much goddamn time doing biology/chemistry/physics (completely irrelevant to my adult life) while the educational system failed to give me the basics of this shit that underpins everything we do?

And underlying the debt thing is that is that you borrow the £10k because it's worth it regardless of the future interest payments - as an individual you get your nice house now and know you can afford £1k a year in future, especially with wage rises (inflation erodes debt, so collectively we'll get out of this eventually); as a company you can trade with it and make more than £1k a year in profit; as a government you can continue to provide services to maintain your tax base and bring in more than £1k that way; etc.

And underlying that is stability, it gives everyone an interest in an orderly, prosperous future. If kept in check, obviously, but I'm thinking Weimar Republic here, not credit crunch.

http://epetitions.direct.gov.uk/petitions/8903

as an individual you get your nice house now and know you can afford £1k a year in future

oh fuck, freelancers never ever get to own a house, do they

i mean even apart from the basic "not paid enough" thing

'The markets' are the people with the money, ultimately - governments, companies, etc need to borrow from/buy from/sell to them, all the stuff that goes on day-to-day is setting the price at which those things happen.

Herd behaviour is totally the thing, but it's a very complex herd. Yes, that's basically 'confidence'.

The markets plunging means the price of shares is cheaper - or the flipside, money is more expensive. If you have cash, it's a great time to buy; the difficulty is knowing whether it's an irrational plunge, in which case wahey the sales are on, or a rational one because the businesses are turning to shit. Like you say, every business is different, so it might be both.

also isn't every business different...if the "markets" as a whole are plunging, does this mean the majority of businesses are suddenly going shit? surely at any given time there are always some thriving businesses.

I work for company A (who everyone suddenly realizes are totally shit) and my wife works for company B (who are about to go bust). We've both been investing in company C (a very healthy and good company) and have both advised all our colleagues to do the same thing

Everyone starts selling off their shares in company A and B once they realize whats going on, and both my wife and I lose our jobs along with many of our colleagues. We need money now to pay our rent/mortgage/food,/debt. We don't really have much in the way of ready cash - but we do have a lot of shares in company C. Unfortunately we're going to have to sell them even though we'd rather not. our colleagues do the same...suddenly, "why is everyone selling shares in company C? I thought they were good, shit i better dump mine too"

And also - huge badly run factory in small town has a really great noodle place just opposite, well run and great food. Rumor is the big factory is about to go bust....knock on effect for the noodle place might not be so good, I'm kind of jittery about it, might dump my shares now before anyone else starts to think the same thing

And then you get - A, B, C and Noodles Inc are all falling, I'd better sell D, E and F and check in in a week or so to pick up some bargains.

ok, i think i get it, but it doesn't seem like a very sound foundation for an economy. so:

why aren't there fixed minimum terms for holding shares to prevent that panicky short-termism leading to instability?

I guess because then you'd lose the ability to react instantly to events - this would make it less attractive to own shares, which would make it more difficult to issue them, which is how companies raise capital. You have to put up with the instability to keep the price-setting mechanism functioning - it's like the line about democracy being the worst form of government, apart from all the others.

That last bit looks like a non sequitur. The parallel I meant is about getting a better type of order from chaos, but you can't expect the type of order you'd get from more logical planning.

why aren't there fixed minimum terms for holding shares to prevent that panicky short-termism leading to instability?

well because both in theory and to some extent in practice the more liquid (or responsive) a 'market' is the better it works i.e. in posts example once company C's stock price falls but you realize that its a pretty healthy company and decide to buy shares since the price is falling and its cheap now. other investors should (and will) come to the same conclusion and thus company C's price will start to rise again as you buy the shares. but if post and his/her partner are stuck holding shares they cant sell than they are worse off (since they need the money) and you're worse off since you miss out on a good investment opportunity.

Lex, its not particularly concrete, but obviously it works for enough businesses, because being on the Stock Market gets them cash, that the benefits outweigh the risks. But of course there are loads of non-quoted businesses that are less subject to the whims of the market.

Theoretically, if a well run business sees its share price fall hugely because of market panic, at some point it becomes a bargain, because it's still a fundamentally good business that you can suddenly buy into cheaply, and as more people realise that and do the same and start buying then the price goes up again. That hasn't always happened over the last couple of years because the herd has been behaving in a very jittery way.

Hah, what Lamp said...

Something like Lloyds has been creamed (again) in the current panic. If it goes on to be a successful business then its shares are sanely cheap just now; if it goes on to fail, then obviously they are not. They are low right now because noone knows which it's going to be; because the effect on Lloyds from the European debt problems is unknown but feared to be huge; (but also because buying Lloyds is right out of fashion). If those things were known, the price would already have risen or fallen to the 'right' level to take account of that.

I get the feeling the modern world economy is a bit like musical chairs -- there's all this hypothetical capital/debt/money floating around out there and the economy runs as though the numbers are a certain way, but then the music stops and you realize the numbers aren't what you thought they were -- more debt and less capital, and some people don't get a chair.

I'm entirely unable to discern whether that makes sense right now.

it's more like three of the players own the chairs and just keep sitting in them whether the music is playing or not.

That makes a lot of sense. Concentrating wealth = taking away chairs. xp

BTW, in re stocks, it's less about what businesses are like now than what people think they will be in the future. A stock's price bears some theoretical relation to a company's FUTURE earnings prospects, so if information suddenly changes about the company's future earnings potential, people may try to sell the stock to get out. I mean there's nothing entirely rational about any of it -- a stock price is ultimately just a function of supply versus demand for the stock, like any other product, and the reasons people buy and sell the stocks aren't always entirely rational.

With a big insurance or finance company it's frighteningly easy for things to get misstated or fudged about future earnings, as opposed to a company that just sells food, where all you're really concerned with are the costs of making and supplying the food and the level of demand for the food. AIG, for example, had all kinds of crazy shit on its balance sheets that was kind of hard to value because you're talking about, like, insurance policies on securities that are bundles of other securities that are bundles of mortgages. It's much easier for a company like that to one day make it seem like everything is rosy and then the next day reveal that no, actually the company is completely and utterly fucked.

Also, I don't think a drop in share price has a direct negative impact on a company unless the company needs to raise capital, i.e. it effects what price the company can issue/sell shares at to raise capital. Otherwise the company being "worth" less on the market should not matter. The stock price is usually more an effect than a cause of a company's problems.

That makes a lot of sense. Concentrating wealth = taking away chairs. xp

― L.P. Hovercraft (WmC), Sunday, August 21, 2011 5:01 PM Bookmark

Not exactly what I meant although actually yes that's true. In the mortgage bubble, e.g., there was all this paper wealth being "created" that didn't actually exist, and when the music stopped a lot of it disappeared, but a few lucky parties had managed to create real wealth from the paper wealth in the meantime.

can i point out, incongrously and hopefully without being jumped upon, that hayek had an intersting set of insights into the way complex systems (ie economies but also etc) operate and that his work isn't even really incompatible with our friend keynes so much as the crazies pushing the awful 'road to serfdom' would have you believe?

^^^^^this

Hayak had much to say about the conditions of artificially low interest rates that lead to credit bubbles, malinvestment, and subsequent financial crises, but offered little advice on how to extricate the economy from the lingering aftereffects. Keynes had much to say about how to escape a deflationary spiral, but offered little advice on how to prevent one in the first place. Arguably they're complementary viewpoints, which when taken in concert would suggest running fiscal surpluses and eschewing any monetary stimulus during mild growth (the road not taken 2000-2008), which might obviate the need for both when a business cycle turns.

The economist who has come out smelling of roses from the current debacle is the post-KeynesianHyman Misky, whose financial instability hypothesis describes the last decade well. The Dodd-Frank financial reform bill would have a lot more teeth if lawmakers paid attentin to Minsky.

the difficulty is knowing whether it's an irrational plunge, in which case wahey the sales are on, or a rational one because the businesses are turning to shit.

