Karl Smith made the following observation yesterday:
At the same time Scott Sumner provides with a rhetorical tool that might help me convey what is otherwise extremely difficult to convey. That is:
Never reason from a food choice
Tyler Cowen made the following observation yesterday:
Don’t think of the model as “what happens to a restaurant when there is an exogenous increase in the beauty of its women” (recall Scott Sumner — “don’t reason from a beautiful women [price] change!” ). Think of the model as “what does lots of beautiful women predict about the place of a restaurant in its product life cycle?”
This leads me to wonder:
1. Can I copyright this maxim, and collect fees anytime someone uses it?
2. In 100 years will my market monetarist ideas be completely forgotten? Will I be a historical footnote—perhaps recalled as the economist who coined the phrase “never reason from a . . . ?” (BTW, I would consider myself very lucky if I became a historical footnote.)
It also got me thinking about what else we shouldn’t reason from:
Never reason from an interest rate change and never reason from an exchange rate change don’t count, as they are obvious, and are actually just special cases of prices.
1. Never reason from a wealth change: Is wealth falling due to factors that would be expected to reduce GDP (i.e. late 1929, or late 2008) or is wealth falling for reasons that would not be expected to reduce GDP (late 1987, January 2006 to April 2008)?
2. Never reason from a current account deficit: Does the current account deficit reflect healthy growth triggered by immigration and neoliberal reforms (Australia)? Or does the CA deficit reflect reckless government borrowing (Greece prior to the recession)?
3. Never reason from a price level: Does the very low price level reflect highly efficient government policies that hold costs down (Hong Kong)? Or does it reflect very inefficient government policies that keep the country poor (many LDCs)?
4. Never reason from an increased propensity to save: An increased propensity to save might cause more actual saving and more growth, or it might not boost actual saving, but rather depress AD. What determines which will occur? Monetary policy. And it turns out that monetary policy also drives AD. So talking about saving propensities adds nothing to our analysis of aggregate demand changes.
5. Never reason from an endogenous money claim: Don’t say; “money is endogenous, therefore . . . “ Unless the central bank targets money (which is very rare), the money supply will respond endogenously to changes in money demand that occur when some other variable is being targeted (interest rates, exchange rates, inflation expectations, etc.) But central banks generally target those other variables by changing the money supply in such a way as to stabilize the target variable. So an observation that money is “endogenous” tells us nothing about the effect of changes in the money supply.
6. Never reason from an aggregate wage change: (Yes wages are a price, but I haven’t discussed this one yet.) Higher real wages could be healthy, reflecting faster productivity growth. Or they could be unhealthy, reflecting deflation and sticky nominal wages.
PS. Speaking of reasoning from a change in beautiful women: About 10 years ago my wife brought me to a nightclub in Beijing full of very beautiful young women who seemed anxious to meet me. If that happens to you then you should feel free to draw the obvious inference—at my age there is no other rational interpretation. (Oh wait, I might have been dreaming . . . )