Economics Questions

Re: The (Keyenesian) multiplier effect. Easily debunked?

ToxicAssets — Wed, 23 Jan 2013 02:41:32 GMT

There are several ways of decomposing GDP as the sum of a few accounting related aggregators.

The most common being Y=C+I+G+(X-M).

The rationale is that given an amount of goods produced during a year, they are either consumed by the private sector "C", saved as capital "I", consumed by government "G", exported "X". The imports figure "-M" enters to correct "C", "I" and "G", since some goods that are consumed or invested domestically were produced abroad.

And this is perfectly correct when applied to every specific good, and when the units are physical quantities, and not money.

The quantities of bananas produced in Republic of Banania is equal to the number of bananas eaten by the non-bureaucrats, plus the increase (or minus the decrease) of the aggregate stock of bananas, plus the bananas used up by bureaucrats, plus the bananas shipped abroad, minus the bananas we have counted before that were actually sent from other places.

Of course this holds logically true since any banana unit produced domestically is either consumed (i.e. destroyed), stocked or shipped away.

And if we don't know the total figure produced, we can still estimate it if we have a good idea of how many bananas fall on each of the above categories.

And what if we don't have total unit numbers, but we have instead payment receipts for banana transactions? Can we still estimate production?

Theoretically yes, but only when very unrealistic assumptions hold.

First of all prices of bananas units change over time and across the land. Of course we could keep track of prices of units for each payment receipt as well as the total amount, but that's the same as keeping track of units transacted.

And even if we assume that banana nominal prices are reasonably stable, we cannot estimate how many bananas were privately produced and consumed without being sold, or how many were privately saved under the mattress and not put in a deposit account. Since there are no transactions to any of these operations there are no payment receipts.

But even if we assume that these instances of banana autarkies are rare and negligible, there's another problem.

If we don't know the current level of the banana capital stock, we cannot determine how many bananas got in or out of it, and therefore we cannot uncouple what's actual production from what's capital consumption.

The Keynesian multiplier voodoo takes place due to these violations of accounting assumptions, specially the last one.

If some capital buffers (of bananas) could be somehow leaked and the proceedings of this operation sold in the market for domestic consumption or exported, there would be increases in "C", "E" or "X", without detectable changes in "I".

Of course, the real "I" would have to drop due to the consumption of pre-existing bananas, but since this was not accounted for it looks in the paper just like as if new bananas had been produced out of nothing.

The multiplier is thus explained.

But if the scheme goes on for too long, these leaked buffers of bananas will eventually be depleted, or their owners will notice the leak and move the remaining bananas to somewhere else safer.

Of course, all this applies to every tradable economic resource, not only to bananas.

You can even lump sum many items together, since figures are now in money terms, and not in good-specific units. And the result of this is the familiar GDP.

However one important item cannot enter in the above computation, and that is cash itself. More precisely, money liquidity. It cannot enter in the computation since it cannot be measured in money terms.

A GDP like indicator makes sense insofar as the "propensities to hold cash" remains the same. When they don't GDP returns will have hidden biases. That is, if liquidity increases, GDP returns will rise, and if it decreases, GDP returns will drop. However this does not reflect any effect on production, but only the non accounted oscillations on the liquidity profile. If we admit that people hold cash for rational reasons, the liquidity profile is indeed capital, and any shor-term increases on GDP figures are probably going to be costly in the future due to the distortions on the market liquidity profile.

So if government can leak capital buffers he can expend more without affecting directly consumption rates, as it would be the case through direct taxations. And as a bonus, the whole operation also boosts the accounted items in the GDP, at least in the short run. Since government performance perceptions and approval ratings are positively correlated with GDP returns, this is indeed very good news. And if the missing assets on the leaked capital buffers are only discovered during the next administration, that's a total jackpot.

What Keynes and his school discovered is that there are several ways government can perform these accounting schemes and effectively leak capital buffers, specially the highly "weird" and intangible liquidity-money buffer, uppon wich it share privileged access with the banking cartel. The basic scheme structure was already in place decades before Lord Keynes and his followers came along, but they provided intelectual backing and some new technical insights on procedural tactics.

Keynesians and the like usually seek to justify these schemes not on the grounds of the net benefits for governments and associated operations, but because they assume that sometimes, people's collective behavior towards hoarding liquid assets is "irrational", and thus create what they call liquidity traps.

