Dear Ben, Please surprise us with a policy regime that never again surprises us

“Left Outside” recent left the following two comments:

It’s all getting quite exciting isn’t it?

and

That’s a bad sign, of course, monetary policy should never be exciting. If it’s exciting you’re doing it wrong.

That’s right.  The central bank is doing its job when monetary policy is incredibly boring.

Then Saturos pointed me to an Arnold Kling post, which starts off quoting one of Arnold’s readers:

if an economist comes up with a novel and correct theory that makes predictions about macroeconomic variables, shouldn’t this theory enable him to beat the markets using these predictions?…

Therefore, it seems that if we accept both the EMH and the basic validity of macroeconomics, the latter must be about predictions that are somehow novel, correct, and non-trivial, but at the same time provide no new information about future market prices, even in terms of crude probabilities. But what would be some examples of these predictions, and what principle ensures their separation from market-relevant information?

Then Arnold adds the following:

Consider financial variables, such as the long-term interest rate or the price-earnings ratio of the overall stock market. According to the efficient markets hypothesis, these are not predictable on the basis of known information. To put this another way, you cannot beat the market forecast for these variables.

On the other hand, in conventional macroeconomics these variables can be predicted using models and controlled using policy levers. Reconciling this with the EMH has challenged economists for decades. Here are various alternative ways of doing so:

1. Policy has no effect. Markets do what they will do, regardless. The market uses the best prediction model, so economists’ macro models can, at best, replicate the market’s implicit model.

2. Policy has an effect, but markets try to anticipate policy. The expected component of policy has no effect. Only policy surprises have an effect.

It seems to me that the market monetarists (e.g., Scott Sumner) believe something closer to (2) than to (1). But (2) can get you into some strange conundrums. Does the Fed have free will? That is, does it have the ability to surprise markets, other than by acting randomly? If its actions are not random, they should be anticipated by markets. If they are anticipated by markets, then they should have no effect. etc.

Here’s what I would say:

1.  The expected part of monetary policy has no impact on financial markets.  It can still impact goods and labor markets, depending on when the policy became expected, and the duration of wage and price stickiness.

2.  Because the expected part of monetary policy cannot move markets, any systematic monetary policy should not involve Fed “surprises” moving asset prices.  If they do, then the policy regime is non-optimal.

3.  If policy is already non-optimal, and expected to remain non-optimal, then markets may be pleasantly surprised if an obscure blogger is able to make the world’s major central banks see the light and “target the forecast.”  That’s a good surprise, but can only occur once—during the transition from a bad to a good policy regime.  After than, no more surprises.  Please.

PS.  I’ll be very busy over the next few days, and may not be able to get to comments.


Tags:

 
 
 

65 Responses to “Dear Ben, Please surprise us with a policy regime that never again surprises us”

  1. Gravatar of Major_Freedom Major_Freedom
    19. December 2012 at 07:14

    The argument that the expected part of monetary policy has no impact on financial markets (relative to a free market standard?) has some very interesting implications.

    If the expected part of monetary policy has no impact on the financial markets, then by extension the financial markets will have no (different) impact on other markets, such as capital goods and labor markets, and those other markets will have no (different) impact on other markets, such as consumer goods. And so on.

    In other words, to the extent that the financial markets correctly expect what the Fed does, then the Fed will have no impact on the greater economy, as compared to if the Fed isn’t there at all (free market standard?). If the Fed is going to have any impact on the greater economy, it will have to be through the impact of the financial markets, because it is in the financial markets that the Fed operates and relies upon to affect the greater economy. Thus, if adding a central bank into the financial markets won’t impact the financial markets (to the extent the CB’s activity is correctly expected), then the financial markets won’t (differently) impact the rest of the economy either.

    The implication of this is that the only way the Fed could impact the greater economy is if the Fed does impact the financial markets, after which the financial markets impact other markets, and those other markets impact still further markets, and so on, till we get to “the economy” being impacted.

    Thus, the only way for the Fed to impact the greater economy is through surprise.

    The Fed surprises (impacts) the financial markets, who then surprise (impact) other markets, who then surprise (impact) other markets, and so on, until “the economy” is surprised (impacted).

    Thus, when MMs call for the Fed to “stimulate the economy more”, what they are calling for, consciously or not, is for the Fed to surprise (impact) the financial markets, and thus eventually surprise (impact) “the economy”. For if the inflation Sumner is calling for is correctly expected, then it won’t impact the financial markets, the financial markets won’t (differently) impact other markets, and those other markets won’t (differently) impact other markets, and so on, and we conclude there is no impact on “the economy”, and high unemployment will seemingly persist.

    How can those who adhere to EMH, at the same time say inflation will impact the economy through impacting the financial markets?

  2. Gravatar of Hugh Hugh
    19. December 2012 at 07:24

    If the Fed is no longer “surprising” the stock market, then the stock market will revert to being driven up or down by changes in perceptions about the future earnings of companies traded.

    That’s what we want,isn’t it?

  3. Gravatar of Hugh Hugh
    19. December 2012 at 07:27

    I should have added that Government/Fed policies will still affect the stock market by changing the ability of companies to earn future profits

  4. Gravatar of ssumner ssumner
    19. December 2012 at 07:32

    Hugh, Yup.

  5. Gravatar of Mikael Mikael
    19. December 2012 at 07:34

    Is EMH saying: If pressing down on the car’s gas pedal increases the speed of the car, shouldn’t a driver be able to consistently increase the speed of the car?

  6. Gravatar of Tyler Joyner Tyler Joyner
    19. December 2012 at 07:49

    The expected part of monetary policy has already had an impact on the financial markets, which is not the same as no impact. If markets try to anticipate policy, then policy clearly has an impact. Just because markets move before the policy is actually announced does not mean there is no causation.

  7. Gravatar of Major_Freedom Major_Freedom
    19. December 2012 at 07:53

    If policy is sub-optimal through surprises, and targeting the forecast is another surprise, then targeting the forecast is another slice in the sub-optimal pie. People will have their fill of that eventually too.

    If targeting the forecast is to be the final final surprise, after that no surprises, which allegedly makes it optimal, then would it not be just like the previous final no surprise price inflation targeting rule, which did not stop recessions where the rule was implemented. It too will not stop recessions caused by prior inflation.

    How can you say the problem is surprises, when the lack of surprise in price inflation targeting (great moderation) nevertheless blew up the economy anyway? Wouldn’t the problem have been the lack of an NGDP surprise that would have tricked and mislead people again? Isn’t the problem one of the price inflation rule being insufficient to sustaining an economy distorted through the surprise/unexpected component of price inflation targeting?

    Maybe you can’t see the kettle because you’re in the kettle, but from viewed outside the kettle, you are a part of a very ancient intellectual movement that is the inevitable consequence of the repeated failures of no surprise socialist rules (in this case inflation rules) in a world where the subject matter LEARNS and ACTS.

    You see, there MUST be continual surprises in order for the Fed to impact learning subjects, i.e. impact the economy through impacting the financial markets! Without the surprises, the Fed won’t be able to stop its own recessions. This is where you come in. Aware of it or not, you are offering a new surprise rule for the socialist oligarchs. It’s not a rule of abolishing their rule, so you got a foot in the door (which you view to be inherently successful, which is rather embarrassing). Your inflation rule sanctions their socialist rule, and is different than their existing inflation rule, which of course failed, and that is sufficient for them to consider your new rule. Why doesn’t the existing rule no longer “work”? Ultimately it’s because humans learn and act. This fact is constantly overlooked by technocratic Keynesians and Monetarists of all stripes. Every single Keynesian and Monetarist model, equation, and theory, assumes humans are like atoms and molecules that behave according to constant causal factors.

