It’s not just the economy that’s deflating
The universe shrank by 95% this year. At least according to a recent theory of gravity by a distinguished Berkeley physicist:
HoYava’s theory has been generating excitement since he proposed it in January, and physicists met to discuss it at a meeting in November at the Perimeter Institute for Theoretical Physics in Waterloo, Ontario. In particular, physicists have been checking if the model correctly describes the universe we see today. General relativity scored a knockout blow when Einstein predicted the motion of Mercury with greater accuracy than Newton’s theory of gravity could.
Can HoYYava gravity claim the same success? The first tentative answers coming in say “yes.” Francisco Lobo, now at the University of Lisbon, and his colleagues have found a good match with the movement of planets.
Others have made even bolder claims for HoYava gravity, especially when it comes to explaining cosmic conundrums such as the singularity of the big bang, where the laws of physics break down. If HoYava gravity is true, argues cosmologist Robert Brandenberger of McGill University in a paper published in the August Physical Review D, then the universe didn’t bang””it bounced. “A universe filled with matter will contract down to a small””but finite””size and then bounce out again, giving us the expanding cosmos we see today,” he says. Brandenberger’s calculations show that ripples produced by the bounce match those already detected by satellites measuring the cosmic microwave background, and he is now looking for signatures that could distinguish the bounce from the big bang scenario.
HoYava gravity may also create the “illusion of dark matter,” says cosmologist Shinji Mukohyama of Tokyo University. In the September Physical Review D, he explains that in certain circumstances HoYava’s graviton fluctuates as it interacts with normal matter, making gravity pull a bit more strongly than expected in general relativity. The effect could make galaxies appear to contain more matter than can be seen. If that’s not enough, cosmologist Mu-In Park of Chonbuk National University in South Korea believes that HoYava gravity may also be behind the accelerated expansion of the universe, currently attributed to a mysterious dark energy. One of the leading explanations for its origin is that empty space contains some intrinsic energy that pushes the universe outward. This intrinsic energy cannot be accounted for by general relativity but pops naturally out of the equations of HoYava gravity, according to Park.
Because dark energy and dark matter comprised 95% of the universe, HoYava’s discovery means that 95% of the universe disappeared this year.
I suppose some of you out there will insist that the universe did not really shrink, but rather that we have developed a new theory of reality. When will you guys realize that there is no such thing as “reality.” I used to argue with my philosopher friends that dark matter and dark energy were merely social constructs, ideas that were useful to scientists. And they kept insisting that these ideas mirrored reality; that you could zip out to distant galaxies and shovel buckets of dark matter into a barrel.
Please don’t take me for one of those left-wing post-modernists who believe knowledge is socially constructed for ideological reasons. I am a pragmatist, and believe science is a fundamentally pragmatic enterprise. We invent concepts (like dark matter) that prove useful. Perhaps in the distant future the remaining 5% of the universe will no longer prove useful, and we’ll discard that concept as well.
Back in the 1930s economists did not have a complete understanding of rational expectations (although they certainly understood the importance of expectations.) Because of this ignorance, they had trouble explaining how expected future changes in the supply and demand for money (or gold) could impact current nominal spending. Woodford’s Interest and Prices had not yet been written. So they resorted to mystical explanations for a sudden change in AD. According to Keynes, there were mysterious shifts in “animal spirits.”
We now know what was really going on. Businessmen and investors made highly rational forecasts of future expected NGDP growth. They knew that wages and prices were sticky, and hence that any sudden change in NGDP would cause RGDP to move in the same direction. They knew that the new supply of mined gold was fairly stable, and hence that changes in NGDP in gold terms were due to shifts in the demand for gold. And they knew that those shifts could occur for three primary reasons:
1. Central bank hoarding of gold due to a higher gold/currency ratio
2. Private hoarding of gold (often due to devaluation fears)
3. Private hoarding of currency, which created a derived demand for gold reserves
And we know that businesses and investors responded rationally to signs that these factors were increasing the demand for gold. For instance, central bank gold ratios rose sharply between October 1929 and October 1930. The stock market quite rationally crashed when it saw what was coming.