That is, given certain economic injunctions, too many people would hold their money for more time, and given a fixed total amount of it, this would create shortages of liquidity that would self-intensify and create all sorts of economic disasters due to many businesses being unprepared to survive that.

So by leaking these private buffers of money through credit inflation plus government and/or private expenditures the liquidity returns to the economy and doomsday is postponed.

There are other "behavioral" reasons some keynesians invoke other than the liquidity trap. One that comes from Keynes itself is the notion of stickyness of certain prices and in particular the common belief that nominal salaries can not be lowered, so in order to mitigate unemployement, real salaries must go down with inflation.

That's all at least very debatable. And since we cannot run perfect parallel experiments a lot or room is left for speculation. The whole thing is undeniably very ingenious and mischievous. Of course this pattern can only be repeated a few times until the people that are being screwed figure out clever ways to protect themselves from it, but that's the fate of every such scheme.

In the end, to debunk some recommendation we should prove that it doesn't work as expected.The problem is to specify what are the expectations concerning the keynesian multipliers. Their effectiveness will depend on whether you consider them mere accounting schemes that are politically and economically profitable for those particular groups applying them, or whether you believe there are collective patterns of irrationality that emerge and can only be mitigated by this sort of large scale system intervention. For the first use, I'm sure they work, at least for a while until people figure them out. For the second use, I'm not convinced.

The large scale liquidity trap scenario for instance seems to be a feature of the single currency fiat monetary systems. Due the monopolistic powers granted them, the fractional reserve facilities (that is, the wholesale liquidity traders) all have incentives to be as much leveraged as they are allowed by the regulators. So when something unexpected happen and a more than a few payments fail, liquidity is quickly sucked back to fill the holes, but it's not enough and one large liquidity trader fails, and as it fail payments to various others in the system, they too fail in contagion and the whole system breaks down together. Since everyone is by law linked to the currency, there are few alternatives to avoid the hit and the costs of the whole mess are highly external. But since the benefits of leverage are internal, we have the classical situation of tragedy of commons.

In a multiple currency competitive setting, fractional reserve facilities would have more incentives to keep their leverage level under control, because they can no longer effectively externalize the costs of an eventual liquidity trap scenario if it is restricted to their own currency. Leverage levels would be thus correctly adjusted to market estimate of the liquidity risks of each currency.

Re: The (Keyenesian) multiplier effect. Easily debunked?

Tugwit — Tue, 22 Jan 2013 19:40:58 GMT

Derpstatis, My latest video "Fiscal Multiplier Debunked, Fast and Easy" http://youtu.be/geMTqQ6nbtw , debunks the fiscal "multiplier" 4 different ways in 3 minutes.

Re: The (Keyenesian) multiplier effect. Easily debunked?

Tugwit — Tue, 20 Nov 2012 21:48:50 GMT

Idol, Exactly. But to say it straight out, G is a disguise for T. So why would the Keynesian macroecon prof make himself look like an ass, by first saying that there is no Tax in Yt = C+I+NX+G, and then saying that Tax is in C? I mean Yt = Yd + T = C+I+NX+G, so it's not too hard to figure out which part of C+I+NX+G is Yd, and which part is T. The prof had to choose between being stupid, or being a fraud. He chose stupidity, because it's better than fraud. Keynes original investment "multiplier" was brilliantly stupid, because he didn't include a Tax variable. But when they added the Tax variable, they had to disguise Tax as G, or the scam would fall apart. But when you see that, it blows the scam. Another clue is that they commonly don't label Y as to whether it is Yt or Yd. Or they use Y-T in place of Yd, which is asinine. Etc. Adding the Tax variable turned brilliantly stupid, into just plain stupid. Stupid enough to warrant going back and see exactly what Keynes did, and uncovering his fraud.

Re: The (Keyenesian) multiplier effect. Easily debunked?

idol — Tue, 20 Nov 2012 19:44:53 GMT

I answered you. Maybe I am not being clear.

Let's say GDP is 50, Consumption is 20, Investment is 30, Net Exports is 0, and Government Spending is 0.

Y = C + I + NX + G

50 = 20 + 30 + 0 + 0.