    The same failure is going to happen to NGDP targeting, if NGDP targeting is going to be imposed on learning subjects. A new NGDP targeting rule will only impact the economy through its surprise and unexpected component, i.e. the part that tricks people and misleads them (typically small businesses and wage earners who are not as intellectually sophisticated as ivy league crony capitalists who have an ear to the Fed). NGDP targeting, if adopted, will eventually fizzle out in terms of its impact, and then, if the CBs are to still exist, if the monetary system hasn’t YET broken down in a crack up boom, there will almost certainly arise a new school of monetarists who will carry the torch of socialist failure away from market monetarism (which will be ridiculed as not being able to see the next collapse because it ignorantly believed NGDP was a “good gauge of monetary policy”).

    This new school may propose a “limited stochastic NGDP growth” rule, or “wage payment” rule, or “S&P 500 index” rule, or “treasury price” rule, etc.

    NGDP theory only SEEMS legit because it has not yet been integrated into the knowledge of learning subjects around the world. You view the past and you think that by targeting the statistic you believe is responsible for recessions (secret hint: it isn’t), that recessions will be avoided despite the fact that there is still socialist inflation. Oh how naive and misguided we are!

    The shadow of the Lucas Critique hammer looms on the horizon…

  8. Gravatar of Felipe Felipe
    19. December 2012 at 07:59

    The expected part of monetary policy has no impact on financial markets. It can still impact goods and labor markets, depending on when the policy became expected

    But that would imply that the policy was unexpected at some point. If policy is expected to (say) loosen at the next meeting, how does the fulfilment of said expectation affect the goods and labor markets?

  9. Gravatar of Becky Hargrove Becky Hargrove
    19. December 2012 at 08:03

    It’s still exciting because the idea of ultimate focus on economic actors and participants is so novel in the present. And it could well remain exciting, at least until the realization sets in that with appropriate NGDP (or better, NGDI) level targeting, the Fed should not be the first one that gets the blame when uncertainty exists. At that point it may be possible to finally develop algorithms that can take actual equilibriums into account, and how economic actors participate in them.

  10. Gravatar of Major_Freedom Major_Freedom
    19. December 2012 at 08:16

    That’s a good surprise, but can only occur once—during the transition from a bad to a good policy regime. After than, no more surprises. Please.

    “A hallmark of every utopia is a militant desire to put an end to history, to freeze mankind in a static state, to put an end to diversity and man’s free will, and to order everyone’s life in accordance with the utopian’s totalitarian plan.” – Murray Rothbard.

    Borrowing from Thomas Molnar, NGDP targeting is the latest “…search of the utopian mind for the definitive stabilization of mankind or, in gnostic terms, its reabsorption in the timeless.”

    and

    “In this view, existence itself is a wound on nonbeing. Philosophers from Plotinus to Fichte and beyond have held that the reabsorption of the polichrome universe in the eternal One would be preferable to creation. Short of this solution, they propose to arrange a world in which change is brought under control so as to put an end to a disturbingly free will and to society’s uncharted moves. They aspire to return from the linear Hebrew-Christian concept to the Greco-Hindu cycle — that is, to a changeless, timeless permanence.”

    It’s difficult to accept all this I’m sure, because MMs like to think their one, their all and end all, their inflation rule to end all inflation rules, is “modern”, “scientific”, and so on. It can’t be based on primitive superstition, can it? How insulting. But nevertheless, the philosophy under which NGDP targeting springs is a continuation of a very ancient thread in philosophical thought that dates back to the ancient world. You may think you’re only trying to help, but you got involved in central banking rules because your mind was already philosophically predisposed to such oneness and desire to end history.

    Fukiyama believes in it. He believes democracy is the end of history. Bernanke believes in it. Marx believed in it. Hegel believed in it. Every totalitarian believed in it. The relentless drive to put an end to change. For MM, it’s to end the history of central banking by making it unchanged. To end the history of spending by making it (the growth) unchanged.

  11. Gravatar of Greg Ransom Greg Ransom
    19. December 2012 at 08:42

    Let’s get real.

    The way macroeconomists use the EMH isn’t sanctioned by any research produced by Fama & friends or any claim that Fama will defend.

    The “EMH” which macroeconomists have constructed is based on pure fantasy, a magic of instant and perfect coordination which only an infinite and all knowing and all powerful being could produced (or an economist could produce with a math construct) a magic perfection only broken by the ad hoc — ie *unscientific* — appeal to “sticky prices” of a size and force that betrays all experience, evidence and common sense.

    A macroeconomics built on a belief in magically processes is a macroeconomics that has no business calling itself science.

  12. Gravatar of Becky Hargrove Becky Hargrove
    19. December 2012 at 08:49

    This is not utopia. It is clarification of what is economically possible, and refusing to hide behind the distortions that exist in the confusion between opposing ideas of equilibrium. Those opposing ideas make an all too convenient fog for anyone not actually a free market supporters in the true sens – that is free markets for all comers. Think of a certain Beatles song and how algorithms for potential economic activity scenarios might actually play out “You say you want a revolution, these are distortions you would get.” Whose distortions? At what cost to the whole? In other words those algorithms could be presented to voters who desire different and sometimes opposing sets of services in local settings. Or, voice and exit.

  13. Gravatar of Randy W Randy W
    19. December 2012 at 09:33

    Scott -

    Jeffrey Frankel from Harvard advocates NGDP targeting:

    http://www.voxeu.org/article/central-banks-can-phase-nominal-gdp-targets-without-damaging-inflation-anchor

  14. Gravatar of marcus nunes marcus nunes
    19. December 2012 at 09:39

    Scott
    And the greatest irony is that Bernanke knew all that since long ago, but insisted on disregarding his own advice:
    http://thefaintofheart.wordpress.com/2012/12/19/bernanke-the-man-who-disregards-his-own-advice/

  15. Gravatar of MichaelM MichaelM
    19. December 2012 at 10:10

    Why hello there Lucas Critique.

  16. Gravatar of mpowell mpowell
    19. December 2012 at 10:50

    This has never made any sense to me. First of all, as Tyler says, just because a fed policy announcement doesn’t move the stock market it doesn’t mean the policy doesn’t have any effect. Secondly, even if you believe that a certain fed policy will move macroeconomic variables in a certain direction, it doesn’t give you the ability to beat the market, unless you have information about policy before the market. That’s what we’re talking about right? Also, fed policy operates like a control loop. There is no theory of macroeconomics that claims to predict, based on current macro variables, what the right target rate is on a month to month basis over the next several years to deliver an associated course for certain macro variables. The idea is that as you go, you tweak the policy to move the macro variables in the right direction. I don’t understand how anyone would argue that just knowing the sign between fed policy and macro variables beats the EMH.

  17. Gravatar of Doug M Doug M
    19. December 2012 at 10:59

    “Policy has an effect, but markets try to anticipate policy. The expected component of policy has no effect. Only policy surprises have an effect.”

    It is by this rationale that some say the Fed should stop trying to be tranparent.

    Regarding the EMH – I would say that even the strongest advocates for the efficient market hypothosis would say that no market is 100% efficient. Clearly there are traders and arbitrageurs who make their livings exploiting small inefficiencies. But the point is that if information is symetric and markets are liquid inefficiencies will be small — in part because the arbritrageurs will bid away any mispricing if it get to be large enough. But, information is not symetric and not all markets are liquid, nor can they be arbed.

    The labor market is an ineffiecent market. As the onwer of my labor, I am the only seller, my employer is the only known buyer. It could take me months to find another potential buyer. There are large transactions costs (training, and severance for the buyer, lack of income in the transition for me), etc.

    So, the financial markets may predict the Fed, but goods and labor markets may not.

  18. Gravatar of jknarr jknarr
    19. December 2012 at 11:06

    I don’t believe that the Fed has ever made its reaction function clear. Greenspan purposefully muddied the pond with freight cars and such garbage. They have gotten closer to clarity with the 2% imputed inflation target, now alongside unemployment thresholds. But promises are situation-specific and written in water.

    From an institutional view — we view them as important because they appear to have power. Their power is rooted in their discretion. The moment that they relinquish discretion and strap themselves to an NGDP mast, then they make their central banking institution obsolete (ie boring). Hundreds of PhDs solving “serious problems” will not willingly be replaced by a chimp with a spreadsheet — even if the chimp does a better job. Every bank on earth works to keep this exciting and discretionary structure.