Keynes major insight was that, so far from these being merely difficult to separate, in actual practise they are inseparable. When money stops circulating, whether or not it is instigated by irrational fear, then the only rational response is to avoid debt, and not spend or invest, until conditions improve. But this very prudence inhibits conditions from improving.

Keynes understood that the antidote for this vicious cycle is for someone to fly in the face of prudence, by borrowing and investing. Since too few individuals would be willing to take that risk to make any aggregate difference, the only actor able to respond in this way is the government, because the risk of borrowing and spending will be shared equably by the entire society.

This was the exact opposite of what governments were doing when Keynes first wrote his theory. Revenues were down, so governments were retrenching and shrinking their budgets to keep them balanced. This only aggravated the slowdown, of course.

What's going on now in the USA is that the tea partiers are rejecting Keynes's antidote, on the grounds that the risk of debt is too great for society to bear, except almost all of them appear ignorant of Keynes's basic argument or his research, and unappreciative of the risks that are being run by cutting government spending.

Bernanke is doing everything he can from the monetary easing side of the equation, but the risk is that he will only fuel another bubble, while businesses sit on their cash, unemployment stays high, spending slows further and the vicious cycle gains momentum. Good times.

In my mind one of Hayek's best contributions was on the theory of the firm, particularly outlining the limits of Weber's bureaucracy, but that is stepping somewhat beyond the field of economics.

Is the tea party being called on this? For an ideology-free society, you do seem prone to utterly counterproductive bouts of ideology sometimes.

I'll put it this way, harping on the idea that tea partiers don't understand Keynes would do them zero damage politically, because a good 95% of US voters would just shrug, because they, too, know nothing about Keynes and anyway all anyone needs is just some "common sense".

There is no point calling them on this, there is no intellectual foundation or consistency on which to challenge them. I'd say it was luddism but that gives it too much credit.

tea party isn't an ideology, it's just a new brand name for various reactionary far right Americans. it's quite un-ideological beyond that. they can't be called out in their beliefs because they don't have shared, coherent beliefs about anything in particular. xp

I thought it was an anti-big-government thing?

only nominally

except when it comes to their state being bailed-out or the bridge that needs to be built in their county or their medicare benefits etc etc

they're against a very vague idea of big government

I dunno. AFAICS, the tea party fringes have a certain overlap with radical liberatrians. They would love to see the federal government shrunken down to almost nothing, on the theory that this would catalze an anarcho-capitalist paradise. But the largest component of the tea party's fringe would probably be the ones who want to establish a theocracy.

nah i don't think the majority of Tea Partiers have "a theory" any more than the majority of any mainstream political movement's supporters

Was speaking of the tea party fringe, not the majority. The majority are bedizened by the idea that lower taxes would leave more money in their pockets and stop funding something they dislike, like welfare or health care for poor people. Their ideas stop right about there, leaving them too dazzled to move any further, except for the religious fundamentalists who form the core of the tea party, who believe God is on their side and He must be repaid for His aid by forcing the country to become more 'godly' once they achieve victory.

Albeit looking from a distance, there seems to be an acceptance that they have a point - I've seen news anchors challenging them along the lines 'I sympathise with your wanting for freedom from central government oppression, but...'. If that's widespread, the battle is half-lost already.

Keynes understood that the antidote for this vicious cycle is for someone to fly in the face of prudence, by borrowing and investing. Since too few individuals would be willing to take that risk to make any aggregate difference, the only actor able to respond in this way is the government, because the risk of borrowing and spending will be shared equably by the entire society.

Schumpeterian cycles of creative destruction probably do more to bring about the end of recession than merely increasing Govt spending in first world economies now, though- large scale spending by the Govt isn't enough anymore, it has to be efficient and infrastructurally productive, and I don't know if Keynes still applies as well in incrasingly open globalised money markets.

i...i can't back that up, like

good post either way imo

yeah it's the kind of soundbite that the media loves, tbf

sometimes I get the feeling that Obama scares big economic entities into sitting on their cash and waiting for him to leave- they fear he will tax them or something so they dont want to help the economy by lending/spending - they will just sit ass to ice until he leaves

also kudos for "Schumpeterian" xp

LG, if those big economic entities thought they could make a shitload of money, it would not matter to them that a slightly larger percentage of it was taxed, they would eagerly go out and make a shitload of money and then complain bitterly about the marginally higher tax rate while enjoying their capital gains.

So I had this kind of everything-comes-together realization about monetary policy today and I want to try to write it out and maybe someone can tell me if it's totally offbase. Basically it's this:

Anti-fed people worry that all this money-printing is going to lead to inflation, on the kind of basic principal that if you drastically increase the amount of money, the "value" of that money should decrease (i.e. inflation). Yet we don't seem to have inflation. Why not? Because the relative value of all the "stuff" in the economy is actually decreasing so much all this time that the increased money supply is just keeping pace. In other words, you can think of the "inflationary" pressures of increased money supply as an upward force, and the "deflationary" pressures of the economic collapse/recession as a downward force, and the two are kind of balancing each other out. In fact a fair amount of the "deflation" is merely the evaporation of pure paper value that probably never should have existed.

But what's the point of all this if it's just an illusion, i.e. the increasing of the money supply is merely avoiding the appearance of an even more precipitous decline in wealth in the economy? Well, I guess because it avoids a deflationary spiral, i.e. a situation where prices of everything continue to fall and everyone holds onto money which only causes prices to fall more (we're talking about capitalists and large assets here, not average joes with their groceries).

Of course, it kind of seems like capitalists are holding their money anyway, so I don't know what gives.

I feel it's slightly pointless me speculating because it's such a complex system that I couldn't begin to see all of it, but I figure there are at least two significant other factors at work:

• a lot of this new money *is* being taken out of circulation immediately as banks in particular rebuild their reserves
• debt has a nominal, not a real, value, so heading off deflation is extremely important because the hangover will never be worked off if everyone's income is decreasing in nominal terms

ismael could you explain your second bullet point?

If you borrow £10k, it stays £10k whether you have inflation or deflation. When inflation is say 3%, then in a normal career you might expect your wages to go 30k-32k-34k-37k-40k for example, so after five years you still have the £10k debt but it suddenly looks a lot more affordable. If there's deflation though, your wages might hardly budge or even could decline, so five years later the debt is still as mammoth as it was.

Other things play into it as well of course - inflation would raise the cost of everyday items which reduces your free cash to pay off the debt - but the point basically is that the debt reduces in value relative to everything else. The bank lent you a third of a salary, but you pay them back a quarter.

Normally you'd have high interest rates (trying to squash inflation) as the quid pro quo to all this, but they're low for the foreseeable future so in theory these are great conditions to be a borrower.

which is why nobody's lending at these interest rates?

I don't think so, it's more because banks are hoarding money to rebuild their cushion against being insolvent if there's a repeat of the convulsions of three years ago. There's still loads of money sloshing around - more so as QE goes on - and if they don't lend they don't have a business after all. You can get a loan easily if you're low risk - mortgage rates have dipped under 4% but you have to put down a huge deposit. It's the risky loans that have dried up.

Also, inflation is happening in the UK at least, at around 4-5%. A few years like this, with low interest rates, and the indebtedness will look significantly different.

Ok this is fine, except - how does inflation by itself make the debt seem smaller? Unless there is wage inflation to match it?

Like, say I earn £100 a week

and i spend

£50 Food Travel Clothes
£40 Loans
£10 Spending money

then there is inflation of 5% but my wage has stayed the same, then out of that £100 I would now be spending

£52.50 Food Travel Clothes
£40 Loans
£7.50 Spending money

Without my wages going up too I'm still having to spend £40 out of £100 on my loan, the only thing that has happened is my costs are going up meaning I've less spending money to go have fun with? If wages don't

Unless we are having 4-5% pay rises along the way? I don't feel like I'm getting pay rises like that!

personal debt market surely competing with eg govt bonds etc for bank cash/investment, though?

