economics - where to begin?

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).