    So why have we settled on a discretionary system? Likely because Fed’s primary functions are: 1) preserving the commercial banks; 2) funding the US Treasury. The Fed’s nominal statutory objectives for monetary policy – maximum employment, stable prices, and moderate long-term interest rates – are at best positive externalities.

    OK, so they have discretion. Do they surprise? I’d say that 90% of the time the central bank effectively targets market expectations — i.e. the market sorts out what the Fed ought to do, and so the Fed does it. IMHO, all the Fed can do on rate policy is match the natural rate of interest that is set by the monetary base — the market simply works out what do do in the short run.

    The only real change I’ve seen is their clarifying Fed Fund targets in the ’80s. At one time, the base and Fed balance sheet stance were taken, and the market priced Fed Funds. Later, FF targets took a life of their own, somewhat separate from the balance sheet. (Oddly, this and IOR have increasingly separated the balance sheet from market pricing.)

    Boring central banking would strip discretion and power away. Note that their discretion is not regularly in-your-face. The Wall Street model, everyone should know, is mutual cooperation 90% of the time, and then 10% a utter screw job. Central banks appear to me to be similar — boring and regular most of the time, but gets suddenly exciting (and not wholly in your favor) when it is in the house’s interest.

    My issue is, optimal for whom?

    Yes, twelve guys in a room directing the flow and valuations of inconceivable trillions might have scope for market-matching, surprise, and sub-optimality all.

  19. Gravatar of Philo Philo
    19. December 2012 at 11:28

    Kling writes that “in conventional macroeconomics these variables can be predicted using models and controlled using policy levers.” But the *predictions* must be *conditional on policy choices*; conventional macroeconomics doesn’t assume that *the policy choices themselves* can be predicted.

    Then he attributes to Scott the view that “[o]nly policy surprises have an effect.” But he should have written: “Only policy surprises have an *unanticipated* effect.” The anticipated policy choices may be, and probably are, having effects, but these effects are anticipated by the market.

  20. Gravatar of Saturos Saturos
    19. December 2012 at 11:31

    Randy, he already did six months ago, but still that’s pretty huge.

    Thanks Scott.

  21. Gravatar of Major_Freedom Major_Freedom
    19. December 2012 at 12:43

    Doug M:

    So, the financial markets may predict the Fed, but goods and labor markets may not.

    Even if they could predict the Fed, they still can’t predict where the money will go after, nor what the actual time preferences of people are, nor the availability of real capital (because there is only one set of prices). They can make educated forecasting guesses, and in the market the bad forecasts tend to be weeded out in favor of good forecasting, but because there is only one Fed impacted price system available, the economy becomes a place where bad decisions are NOT weeded out, but are exacerbated. Wealth consuming activity is encouraged and wealth producing activity is discouraged. Call it increased systematic risk if you want.

    As the market force induced relative pricing pressure continues to push back against the central bank force determined relative pricing pressure, it requires more and more central bank pressure to counteract the increasingly pressurizing market forces, until one or the other gives. Sometimes the central banks do not balk first, and they end up hyperinflating the currency. Usually however it’s the central banks who balk first, and they bring on a recession now and save the currency rather than bring on a recession later and lose the currency. This is why we have so many economists who blame recessions on insufficient inflation or aggregate demand. They aren’t peeling back the outer layers.

    Consider this relative sector analysis for the US.

    After the Fed started to raise the benchmark rate in 2004 and into 2006 because of growing price inflation concerns, it let up on its own relative price pressure that had been building up prior (with opposing market induced relative pricing pressure building up in the reverse direction), it allowed more market induced relative pricing pressure. CPI and PCEPI indexes mask this relative price analysis. NGDP masks relative spending. That’s why Keynesians and Monetarists don’t know when problems are brewing. These statistics are what they look at.

    If you notice, those sectors that are most sensitive to interest rates, such as construction and durable goods, experienced the most severe fall in employment (and spending), whereas in those sectors that are least sensitive to interest rates, such as the retail and service sectors, experienced the least severe fall in employment (and spending). This is strong evidence that the prior Fed induced relative price pressure resulted in too many resources and labor going to construction and durable goods industries and not enough to the retail and service industries.

    THIS is what was and is wrong with “the economy.” THIS is why the Fed found itself having to scramble in 2008 like they never have before, and why inflation programs that would have sent markets in a frenzy, are now barely registering a blip. The economic structure was so warped beyond belief (from decades of prior inflation that fundamentally altered the structure of the US and world economy, which has never happened before), that mountain sized piles of new money were necessary to prevent the relative price structure from going full tilt in favor of market forces.

  22. Gravatar of ZHD ZHD
    19. December 2012 at 12:56

    This “no surprises” doctrine is silly.

    The macro stability mandate does not necessarily equate to stable/predictable policy. What you refer to as a “surprise” is more aptly known as “information.” In order for the Fed to achieve whatever goals it sets, it must put information into the market—whether through asset trading, guidance, or even the interesting but mostly irrelevant economics research wing (http://research.stlouisfed.org/).

  23. Gravatar of ZHD ZHD
    19. December 2012 at 13:02

    Major_Freedom,

    Historically, bad forecasters enter the market just as quickly as others leave.

    Here’s a nice chart of 27 years of fail: http://www.businessinsider.com/gerard-minack-forecasting-earnings-2012-12

  24. Gravatar of Major_Freedom Major_Freedom
    19. December 2012 at 13:09

    ZHD:

    Yes, that’s why I said “but because there is only one Fed impacted price system available, the economy becomes a place where bad decisions are NOT weeded out, but are exacerbated.” I said that right after I said the market weeds out bad forecasters. Key word is market. I mean a free market, the only market.

    Interesting chart, BTW. Take away: As a rule of thumb, reduce EPS forecasts by 6% for first year, and 12% for second year.

  25. Gravatar of Major_Freedom Major_Freedom
    19. December 2012 at 13:15

    ZHD:

    Also, forecasting stats should be treated as a benchmark, not actual predictions. If those EPS forecasts were consistently accurate, then anyone could beat the market by using them. But then those people would become a part of the market.

    No, I am not saying EMH is true. It’s close though.

  26. Gravatar of Doug M Doug M
    19. December 2012 at 13:34

    ZHD,

    I have a much better representation of this data. Don’t re-index the forecasts to 100 and run this plot. Then overlay the the level of the S+P 500. You will see that forecasts follow changes in the level of the S+P. i.e. Forecasters tell the market what they think the market wants to hear. If you are trying to sell research, important thing, not to be right, but to validate prejudices of your clients.

  27. Gravatar of Indeed Atrios « Left Outside Indeed Atrios « Left Outside
    19. December 2012 at 15:07

    [...] I would rather see Scott Sumner use my real name (and link to me, blogiquette please) when referring to me, the sort of stuff in the last post is why writing under a pseudonym is [...]

  28. Gravatar of jknarr jknarr
    19. December 2012 at 15:36

    Shouldn’t we be saying:

    “That’s a bad sign, of course, *NGDP* should never be exciting. If it’s exciting you’re doing *monetary policy* wrong.”

    NGDP targeting *mostly* reduces the standard deviation of growth — by cutting out the middleman of debt-leveraged inflation/deflation. It’s less of a growth level argument, which would likely be close to trend anyway.

    The problem is that the Fed stabilizes the banking system, and lets NGDP float (banking boring, NGDP exciting). (All the while saying that it is stabilizing NGDP — har-har, check the pre- and post- Fed NGDP standard deviations.) A stabilized banking system in fact creates leverage-driven NGDP volatility. (Thanks, guys!)

    The dilemma is that making NGDP boring will likely make banking exciting again — can’t have boring NGDP and banking both because of the tendency to leverage up low and stable returns. Instead of playing regulatory whack-a-mole with these perpetual incentives to leverage up stable returns, best scrap the reserves-commercial bank system alltogether.

    So where does one place savings under NGDP targeting? Bonds, notes, and bills might be a much better place than the current banking system model — people’s savings would be marked to market to a liquid NGDP-stabilized long end, all the time, everywhere.