The government decides to raise $10 in revenue with taxation and immediately spends it. Now the equation will be:

50 = 15 + 25 + 0 + 10.

Consumption and Investment may not necessarily be those values but hopefully the point is clear.

Re: The (Keyenesian) multiplier effect. Easily debunked?

Tugwit — Tue, 20 Nov 2012 13:26:39 GMT

Idol, So where Tax is in Yt = C + I + NX + G? That's my question, the one I asked the Keynesian professor.

Re: The (Keyenesian) multiplier effect. Easily debunked?

idol — Tue, 20 Nov 2012 01:46:51 GMT

Well you're correct, tax lowers C+I and increases G by an equal amount. It is implicit in the equation.

Re: The (Keyenesian) multiplier effect. Easily debunked?

Tugwit — Mon, 19 Nov 2012 19:20:51 GMT

Idol In another mises forum topic, the question was whether I had actually debunked the math of the Keynesian fiscal multiplier (Which I have. You can see that on Tugwit.blogspot.com if you like.). Wheylous and a couple of others believe in Keynes' bogus "mulitplier", and Wheylous suggested that I contact an economist named Caplan about it. In this current forum topic, Wheylous asked me if I got a reply from Caplan. I said I never got a reply from Caplan, but I did get a reply from a Keynesian professor. I had asked the Keynesian prof, in Yt = C + I + NX + G, where is tax? I mean it's the GDP equation and there's no mention of tax? Why doesn't the Keynesian equation show tax? The Keynesian prof gave me a long-winded run-around and didn't answer. So I asked him again. He then said that there was no tax in Yt = C + I + NX + G. And then he said that tax is in C ... which is in the equation. Wheylous then said "As for Tugwit - you don't need Tax to show up in GDP because it's not production, obviously." So I said "then what is it that government spends?" G is in the GDP equation Yt = C + I + NX + G. I keep having to pay tax, so that meathead politicians can spend it as G, and waste a good portion of it. So if they're not spending tax as G, and all this stuff I see in the news about how they spend tax, and need to increase tax so they can have more tax to spend ... is false ... then I'd like to have my money back so I can spend it on C and I and NX. But Wheylous hasn't got back to me on that. So do you know where tax is in Yt = C + I + NX + G?

Re: The (Keyenesian) multiplier effect. Easily debunked?

idol — Mon, 19 Nov 2012 17:38:10 GMT

If "you don't need Tax to show up in the GDP equation because it's not production" then what is it that government spends?

The government spends what would otherwise be C+I. When government spending increases by, say, $10, C+I falls by $10.

Re: The (Keyenesian) multiplier effect. Easily debunked?

Jargon — Mon, 19 Nov 2012 07:02:35 GMT

Absolutely not. Neither the science employed by civil engineers or that employed by economists is prescriptive. Science is not prescriptive! You are referring to a situation where this science tells said specialist what happens/what will happen should they do X. Using their judgment, they then select a course which is deemed to produce the desireable outcome.

But it is absolutely untrue to say that when an engineer is designing a bridge, his calculations will come out to: "This design is good!" No, his calculations will come out to something like X=Y+B, and the engineer will use his judgment as an engineer to determine that that is in fact the design he wants to employ.

Prescriptive is how it sounds: a prescription. A doctor prescribes you medication because he thinks it will help. Economics describes what happens and the economist uses his judgment from there to prescribe a course of action which does not produce unemployment/waste/whatever.

Re: The (Keyenesian) multiplier effect. Easily debunked?

gotlucky — Sun, 18 Nov 2012 20:14:49 GMT

Murray Rothbard explains it in more depth here, for anyone who is interested. His introduction:

Economics, as a science, attempts and claims to be purely value-free; that is, separate from the personal, valuational, or political proclivities of the economist. And yet economics and economists are continually making political pronouncements; economics per se is shot through with value-loaded assumptions, usually implicit, which then emerge as political conclusions and recommendations. It is my contention that this procedure is illegitimate and unscientific, and that it is incumbent on economic theory to purge itself of all vestiges of the unsupported value judgment. As a science, economics can and should stand apart from such value judgments. But since all political policy recommendations necessarily involve value judgments, does this mean that the economist must never make any policy recommendations or indeed, never use any terminology that is value-loaded? Not necessarily.

