Is the battle against “reasoning from a price change” unwinnable?

Over at Econlog, I have another post that touches on reasoning from a price change.  I must have already done a hundred such posts.  And yet every day I see more examples of this EC101 error in reasoning almost everywhere I look.  Not just among the uneducated, but in elite newspapers like the WSJ, NYT, Economist, etc. Here’s a new example from the FT:

Loose monetary policy led to share buybacks that enriched mainly the wealthy

One of the great ironies of the 10 years following the financial crisis is the way in which low interest rate monetary policy — which was designed to get Main Street USA back up and running and to help people buy homes and start businesses — has bolstered share prices and the markets more than it has helped ordinary Americans.

This is just embarrassing, and yet it happens all the time.  Is there any way to make people see that this is flat out wrong?  We teach students in EC101 not to reason from a price change, but people don’t seem to get the message.  What are we doing wrong?  Is there any way to explain this that I haven’t yet tried?  Lots of you commenters are closer to people with “average opinion” than I am.  Some of you may have recently learned not to reason from a price change.  So what works? What allows people to see that low interest rates are not a loose monetary policy?

PS.  A few reporters such as Caroline Baum warn against the fallacy of reasoning from a price change, but most don’t seem to get it.



21 Responses to “Is the battle against “reasoning from a price change” unwinnable?”

  1. Gravatar of Kevin Erdmann Kevin Erdmann
    26. August 2017 at 11:55

    If you listen to the author’s recent appearance, you’ll see that reasoning from a price change is the least of her problems.

    There are those that can be addressed and those that can’t. Think on the margin. If it’s a losing battle, it’s all the more necessary.

  2. Gravatar of Steve F Steve F
    26. August 2017 at 12:44

    I’m finishing up a bachelor’s in economics at a private university in the Pacific Northwest. The students are surprisingly a little more conservative/libertarian than the faculty. I can tell the professors try to be balanced, but they certainly tend towards the “left” side of things.

    I tell you that to tell you this: I have never once heard any of them reference reasoning from a price change in any way. The only time I see it is from you, and I didn’t understand what it meant for the first year or so, until it just up and clicked one day.

  3. Gravatar of Scott Freelander Scott Freelander
    26. August 2017 at 13:01


    Most people get out of econ 101 without learning the basics of how supply and demand works. I think that’s the problem, though may not have been a problem for your students.

    Worse, many think they understand supply and demand, nonetheless.

    Mistakes I see all the time include thinking demand is the aggregate desirability of goods or services, getting confused about how demand changes with supply, etc. Many think demand may rise with decreased supply, as rarer things tend to be worth more, but then think about reduced affordability and can’t decide what then happens to demand.

    The problem is, it’s possible to pass many intro econ courses even with such fundamental confusion. Better teaching and making it impossible to pass econ 101 with out being able to solve simple problems would greatly help I think.

  4. Gravatar of John Hall John Hall
    26. August 2017 at 13:02

    To follow on with Steve F, I don’t think in my high school, BA, or MA econ classes the teachers ever used that phrase, “don’t reason from a price change.” They might have expressed it differently though, with exam questions like the price increased and quantity increased, was it a demand shock or a supply shock. The problem is that they don’t really emphasize it the way you do.

  5. Gravatar of Major-Freedom Major-Freedom
    26. August 2017 at 13:20

    “What are we doing wrong?  Is there any way to explain this that I haven’t yet tried? ”

    “So what works?”

    “What allows people to see that low interest rates are not a loose monetary policy?”

    Sumner, it is likely that one of the reasons you can’t convince people is that what you are trying to convince them into believing, is itself internally contradictory and impossible for reasonably intelligent people’s minds to square the circle.

    Whatever falsehoods you are trying to debunk, your statement “low interest rates are not a loose monetary policy” is not even an economics statement, it is a POLITICAL DEFINITION, but if you are trying to say what I know you’re trying to say, the correct statement is that low interest rates COULD be a loose monetary policy.”

    It is not absolutely one way or the other.

    Just like there is no such thing as a definite or even narrowly defined economic law that says “there is something special and mysteriously benevolent about the Soviet policy of ordering yet another a 5% annual increase in the production and sale of 2 door mid sized automobiles, so too is there no economic law on what is the right quantity of money and volume of spending. The only right answer is what prevails on the open market. But you don’t speak of a market in money, you are just talking about politics.