    Not a bad trade.

    BTW, I am uncertain why we treat 12 guys in a room as some font of reliable EMH assumptions. There have only been some 90 Fed decision-makers in all of recorded history — why anyone should purport to know their means, motives, and opportunities is beyond me. (“But they say so” does not count.)

  29. Gravatar of Suvy Suvy
    19. December 2012 at 15:44

    I would just like to add on the EMH discussion. Why not try using a different theory like the Fractal Market Hypothesis? It seems a lot more reasonable and realistic than the EMH. Why not just ditch the EMH?

    I couldn’t find a Wikipedia page on the topic so this will have to suffice:
    http://www.businessdictionary.com/definition/fractal-market-hypothesis-FMH.html

  30. Gravatar of ZHD ZHD
    19. December 2012 at 15:55

    Doug M:

    That seems reasonable. The Sell-Side isn’t exactly known for its scientific or moral fortitude.

  31. Gravatar of Major_Freedom Major_Freedom
    19. December 2012 at 16:13

    Suvy:

    I would just like to add on the EMH discussion. Why not try using a different theory like the Fractal Market Hypothesis? It seems a lot more reasonable and realistic than the EMH. Why not just ditch the EMH?

    It’s fruitless to try and understand capital markets, and markets in general, through the usage of tools of the physical sciences. Fractal market hypothesis is still as mechanical as EMH. Only a theory that encompasses purposeful human behavior, is tenable.

    Imagine trying to understand the behavior of unconscious trees by attributing consciousness to them. It’s the same thing, but in reverse, when trying to understand the behavior of conscious people by attributing unconsciousness to them.

  32. Gravatar of Suvy Suvy
    19. December 2012 at 16:29

    Major Freedom,

    I actually agree with what you’re saying; however, we can still gain something from these models. Take the Black-Scholes formula as an example, it’s obviously complete bull, but that doesn’t mean that it has no practical value. I happen to think that trying other methods and approaches might be valuable in the sense that it may provide us with a different approach and view point.

    I’ve said this before and I’ll say this again, I think it is useless to try and predict market behavior. However, I don’t think it’s useless to necessarily build models and see how those models might work. That may give us some sort of practical value. For example, Black-Scholes is used all the time and has theoretical value, but it is a tool that might have value.

    I think you’ll agree with me on this, the difference between the hard sciences like physics and chemistry and something like economics is that in economics there are no hard rules(like the rules of entropy). The theories in economics are not facts, like many of the theories in physics.

  33. Gravatar of Major_Freedom Major_Freedom
    19. December 2012 at 17:23

    Suvy:

    I think you’ll agree with me on this, the difference between the hard sciences like physics and chemistry and something like economics is that in economics there are no hard rules(like the rules of entropy). The theories in economics are not facts, like many of the theories in physics.

    Unfortunately I will not agree with you on this, because I hold that there are hard rules in economics. These rules are logical constraints on all outcomes. For example, the law of opportunity costs is a hard rule that will never be contradicted as long as humans act. It is a category of action. It says that no matter what anyone does, that in every conceivable context in every conceivable location at any conceivable time, there will be foregone alternatives that could not be carried out because the actual action was carried out.

    For example, no matter what I do with a pound of flour, either baking bread, or cookies, or cake, or whatever, anything I do with that flour, I will be guaranteed to forgo all other possible alternatives that flour can be used as a means to accomplishing. If I bake bread, I cannot bake cookies, cake or anything else. In addition, my own body will have forgone alternatives associated with it. If I bake bread, then I cannot fly on an airplane and drive to the store and sleep and dance and type on a PC all at the same time. I can only use my body to do one thing at a time (“one thing” includes multiple sub tasks at the same time, like walking and chewing gum).

    This law is, IMO, more certain, more hard and fast, more fundamentally incontrovertible than even the law of gravity. This is because it is impossible, literally impossible, for me to even THINK of the law of opportunity costs being overturned. I cannot even coherently imagine myself flying to a resort for vacation, and staying at home to bake bread, at the same time. It is literally unthinkable. Even if someone claimed to have empirically confirmed an experiment that allegedly shows it can be done, I will not even be able to make sense of it.

    With the law of gravity on the other hand, I can coherently conceive of gravity changing in some way. I can imagine what it might be like if the law of gravity did not exist. Physicists have done this too, and they say that matter could not coalesce, but be freely floating particles everywhere with zero attraction. It is somewhat difficult to think of this, but it is at least thinkable. This casts SOME doubt, however small, on whether or not the law of gravity is permanent, and forever unalterable by human innovation and technological savvy.

    Philosophical rationalists hold that the laws of the mind, if they are correctly laid out, which I think the law of opportunity costs is, provides us with absolute knowledge about the fundamental fabric of reality that cannot ever be transcended by any conscious entity, because they are laws of consciousness itself.

    Mises, to his credit, and one of his many accomplishments, was, IMO, able to bridge the gap between these “internal” laws of the mind, and “external” empirical human life in society. The bridge to Mises is action. If something is true for action, then it is true for our minds and external reality. By depending on this laws of the mind, we are able to know exactly what the logical constraints on all possible “external” empirical events in human society. These logical constraints don’t say much, but they are nevertheless absolute. No conscious entity will ever be able to overturn the laws of consciousness itself.

    Back to economic modelling, when I see “practical” mathematical models being used, I know that they are only ever “true” by freak accident. An economic model that contradicts the laws of consciousness, but is nevertheless confirmed over and over again, for however long a period of time, is not actually revealing to us an economic law the way physicists reveal laws of unconscious matter. It would be like me saying my model is that humans will always ingest food. I could have this model confirmed for tens of thousands of years, and positivists will believe that ingesting food is an objective law of the universe, but I know, despite all that, that eating is something that does not HAVE to occur, but is one action among possible alternative actions, such as purposefully starving to death.

    This discussion above is why rationalists are charged as being dogmatic and antiscientific. They seem to flout even the most confirmed of empirically falsifiable theories. Some of them make logical mistakes from time to time, which only further adds to the dogmatism charge. It’s strange, because while positivist empiricists are seemingly allowed to make mistakes in their method, rationalists have to be perfect or they’re nothing. I see this all the time. One logical misstep, and positivists charge “See? Your method leads you to mistakes! Your mind cannot be trusted!” Then they go ahead and use their own minds, make occasional mistakes, and think nothing worse of their method.

    Anyway, to sum up, I will say that economic laws, the ones that are grounded in the structure of our minds, I think they are more certain than physical laws. Why? It’s because while I don’t have “inside information” on what it’s like to BE a tree, I do have “inside information” on what it is like to BE a conscious entity. Because of that, my knowledge of consciousness, when studied closely and persistently, will be more certain than my knowledge of trees and rocks and metals and everything else not me. Full knowledge of something, IMO, requires one to BE that something. I can’t have full knowledge of the world around me, but I can have full knowledge of the laws of consciousness. Of course I have only some knowledge of both, and so my life consists of learning about both my own consciousness and the world around me. But at the same time, my knowledge of the world around me is entirely grounded on my knowledge of myself, not the other way around. I don’t think I’m an unconscious tree and then believe that through this I can understand my conscious self “outside myself.” No, I think I am conscious, and then know that through this consciousness I can understand both trees and myself “inside myself.”

  34. Gravatar of Suvy Suvy
    19. December 2012 at 18:01

    “Back to economic modelling, when I see “practical” mathematical models being used, I know that they are only ever “true” by freak accident. An economic model that contradicts the laws of consciousness, but is nevertheless confirmed over and over again, for however long a period of time, is not actually revealing to us an economic law the way physicists reveal laws of unconscious matter. It would be like me saying my model is that humans will always ingest food. I could have this model confirmed for tens of thousands of years, and positivists will believe that ingesting food is an objective law of the universe, but I know, despite all that, that eating is something that does not HAVE to occur, but is one action among possible alternative actions, such as purposefully starving to death.”