Re: The (Keyenesian) multiplier effect. Easily debunked?

Jon Irenicus — Sun, 18 Nov 2012 19:51:53 GMT

Well to be honest economics is also prescriptive in that sense, given that it's a science of means and their relation to given ends rather than a science of means. But yeah, prescriptive implies an element of normativity in modern day parlance, yet I can see why Shackleford used the term.

Re: The (Keyenesian) multiplier effect. Easily debunked?

gotlucky — Sun, 18 Nov 2012 03:09:14 GMT

I never thought people would equate normative with prescription.

Yeah, it's the standard.

I disagree to an extent. Science is about confirming that the should is the "is" and "ought." How do you think quantum mechanics and special relativity arose? The historical classical "ought" failed to explain a new "is." Consider blackbody radiation, angular momentum of the electron, etc. according to classical theory. The lack of correct predictability prompted new theories that then were able to correctly predict behavior and identify the failures of the previous theories. In the scientific method, you develop the should and after experimentation, you get the "ought" or you have to revise your "should."

The purpose of science is descriptive. Scientists use various methods to try to understand the world and describe it. Your example of civil engineer was a good example of a prescriptive use of scientific knowledge. Engineers use descriptive knowledge in order to tell people what they should do:

"This is the safest method of keeping this building up. Oh, you want me to keep it up for a lower cost X. Okay, then for X cost, this is the safest way to keep this building up. Oh, the architect wants to use certain materials? Then for cost X and materials Y, etc."

Re: The (Keyenesian) multiplier effect. Easily debunked?

shackleford — Sun, 18 Nov 2012 02:31:05 GMT

gotlucky:

Science is normative? I don't follow.

Do you understand that is what the other posters in this thread thought you were saying? That is why they said you were wrong. You don't understand that you were using the word "prescriptive", which people understand to mean "normative"?

Looking at that definition, are you telling me I'm not using the correct word in characterizing the mathematics used in physical science?

Yes, I am. Notice the word "should" in the definition. Science has to do with "is", not "ought".

I never thought people would equate normative with prescription.

I disagree to an extent. Science is about confirming that the should is the "is" and "ought." How do you think quantum mechanics and special relativity arose? The historical classical "ought" failed to explain a new "is." Consider blackbody radiation, angular momentum of the electron, etc. according to classical theory. The lack of correct predictability prompted new theories that then were able to correctly predict behavior and identify the failures of the previous theories. In the scientific method, you develop the should and after experimentation, you get the "ought" or you have to revise your "should."

Re: The (Keyenesian) multiplier effect. Easily debunked?

gotlucky — Sun, 18 Nov 2012 02:23:05 GMT

Science is normative? I don't follow.

Do you understand that is what the other posters in this thread thought you were saying? That is why they said you were wrong. You don't understand that you were using the word "prescriptive", which people understand to mean "normative"?

Looking at that definition, are you telling me I'm not using the correct word in characterizing the mathematics used in physical science?

Yes, I am. Notice the word "should" in the definition. Science has to do with "is", not "ought".

Re: The (Keyenesian) multiplier effect. Easily debunked?

shackleford — Sun, 18 Nov 2012 02:19:06 GMT

gotlucky:

Are we really arguing over semantics?

If you are going to tell people that science is normative, then yes.

Physical theories use mathematical models to predict or lay down the course of action that the system/particle will follow. That's all I mean.

Let's go with an actual standard definition of prescribe:

pre·scribe

verb /priˈskrīb/
prescribed, past participle; prescribed, past tense; prescribes, 3rd person singular present; prescribing, present participle

(of a medical practitioner) Advise and authorize the use of (a medicine or treatment) for someone, esp. in writing

- Dr. Greene prescribed magnesium sulfate

- the doctor prescribed her a drug called amantadine

Recommend (a substance or action) as something beneficial

- marriage is often prescribed as a universal remedy

State authoritatively or as a rule that (an action or procedure) should be carried out

- rules prescribing five acts for a play are purely arbitrary

- doing things in the prescribed manner

Science is normative? I don't follow.

State authoritatively or as a rule that (an action or procedure) should be carried out

Looking at that definition, are you telling me I'm not using the correct word in characterizing the mathematics used in physical science?