Lol business degree 2006 this stuff is fading like latin

oops missed a bit - If wages don't rise equivalently then food/travel etc is just taking up a larger percentage of my pay packet each month

and yeah xp the prob with assumed wage increases in line with inflation is that lol

Well yeah, it does depend on that. Wage inflation doesn't come about through some idea of fairness of course, it's through your bargaining position getting better as an employee - i.e. it's more difficult for your employer to replace you. This ought to improve in time too, employment figures are heading up slowly. Once this happens, interest rates will have to go up a bit to keep wage inflation in check.

All this stuff is going to take years, basically, but after that the idea is that the huge debts racked up before 2008 won't be so crippling anymore.

Thats fine but what happens if the figures above were this instead

£60 Clothes etc
£38 Loan
£2 Spending money

then 5% inflation + no wage increase becomes

£63 Clothes etc
£38 Loan
£-1 Spending money

Isn't your loan now getting bigger rather than smaller?

Then it's getting bigger relative to your salary, and lower relative to bread, travel, rent, etc. That's the worst of all worlds really.

Its getting bigger in absolute terms also because unless you cut back on clothes etc you have had to borrow another £1

Bigger relative to your disposable income, i mean.

Things change in value relative to each other constantly - think about what clothes or toys cost now compared to the early 90s, as against what wages have done in the same period. That's largely down to China making much more of that stuff at low cost now. The shift might be only a few % each year in either direction, but over years the total effect is huge.

I could be wrong, but my impression is that an increase in the money supply should theoretically have an equal effect on everything, including wages. That doesn't mean wages go up at the same rate as everything else, however, because there are other forces applying downward pressure to wages, e.g. the outsourcing of labor.

ceterus paribus ftw

An amusing post - works up a good head of steam decrying the ignorance of economists:

http://scottlocklin.wordpress.com/2011/07/31/in-which-i-have-a-laugh-at-economists/

I like the idea of debt decreasing over time due to inflation but salaries dont seem to be keeping up

I think the other benefit of inflation is that it's supposed to encourage companies to invest. Right now companies are just sitting on great gobs of cash, since there's a lot of uncertainty about the economy. If inflation were to pick up, suddenly companies would have to put that money to work or it would lose value.

I dont like this economy!

from wiki

Joseph Tainter
In his 1988 book The Collapse of Complex Societies, American anthropologist Tainter presents the view that for given technological levels there are implicit declining returns to complexity, in which systems deplete their resource base beyond levels that are ultimately sustainable. Tainter argues that societies become more complex as they try to solve problems. Social complexity can include differentiated social and economic roles, reliance on symbolic and abstract communication, and the existence of a class of information producers and analysts who are not involved in primary resource production. Such complexity requires a substantial "energy" subsidy (meaning resources, or other forms of wealth). When a society confronts a "problem", such as a shortage of or difficulty in gaining access to energy, it tends to create new layers of bureaucracy, infrastructure, or social class to address the challenge.
For example, as Roman agricultural output slowly declined and population increased, per-capita energy availability dropped. The Romans solved this problem in the short term by conquering their neighbours to appropriate their energy surpluses (metals, grain, slaves, etc.). However, this solution merely exacerbated the issue over the long term; as the Empire grew, the cost of maintaining communications, garrisons, civil government, etc., increased. Eventually, this cost grew so great that any new challenges such as invasions and crop failures could not be solved by the acquisition of more territory. At that point, the Empire fragmented into smaller units.
We often assume that the collapse of the Roman Empire was a catastrophe for everyone involved. Tainter points out that it can be seen as a very rational preference of individuals at the time, many of whom were better off (all but the elite, presumably.)[citation needed] Archeological evidence from human bones indicates that average nutrition improved after the collapse in many parts of the former Roman Empire[citation needed]. Average individuals may have benefited because they no longer had to invest in the burdensome complexity of empire.
In Tainter's view, while invasions, crop failures, disease or environmental degradation may be the apparent causes of societal collapse, the ultimate cause is diminishing returns on investments in social complexity.[10]

Free book from Dean Baker, and it's on my own personal hobby-horse:

"Liberals ... have accepted a framing where conservatives want market outcomes whereas liberals want the government to intervene to bring about outcomes that they consider fair. This is not true. Conservatives rely on the government all the time, most importantly in structuring the market in ways that ensure that income flows upwards."

http://www.cepr.net/index.php/publications/books/the-end-of-loser-liberalism

Is taht book any good? I mean its free...

I can feel the economics

thats just my rising indicator on yoru leg

lukas i'm reading that (free!) book. it is housing me

WHY is it a bad thing if greece exits the euro? i don't understand any of the headlines today

But they beat Russia last night, they aren't out :-)

Not really about a bad thing - things are v bad now. Some people will lose a lot of money outside Greece, others have already lost their lives inside the country.

Reports I have read say that Greece are already out of the Euro...whatever the outcome it seems patience has run out.

the problem aiui is that greece is so obviously a basket case and a barrier to any kind of eurobonds/debt mutualization or w/e and because its fiscal management was so disgraceful it allows a lot of fat lutherans to moan about RESPONSIBILITY and AUSTERITY (even though many other troubled govts like spain were running a surplus prior to 2008)

so why is a greek exit from the euro quite so feared? it must represent like 3% of the eurozone economy....and unlike a default, the debts held by northern banks will presumably be renominated in nu-drachmas.....it would create turbulence but the current pattern of indecision and torpor is doing exactly the same

Because if Greece exits Spain, Portugal and Ireland may be tempted to do the same and the whole Euro "project" loses credibility, banks become overexposed (again), and it's back to 2008..

spain is big enough to extract bargains from the ecb/germany

ireland is fucked thanks to the ahern guarantee, and there is no political will to renege on that afaik

portugal maybe? but again it is a tiny economy

Not so much about Ire and Por as about Spain and then speculation about Italy. Those are too big to fail type thing.

the last six months or so has been about exceptionalizing greece and firewalling it wherever possible

a greek exit will probably look nasty enough on the streets of athens to thoroughly dissuade spain and italy from following

tbf it`s the lenihan guarantee

the Greeks are fucked no matter what they do ... if they leave the euro, they'll be less fucked (b/c they can then control their own currency) but shit will still be bad for at least a while. obviously the devil will be in the details, but theoretically if the Greeks have their own, non-Euro currency then the new Greek currency can be devalued and make Greek products and services more competitive which would (theoretically at some point) aid their economic recovery.

the band-aid analogy is apt here ... they can rip it off fast and be in excruciating pain for a concentrated period of time; or peel it off slowly and be in lesser (though still agonizing) pain for a longer period of time.

hard truths from dr eisbaer :(

if Greece exits Spain, Portugal and Ireland may be tempted to do the same

A revival of the infamous 'domino theory'?

The most interesting thing to me is that, if Greece stays in the euro, their path out of penury is wholly dependent on bailouts and guarantees to prop up their euro-denominated debt, and therefore their future is placed in the hands of governments whose interests do not lie in Greece, except in the most tangential and attenuated sense. The Germans really don't give a rip if Greece sinks, so long as the euro floats.

