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Nice post! ZMP2 and 3 differ in two ways: three people instead of two, and services that can't be rendered simultaneously. The first difference suggests a need for a medium of exchange; the second a store of value. Did you mean to invoke both of these properties of money or just one?

Thanks K! I hadn't thought about the store of value angle. I was concentrating on the medium of exchange. And I wanted to explain why a three-way barter deal couldn't happen.

In practice, almost any medium of exchange has to always be a store of value to some extent. Because there's almost always a time gap between selling something and buying something else, however short.

I think Arnold's is more entrepreneurial/technological. The electrician and plumber would like a new gizmo, but it doesn't exist and there is nothing else they want. Wannabe gizmo producer wants both electrician and plumber services, but has to create his gizmo first before he has anything to trade. Half of his unemployment is voluntary.

Lord: that wasn't how I interpreted Arnold. I interpret him as saying that it *might* be a new good. Or it might just be a re-arrangement of the way in which we produce existing goods.

I expect we will have to wait until Arnold responds, if he does. The big difficulty with capturing his vision though, is that we want a simple story so we can understand it, but if it really were that simple, a real-world entrepreneur would figure it out immediately.

(I wish I could remember what "PSST" stands for. Patterns of Sustainable something and Trade?)


Courtesy of my friend SD, a description of how to solve the ZMP3 problem.

It is a slow day in a damp little Irish town.

The rain is beating down and the streets are deserted. Times are tough,
everybody is in debt, and everybody lives on credit. On this particular day
a rich German tourist is driving through the town, stops at the local hotel
and lays a EUR100 note on the desk, telling the hotel owner he wants to
inspect the rooms upstairs in order to pick one to spend the night. The
owner gives him some keys and, as soon as the visitor has walked upstairs,
the hotelier grabs the EUR100 note and runs next door to pay his debt to the
butcher. The butcher takes the EUR100 note and runs down the street to repay
his debt to the pig farmer. The pig farmer takes the EUR100 note and heads
off to pay his bill at the supplier of feed and fuel. The guy at the
Farmers' Co-op takes the EUR100 note and runs to pay his drinks bill at the
pub. The publican slips the money along to the local prostitute drinking at
the bar, who has also been facing hard times and has had to offer him
"services" on credit. The hooker then rushes to the hotel and pays off her
room bill to the hotel owner with the EUR100 note. The hotel proprietor then
places the EUR100 note back on the counter so the rich traveller will not
suspect anything. At that moment the traveller comes down the stairs, picks
up the EUR100 note, states that the rooms are not satisfactory, pockets the
money, and leaves town. No one produced anything. No one earned anything.
However, the whole town is now out of debt and looking to the future with a
lot more optimism.

And that,

Ladies and Gentlemen, is how the bailout package works

And now back to the research report that I'm supposed to have a draft of by Friday...

"patterns of sustainable specialization and trade"
I personally think Kling is engaging in evidence-free bloviating inspired by bitterness about the economics profession. If he wants to dethrone Friedman's (or even Rothbard's!) take on the Great Depression he'll need more than simply announcing his desire that people adopt his paradigm.

Specialization and Trade. It could be a new meal/dining experience which might take less time to create but more to perfect and become known and popular. And in his it is the affluent/educated that are jaded and the poor/uneducated that have nothing to offer, and the affluent are waiting on each other to create these for each other and the many are idle unless and until one of these opportunities arrive. Apparently the affluent/educated don't see many opportunities or they would be busy creating them rather than taking leisure (which is a bit of a misnomer since American leisure is generally quite costly.)

Thanks David and Wonks! Post updated, and link added.

Frances: that is a lovely story, and illustrates the monetary disequilibrium view perfectly. It's been doing the rounds, told about various countries. I think I first heard it from Michael Francis. It was set in Australia when I first heard it. It works very well for this post. It's a variant of ZMP3, except: in your story, the trades have already taken place, based on trade credit. So there's debt, but no unemployment. In my story there's unemployment, but no debt.

Trade credit/debt sometimes has the same Wicksellian(? Damn, is that right?) triangle that the story of lack of coincidence of wants has for monetary exchange.

"The easiest solution is for the central planner to print more money and give each of the three women enough so they buy what they want."