Was the “animal spirits” model wrong? That’s not the right question. The question is; “Was it useful?” I suppose it might have had some value. It pointed to the problem of unstable nominal spending in a market economy, and the need for the government to insure that NGDP was stable. So in that sense Keynesian economics was a step forward. But it is no longer a useful model, i.e. a useful social construct. And some day my gold market model of the 1930s will also be obsolete.
When physicists developed models that didn’t need concepts like dark energy and dark matter, they threw those concepts into the trash bin. It is time to throw Keynesian economics away. The pre-Keynesians knew wages and prices were sticky, and that’s the only useful part of Keynesian economics.
So if we are to get rid of Keynesian economics, then where do we start from? To which thinkers do we go back and look for inspiration? Who is relevant for the modern economy? How about Keynes! This is from a 1996 interview of Paul Samuelson:
He cited one of Keynes’s earlier books, “A Tract on Monetary Reform,” in which he put much more emphasis on money and interest rates. “I think nineteen-twenties Keynesianism””the Keynes of the Tract on Monetary Reform””that is what is needed in a well-run market economy. You lean against the wind and you try to do it intelligently.” By this, Samuelson meant that during an economic downturn the Fed should reduce interest rates to stimulate the economy; when the economy has recovered, the Fed should raise interest rates to head off a speculative boom. At the time of the interview, Alan Greenspan and his colleagues were holding off from raising interest rates despite the fact that the economy was chugging along. The previous day they had again held rates steady. “I think the Federal Reserve made a mistake in not raising interest rates yesterday,” Samuelson said.
If you are someone who loves the Quantity Theory of Money and hates Keynes, you really need to read the Tract. You will love it. It is very short, and much better written than the General Theory.
HT: James Hamilton, Tyler Cowen
PS. Yes, I am half-joking. I know that this new theory implies the universe was also 95% smaller last year, and the year before. But I am serious about my pragmatism.
Tags: science
16. December 2009 at 09:57
Keynes two best books are The Economic Consequences of the Peace, written because nobody was paying attention to his arguments, and Tract.
But on the subject of i, viewed by policymakers as the “instrument” of policy, Samuelson was wrong in 1996 and Greenspan was right. RGDP growth was rising because of an increase in productivity. Analysts and pundits, including Krugman, were shouting that the Fed was behind the curve and that inflation would soon show its ugly head. Nothing of the sort happened. RGDP growth was up, unemployment was down and inflation was down too!
16. December 2009 at 10:01
You are correct, dark matter and dark energy were/are in fact fudge factors made into a theory in order to make GR work at large scales. Actual dark matter and dark energy have never been found.
I agree about us needing to abandon the outdated parts of keynesian models, for example the reliance on fiscal stimulus, and several of the horrible “paradoxes.”
Price stickyness is actually, very easy to explain from a non-keynesian perspective. The Austrian models for example include price stickyness, by saying that changing a price has a cost associated with it. This plus productivity increases is actually why Austrians tend to argue for natural mild deflation.
16. December 2009 at 11:24
You may be mistaking what is meant by reality. Ideas are useful when they describe reality and fail to be useful when they cease to, but reality is a check on those ideas. Reality is the unchanging platonic ideal against which our ever changing imperfect ideas are formulated and tested, ideas held even when knowingly wrong if we have none better. That we recognize ideas as useful though wrong through limitations, allows us to recognize reality through better ones, even if we can’t perceive it without them and may never know it.
16. December 2009 at 11:52
There seems to be less disagreement here than meets the eye. Keynes’ believed in animal spirits, but wrote much of the General Theory in exactly the terms you lay out. People anticipate low demand, and are correct. This is a rational equilibrium.
The physics stuff if interesting. But I imagine the real test is not whether it predicts everything that we see (after 100 years, it should be possible to overfit whatever data we have), but whether it predicts anything we don’t.