    The only issue I really have with something you said is about modeling. Modeling doesn’t necessarily mean that you have to use what the model spits out. For example, you could use a model to measure the impact of a certain event. The positivist interpretation of a model is a bad interpretation of any model. The flaws of any model are clear; it’s up to the person that uses the model. For example, very successful traders use the Black-Scholes formula knowing very well that it isn’t realistic. They use the model as a tool, but they know that there are things it can’t account for.

    It’s the same way with models in physics. The Newtonian model for motion makes certain assumptions and it is factually wrong. However, it is still a model that is used today because it has practical value. There are places where the Newtonian model breaks down and the positivist interpretation of the model is different from using the model successfully. I don’t have to know the model is 100% correct to use it.

    For an example in finance, I could use a certain model and I could also know the areas where the model breaks down. Therefore, I could use the model and be convex to the areas where the model breaks down. Actually, Nassim Taleb talks about this in his new book Antifragile. He actually proposes that this is how central banks and regulators should do stress tests on banks.

    I know you never said anything about the use of models versus the interpretation of models by positivists, but those two things are two very different things. Also, very few things are developed in theory before they are used in practice. I actually don’t think that you said that the models shouldn’t be used; it seems to me that you’re saying we should be more careful how to interpret them and that we can’t get much out of any model’s interpretation. Is this an accurate interpretation?

  35. Gravatar of Suvy Suvy
    19. December 2012 at 18:04

    “Back to economic modelling, when I see “practical” mathematical models being used, I know that they are only ever “true” by freak accident. An economic model that contradicts the laws of consciousness, but is nevertheless confirmed over and over again, for however long a period of time, is not actually revealing to us an economic law the way physicists reveal laws of unconscious matter. It would be like me saying my model is that humans will always ingest food. I could have this model confirmed for tens of thousands of years, and positivists will believe that ingesting food is an objective law of the universe, but I know, despite all that, that eating is something that does not HAVE to occur, but is one action among possible alternative actions, such as purposefully starving to death.”

    I want to clarify your feelings on modeling. Modeling doesn’t necessarily mean that you have to use what the model spits out. For example, you could use a model to measure the impact of a certain event. The positivist interpretation of a model is a bad interpretation of any model. The flaws of any model are clear; it’s up to the person that uses the model. For example, very successful traders use the Black-Scholes formula knowing very well that it isn’t realistic. They use the model as a tool, but they know that there are things it can’t account for.

    It’s the same way with models in physics. The Newtonian model for motion makes certain assumptions and it is factually wrong. However, it is still a model that is used today because it has practical value. There are places where the Newtonian model breaks down and the positivist interpretation of the model is different from using the model successfully. I don’t have to know the model is 100% correct to use it.

    For an example in finance, I could use a certain model and I could also know the areas where the model breaks down. Therefore, I could use the model and be convex to the areas where the model breaks down. Actually, Nassim Taleb talks about this in his new book Antifragile. He actually proposes that this is how central banks and regulators should do stress tests on banks.

    I know you never said anything about the use of models versus the interpretation of models by positivists, but those two things are two very different things. Also, very few things are developed in theory before they are used in practice. I actually don’t think that you said that the models shouldn’t be used; it seems to me that you’re saying we should be more careful how to interpret them and that we can’t get much out of any model’s interpretation. Is this an accurate interpretation?

  36. Gravatar of Major_Freedom Major_Freedom
    19. December 2012 at 19:17

    The only issue I really have with something you said is about modeling. Modeling doesn’t necessarily mean that you have to use what the model spits out. For example, you could use a model to measure the impact of a certain event. The positivist interpretation of a model is a bad interpretation of any model. The flaws of any model are clear; it’s up to the person that uses the model. For example, very successful traders use the Black-Scholes formula knowing very well that it isn’t realistic. They use the model as a tool, but they know that there are things it can’t account for.

    Models are either representative of reality, or they are not. A flawed model that is nevertheless practically useful, is, IMO, only useful by accident. For such a model could blow up in one’s face at any time, when the underlying reality changes to whatever extent that it finally reveals the model’s flaw in the practical sense. This is precisely what occurred with the MBS pricing models. The variable rho, which encompasses the volatility of the mortgage payments, can only ever be treated as a constant. Those who utilized this model did have much success for many years. But then the flaw of the model was finally revealed, those who were lulled into a false sense of security were caught completely off-guard.

    It is not often that you find users of mathematical models such as these that aren’t lulled into that false sense of security, but to the extent they aren’t so lulled, it is only because they have some sense, however strong, that they are not like physics and chemistry models which are treated as so certain, that people literally risk their lives by depending on them (like building skyscrapers, airplanes, etc).

    It’s the same way with models in physics. The Newtonian model for motion makes certain assumptions and it is factually wrong. However, it is still a model that is used today because it has practical value. There are places where the Newtonian model breaks down and the positivist interpretation of the model is different from using the model successfully. I don’t have to know the model is 100% correct to use it.

    Yes. I will only add that it is important to note that both Newtonian mechanics and Einsteinian geometry, and Quantum mechanics for that matter, can all be grounded on the same fundamental axiomatic system, what Paul Lorenzen dubbed “protophysics”. Granted, this was rejected by most physicists, but this is mainly because it hasn’t yet been adequately communicated in terms of spacetime geometry, which most physics “speak” as their language.

    For an example in finance, I could use a certain model and I could also know the areas where the model breaks down. Therefore, I could use the model and be convex to the areas where the model breaks down. Actually, Nassim Taleb talks about this in his new book Antifragile. He actually proposes that this is how central banks and regulators should do stress tests on banks.

    Yeah, except it is possible that where they think the model doesn’t break down, actually does break down under certain circumstances heretofore unseen.

    I know you never said anything about the use of models versus the interpretation of models by positivists, but those two things are two very different things. Also, very few things are developed in theory before they are used in practice. I actually don’t think that you said that the models shouldn’t be used; it seems to me that you’re saying we should be more careful how to interpret them and that we can’t get much out of any model’s interpretation. Is this an accurate interpretation?

    Yes. There is nothing wrong with using mathematical models as mental tools, IMO. They can guide one’s thinking by making it easier to handle multiple factors that may otherwise get mishandled with purely verbal methods. But at the same time, I still think that verbal methods are inherently superior, when done right. This is because the verbal method is not limited to quantities as is the case with mathematical models. It can delve into qualities that mathematics cannot tread. So while verbal analysis can accommodate both quantity and quality, the method of mathematical modelling can only accommodate quantity. Since economics is the study of acting man, or of the production of wealth depending on how you define it, and these include both quantity and quality, I hold that verbal analysis should be the ultimate standard, and where appropriate, mathematical models can be used but with strict understanding of its limitations.

  37. Gravatar of ZHD ZHD
    19. December 2012 at 19:45

    Major_Freedom,

    When you note the differences between mathematical models and verbal models as “quantity” versus “quantity and quality,” are you referring to the inputs or the outputs?

  38. Gravatar of Suvy Suvy
    19. December 2012 at 20:15

    Major Freedom,

    “There is nothing wrong with using mathematical models as mental tools, IMO. They can guide one’s thinking by making it easier to handle multiple factors that may otherwise get mishandled with purely verbal methods.”

    I think that statement sums it up pretty well and I actually agree–models should never be used as the end-all-be-all and they are nothing more than a tool. I was actually talking to someone about how agent based modeling was being tried by some Austrian economists (I don’t know if this is true or not). What do you think about this? I found a few articles on it too.

  39. Gravatar of Major_Freedom Major_Freedom
    19. December 2012 at 22:34

    ZHD: IMO, both, as well as the model/theory itself. What do you have in mind?

    Suvy: As long as the agent based model doesn’t presuppose constancy in causal relations, then it at least doesn’t contradict learning and action and is worth looking at. I am skeptical though because most ABMs are simulation driven that depend on constancy assumptions. Plus they tend to treat the agents as homogeneous clone like subjects.

  40. Gravatar of ZHD ZHD
    19. December 2012 at 23:36

    Major_Freedom: I’m not quite sure yet. Can you give an example of two models that appear close but one is mathematical and one is verbal?