Given this fact, I think the Greek people correctly suss that fleeing the euro at least gives them the power to seek their own interests, and perhaps a shorter way through the blinding pain of retrenchment and back into relative health. As a tourism-heavy economy, a retreat to cheaper drachmas makes a hell of a lot of sense to me, since you can sell 'cheap holidays' over and over and still have more tourism left to sell tomorrow.

http://www.thedailybeast.com/articles/2012/08/15/thanks-for-the-feedback.html

for a year or two now Frum's been preaching that low interest rates coupled with mild inflation could be the tonic to pull us out of our situation. the idea (as i understand it, and i'm very dumb on these matters) being that mild inflation would accelerate debt reduction and help households regain confidence to spend.

is he on to something? and is anyone listening? and if they are, would it even matter? because it seems that the one of the few places where mainstream GOP and Paul freaks see eye-to-eye is on tight money. and, let's face it, these guys are winning the messaging war when it comes to monetary policy.

he's not the only person talking about this, paul krugman's latest book is all about this, and the academic consensus is that the fed are not being aggressive enough

in theory monetary policy should not be influenced by GOP rhetoric or ron paul, the fed are an independent ("monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government" - wikipedia) although the extent to which this is perfectly true is debated ("we would treat [Bernanke] pretty ugly down in Texas" - rick perry). it's always a guessing game as to what the fed's real intentions are; their control over "expectations" is equally if not more powerful as their control of interest rates. central bankers might be playing it safe in case of a republican win, but that's only one of many possible explanations

relevant utube:

https://www.youtube.com/watch?v=a62dNGqQfNM

yeah, i think plenty of people agree, but stuff like that will get zero traction from republicans anytime soon. paul ryan getting the vp nomination sort of underscores how hard moneyism has become totally dominant for the gop. ben bernanke has basically become a pariah despite being extremely cautious.

and increasing inflation is hard in a depressed economy. you can't really have inflation if nominal wages are stuck. i haven't read frum lately to know what exactly he wants monetary policy to be doing.

apparently the fed has 2 mandates - control inflation & reduce unemployment; most economists that i read seem to think they're worrying too much abt the former & not enough abt the latter. rich ppl care more abt inflation because they have a lot of fixed income investments

The Federal Reserve tripled their balance sheet and it hasn't stirred inflation.

http://upload.wikimedia.org/wikipedia/commons/0/08/US_Federal_Reserve_balance_sheet_total.png

Asian competition continues to be disinflationary on the goods and tradable services side, and newfound prudence from banks has prevented the funds from escaping into the real economy through loans. Quantitative Easing II (the last major money printing round) largely just enriched commodity traders.

My take is that we've had a hollowing out of the economy from the early 90s that was obscured by internet and housing bubbles. Take the bubbles away, and you get the economy of the early 1990s, only with a lot more workforce and a lot more debt. You can toss tons and tons of dollars in, but that doesn't change the fundamental bias towards deleveraging (paying off debt). Banks are beginning to offload their inventory of foreclosed property in earnest, so there's no tailwind from housing.

Also, as its not a normal inventory rebalancing based recession, but a financial/asset bubble collapse, different timescales apply. Normal recessions reduce inventory and resume growth in a couple of years. Credit bubbles take a lot longer to work themselves off. In Kondratieff's cycle, the "winter" generally lasts 17 to 20 years, until the generation that was scarred by the crisis is replaced.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/draghi/NWO%2014.jpg

the generation that was scarred by the crisis is replaced

ie the generation that was scarred by inflation in the 70s?

Also, most of my fellow bear forum travellers that have watched Ron Paul in every Humphrey-Hawkins congression testimony have known he's a nutter for ages. Some of the ideas are sound, in historical terms, but he's such a broken record there's no evidence of a mind behind the vitriol.

Um, the best recent book on Kondratieff may be the one by Michael Alexander, who ties it into Strauss and Howe generational analysis (the guys that gave us "Greatest Generation" and "Generation X").

My own grandfather, age 22 in 1929, abjured debt his entire life (I've inherited that). Its wasn't uncommon for those of his generation. It took about a generation, until 1948, until people started seeking credit for suburban homes and all the trimmings.

From 1992 to 2007, rare was the week in which I wasn't offered another credit card in the mail. A lot of peeps are paying for them, and student loans, and mortgages on credit bubble inflated property. Funds going to pay down debt are not spent, and don't contribute to GDP.

It isn't clear whether the Kondratieff peak should be 1999 (for financial assets) or 2006-7 (for household assets - mostly housing, and credit). The latter seems more compelling to me. Macroeconomics largely ignores mass psychology, and perhaps rightly so, as there aren't too many levers economists exert over it.

i have no debt

i also have no assets or money to speak of

if only i'd bought and sold before all this went down

My take is that we've had a hollowing out of the economy from the early 90s that was obscured by internet and housing bubbles. Take the bubbles away, and you get the economy of the early 1990s, only with a lot more workforce and a lot more debt.

This seems to me to be entirely correct.

The deflationary forces are very strong now, and attempts to pump money into the economy since 2009 have mostly fueled a variety of commodity bubbles, like gold. The Fed's asset acqusitions have been little more than shoveling free money into banks, without the slightest quid pro quo.

This kind of economy is when a more sensible government would be trying to finance a lot of public works and infrastructure modernization, just to get people working. Republican policies seem to be aimed at reestablishing a vast peasantry under the thumb of a tiny aristocracy. Their apres moi l'deluge sentiments are pretty frightening.

Don't know where to put this so:

Libertarians love neoclassical economics when it suits them. "People are rational utility-maximizers and we should trust them to make the right decisions." Then they turn around and blame poor people for their plight - lazy, stupid, uneducated, trapped in a "culture of poverty". They can't reconcile their assumption that people will make the right decisions for themselves with their assumption that the results of capitalism are not just Pareto-optimal but just.

I'm not just making an abstract point, you can find tons of example of microeconomic thinking (as much as I hate the Freakonomics guys, they have some good examples here) where the key to properly understanding a bizarre-looking situation is imagining "what if people are actually making the optimal decisions in this situation, based on the resources available to them?" But libertarians won't apply that thinking to the poor.

To play devil's advocate, some libertarians would probably argue that the poor are optimizing in response to a bad set of government policies (such as welfare) that reward laziness.

when you consider that libertarians tend to be privileged racists and replace "the poor" with "the non-white," their bullshit makes more 'sense'

Yeah both of you otm, although o. nate what triggered this for me was someone ridiculing an article about poor food options in rural areas with "what about the fact that these people are uneducated and have too many kids, eh? that's why they make poor food choices"

Yeah, I'm not saying that many libertarians aren't inconsistent in applying their assumptions. Personally I think the idea that welfare causes poverty is ludicrous.

anyone else reading/planning on reading thomas piketty's capital?

placed an order for my copy a little while ago

The reviews have been illuminating but it sounds like a bear of a book to actually read.

if i remember i'll report back

Sounds like it'd be worth a thread (I've been meaning to read it, but haven't got a copy yet).

i feel like it'd get very few posts

This Piketty book is kinda blowin up, huh --- got a scoff from Ross Douthat in the NYT last Sunday, plus a profile in the biz sec.

pik shit poppin, little shit scoffin

http://www.theguardian.com/commentisfree/2014/may/09/university-economics-teaching-lobotomy-non-mainstream

1% bristling at the suggestion it has an unfair economic advantage

The economic advantage of great wealth isn't unfair, because it exists. Its existence proves its right to exist. I have now used the word "right" and applied it to the advantages of great wealth, and what is right cannot simultaneously be unfair. QED. /think tank flack

Sobering history of the politics of inequality in the US by Eduardo Porter:

http://www.nytimes.com/2014/05/14/business/economy/the-politics-of-income-inequality.html?ref=business&_r=0

https://www.jacobinmag.com/2015/11/microcredit-muhammad-yunus-bono-clinton-foundation-global-poverty-entrepreneurial-charity/

hey can i get a quick read on this by an econ person

Not an economist and not qualified to talk about the bulk of his piece, but I did work at a nontraditional MFI for smallholder farmers. He completely ignores a billion subsistence farmers, who I (obviously) believe do benefit from properly structured microfinance programs. His arguments about Say's law don't apply here, because subsistence farmers have a pure supply problem (many are slowly starving.)