16. December 2009 at 12:52
This is an interesting post. I agree with what you wrote scientific models. If we ever think they are more than models, then we cease to be scientific. All that matters is how well a model fits the available data and predicts new data relevant to your task.
Even highly precise models are overthrown all the time. Even the standard model, which is the paragon of models must be incorrect as it doesn’t properly account for gravity.
So, if Keynesianism has not been overturned, I agree that it will be. It is an archaic model by today’s standards. Can you imagine any original reference to “animal spirits” in a contemporary peer-reviewd paper? I assume it would never get published.
16. December 2009 at 13:18
marcus, You may be right about policy in 1996. In my view it was a close call. Inflation certainly wasn’t a problem, but NGDP growth might have been a tad high. In any case, I disagree with Samuelson and Keynes that interest rates are the right tool. But despite that disagreement, the Tract is a fine book.
Doc Merlin, I’m saying more than that, I’m saying it’s all fudge factors–all of science. We’d don’t really even have any idea of what the other 5% is. The stuff you can pound your fist on. Everytime I read cutting edge physics I become increasingly doubtful that we are getting at “reality.” What is it now? Eleven dimensional strings, or something like that? How many people think that will be the last word on “matter” until the end of time?
I agree about the Austrian perspective, and indeed this issue was touched on in the Selgin book I reviewed.
Lord, I may be mistaken about reality, in fact I’m pretty sure I am. But not because I don’t know about the “Platonic Ideal” theory of reality. I know about it and I don’t like it. The idea that theories that predict better are theories that bring us closer to “reality” is possible, but of course there is zero evidence to support it.
Thorfinn, You said;
“There seems to be less disagreement here than meets the eye. Keynes’ believed in animal spirits, but wrote much of the General Theory in exactly the terms you lay out. People anticipate low demand, and are correct. This is a rational equilibrium.”
Keynes certainly discussed expectations (that’s what animal spirits are) but he certainly did not believe in rational expectations. I recall one chapter of the GT that is devoted almost entirely to ridiculing the idea that expectations are rational and markets are efficient. So there is a wide gulf between his views and mine.
Your point about overfitting is correct, but I still think elegance counts for something. We have (inductive) evidence that the theories that were the most elegant often turned out to be the most fruitful. So even if it explains things we already know about, but does so much more elegantly, it would be considered a useful theory.
Mike, Yes. They’d have to call it something other than ‘animal spirits’ to get it published.
16. December 2009 at 13:42
Isn’t pragmatism itself a fundamentally pragmatic enterprise? Perhaps “in the distant future” the philosophy will no longer prove useful, and we’ll discard pragmatism too.
16. December 2009 at 14:12
Just in case you haven’t heard already…
http://www.time.com/time/specials/packages/article/0,28804,1946375_1947251,00.html
16. December 2009 at 14:16
“Pragmatism” is socially constructed for ideological reasons, in your case to market your half-baked and fully-baked musings as 100% organic honesty! and Now Free of Toxic Ideological Ingredients!
In my case I claim pragmatism to kneecap my opponents by forcing them to defend themselves as not unpragmatic. A very Sun Tzu ideology (choose the battlefield).
16. December 2009 at 14:19
@coray:
Philosophical pragmatism (which died after ww1, when the european philosophers came to america) was the idea that what is actually real is what is useful to believe. It might appeal to an economist, because so many things economics studies, exist only because people believe they do.
Actually, I can’t think of anything off the top of my head that economics studies that exists, other than from people thinking it does, or thinking a more basic component of it does.
16. December 2009 at 14:22
Physics up till string theory, very strongly tried to avoid asking what things actually were and instead asked, “what do I observe when I do X?”
String theory instead went the opposite rout and said, “Hey, lets pretend that fundamental reality is X, what does that mean?”
16. December 2009 at 14:42
Coray, I suppose you are right, but isn’t there some sort of logical contradiction there?