    Also I agree with you on the difficulty of developing adaptive ABMs. The most recent one I’ve gotten to talk to the developers of was Argonne’s that they used to model the potential supply-demand impact of deregulating certain aspects of the Illinois energy market. I’m going to take it for granted that you have similar tastes to myself and say: it was awesome to see.

  41. Gravatar of Saturos Saturos
    20. December 2012 at 05:27

    A new wave of skepticism on NGDP targeting. Here is M.C.K. at Free Exchange: http://www.economist.com/blogs/freeexchange/2012/12/central-banking

    and here is Justin Wolfers: https://twitter.com/justinwolfers/status/281517250777858049

  42. Gravatar of Saturos Saturos
    20. December 2012 at 05:29

    Here is Miles Kimball: https://twitter.com/mileskimball/status/281641302490218496

    and here is his new blog post on “Neomonetarism” (clearly his own model): http://blog.supplysideliberal.com/post/38379748518/the-neomonetarist-perspective

  43. Gravatar of Major_Freedom Major_Freedom
    20. December 2012 at 06:11

    ZHD:

    Can you give an example of two models that appear close but one is mathematical and one is verbal?

    Possibly, but the way I was thinking this can be approached is to consider to what extent there are actions or wealth generation concepts that can’t be modeled mathematically, but can be modeled verbally, and to what extent there are actions or wealth generation concepts that can’t be modeled verbally, but can be modeled mathematically.

    The latter one is easy to answer. It’s zero, because every mathematical model can be expressed verbally. The former one, if we can propose just one satisfactory example, is sufficient to establishing that verbal analysis encompasses mathematical analysis.

    One example is obvious: Change of perception. No mathematical model can encompass this concept, because no mathematical model can consider itself, or consider itself in a different way than how it used to consider itself, which leads to the formation of a new plan and new model. All mathematical models are “sterile” and “timeless”, as it were. Once they are established as fixed, they immediately become tools of thought, not thought itself.

    Also I agree with you on the difficulty of developing adaptive ABMs. The most recent one I’ve gotten to talk to the developers of was Argonne’s that they used to model the potential supply-demand impact of deregulating certain aspects of the Illinois energy market. I’m going to take it for granted that you have similar tastes to myself and say: it was awesome to see.

    I can imagine. The technology at that place borders on science fiction.

  44. Gravatar of J Mann J Mann
    20. December 2012 at 06:50

    I am too lazy to read all the comments above, or even Arnold’s original post. Therefore, I assume someone has beaten me to the following obvious point.

    - Any real world EMH hypothesis would probably lead to the following conclusion: Although it is possible for the Fed to surprise the markets, the markets are collectively as good as an expert at predicting these surprises and their effect.

    - Therefore, you could beat the markets if you had inside information about what the Fed is planning to do, but not if you merely had a sophisticated or outlying understanding of how the Fed works.

    - Many EMH hypotheses grant that there will occasionally be a temporary advantage on the market, and that in those cases, you can make money against the market for a period of time. (E.g., occasionally you do find a $20 bill on the sidewalk). The slightly more aggressive hypotheses might argue that even though that is true, there’s no reliable way to identify when you have such an advantage until after you’ve made your bets.

  45. Gravatar of Saturos Saturos
    20. December 2012 at 08:15

    Everyone, check out the awesome new Twitter hashtag: “End of the World Econfessions”

    http://twitter.com/search?q=%23EndOfTheWorldEconfessions&src=hash

    Btw it just turned 21st here in Perth, night everyone. I’ll comment again tomorrow. If I’m still here.

  46. Gravatar of Major_Freedom Major_Freedom
    20. December 2012 at 08:36

    Saturos:

    If I am considering making a poor investment decision, relative to others in the country, in the sense that I intend to allocate resources to goal X that is less highly valued by others relative to possible goal Y, but I don’t know it just yet, then I am sure you will agree that it makes sense that if I do go ahead and invest in X, that I should incur nominal losses. I am sure you will also agree that should my investment nevertheless receive profit making revenues for whatever reason, that my continued activity towards goal X would prevent the more highly valued goal Y from transpiring.

    Now, would you agree that if I am receiving such “unwarranted” revenues, that my resulting spending out of those revenues would implicate other producer’s resource usage to be sub-optimal as well, on the basis that they should not be physically sustaining my activity through sending me resources in exchange for the revenues I earned prior? If so…

    I am sure you will agree that it would be justified to say that a country’s economy, i.e. myself and others in the country, is sub-optimal, to the extent that I am making poor decisions, and others are sustaining my poor activity in real terms. Too many resources here, not enough resources there, and too many resources are sustaining my activity. Whatever others are producing for my benefit, should not be produced, because my activity is malinvestment activity. Their means of production should be used to produce other things that are not catered towards my benefit.

    If you agree that it would be warranted for me to incur insufficient nominal demand should I go ahead and invest in goal X anyway, then by logical extension, I am sure you will agree that if two people relative to others make poor investment decisions, that they too should incur losses, and any others who are sustaining them in real terms should instead be deploying their resources for different usages as well, for those whose activities are sustainable.

    If you agree with all this, then I am sure you will agree that to the extent these two people are merely given a name, a label, that nothing economically should change. They should still incur losses if their activities are poorly handled and not in coordination with other people’s activity which is utilizing resources more optimally.

    If you agree with the above, then I am sure you will agree that if there are 3 people, or 4 people, or 5, 10, 100, 1000, 10000, 100k, 1 million, or 100 million people, who have made poor decisions relative to the rest of the population of the world, in the world market, that those people should incur losses, so that they can change their activities to be in coordination with the rest of the world.

    The logic is the same. There is no scientific law of the universe that says what is true for one person, and two people, and three people, and 100 people, and 1000 people, is somehow not true for an arbitrary number of specific people who are given the name “American”, or “Chinese”, or “Japanese”. If their decisions are poor, then they ought to incur losses. This includes those secondary parties who are sustaining those who are making poor decisions. These secondary parties would be making poor decisions as well. They are physically sustaining physically unsustainable activity, and thus are physically unsustainable themselves.

    Thus, if a country unduly expands its financial sector relative to the rest of the economy (and world), and this unduly expands the capital sector relative to the rest of the economy (and world), and thus unduly expands the consumer goods sector relative to the rest of the country (and world), then it is justified to argue that every single one of these sectors should incur losses, so that their activities change to be more optimal. We say this exact thing for individual firms. There is no reason why it doesn’t apply to firms in a network that constitute a country.

    Does this mean widespread unemployment? Yes, but only temporarily. We don’t lose sleep over a single individual losing their job temporarily. Why? Because we assume that what they were doing was not as highly valued as other things. Why lose sleep over 10% or 20% unemployment in a context of healthy recovery from poor decisions to better decisions for a number of people above some arbitrary threshold? Does it make sense to keep people in jobs that are not physically sustainable and sub-optimal, on the basis that there are just so many of them? Isn’t that all the more reason to say they should change their actions? I don’t get why the worse things get, the more MMs don’t want to change it.

    I also don’t understand why MMs set up for themselves various arbitrary thresholds, for employment and output and so on, below which there is seeming rationality and usage of common sense economics, but beyond which all hell breaks loose, common sense economic principles break down, and they instead pray to the state God to save everyone’s souls. It’s like “Oh no! If a hot dog seller experiences declining revenues, that’s inherently OK. Maybe people just don’t want as many hot dogs. But if there is not an exactly equal and offsetting revenue in some random location in some other part of the country, I don’t care what it is, it can be drones that kill people, anything, as long as there is some spending on something, then all hell will break loose! We’re doomed!” NGDP “logic” just isn’t my language. MMs go from common sense when the range of perception is narrow, to insane when the range of perception widens past some arbitrary extent.

  47. Gravatar of Major_Freedom Major_Freedom
    20. December 2012 at 08:41

    Saturos:

    Btw it just turned 21st here in Perth, night everyone. I’ll comment again tomorrow. If I’m still here.