    Sumner in the old Soviet Union would have said “Heck I remember 8 years ago when production of 2 door cars fell to 2%. So many people felt bad about it and complained. What? You think this should be left to anarchist production in an open market? You’re crazy! What if your holy market method results in a percent increase that I don’t approve of? Huh? What if it fell -25%? What then? 30 years ago Hitler rose to power in Germany, Ok? Checkmate. I win. Obviously that would be a worse way to make cars. No, the pragmatic solution, is for everyone to shut up, listen to me, and just bloody believe me when I say 5% is clearly better than existing production policy where they’re looking at the wrong numbers! Those silly people. I, me, this guy, I have the right rate and the right variable! I have the solution everyone! Anyone? Hello? Why isn’t anyone listening to me? Why are you just producing and selling stuff as individuals and ignoring me who speaks on humanity’s behalf? I am smart! Being smart means to start bossing other people around against their will. See, they prefer to just participate in a division of labor and left alone from political propaganda masquerading as science.”

    You cannot convince average people that believing in a different political definition concerning money is going to fix their problems.

  6. Gravatar of Tf Tf
    26. August 2017 at 13:58

    All it takes is one simple supply/demand example to understand reasoning from a price change.

    What financial press does not understand is that interest rates are a price. They think of interest rates as a policy. So I think it is a different issue that they are really confused about.

  7. Gravatar of Philo Philo
    26. August 2017 at 16:06

    I think what happens in some of these RfaPC (Reasoning from a Price Change) situations–in particular, in this one–is that the reasoner is relying some unstated assumptions about what is happening, assumptions of which he himself may be unaware. In this case, the writer assumes that “interest rates” are an administered price: they are wholly determined by Fed actions. It is unclear exactly in what these actions are supposed to consist, except that they are supposed to have no important economic consequences other than to set “interest rates.” (Maybe the Fed just announces what “interest rates” are to be, and everyone obediently falls into line.) Your plea that prices are epiphenomena, that explanatory value is to be found not in prices or price movements but in their underlying causes, is thus inapplicable in this special case and may safely be ignored.

  8. Gravatar of Benjamin Cole Benjamin Cole
    26. August 2017 at 17:41

    re low interest rates

    I probably have never changed anyone’s mind in the field of macroeconomics ever.

    But perhaps there is a glimmer in some peoples’ eyes when I point out that for two generations we have heard that money is “easy” or “loose” and that for the last 35 years interest rates and inflation have been falling.

    In the next recession we will hit zero bound quickly and possibly see deflation.

    You see what 40 years of easy money has wrought?

  9. Gravatar of Matthew Waters Matthew Waters
    26. August 2017 at 18:58

    This blog post by Bernanke should be a start for all financial reporters. It’s fundamentally wrong how banks, reporters and many economists think about interest rates. The Fed just does not control interest rates under an inflation or NGDP mandate.

    A lot of things about economics are tough, but this idea isn’t really one of them. If you simplify the Fed as purely an interest-rate-setting machine which prints/destroys money to buy/sell assets until interest rates meet a short-term target, then the Fed is at the mercy of the markets. Inflation is ultimately prices set by private companies based on their individual market, not by the Fed. If interest rates are too low, then private companies set inflation at a higher level and the Fed has to change its interest rate target.

    In general, this idea doesn’t even cross the mind of many bankers, reporters, etc. Even though many economists, from Milton Friedman to Bernanke, expounded this basic idea, it just didn’t become mainstream for some reason.

    There is no good answer for a great shift in thinking. The WSJ, FT, the Economist or other business publication just hasn’t thought through interest rates in general. At least it’s not presented in completely inverted terms as “the Fed actually doesn’t control interest rates.”

  10. Gravatar of dtoh dtoh
    26. August 2017 at 18:59

    “low interest rates are not a loose monetary policy?”

    Aren’t you reasoning from a price change? 🙂

  11. Gravatar of Scott Sumner Scott Sumner
    26. August 2017 at 19:12

    dtoh, No. Reasoning from a price change is exactly the opposite, drawing a policy implication from the level of interest rates. Thus saying “Low interest rates are a non-loose monetary policy” would be reasoning from a price change.