Cameron. I heard, but does anyone pay attention to Time anymore? I lost all interest when Osama didn’t win Man of the Year back in 2001. What does an evil genius have to do to get some attention these days?
bababooey, I agree, except with your use of the term ‘ideology.’ If I had wanted to sell libertarianism I would have chosen to be a dogmatist, not a pragmatist.
Doc Merlin. Are you sure about that? I thought physicists used to think protons and neutrons were particles. Then later they thought they were objects composed of quarks, which are themselves particles. Is that impression wrong? Are you saying that physicists had no idea what these things were? How is a string any more “actually were” than a particle?
16. December 2009 at 15:13
Shouldnt this massive decrease in the matter supply have caused prices for matter to rise? Maybe this explains the commodities rally. On the downside, all the dark matter I bought on spec in the Andromeda Galaxy is now worthless. My trust in real estate agents is again slipping.
16. December 2009 at 17:29
rob,
Surely the Andromeda Galaxy is too big too fail. You should email your congressional representative and senators. You too can get bailed out at the expense of taxpayers to be named later.
16. December 2009 at 17:33
scott, when is the book on gold and the depression coming out? we get snippets of your thoughts on this blog, thankfully. its time! unless the 95% of the universe that disappears next year takes all your notes…
16. December 2009 at 17:55
Off topic – why am I always off topic?
I have mentioned often that it seems to me Obama just lacks political backbone. He just talks – and I don’t listen – because nothing happens. It is just wind.
This guy has also noticed that.
http://www.forbes.com/2009/12/15/barack-obama-wall-street-bankers-opinions-columnists-dan-gerstein.html
to lift a quote from the article
A few weeks ago I proposed a Half Tax on bailout bonus babies to allow taxpayers to share in the upside we underwrote; the Brits recently enacted a somewhat similar proposal. Why not use that idea (or others like the Tobin transaction tax) as a club to wring real concessions from God’s workforce? What’s the worst that could happen? You get a major public fight on an issue that’s 80-20 in your favor and force the Republicans to defend the people who broke our economy.
end quote
Indeed. Why not fight on an 80-20 issue (take for example raising the issues raised on this very blog) rather than on stuff no-one supports. What in the dickens is with him? I really don’t get it.
17. December 2009 at 05:30
rob and happyjuggler0, The analogy I thought of was excess bank reserves—we think they are there, but they exert no impact on any other variables in the system, hence it’s hard to be sure.
van, It would come out sooner if I spend less time on the blog. I plan another Depression post before too long.
JimP, Keep in mind that Wall Street contributed a lot of money to the 2008 Obama campaign.
17. December 2009 at 07:35
“And they knew that those shifts could occur for three primary reasons:
1. Central bank hoarding of gold due to a higher gold/currency ratio
2. Private hoarding of gold (often due to devaluation fears)
3. Private hoarding of currency, which created a derived demand for gold reserves”
I don’t get it. How could you not factor in the fact that the money supply increased by 48% in the 1920’s? Why could it not be that that increase in the money supply is the reason that there was ‘excess demand’ for gold?
17. December 2009 at 08:40
And here we have the answer – directly from Bernanke:
http://www.economist.com/blogs/freeexchange/2009/12/from_the_horses_mouth
begin quote from Free Exchane
The Wall Street Journal recently had questions from prominent economists submitted to Ben Bernanke by Senator David Vitter. Brad DeLong had asked:
Why haven’t you adopted a 3% per year inflation target?
And Mr Bernanke responded:
The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.
I can’t imagine getting a more direct answer from the chairman than that. Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk.
end of quote
Its 10% unemployment – from now on – and you are just toast.
Charming
17. December 2009 at 08:47
Jim
All that sounds very much like Japan, that also did not want to risk “price stability” (in their case, zero inflation)!