    I always wondered if the Mayan end of the world goes according to time zones. Is it going to be like “The Nothing” coming closer to eastern hemisphere folks? Atreyuuuuuuuu!!! Falcorrrrr!

  48. Gravatar of Felipe Felipe
    20. December 2012 at 09:23

    MF:
    Why lose sleep over 10% or 20% unemployment in a context of healthy recovery from poor decisions to better decisions for a number of people above some arbitrary threshold? Does it make sense to keep people in jobs that are not physically sustainable and sub-optimal, on the basis that there are just so many of them?

    In a context of multiple equilibria, it does. Because your spending is my income (and vice versa), a high enough level of unemployment means that lots of people are not spending, which means that lots of people do not get incomes, so they themselves reduce spending, and so on and so forth.

    Such a spiral might mean that the economy as a whole get trapped in a local maxima with lower employment and output. In this maxima, an “artificial” boost of employment can get the economy out of this local maxima into a new one of higher output and employment.

  49. Gravatar of Doug M Doug M
    20. December 2012 at 10:54

    NDGP Growth was revised upward today to 5.8% for the 3rd quarter.

    Does that mean it is time to tighten?

  50. Gravatar of Major_Freedom Major_Freedom
    20. December 2012 at 10:58

    Felipe:

    In a context of multiple equilibria, it does. Because your spending is my income (and vice versa), a high enough level of unemployment means that lots of people are not spending, which means that lots of people do not get incomes, so they themselves reduce spending, and so on and so forth.

    Woah woah, “so on and so forth”? That doesn’t go on ad infinitum until there is 100% unemployment.

    Yes, one person’s reduced spending is another’s reduced income, but that doesn’t mean as soon as the first person reduces their spending, that in the absence of inflation, total spending will collapse to zero.

    Such a spiral might mean that the economy as a whole get trapped in a local maxima with lower employment and output. In this maxima, an “artificial” boost of employment can get the economy out of this local maxima into a new one of higher output and employment.

    Why would it be “trapped” in an equilibria that never exists?

  51. Gravatar of Suvy Suvy
    20. December 2012 at 11:16

    “Yes, one person’s reduced spending is another’s reduced income, but that doesn’t mean as soon as the first person reduces their spending, that in the absence of inflation, total spending will collapse to zero.”

    It could over time. If you treat it as dynamically shifting over time; it could keep heading towards zero while the economy keeps correcting. The correction could, theoretically, never stop. I’ll give a simple example, debts could fall to zero while incomes fall to zero. However, debt/income ratios could keep rising in the process. This has been observed over various periods before.

  52. Gravatar of Major_Freedom Major_Freedom
    20. December 2012 at 11:32

    Suvy:

    It could over time.

    You mean people could choose to stop spending altogether, and die of starvation?

    If you treat it as dynamically shifting over time; it could keep heading towards zero while the economy keeps correcting. The correction could, theoretically, never stop.

    So theoretically speaking, people could reduce their spending so much that while they have some money form past exchanges, they won’t spend it even on food? People will choose sitting on piles of money and die?

    I’ll give a simple example, debts could fall to zero while incomes fall to zero. However, debt/income ratios could keep rising in the process. This has been observed over various periods before.

    Incomes falling to zero have been observed? When and where?

  53. Gravatar of ZHD ZHD
    20. December 2012 at 11:50

    Major_Freedom,

    I think you’ve signaled a bit about some knowledge in both AI and rationality. Are you a SingInst/LessWrong-ian?

    “Change of perception” is fairly vague, n’est-ce pas? In terms of a “verbal” model that involved that variable, do you have a particular example in mind? I would agree that most (all) current attempts to quantify that type of notion have produced nothing but pomp and circumstance — most obviously during election debates in the form of hand held Likert Scale dials. But going forward, there will be a time when the feelings we know as sympathy and empathy will be accurately measured, although it might not be the most efficient.

  54. Gravatar of Suvy Suvy
    20. December 2012 at 11:55

    “Incomes falling to zero have been observed? When and where?”

    1929-1933. There are other factors involved as well; like the collapse of global trade, etc. So it is impossible to isolate one factor.

    “So theoretically speaking, people could reduce their spending so much that while they have some money form past exchanges, they won’t spend it even on food? People will choose sitting on piles of money and die?”

    You’re forgetting falling prices. Also, this actually happened in Germany and other countries in The Great Depression. It’s happening in Greece and Spain right now. Again, there are other factors in play here that make a huge difference (like trade).

    “You mean people could choose to stop spending altogether, and die of starvation?”

    There are people in other parts of the world that eat garbage and other things like that. That is something that is very common in depressions. People don’t have money to spend on basic things like food.

  55. Gravatar of Major_Freedom Major_Freedom
    20. December 2012 at 12:50

    ZHD:

    I think you’ve signaled a bit about some knowledge in both AI and rationality. Are you a SingInst/LessWrong-ian?

    I am not a follower, if that is what you mean.

    “Change of perception” is fairly vague, n’est-ce pas?

    To a mathematical mind, yes. The same way economics is vague to the physicist mind. By change of perception I mean the act of altering one’s mental state as it pertains to the same underlying objective data. In other words, a mathematical model will not be able to “do” anything. It cannot observe itself. It cannot engage in any activity. Mathematical models are homeostatic, timeless entities. If my perception of every single existing mathematical model changed, say I went from perception A to perception B, and this altered perception was associated with altered actions, say I go from reading more to fewer, or vice versa, then those mathematical models will not be able to describe my perception of those models. You can keep adding as many models as you want, by measuring my mental states as I am considering each successive model, but there can always be further activity that is the ground for further consideration, further perception, of the accumulating model set.

    In terms of a “verbal” model that involved that variable, do you have a particular example in mind? I would agree that most (all) current attempts to quantify that type of notion have produced nothing but pomp and circumstance — most obviously during election debates in the form of hand held Likert Scale dials.

    Ever heard of uncomputable numbers? Transfinite mathematics? It’s related to what I mean. Uncomputable numbers are numbers that cannot be described by ANY mathematical formula. Mathematics itself cannot describe them! This may seem counter-intuitive, but Georg Cantor made a convincing case. Anyway, I hold that the reason Cantor, and by extension those who learn of them, can grasp these numbers, despite all mathematics being insufficient in describing them, stems from our mind’s activity transcending all fixed non-consciousness rules.

    My philosophy is that for conscious entities like humans, like me, or should I say for the conscious entity that is me, activity is antecedent to substance. While I am composed of matter that in its form resulted in consciousness, I know this by way of positing substance, which is activity. Without activity, there is no positing. I posit substance. Substance does not posit me. Everything I know of the world, is constrained by what I know of my own mind, which itself continually engages in activity and transcends each subsequent mental state. No matter what rigid knowledge I accumulate, it will only ever be transcended by activity that adds to the accumulation, or replaces existing accumulation.

    A verbal analysis is the only way to describe mathematics. Mathematics cannot describe itself. It takes consciousness to describe it.

    But going forward, there will be a time when the feelings we know as sympathy and empathy will be accurately measured, although it might not be the most efficient.

    How do you know that? Are you saying you can predict the future path of your own learning? If so, why wait? Why not utilize what you think is enabling you to predict your own future path of learning, and acquire that knowledge right now in the present! Or are you eliciting a statement akin to axioms by induction? Such axioms are not certain. Grue.

    —————-

    Suvy:

    “Incomes falling to zero have been observed? When and where?”

    1929-1933. There are other factors involved as well; like the collapse of global trade, etc. So it is impossible to isolate one factor.

    1929-1933 had incomes throughout. I don’t mean decreasing incomes. I mean falling to zero incomes.

    “So theoretically speaking, people could reduce their spending so much that while they have some money form past exchanges, they won’t spend it even on food? People will choose sitting on piles of money and die?”

    You’re forgetting falling prices. Also, this actually happened in Germany and other countries in The Great Depression. It’s happening in Greece and Spain right now. Again, there are other factors in play here that make a huge difference (like trade).

