A few times last year, I mentioned the difficulty of trying to teach economics, particularly macroeconomics, at a time when all of our theories were falling apart. Economics has always been difficult for many because it is so theoretical and so dependent on simplifying but often unrealistic assumptions. However, it was a subject where the theories worked and made general sense - I'm sure you remember me saying that economics is really all about common sense.But what do we do when the common sense disappears from the system? What do we teach when none of our theories seem to apply and none of our tidy policy solutions seems to work? In many ways this is a fascinating time for economic study, because it is a time like the 1930's when failures of our theories are causing us to reevaluate and refine our analysis. Does Keynesian fiscal policy work in this environment? Did it really work in the 1930's New Deal, or was that an illusion when the true economic recovery was due to other causes? I often have said the National Debt of the United States seemed manageable and appropriate to the size of our economy - that was before the deficit ballooned to unheard of levels. The past decades gave us confidence in monetary policy solutions to our problems, but the Federal Reserve Bank may have prolonged and enhanced the Housing Bubble as it tried to stave off deflation, while misreading the economic indicators in the first place. How do you conduct expansionary monetary policy when real interest rates are near zero? If the Fed injects massive quantities of money into the money supply to cause the economy to expand, can we really trust them to prevent the inflation that is poised to occur if the economy recovers? Do the facts support a supply-side, neo-classical approach, or were the policies of the past 15 years merely "pseudo-supply-side" and thus not helpful to our analysis? Do the supply side policies lead to social issues and how do we weigh those issues in our cost-benefit framework?
I have a lot of thoughts and ideas, but I certainly don't have the answers. I'm sure that my perspective as a 52 year old is very different from those of you who are very much younger. As I said, I wasn't sure how to teach theories that seemed to be crumbling around me by the minute. The picture above is from the cover of the Economist magazine's July 18th issue. In that issue, it says: " . . . a broader change in mindset is still needed. Economists need to reach out from their specialized silos . . . . For in the end, economists are social scientists, trying to understand the real world. And the financial crisis has changed that world."
What do you guys think?
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You mention the economic recovery New Deal being an illusion. That's true in the fact that the economy is an illusion. Money is fake, worthless.
ReplyDeleteIndeed it IS difficult to teach the theory of an illusion. Illusions, to me, are things you can make, though. If we think the 'economy' is doing well, in turn people do well. If the media speaks of unemployment rates and falling stocks, then people panic, sell, don't buy, and they become worse off than if they had done nothing (maybe). What was it about expectations again?
I always liked Locke's view of money: the introduction of money removes the limits of accumulation. He says unlimited accumulation is a problem. I really feel sorry for people who believe it is not (which, in my opinion, is the entire foundation of capitalism: that the more accumulation there is, the better off everyone is).
Money is just a way of saying you owe someone something. So "unlimited accumulation is a problem" is kind of common sense; if I hand out an infinite amount of IOUs (aka money), and don't pay on them, then they don't mean anything. They are useless words, thoughts, pieces of paper etc. So Locke's basically saying, if someone takes away the value of the money away from the money, then there's a problem. Money becomes meaningless.
ReplyDeleteUnless, Locke is saying that introducing money changes physics, and that people can have an infinite amount of items in a world that does not have an infinite amount of items. There has to always be a limit to accumulation, with or without the 'I owe you's.
So in the end, what I believe you're trying to say Schyler, is that you believe there is a problem when people don't keep their word. That's when money becomes "worthless." However, money is not "fake." I can hold it in my hands. Furthermore, the economy is just a word describing how people are progressing. Depending on who's doing the talking, the economy could be doing well or poorly. That's where I think you get that it's an illusion, because it doesn't have one set answer to everyone. Generally there's a consensus, but not always. But I believe your blaming the media on how well the economy does is just ignorant. If I lose my job, I don't spend as much. It doesn't matter how well the economy is doing for everyone else. If I have a job, but everyone around me is losing theirs, I start to save my money in case of a disaster. The media pointing out the people losing their jobs might make me save more of my money, but it's not the cause of the economy doing poorly.
I for one, believe the economy is doing poorly because a lot of people don't consider themselves to owe anyone anything when they buy things. If someone makes 7 dollars an hour, and thinks "I owe this person thirty minutes of work for this cup of coffee," that person would buy less cups of coffee. Maybe that person would think it was worth that IOU to buy a cup of coffee, but I think someone would quickly stop being so careless with their money if they were writing IOUs instead of paying out pieces of paper.
But who knows. Maybe we're heading towards another Ceaser. Dictator in times of trouble. All that Jazz.
Let me add a couple of observations and clarifications. My reference to the illusory nature of the New Deal is that there is a popular opinion that the New Deal spending programs were the key to economic recovery inthe 30's. I think the better scholarship casts serious doubt on that conclusion and in fact suggests the New Deal programs may in fact have prolonged the Depression.
ReplyDeleteWhile money may remove the liits of accumulation, it is a necessary key in unlocking the potential of an economy. Remember that money is anything we agree to use to store value and to facilitate exchange. Money is not a modern iinvention as I was reminded of while browsing in the British Museum - money has been around for thousands of years. Neither is money an indicator of a modernized civilization - remember Yap?
Without money, the barter economy would by nature be extremely limited. Maybe then we would find ourselves in a Malthusian situation. All the modern conveniences and technologies we love and especially those we are using now are made possible because there is a monetary system in place and we do not have to rely on barter. AS I've said many times, imagine shopping at Wal Mart in a purely barter economy. It's nearly impossible to even imagine.
We're back once again to the question of human nature and greed. Why is the desire to accumulate necessarily a bad thing?