The rest of the piece might be right. Traditional microfinance hasn't been shown to increase incomes. Going directly to the poor rather than through corrupt governments is good, but just giving them money seems to be more effective. If microfinance detracts from fundamental reforms, that would be bad. Those reforms are never going to come from the outside, though.

Proof that I'm a neoliberal stooge: I used to sit in a cafe in Nairobi frequented by NGO workers and Chinese businessmen and wonder which group was having a more positive impact. (Kenya doesn't have natural resources to extract, so Chinese businesses there are just building roads, selling cheap high-quality farm equipment, etc.)

'detracts from fundamental reforms' seems so go-to for these guys that as an argument it ought to have a name

I feel like part of the problem with "microfinance" as a concept is that it's sort of like "charter school" -- it's a vague buzzword that doesn't actually tell you much about the actual structure of the specific thing in question, and which can be applied to a wide variety of different enterprises -- non-profit, for-profit, super-predatory for-profit, etc.

not really my field but my impression of the evidence is that since duflo and banerjee and their crew started looking at it people realized it's not as hot as first believed. like just poking through some nber wps

This paper reports on the first randomized evaluation of the impact of introducing the standard microcredit group-based lending product in a new market. In 2005, half of 104 slums in Hyderabad, India were randomly selected for opening of a branch of a particular microfinance institution (Spandana) while the remainder were not, although other MFIs were free to enter those slums. Fifteen to 18 months after Spandana began lending in treated areas, households were 8.8 percentage points more likely to have a microcredit loan. They were no more likely to start any new business, although they were more likely to start several at once, and they invested more in their existing businesses. There was no effect on average monthly expenditure per capita. Expenditure on durable goods increased in treated areas, while expenditures on "temptation goods" declined. Three to four years after the initial expansion (after many of the control slums had started getting credit from Spandana and other MFIs ), the probability of borrowing from an MFI in treatment and comparison slums was the same, but on average households in treatment slums had been borrowing for longer and in larger amounts. Consumption was still no different in treatment areas, and the average business was still no more profitable, although we find an increase in profits at the top end. We found no changes in any of the development outcomes that are often believed to be affected by microfinance, including health, education, and women's empowerment. The results of this study are largely consistent with those of four other evaluations of similar programs in different contexts.

http://www.nber.org/papers/w18950

Theory and evidence have raised concerns that microcredit does more harm than good, particularly when offered at high interest rates. We use a clustered randomized trial, and household surveys of eligible borrowers and their businesses, to estimate impacts from an expansion of group lending at 110% APR by the largest microlender in Mexico. Average effects on a rich set of outcomes measured 18-34 months postexpansion suggest no transformative impacts.

(http://www.nber.org/papers/w19827)

We use an RCT to analyze the impacts of microcredit. The study population consists of loan applicants who were marginally rejected by an MFI in Bosnia. A random subset of these were offered a loan. We provide evidence of higher self-employment, increases in inventory, a reduction in the incidence of wage work and an increase in the labor supply of 16-19 year olds in the household's business. We also present some evidence of increases in profits and a reduction in consumption and savings. There is no evidence that the program increased overall household income.

http://www.nber.org/papers/w18538

i think the problem is micro-credit creates a lot of very small unproductive firms. in poor countries there are ten people selling coca cola and water bottles on every block. what they need is big productive firms. i don't know why there aren't more of those. dani rodrik emphasizes coordination failures, other people emphasize weak property rights or extractive institutions. despite all the criticisms i think weakening credit constraints for poor people is really important, maybe the interest rates on these loans are just too high?

j. i think i told you i would get you some links about universal basic income the other week too? that actually prompted me to find some cool stuff. i've got to go to bed now but i'll bump that thread when i have a chance

this was a fun thread to read

curious whether lex has given up now or feels he has some knowledge.

currently reading this https://www.theguardian.com/books/2014/may/29/economics-the-users-guide-ha-joon-chang-review and really enjoying it

what econ bloggers should i read? there are too many

Noah Smith (blog and Bloomberg column)
Marginal Revolution
Chris Dillow

more growth/economic history/development focus:
Pseudoerasmus
Dietrick Vollrath

prob a bit 'advanced' (strict academic focus and assumes knowledge of economic theory) but my personal fav is

A Fine Theorem

oh also Mark Thoma basically runs a huge econ blog aggregator, updated daily

http://economistsview.typepad.com/

curious whether lex has given up now or feels he has some knowledge.

neither but i've stopped feeling shit about it i guess?

Can anyone recommend me good stuff to read about understanding government debt, "unfunded liabilities" for public programs, etc.? I keep getting told by people on the left that it's a lot of right wing smoke and mirrors but I don't feel 100% comforted.

Here's a typical Krugman column:
http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html

My totally underinformed belief is that if you renamed the "national debt" to "national market capitalization" everyone would love it and be super excited for it to get bigger.

which is to say I read a brief introduction to Modern Money Theory a while ago and promptly decided I believed it.

xxxxp thx flopson!

my pleasure, hope u enjoy

as far as MMT goes, yeah I never really "got it", and people seem to get into crazy Talmudic debates about accounting identities whenever it comes up. a lot of its adherents are unpleasant quacks, but some of its more eloquent advocates seem reasonable. of all heterodox theories (of which there are surprisingly few, for all the screeching you hear since the crisis) MMT seems like the one most poised to puncture the mainstream of macroeconomics. (the other being neo-Fisherism).

it's not totally obvious what MMT is and the definition seems to shift based on which criticism is being made or who is defending it, but this was something I read (by a writer who I trust, very knowledgeable and open-minded on monetary theory & history) a while ago that nailed it down a bit for me; basically the sleight of hand is assuming central bank-treasury independence:

Modern monetary theory (MMT) in a nutshell, at least as far as I see it, goes something like this. Back in the 1990s a couple of clever guys came up with the idea of a government-provided jobs guarantee. They realized that this program would be seen by the public as an expensive boondoggle requiring sky-high taxes and huge debts. Could they outflank these criticisms by finding another way to fund the jobs guarantee?

To find the funds the early MMTers worked backwards through the labyrinthine relationship between the Federal Reserve and the Treasury. What they claimed to have discovered at the end of their trek was certainly shocking. The US Treasury, they said, funds itself not by the conventional route of taxes and bonds, but by creating and directly spending fiat (i.e. inconvertible) money. Furthermore, it is not only the government's prerogative, but its obligation to spend this money into existence, since people need a stock of fiat money to pay their taxes. Bonds, contrary to what most of us think, are not a sign of government indebtedness—rather, they drain spending.

This bit of monetary jiu-jitsu is powerful because it has the ability to disarm people's instinctual aversion to expensive social programs. If all it takes to fund a jobs guarantee is that the government spend money, and debt and taxes are not the great evils we have been trained to think, then why resist it?

Most governments don't create fiat money—their central banks do. For a government to have this power, it needs to be able to force its central bank to add new money to the government account. One way to do this is for the government to print up a bond and give it to the central bank. The central bank then credits the government's account for the full amount of the bond, and now the government can spend, say on a jobs guarantee. Alternatively, the transaction can be completed without the transferral of the bond—just have the central bank automatically credit the government's account prior to spending. When the government can require its central bank to create money on its behalf, we say that they are effectively consolidated into one entity.

The earliest MMT tome, Wray's Understanding Modern Money, is very insistent on the consolidated nature of the Fed-Treasury:
"The important thing to notice is that the Treasury spends before and without regard to either previous receipt of taxes or prior bond sales."

"...permanent consolidated government deficits are the theoretical and practical norm in a modern economy... Further, government spending is always financed through creation of fiat money - rather than through tax revenues or bond sales."

"While it appears that the Treasury 'needs' the tax revenue so that it can spend, that is clearly a superficial view... The government certainly does not need to have its own IOU returned before it can spend; rather, the public needs the government's IOU before it can pay taxes."