17. December 2009 at 08:48
“Doc Merlin. Are you sure about that? I thought physicists used to think protons and neutrons were particles. Then later they thought they were objects composed of quarks, which are themselves particles. Is that impression wrong? Are you saying that physicists had no idea what these things were? How is a string any more “actually were” than a particle?”
In quantum mechanics, a fundamental particle is just a mathematical object that represents the fundamental symmetries in the system. We take and add up all the symmetries. For example if the rules don’t change when the system is rotated, we have rotational symmetry.) Ignoring gravity and acceleration caused symmetries we get the Pointcaré group.
We call the unitary (means when we take the inner product of them with themselves, we they result in one), fundamental representations of the Pointcaré group, “elementary particles.” But really they are just mathematical constructs that describe what we repeatedly observe.
Quantum mechanical waves are the same way. There isn’t actually anything “waving.” We call it a wave, because the probability amplitude of an event happening follows a “wave equation.” In QM a particle (this is different from an “elementary particle”) is another way of saying, “a QM event has happened.” Particles “happen”, they do not, “is.”
Dark matter and dark energy were fudge factors to equations. The theory of dark matter arose because our description of gravity (which was derived by looking at stuff on the scale of solar systems) predicted that spiral galaxies couldn’t stably exist. So, scientists, said, “well obviously they exist, we can see them through our telescopes. The equations must be wrong, lets add this function to them so they still work out.” But we never found anything that was adding the extra mass that the new fudged equations were predicting. So scientists said, “um what if the matter was invisible?” and thats how we got the name “dark matter.” Dark energy was the same way, it was Einstein arbitrarily adding a constant to his equations.
Now, string theory isn’t actually a theory, and many scientists don’t actually believe string theory is even physics, or even a theory, much less right. String theorists describe string theory as a quest for finding m-theory. Which is the theory that string theorists actually want to find. String theory itself makes no predictions, and has no testable hypotheses. It is an attempt to create math that both describes the “fundamental particles” and the math that describes gravity.
A lot of confusion exists in the popular media and in education sources concerning these descriptions, and that all they really are, are descriptions of what we see. Also, science quite often says, “oops! we these descriptions were wrong, this one is better” which leads social scientists think that physics is a social construct. But really physics is just a process, as Feynman said, “Physics is the art of telling smaller and smaller lies.”
P.S:
With regards to the thought that at one time neutrons and protons were thought to be fundamental, we hit them with things and stuff didn’t bounce off uniformly. It bounced off as if they were made out of smaller things, so thats how we decided they weren’t fundamental. However the math never actually predicted that they would be fundamental, we just hadn’t hit them hard enough yet.
17. December 2009 at 08:50
And Obama has renominated this man. Good lord.
To quote from the above quote from Bernanke:
“The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output.”
Indeed so. Employment would rise. He thinks this is a bad thing.
He is fully and entirely aware of the arguments on this blog. He just does not feel like doing it.
Good lord. And the are renominating him. I mean – they actually don’t have to. God does not command it. But the Obama idiots are renominating him. And they will deserve exactly what they get – which will not be pretty.
Good lord.
17. December 2009 at 09:20
JimP
As Scott mentioned in an answer to a comment of mine. The problem is INSTITUTIONAL. Bernanke has been for more than 10 years a proponent of inflation targeting (his book, coedited with Mishkin is from 1997). So if a chairman that is “all for it” backs down, who else would do it? So maybe Bernanke continues to be the “best” choice!
17. December 2009 at 09:49
marcus
That is sort of my point. Bernanke can’t do it – even if he actually does believe it is the best policy (which I actually think he secretly does) – because he would need to open support of Obama. No central banker can call explicitly for higher inflation, but a President can. Roosevelt did – and so can Obama. And doing that would be an 80-20 fight for Obama – rather than these losers he is fighting now.
Obama needs to grow some backbone.
17. December 2009 at 10:38
Scott,
I wanted to make sure you saw this Bernanke reply to Brad Delong’s question, put forward by a Senator. The question was why doesn’t the Fed adopt a 3% inflation target. You will see that you and Krugman are highly aligned in comparison to the Chairman:
“The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.”