Yes. But central banks do not print money and give it away. They print money and sell it for cash-equivalents, at market prices. Therefore apart from changing the market prices between cash and cash-equivalents, central banks are unable to fix this problem.

Fiscal policy is when you "give money away".

And it's the giving away part that is key.

Fiscal policy is what changes net-worth, whereas portfolio shifts do not change directly change net-worth. They can only hope to change net-worth indirectly, by encouraging more people to borrow and spend at the (lower) rates, resulting in an increase in the net-worth of those who sell to them. But if everyone wants to be the saver and no one wants to be the dissaver, then these enticements stop working. And that's the only tool in the monetarist's toolbox.

"ZMP3 is what the rest of us Monetarists and Keynesians (quasi or otherwise) are talking about."

No, it is not.

I wish you were talking about giving money away -- about fiscal policy.

But you are instead arguing against the effectiveness of giving money away, and for the effectiveness of selling cash, at market prices, for cash equivalents.

And frankly, this blurring of the non-financial sector with the financial sector, the blurring of monetary policy with fiscal policy, and the blurring of currency with reserves, is frustrating.

From a bird's eye view, we are all in agreement with the problem, but when it comes to policy implementation, and the hordes come begging for more money to increase their net-worth, you don't supply it.

You only sell them the money for cash-equivalents, whereas what they want is to sell their labor for money, not their money for money. And not seeing the distinction means that when push comes to shove, the monetarists and quasi-monetarists oppose any helpful solution to the problem.

Isn't there something missing here in this account. Imagine that a process requires input from two different specialists, and I have 1 of type A but not one of type B. Then the marginal product of type A is zero.

Reason: would that not constitute structural, rather than cyclical unemployment? That is really a kind of ZMP1 - the sort that "nobody is talking about."

RSJ: what you said.

Nick: Arnold would include the case that person 'A' doesn't know if he should be a plumber or electrician. The uncertainty of what the market will bear means his risk premium isn't meet, and thus he neither becomes a plumber or a electrician but rather is waiting to figure it out.

Why is person 'A' not doing what he used to do? That information is 'known'. Demand in that particular industry has collapsed.

RSJ: In my ZMP3 example here, the money is given away. It's *both* fiscal and monetary policy. There's a trasnsfer payment (negative tax) so it's fiscal policy. And the money supply increases, so it's monetary policy. (Yes, I know that MMTers define monetary and fiscal policy differently, and that according to their definition, helicopter money is fiscal policy only, but most economists don't use the MMT definitions. And no, let's not argue that point here.) Now, some monetarists and some keynesians argue about the relative effectiveness of fiscal vs monetary policy. But since this post is not about monetarism vs keynesianism, but about AD vs PSST theories, my example works well because it uses a policy that is both fiscal and monetary.

reason: the joint production, fixed coefficients case. Y=min{L,N), where the derivative is discontinuous. No worries. We combine the inputs into teams, and instead talk about the joint marginal product of the team. I see that as an example that would fit better with ZMP2 and the PSST type of coordination failure. Each worker has ZMP as an individual, but when the entrepreneur introduces them and joins them together into a team, their joint MP is now positive.

Off topic, but I can't resist.

In certain complex design situations (software development being the big one) it is possible to have team members with negative productivity. They make so many mistakes that cost the others on the team time to fix that the team would be better off without them. Management with good clues about software production are scarce, so there are more of these situations than one might expect. In particular, this is very likely to happen in software bubbles. I suspect that it happens in other bubbles as well, but in simpler situations the management can tell what is happening and can fix it quickly.

Return to topic.

You're forgiven Jim. That was interesting. And only slightly off-topic. Hmmm. In fact, your point here is just an extreme example of a more general problem. The people who hire others don't know what their MP is in the job. But they must expect it's positive, otherwise they wouldn't hire them. But they could easily be wrong. Wherever I say "ZMP", replaced it with "expected ZMP"?


Your story is nice, but since the hotel keeper stole the money and then gave it back, the books won't add up in the end. With fiscal policy the books will add up because a businessman will have unquestioned and legitimate entries in both sides of her ledger. The ledger won't add up with the Hot Euro Note Solution.

Unless you regard taxation as theft. In which case this is a political argument, not an economic one.