Now as their critics were quick to point out (see Lavoie, for instance), the relationship between Fed and Treasury is such that the two are not consolidated. The Treasury cannot ask the Fed to credit its account, nor can the Treasury print up a bond and give it to the Fed in exchange for spending power. The only way the Treasury can spend is by moving previously acquired funds that are held in the private banking system into its Federal Reserve account—and the only way it can acquire these funds is through taxes and bond issues. Using the Fed to print money and fund a jobs guarantee program is impossible.

The MMT wish, it would seem, was the father to the thought—Wray's 1998 tome was too hasty in consolidating the Fed and Treasury. MMTers are left with an intriguing theory of how modern money works, yet their theory corresponds to no underlying reality. That doesn't mean that MMT is without some merits. MMTers are hackers. In their efforts to reverse engineer the Fed-Treasury nexus in order to fund their pet project, they've come across plenty of interesting minutiae about monetary operations. MMT papers and blogs go into these details and are worth reading if you want to hone your understanding of the monetary system [just take anything they say about consolidation with a grain of salt].

Has the lack of overlap between Wray 1998's theory and reality stopped MMTers? Not at all. When your theory doesn't describe reality, don't bother changing your theory—change reality so that it conforms to your theory. Enter the platinum coin.

The idea of issuing a trillion dollar platinum coin rose to prominence with the onset of yet another US debt ceiling crisis. The MMT blogs hummed about the coin, a huge coin crescendo grew on Twitter, and the issue went all the way to the White House, which demurred. My hunch is that beating the debt ceiling is only a tertiary motive for MMTer excitement over the platinum coin. Far more important to them is that the platinum coin, if implemented, will effectively consolidate the Fed and Treasury, finally redeeming Wray 1998. This opens to door to their beloved jobs guarantee.

I'm not sure how MMT will evolve, but one thing we'll probably see more of is platinum coin-style activism. Though the rest of world has moved on from the coin, the MMT blogs are still buzzing about it. I'm sure more clever ways to hack the Fed-Treasury nexus will be found, thereby giving the Treasury other routes by which to force Bernanke or whomever follows him to print dollars on demand. These hack-arounds will be publicized. Perhaps a political movement will form. This wouldn't be unique. All sorts parties have formed around monetary ideas—Greenbackism, Free Silver, and Social Credit.

http://jpkoning.blogspot.ca/2013/01/meandering-from-mmt-and-platinum-coin.html

Can anyone suggest educational comics on economics? Something like a Larry Gonick "Cartoon Guide to..." book. I've read Michael Goodwin's Economix and Sean Michael Wilson's Parecomic about Michael Albert(which is more biography than explainer) but the two "Cartoon Introduction to" econ are way too yay-free-market! for me.

So I'm wondering if there's something else out there.

http://i.imgur.com/uYM2ZUl.jpg

Lol

I'm clicking unfollow but it isn't doing anything!

Killing yourself is an action where everyone intuitively understands the consequences for themselves and their dependents, so they can make a more or less informed decision about it. Borrowing money at high rates of interest has far reaching consequences that few people in the USA seem to understand until some time after the consequences have already arrived.

cowen is fucking capitalist swine

xp the "joke" is that suicide is like an infinitely high interest rate. an interest rate is the price of bringing money from the future into the present, so someone who pays a high interest rate values having money in the present more than the future. someone who kills themselves values the future at zero or lower, so it's like they're paying a high interest rate. har har

I've got a question.

I read Diane Coyle's GDP: A Brief but Affectionate History, which was very good. It goes clearly through both the history of it, but also how its structure and statistical composition has changed over time. She defends it as being the best way we have of measuring a country's economic capabilities, while painstakingly going through its shortcomings. Very far from being the least of these shortcomings is the particularly eye-watering case of the financial services measurements.

As the OECD GDP statistics manual puts it: "Measurement using the general formula [for constructing GDP] would result in their [the banks'] value being very small, if not negative; in other words, their intermediate consumption would be greater than their sales!"

Unable to imagine when this was writing that banking could be subtracting value from the economy, statisticians sought to find a way of measuring these earnings from financial intermediation...

..

One study of the United States concludes: "Making conservative assumptions, we show that the current official method overestimates the service output of the commercial banking industry by at least 21% (amounting to $116.8 billion in 2007:Q4 for example)"

That isn't my question, though it leads into it and the question whether financial services should be included in GDP at all, or whether they should sit behind the imaginary line dividing productive from unproductive, the 'production boundary'.

Diane Coyle starts the book with the example of how most European economies got a huge boost when statisticians decided to start including 'informal economy' outputs, including prostitution and drugs (and of course cash-only plumbers etc), in GDP (it immediately took Italy past the UK to become the fifth biggest economy in the world). At the end of the book she makes a strong case for also including household work in GDP.

It's a strong case - the central repeated paradox is a rather '20s-ish example of a widower marrying his housekeeper thus reducing productivity. But I don't really get it. Diane Coyle says:

It's what economists call "own-production" or "household production." This means all the work done within the family for its own use: the cooking, cleaning, child care, vegetable growing, sewing, carpentry, and so on. All of this can be bought, outsourced outside the household; but much is not. The main reason given for not counting unpaid housework as part of "the economy" while paid housework is counted, is the difficulty of measuring it

What i don't get is how something that doesn't, effectively, contribute to the market, or generate revenue can be considered GDP. I obv don't mean this work isn't real work, or that there is avoided cost and cost-opportunity issues associated with i, i just don't see why or how it would be desirable to count it as part of GDP. Anyone help?

the line that combines the two bits is the great:

Preliminary estimates suggest unpaid childcare is worth about three times as much as financial services, while household laundering is worth about four-fifths of financial services' contribution to the economy.

Additional evidence for wanting to include it:

Even in good times, however, the scale of this informal, unpaid work is significant: it accounts for more than half of all the time people spend working. if this is valued at money wages paid for similar work, it is equivalent to 1.85 times the size of the conventional national product figure for the United Kingdom in 2001. Although the figure, will vary among countries, the importance of this activity, conventionally but arbitrarily excluded from official GDP statistics, is universal.

xp

I have no formal economics training, but from my perspective the question could be recast in terms of whether GDP ought to be considered as an abstract measure of productive activity, in which case housework, vegetable gardening etc. are certainly productive activities and ought to be included, or alternately if GDP should be a measure of activity producing revenue or wages, and therefore more reflective of the 'money economy' only. In the second case, GDP might be more useful to planners, investors and statisticians whose main concern is the money economy, but less reflective of the whole productive activity within a society or a nation.

In short, it would depend on who is using GDP numbers and for what purpose.

Because GDP is just a measurement of whatever we want to include in it, there's no right answer apart from its fitness for the uses we put it to. Inevitably, GDP has entered the realm of politics, and so it is made to bolster arguments for which it is ill-suited. But if it is reformed to better fit some uses, it will perform other uses more poorly. As someone once said, "You pays your money and you makes your choice."

Yes, i roughly agree i think, though 'money only' is probably a bit tight, as this is after a definition of product, that which is produced, rather than credits and debits. so on that basis i think you would want to see charity sector and voluntary work included in it, for instance. nevertheless, there is something that i'm struggling to shake about it in some way representing the output resources (whether goods or services) that are available for use, and in some way represent the capabilities of an economy.

For instance the reason that current methodology around the financial sector is so damning is because it severely overestimates the importance to an economy of that sector. With GDP being one of the main tools used to judge the success of a country, and improved productivity being such a constant goal, that miscalculation means that politicians badly overrate the productive, social and political importance of the financial sector. I think most of us here would feel that anyway, but the important point is that in this case it is on their own terms.

But the desire to improve the proportion of outputs to effort put in doesn't seem to be necessarily a bad one, and i'm struggling slightly to see how 'household production' fits into that.