17. December 2009 at 10:40
Here’s the link:
http://blogs.wsj.com/economics/2009/12/17/sen-vitter-presents-end-of-term-exam-for-bernanke/
17. December 2009 at 11:07
Can Bernanke tell congress to start a money (printing press) funded tax cut/break? What central banker would stand there and say “boys, give every household $5,000 of newly printed cash?”.
Sounds like republican senators (the old a fiat currency is teh only way they can keep the welfare system alive group)and old people (Fixed Income) would go bananas. And the US=Zimbabwe crowd would be out in full force. Every night on Bloomberg/CNBC/any financial press you want and you hear doom about inflation and a devaluing of the US dollar. Which is just shocking, because all financial assets would gain if GDP were growing and inflation was around the corner.
Hey, maybe a dollar devaluation would be a good thing; we could buy less crap from all over the world and maybe we would save more.
17. December 2009 at 12:08
No evidence? Rather it is only evidence that can confirm or reject our ideas. Not that we stop thinking of them or all can be confirmed or rejected without even more ideas. Dark energy and matter were ideas created to explain the evidence of accelerating expansion and faster galactic rotation. That better ideas may have occurred to explain them doesn’t change the evidence that still requires explanation under previous ideas.
A purely social construct, a purely social convention, has no need of evidence or use for it. Its usefulness doesn’t depend on truth or falseness but on acceptance and commonality. Language isn’t true or false but is useful to communicate. That true and false statements can be made rely on something beyond language to make them so.
17. December 2009 at 14:04
“On a non-physics point:
This year we haven’t really had price deflation. That was the second half of last year. This year, CPIAUNCS has been growing pretty much the whole year, and PPI has been mostly growing since March.
CPI is now about 3% above what it was at the start of the recession, and PPI is almost at the level it was at the start of the recession.
Here is the plot:
http://picasaweb.google.com/lh/photo/KhkqgfKdkHsxO73B3AL93w?authkey=Gv1sRgCOSj8aqKqty4lwE&feat=directlink
————————————–
The above was accidentally mis-posted to the Krugman thread.
Lord (it feels sacrilegious calling you this),
You say, “Dark energy and matter were ideas created to explain the evidence of accelerating expansion and faster galactic rotation. ”
Exactly! They were modifications of equations so the equations would fit observed reality better.
18. December 2009 at 07:12
Saifedean, In my model what matters is changes in the real demand for gold. An increase in the nominal supply of money is not deflationary. Deflation results from increases in the real amount of base money. And the real amount of base money did not increase in the 1920s. But it soared in the 1930s, which was very deflationary.
Jim, I am way behind on my responses. That is a very interesting quote, and I did a post on it yesterday.
marcus, Yes, it does sound like Japan.
Thanks for the info Doc Merlin. One gets the feeling that the endpoint of science (which we will never achieve) is to see the entire universe in terms of mathematical concepts.
Thanks David, As I mentioned to Jim and marcus I picked up on it yesterday, and there is a new thread.
Joe, If they don’t do sensible policies now, you can be sure that nutty policies will follow at some point.
Lord, I am not sure what you mean by purely social construct. Scientific theories are social constructs. They also allow us to explain, predict, and control our environment, which is why so many pragmatic humans accept them. I am not comparing them to religious belief, except that both are beliefs. But after that trite observation, all comparisons end.
Doc Merlin, Yes, but a couple points. In my view the recession actually began in mid-2008, and I am focusing on this period.
2. I think the CPI is a very misleading indicator. In other posts I have pointed to the absurd CPI data, which shows housing costs rising significantly between 2008 and 2009, when we all know that housing cost plummeted.
3. For me, what really matters is not falling prices, which could be caused by rapid technological change, but falling NGDP. And NGDP is significantly lower than mid-2008.
18. December 2009 at 08:17
@Scott:
Got yah, I agree about CPI.