  12. Gravatar of Justin Justin
    26. August 2017 at 19:31

    “What financial press does not understand is that interest rates are a price. They think of interest rates as a policy. So I think it is a different issue that they are really confused about.”

    I think this is it.

    Though, like others in this thread. I didn’t learn about reasoning from a price change in EC101. I learned it in upper-level classes. I doubt many journalists (though, ironically, I am a journalist) have taken upper-level economics classes.

  13. Gravatar of dtoh dtoh
    26. August 2017 at 20:11

    But don’t you frequently argue that low rates are a sign of tight money?

  14. Gravatar of Matthew Waters Matthew Waters
    26. August 2017 at 20:43

    “But don’t you frequently argue that low rates are a sign of tight money?”

    I think “don’t reason from a price change” is short-hand for “price changes can be contradictory and confusing.” It depends on which interest rate (short-term or long-term) changes and what news it was in reaction to.

    Say, a stock market decline along with an interest rate decline is a big indicator of tight policy. With the same future profits, an interest rate decline in isolation should increase stock prices. So if stock prices decreased, then the market expects lower profits in the future to offset a lower discount rate. In turn, lower profits are due to lower utilization of capital under lower NGDP.

  15. Gravatar of Scott Sumner Scott Sumner
    26. August 2017 at 21:40

    dtoh, No, that’s the NeoFisherian view. I’m not a NeoFisherian.

  16. Gravatar of Patrick Sullivan Patrick Sullivan
    27. August 2017 at 08:16

    There’s a big difference between ‘are’ a sign of tight money, and ‘can be’ such.

    That said, until the economics profession grasps that interest rates are NOT the price[s] of money, there’s little hope that journalists will get it.

  17. Gravatar of Christian List Christian List
    27. August 2017 at 19:28

    Maybe a lot of people don’t get it because you aren’t using the clearest example? It’s a good example but also a tough one to understand. Someone really needs to read your blog to understand what you mean.

    I think Philo explained it best so far. A lot of people think that prices are more or less arbitrary and/or set by policy instead of seeing them as “neutral” pieces of information.

    So when you use monetary policy as an example the “policy idea” gets affirmed. Interest rates aren’t even considered prices by many. Not to mention that a lot of people love to blame monetary policy for everything. It’s just a scapegoat, the same that Communists and Nazis like to use, when they talk about “constructive capital” vs. “money-grabbing capital”. In your example people don’t even want to know the truth.

  18. Gravatar of ChrisA ChrisA
    28. August 2017 at 01:19

    Interest rates are certainly tricky to think and discuss in a clear way, like the concept of “money” itself. Perhaps the best way is the oil price example – prices of oil can be high relative to long term averages, but most people can quickly understand that might be due to demand increasing, or supply falling. So seeing that oil prices are high and saying that supply is therefore falling is not good reasoning.

  19. Gravatar of TallDave (@TallDave7) TallDave (@TallDave7)
    1. September 2017 at 13:05

    Anyone who bothers to ask the question quickly arrives at the answer.

    Few do.

  20. Gravatar of David X David X
    2. September 2017 at 09:33

    Well, speaking as someone who has *only* taken Econ 101, I can say we were consistently taught that lowering interest rates (via open market operations or whatever) was indeed a “loose money” policy. I don’t recall ever being taught about “reasoning from a price change,” unless that is referring to something along the microeconomic lines of “if the price of something goes up while the quantity demanded goes down, then we can reason that supply has gone down, i.e. shifted left”.

    That being said, I’m probably way over my head here and misinterpreting what this post is trying to say. But my point is that unless things have changed drastically in the last 20 years, my guess is that ECON 101 students are not being told what you think they are.

  21. Gravatar of ssumner ssumner
    2. September 2017 at 10:03

    David, If it’s OMOs (the money supply curve shifting right) then you are right. But surely you were taught that interest rates can also fall because the money demand curve shifts left? Weren’t you?

    When you say “open market operations or whatever”, the “whatever” is a huge mistake. Interest rates are sky high during hyperinflation. Were you taught that hyperinflation is tight money?

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