Friday, February 5, 2016

Marginal Analysis of Self-Mutilation

Terry Burnham writes

Walking through Harvard Square one day Professor Sen asked me, “What should you do if you see a person trying to cut his fingers off with a pair of dull scissors?”

My response: stop him from cutting off his fingers, call the police for help, etc.

“Offer him sharper scissors,” was Professor Sen’s answer. Standard (a.k.a. “neoclassical”) economics assumes that people know what they want. [Source]

This tale outlines well the lesson that humans are not always rational consumers of utility. When economists utilize marginal analysis without accounting for our beliefs, social expectations, and distribution of resources, how often are we lead astray!

If we transfer this lesson from insane self-mutilators to captains of industry we can begin to see a range from the calculated oilman who coldly forecasts the cost/benefit of drilling another well vs. a reckless mortgage banker who bases his decisions more on the collective group-think of his peers more than a rational analysis of economic fundamentals.

Or we can look at the common man. Why does he pay a certain price for a vehicle or a home? Is it because it is the best he can afford on the income he has or is it because of an honest assessment of the economic inputs required to build and maintain his purchase? Why do wage-earners rarely use their surplus wages to purchase capital? Why do they buy vacations and fast food and televisions when these purchases depreciate so much at the moment of purchase?

It seems that we ought to consider marginal analysis as one of many tools when considering the science of economics.

Tuesday, January 19, 2016

Priorities in Spending: A Challenge of MMT Economists

L. Randall Wray writes

"...the sovereign government’s debt is the non-government’s asset. Indeed, the outstanding US Federal Government Debt is (identically) our (nongovernment) net financial (dollar) wealth...they argue that the irrational fear of government debt is what constrains our government spending...Hence the conceit is that if we found another way—printing debt-free money—to finance spending without issuing more debt, Congress would jump at the chance to spend more." [Source]

One of the ideas I most admire of the MMT crowd is that they do get away from the idea that government is limited by the same economic laws as individuals. Government borrowing and spending money is a very different thing that my borrowing or spending and ultimately the nature of this borrowing and spending is tied-up in the governments ability to compel others to pay taxes in their currency and their ability to create more of this currency without limit other than those self-imposed.

Wray hits on a common objection of conservative-minded people. They do not want to lift the veil for all to see that government doesn't have to tax tomorrow's citizen so to pay for today's government debt. It seems that the idea of government cash injections is to create demand so that there may be full employment and general prosperity. The problem is, the government happens to like funding things that are already in high demand, especially healthcare and education. There is little attraction to government funding street performers, shoe repair, or internet blogging. If the public were to look at such spending proposals, they'd protest "This is a waste of our money!" And perhaps it would be. It seems the challenge is to create a demand that then sustains itself. No easy task.

Thursday, January 7, 2016

So they say my views best align with Anil Kashyap

Another site posted a link to this survey that seeks to provide feedback on which economist one's views match. I did not like the survey because it was too focused on practical policy matters (and honestly, I don't like it when economists focus on prescriptive analysis) and gave too little weight to philosophy, but it seems that they think I am best matched with Anil Kashyap. I shall endeavor to read something from his body of published work sometime in the next few weeks.

A Statement of Purpose

It is in our nature as human beings to assign a purpose to all things, real or imagined. The idea of this blog has been long coming, probably rooted in the decision made years ago to terminate social media (most especially Facebook). Although social media offers an outlet to those who seek to reflect via written text and to avoid reflection in isolation, it can quickly turn toxic. It is my wish that this site enables me to better contemplate certain phrases and passages I read in my own studies of economics and that there is at least the illusion that I am not alone in my thoughts.

I am an amateur economist working my way though a master's degree at a heterodox university known for Modern Monetary Theory (MMT) but am myself still agnostic toward any one school of economic thought. At this moment I am becoming more and more skeptical of economic thought rooted in the enlightenment, having great distaste for the values of the Protestants and of the Modernists. I have no career ambitions as an economist and seek further studies for the value of knowledge itself.

My desire is to post key phrases and passages I come across in my reading that strike me in some way and to offer a few words on why they seem meaningful. Perhaps you will have some ideas of your own to add to whatever ideas are considered.

Aside from my work as an amateur economist, I own a small business, have a large family (8 children and counting), and enjoy nothing more than a good conversation over a good beer, especially if it is a stout. I appreciate the company of well-read people but am uncomfortable when situated around those who have an air of opulence or wealth, and have a difficulty understanding why any would seek material possessions much in excess of the society around one's self.