    Are you serious? People in Germany chose starvation rather than spending money on food? People in Greece and Spain are choosing death over spending money on food?

    “You mean people could choose to stop spending altogether, and die of starvation?”

    There are people in other parts of the world that eat garbage and other things like that.

    Even when they have money to buy food?

    That is something that is very common in depressions. People don’t have money to spend on basic things like food.

    All money literally disappears from existence during depressions?

    Suvy, you’re espousing some pretty insane stuff here. Maybe you need to rethink.

  56. Gravatar of Major_Freedom Major_Freedom
    20. December 2012 at 13:35

    What if….just what if….US domestic “spending” should, if it is going to return back to healthy growth, be falling month after month because of her trade relationships with the rest of the world, i.e. current account deficit?

    What if the present central bank policy, which has increased domestic spending 4% annually for the last few years, is doing serious harm to the economy but not because the inflation is too low, but because it is reversing what would have been falling domestic spending?

    “…whatever our views about the desirable behaviour of the total quantity of money, they can never legitimately be applied to the situation of a single country which is part of an international economic system, and that any attempt to do so is likely in the long run and for the world as a whole to be an additional source of instability. This means of course that a really rational monetary policy could be carried out only by an international monetary authority, or at any rate by the closest cooperation of the national authorities and with the common aim of making the circulation of each country behave as nearly as possible as if it were part of an intelligently regulated international system.

    “But I think it also means that so long as an effective international monetary authority remains an Utopian dream, any mechanical principle (such as the gold standard) which at least secures some conformity of monetary changes in the national area to what would happen under a truly international monetary system is far preferable to numerous independent and independently regulated national currencies.” – F.A. Hayek, Monetary Nationalism and International Stability, pg 93.

    (It should be mentioned that Hayek at another point in his life also advocated for the exact opposite of the above).

  57. Gravatar of Suvy Suvy
    20. December 2012 at 14:17

    “Even when they have money to buy food?”

    Pre-Hitler Germany had 40% unemployment. Usually, these numbers are under representative of the population; so I think it’s safe to say that 50% of the population didn’t have jobs. Greece and Spain have 25% unemployment right now and those numbers are under representative of the the employment of the population. The German people in the Great Depression did not have enough food to eat. That’s what happens during depressions. The people in these countries don’t have the money to buy food. People in Greece are actually eating garbage.

    http://www.mole.my/content/poverty-economy-down-and-down-spain

    “Are you serious? People in Germany chose starvation rather than spending money on food? People in Greece and Spain are choosing death over spending money on food?”

    You’re assuming that the people have money to spend on food in the first place.

    “1929-1933 had incomes throughout. I don’t mean decreasing incomes. I mean falling to zero incomes.”

    From 1929-1933, nominal output fell at an annualized rate of 16%. Debt levels fell at an annualized rate of 5.5%. There is no reason why this process could not keep continuing. Without the reflation from 1933-1937, the trends could have very well continued. Just track those trends, what would happen if those trends continued.

    Look at some of these pictures from The Great Depression/today.
    http://libcom.org/files/the-great-depression1.jpg

    http://www.profi-forex.us/system/news/J9-1.jpg

    http://previous.presstv.ir/photo/20120104/geraphian20120104144543920.jpg

    This is the kind of stuff that depressions do. They completely destroy the social fabric of a society.

  58. Gravatar of Suvy Suvy
    20. December 2012 at 14:22

    Keynes pointed this out in the 1930s and I completely agree. This kind of stuff is what breeds civil unrest on the streets. Depressions destroy the social fabric of a society. These are the kinds of situations that lead to people like Hilter coming to power. Those kinds of situations must be avoided at all costs as no one benefits.

    For the current situation the world is in where people in developed nations are in worse living conditions than those in 3rd world countries, the only output is frustration and violence. When you have youth unemployment at 50+%(probably much higher), where do you think all of those people put their energy into? When you have a bunch of 18 year old kids without jobs who aren’t in school, what do you think they do? They get frustrated and resort to violence.

  59. Gravatar of Felipe Felipe
    20. December 2012 at 15:13

    MF:
    Woah woah, “so on and so forth”? That doesn’t go on ad infinitum until there is 100% unemployment.
    Yes, one person’s reduced spending is another’s reduced income, but that doesn’t mean as soon as the first person reduces their spending, that in the absence of inflation, total spending will collapse to zero.

    Of course it doesn’t collapse to zero. But it might collapse to a number somewhere between the initial number and zero. In such a case, boosting (nominal) spending could result in shifting to the higher equilibrium.

    Why would it be “trapped” in an equilibria that never exists?

    You assumed there is a single equilibrium, therefore the economy cannot get stuck in a second one. Kind of circular, isn’t it?

  60. Gravatar of Doug M Doug M
    20. December 2012 at 16:01

    Felipe,

    “You assumed there is a single equilibrium, therefore the economy cannot get stuck in a second one. Kind of circular, isn’t it?”

    I would say that there are no equilibria. The economy is dynamic, changing and never in the same place twice.

  61. Gravatar of ZHD ZHD
    20. December 2012 at 16:15

    Major_Freedom,

    If my perception of every single existing mathematical model changed, say I went from perception A to perception B, and this altered perception was associated with altered actions, say I go from reading more to fewer, or vice versa, then those mathematical models will not be able to describe my perception of those models.

    I see what your saying. But I don’t think people will find any value in trying to model your changing perceptions, only the actions that are a result. In which case your perception would be considered some degree of freedom in the model. But since your perception isn’t mathematically explainable, we do the next best thing and attempt to feed the model with some set of variables that could have been causal to your perception change.

    I wont make any hasty judgments until I read what you recommended.

    My philosophy is that for conscious entities like humans, like me, or should I say for the conscious entity that is me, activity is antecedent to substance….

    I really enjoyed this paragraph. I haven’t spent enough time in the consciousness space to be able to provide any counter opinions. So at face value, it’s good writing.

    This is a good presentation on a particular line of research in consciousness http://www.youtube.com/watch?v=6i9kE3Ne7as

    From it, I like the idea of consciousness being treated as a discrete function as opposed to binary.

    How do you know that? Are you saying you can predict the future path of your own learning? If so, why wait? Why not utilize what you think is enabling you to predict your own future path of learning, and acquire that knowledge right now in the present! Or are you eliciting a statement akin to axioms by induction? Such axioms are not certain. Grue.

    Those emotions are routine chemical releases and neuronal activity (obviously with a high degree of variability per person and instance). And if you believe, as I do, that artificial general intelligence will one day exist, then from those two assertions we can infer that there will most definitely be a way to measure all chemical and neuronal activity in a person. Which means that we will be able to measure feelings.

  62. Gravatar of ssumner ssumner
    20. December 2012 at 17:11

    Greg, Is that the research program that assured us Romney would win.

    Doug, You asked;

    “NDGP Growth was revised upward today to 5.8% for the 3rd quarter.

    Does that mean it is time to tighten?”

    No, the Fed should be targeting expected future NGDP, which is still way too low. And of course the NGDI numbers are more reliable, and were far lower in Q3.

    Saturos, Read MCK again, his post is actually supportive of NGDP targeting, his only fear is that it won’t be implemented.

  63. Gravatar of Steve Steve
    20. December 2012 at 17:48

    S&P 500 futures abruptly plunge 50 points, now down only 20 points.

    Apparently the Mayans are channeling their doom through the House of Representatives. Expecting heads to begin exploding in DC once the calendar rolls on the east coast.

  64. Gravatar of Felipe Felipe
    21. December 2012 at 04:42

    Doug,

    Equilibrium does not necessarily mean staticness. The equilibrium can be a path.

  65. Gravatar of Major_Freedom Major_Freedom
    29. December 2012 at 10:24

    No, the Fed should be targeting expected future NGDP, which is still way too low. And of course the NGDI numbers are more reliable, and were far lower in Q3.

    It has to be too low doesn’t it? Interest rates are not rising like they are supposed to. Unemployment isn’t decreasing like it’s supposed to.

Leave a Reply