That said, increasing the importance of household production to the level of financial services currently may see huge improvements in childcare as well as more money in domestic care etc.

the idea is that gdp only counts market transactions, and you can't sell your home production to yourself. i'm sure Diane Coyle talks about this (i've been meaning to read that book) but, you know, gdp would increase by nearly 30% if everyone worked saturday and sunday, but obviously we'd all be far worse off. it's quite important (and good econ profs will stress) that gdp is not a welfare measure

imo rather than enlarge the definition of gdp or fuss about redefining it we should just learn to focus less on it, and any single index for that matter. you see a similar thing in inequality where people become too focused on one measure (the gini coefficient in an earlier literature, things like 1% share or 90-10 ratio now) and miss some subtler trends that make up the big picture

as far as the financial sector goes, its social benefit should be measured by how it benefits our ability to insure ourselves against risk, save and borrow at reasonable cost, and allocate capital efficiently, not by how big a share of gdp it occupies. and the amount of resources poured into finance have to do with the returns to it, not with its proportion of *Measured* GDP. what matters is the counterfactual. a good article on this: Luigi Zingales' Does Finance Benefit Society

also may not be news to you after the Coyle but i v much enjoyed the chapter in Ed Leamer's 'Macroeconomics: Stories and Patterns' on income accounting

I guess I should read the book but I'm not sure why the contribution of financial services to GDP are harder to measure than any other services, such as education, medical care, entertainment etc. I don't think GDP is intended to be a measure of social value. If people want to spend their money gambling in Las Vegas or playing the stock market, then they're paying for a service, and they're valuing that service by how much they're willing to spend.

all v useful, flopson, thanks:

the idea is that gdp only counts market transactions, and you can't sell your home production to yourself. i'm sure Diane Coyle talks about this (i've been meaning to read that book) but, you know, gdp would increase by nearly 30% if everyone worked saturday and sunday, but obviously we'd all be far worse off. it's quite important (and good econ profs will stress) that gdp is not a welfare measure

Coyle persistently reminds the reader of this throughout the book. If only governments understood this in terms of policy and pronouncements.

imo rather than enlarge the definition of gdp or fuss about redefining it we should just learn to focus less on it, and any single index for that matter. you see a similar thing in inequality where people become too focused on one measure (the gini coefficient in an earlier literature, things like 1% share or 90-10 ratio now) and miss some subtler trends that make up the big picture

this was very much what I came out feeling. it's incredibly useful to have this statistic, but (as above) focusing on it to the exclusion of a wider dashboard of measures is wrong (see this nice OECD layout here).

o. nate, I'm extremely wary of attempting to explain or re-present anything here, because I don't actually properly understand it, so I'll just quote from the book on measuring financial services:

Most services charge customers a fee, and the fee revenues give statisticians the handle they need to measure output. Relatively few financial services involve direct fees or commissions. For the most part, banks do not generally sell services for a fee. A large proportion of their profits comes instead from the gap between the interest rates at which they can borrow (or pay depositors) and lend, or from trading activity. As the OECD GDP statistics manual puts it: "Measurement using the general formula [for constructing GDP] would result in their value added being very small, if not negative.." &c

There's then a long bit about how they're currently measured, and how the higher the risk, the greater the productivity score.

That's a good point about a lot of banks profits being made indirectly and not in the form of obvious fees. For example, market-makers make profits on the difference between the bid and offer price and not from an explicit commission. As I understand it, GDP can be measured in two ways: by income or by consumption. Measuring by consumption would be hard when the fees are not explicit, but it seems they would be relatively easier to capture using an income based approach, i.e. by simply measuring bank income. I guess a similar problem occurs in the case of legalized gambling. A casino doesn't make it's money on explicit fees - it makes it by offering a game with known odds. I guess there are still some complications, such as for instance separating out cases when banks are actually making money on appreciation of assets, which is strictly not part of GDP, but these seem at least somewhat surmountable in principle.

Not sure this is the best place to put some thoughts and questions about Maurizio Lazzarato's The Making of Indebted Man - some v generic observations in the reading thread after getting about a third of the way through (it's not long - more of an essay than a book). It's more philosophy than economics.

tl;dr version: the connexions between the specific mechanisms of psychology, economics, society and politics don't always map well onto the methods of philosophy, resulting in some stuff that i feel a bit sceptical about, but reassuringly the general conclusion that we're all definitely fucked isn't very much affected.

It's written after the 2008 financial crash. His argument seems to be that the financialization of the state and banking, and the high levels of personal debt - whether in housing or via consumer credit - have resulted in an existential change to western people. The first chapter examines the evidence for this, and the second looks to apply Nietzsche's Genealogy of Morals and Deleuze and Guattari's analysis of the creditor-debtor relationship in Anti-Œdipus, which I haven't read.

That first section contains some shocking figures on the financialisation of local government and welfare in France, none of which I knew. UNEDIC collects an unemployment tax on wages and contributions from employers, which it then disburses to the unemployed, and precarious and seasonal workers. Mainly because of tax breaks to employer contributions as part of the government's 'jobs policy', and the explosion of gig economy precarious work, UNEDIC is structurally in the red. UNEDIC has raised money by issuing bonds on financial markets The consequence is that unemployment benefit has become a source of revenue for banks, financial institutions and pension funds. If one of those pernicious institutions like Moody's reduces its rating for the organisation, the borrowing rate rises and finance takes a larger draw on tax revenue, which decreases the availability of welfare funds.

In order to maintain good ratings, unions and employers must act in accordance with the demands of ratings agencies rather than with the unemployed.

Couple of questions: I don't believe in the UK we have the ability to issue bonds purely on the welfare funds, because it's not separate? In this case it would be the government issuing bonds (which of course only moves the issue up a level - the central problem doesn't go away, but is in this case less immediately focused on the welfare mechanism).
Also, that statement about acting in accordance with ratings agencies - it's not clear a) that the ratings agencies would pronounce on UNEDIC or France more generally, or b) what pressure they can actually bring to bear on the mechanisms of the welfare system (other than a pressure on general government brought about by needing to meet their expectations on financial behaviour.

I realise the difference is a matter of degree here, but it was difficult to be clear from his wording.

He then presents some eyewatering stats about local government in France. The departmental government of Seine-Saint-Denis had got loans from the financial markets linked to a highly volatile index, with the result.

"The initial rate, over three years, was 1.47%. It is now 24.20%, which comes to a jump of 1.5 million euros a year, nearly the cost of a daycare centre."

The debt of French administrative regions and departments has risen 50% since 2001.

Lazzarato makes it sound as if this is commonplace across Europe, but I really wasn't sure about the UK, and had a rummage around. As far as I can tell from this FT article in April (paywalled), it will surprise no one to know, the vast proportion of financial speculation carried out by local governments has been in property, especially shopping centres it seems.

Across the UK, local councils have been plunging into the commercial property market or embarking on residential property development, either for sale or for the private rental market.

“They are punting like drunken sailors all around the country,” says a bemused fund manager who has been outbid by local authorities on more than one investment this year.

The driving force behind this hedge fund-style activity is the same one that pushed local governments in Japan to buy property in the 1980s bubble and that now prompts China to encourage manic property development from its municipalities: the need to plug gaps in their budgets after years of funding cuts from the central government.

However at the bottom, I noticed this:

As well as requiring much less due diligence than a commercial bank, the PWLB [Public Works Loans Board] does not apply a loan-to-value discipline, whereby borrowings are capped at a given percentage of the purchase price. And it has plenty more largesse to distribute because its outstanding loans, which stood at £65.3bn in March 2016, are permitted under its current remit to rise to £95bn. The larger local authorities are also now turning to the capital markets where, as sovereign borrowers, they can issue index-linked debt on terms even more favourable than those available from the PWLB.

So, although it seems that UK local government is badly exposed to a potential property crash, it's currently less exposed on the financial markets, though has the capacity to do something about that, and is starting to do so.

He then goes on to combine personal debt with structural or societal debt with this sort to argue we are living in a society totally governed by debt. I found this a bit of a weakness, in that I think the psychological effects of consumer debt are different to the effects of structural debt. The sense of almost feudal bondage is surely less if you are part of a society that is indebted than if you have personal responsibility for the debt. His approach is philosophical though, and is therefore a question of category rather than extent, i guess. He writes about the idea of the debtor's guilty conscience for instance, but does a citizen living in a society shaped by the debt structures I wrote about above feel a guilty conscience to the same or any extent?

I also have some difficulty with the idea this is new. It was interesting to read in the book on double-entry bookkeeping how writing came out of counting, and how the symbols used for counting first made their way into wider culture via funerary rites and i believe it's certainly the case that in many societies the process of dying is also an accompting.

My recollection of notes on Othello and The Merchant of Venice is that credit was very much a part of mercantile shipping - necessarily so, given that much shipping was a gamble.

So it seems hard to say that the indebted person is purely a function of the modern finkncialised politics and consumerism. His book in fact constantly refers to a baseline 19thC industrial society, a time of those who owned capital, and of marxist production and labour, and consequent consumer fetishism. His stated belief, if I've understood him correctly is that in a credit-debit relationship, including existing in an indebted/financialised society what you are selling is effectively your good character, and your future decisions. Everything becomes about this 'moralism' of the power relationship put in place by debt.

After all, the "moral" judgment has to do with "life." And yet the "life" in question is not biological life (health, birth, and death), as with the concept of biopolitics, and still less cognitive life, but "existential" life. Existence here means the power of self-affirmation, the force of self-positioning, the choices that found and bear with them modes and styles of life. The content of money here is not labour but existence, individuality, and human morality...

Although I have been regularly wary of the argument in its detail there is a *lot* of otm in the book. This bit on the knowledge economy in particular was very good:

It seems to me that my friends in cognitive capitalism are mistaken when they make "knowledge" the origin of valorisation and exploitation. There is nothing new in the fact that science, skills, and technological and organisation innovations represent the productive forces of capital – Marx already understood as much in the mid-19th century. But the so-called knowledge economy fails to account for most of the class relations the theory of cognitive capitalism attributes to it. it is but one mechanism, one type of activity, one site of power relations alongside multiple other activities and power relations. Indeed, it must submit to the imperatives of the debt economy (savage cuts in "cognitive" investments, in culture, education, public services etc.)

..

In the current crisis, the "most" that capitalism demands and compels, in every area, is less knowledge than that one take upon oneself the costs and risk externalised by the State and corporations .. It is this "subjectivization," [his word for making someone a 'subject'] in addition to "labour" in the classical sense of the term, that – to speak like the economists of capital – makes productivity grow.

..

If capitalists spend little time worrying about investing in a more than improbable – always heralded but never realized – "knowledge society," they are, on the other hand, cruelly inflexible when forcing the governed to take on all the economic risks and damage the capitalists themselves have created.

So, yes, this book is currently contributing to my inner warfare about the great, exciting changes and turmoil brought about about by the mercantilist vector (culminating in the vast inhuman abstractions of financialised debt structures and neoliberalism), with l'uomo novo liberated from feudalism and social democracy the two ideals that go long with that, at least in some of its stages, and a more structurally radical approach - burn the fuckers down, basically.

ime philosophy ppl have no fucking clue when it comes to economics/finance

ime, vice versa

sorry Fizz your post is tl;dr so i just skimmed. book sounds like shit, and maybe vaguely David Graeber-ish? one common fallacy dudes like that use is confuse the reason something came to exist (historically) with the reason it continues to exist. i don't know if there is a latin name for that type of fallacy. like, Graeber would say that currency came about because early states wanted to levy taxes to fund wars, hence all currency is about WAR, not double-coincidence of wants or liquidity or even about exchange at all. but, that's obviously not true. if currency did not exist we would have to invent it

some non-crazy ppl actually do contemplate ending debt, this is a classic post by John Cochrane (ok he is maybe crazy in another way) on the radical proposal of getting banks to themselves fund on 100% equity: http://johnhcochrane.blogspot.ca/2016/05/equity-financed-banking.html

(for some reason bonkers finance-curious philosophers don't seem to talk about equity, the natural alternative to debt)

some economists know a lot about philosophy of methodology, but a lot are kinda naive-Popperian-via-Friedman, unfortunately

what economics/finance should philosophy ppl know? asking for a friend

ime philosophy ppl have no fucking clue when it comes to economics/finance

for me a major problem with economics (from economic theory to the economist magazine) is an inability to sceptically analyse its inherent ideological assumptions

yeah this is the wedge they use to get you to read them, but in the limit they're just cranks. the solution is to read better economists (they exist, i promise), not to read neophytes claiming to be able to see through the ideology

i think the best contemporary left-friendly econ writer for u guys is Chris Dillow, blog is here http://stumblingandmumbling.typepad.com/

some choice posts to earn your trust:

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2015/03/economists-be-more-marxist.html
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2016/05/bad-arguments-against-marxism.html
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2016/10/the-case-for-basic-income.html

and here are some posts where he discusses ideology & mainstream economics

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2017/04/on-mainstream-economics.html
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2017/01/on-defences-and-attacks-on-economics.html
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2016/11/ideology-in-economics.html

you also may like JW Mason, blog here http://jwmason.org/the-slack-wire/

the type economics i'm into is pretty intensely empirical rather than theoretical (altho the latter still plays a huge part by necessity) and takes quite seriously the difficulty of establishing cause and effect in the world, so things like methodology are first-order. imo most of what we think of as ideologies implicitly rest on a set of empirical assumptions about the world, and the first thing to do (even if you are a naked ideologue) is to investigate those to establish common knowledge (in an Aumann sense)

cheers flopson. been reading stumbling and mumbling for a while, but jw mason is new to me - will check out.

i think i’m reasonably empirically aware and orientated but even taking into account the analysis of people like stumbling and mumbling, flip chart fairytales, dan davies, yorkshire ranter, frances coppola etc, i like to see even irrational stuff or conceptually artificial stuff throw itself against the wider set of assumptions.

ya also tbh i'm burntout from reading the same old critiques being tossed around for 5 years

i like this guy a LOT (flopson's mmv):

1 like = 1 criticism of mainstream economics

— Unnerving Economics (@UnlearningEcon) October 17, 2017

dillow is also very good -- i want to like mason but i find him technically hard going

ah great, some new follows. felt i was glib in the posts above. good economic theory practice and analysis is good, not bad. and necessary with so much around that is mendacious or muddled. money is an important thing and important to get right or people will suffer. and my quarrel certainly isn't with the bloggers and writers we've been recommending and mentioning in the last few posts. but there are some writers, even writers who can occasion be good and interesting, whose writing and thought doesn't seem to comprehend or acknowledge, even tacitly, that there is a green hill without finance's walls, and that the wider structures of finance operate within ideology. I'm looking at you Tim Harford.

I had what I thought was a good example of this earlier this week, but have obviously forgotten it now.

noooo mark

Simon Wren-Lewis's blog and twitter feed https://mainlymacro.blogspot.co.uk/ are well worth reading, again fairly technical but not oppressively so.

For someone coming from a more philosophical background, I think Steve Randy Waldman's blog might be of interest. He sometimes steps back and unpacks the philosophical assumptions behind economic concepts in a way that's helpful for an outsider. He doesn't post as much any more, but if you start digging through his archives, you'll probably turn up something interesting. Here's a series of posts he did on welfare economics, as a taster:

http://www.interfluidity.com/v2/5149.html

those are great posts but way tl;dr for the point he's making

Maybe not his most concise writing, but hey it's a blog. Here's one which I think is a bit pithier, on optimal taxation of capital:

http://www.interfluidity.com/v2/4218.html