Your ZMP3 ladies seem to have created their own Prisoner's Dilemma. A store of value isn't a complete solution here because nobody can decide who will get paid first. So there is still a problem.

Though to be fair ZMP3 *feels* very much like the problem we are having now. I remember when a Trent Prof, Torben Drewes presented a graph of the broad money supply to a community group, attempting to explain the recession (then at an early stage). Everything was fine and consistent until the crisis when all the monetary measures, particularly M2 and above went haywire. I thought then that nothing good could come of that.

I'm not sure about the books not adding up, the the Hot 100 Euro isn't making anyone any richer, just doing the usual facilitation. Everyone in the chain paid a 100$ debt and lost a 100$ asset as the debt to them was repaid. No-one is working any more or earning anything extra.

You could be saying that adding money to the system would help clear up an imbalance between "want/time/ability to work" (assets) and "lack of work" (debts). If so it seems like the key point is putting the money in, letting it do its magic and taking the money back out again. Which is a different solution than just adding it.

"The easiest solution is for the central planner to print more money and give each of the three women enough so they buy what they want."

At what cost, and to whom? Unless you believe in free lunches...

Determinant: In Frances' problem, each person has an equal asset and liability. But they can't be canceled out in any sequence of pairwise cancelings. Just as there are no pairwise trades that my three women can do. That's why you need a medium of exchange, to solve the coordination problem. It is a (variant on) prisoners' dilemma. But it's not a store of value that solves the problem; it's a medium of exchange. Something that's generally acceptable to all as payment.

Doug: if you take the money out next period, then the original problem re-appears. You have to put the money in, and leave it in (unless something else changes).

Dave: the cost is paper and ink. I always like what Arthur Laffer said about free lunches. "Of course there are free lunches; and it's our job as economists to find them and eat them!" In other words, if you believe the economy is not working efficiently, and a change in policy can improve it, we should do that. It creates a free lunch. (Well, normally it's just the benefits exceed the costs, but in this case the cost of paper and ink is trivial. That does not of course mean that printing money will solve all problems. And you can print too much.

Frances problem is that nobody actually gained 100 Euros. You can't solve economic problems with the theft that occurred in this scenario, mostly because we can't steal like that in the real world. Unless you actually *want* to commit fraud and/or theft.

The theft creates a mathematical and accounting inconsistency, which affects behaviour because you'll act that you *have* to give it back. Nice story, but not a theory.

I'm all for printing money. We have this post every month or so it seems. The problem is always the same: the inflationistas will scream like it's 1979. Now I'm all for screaming inflationistas and I think they really, really need to recognize that we have come full-circle on inflation and interest rates but they'll trot out the same old arguments that Keynes was an idiot and Hayek a genius and Friedman will arise from his grave and kick the Fed in the rear end and the surest way to bring a capitalist economy is to debase its currency according to the Thrice-Accursed Lenin.

Can't we have something new?

Determinant: a central clearing house does exactly the same thing that the 100 Euro note does in Frances' story. It looks for circles of debits/credits, and cancels them out, leaving just the remainder. I read it as a parable. Money is just a decentralised version of a central clearing house.

On the inflationistas: sometimes I think it's a generational thing. We have the memories of our formative years, and they stay with us till we die, and a new generation replaces us, with it's own salient memories. Like generals always fighting the last war, except we go in circles.

I've been saying that about the inflationistas for a while now. Good to see that I've brought you on board.

Determinant: I might indeed have gotten the idea from you. My memory is too hazy to say.

Determinant: the tourist willingly laid down the cash, presumably as a security or deposit while he had the keys. He essentially paid the hotel owner to carry the risk (of theft) for giving him the keys to the room; the price was use of that 100 Euro for a short period of time, whether to make change or do a magic trick or whatever.

So if that 100 Euro note was utilized by the hotel keeper while it was legally in his possession, then immediately produced when the customer demanded it... isn't that just an extreme case of fractional reserve loaning on deposits? (A reserve rate of 0%, and unlimited power to delay/time withdrawls.) Then, per Nick's comment, the only thing you need to add is knowledge of all existent loans in the town: a central clearing house, or a well-connected hotel owner, or maybe the entire town posts its books at the town hall and lets firms figure out their own multi-party cancellations.

It might have been theft if the hotel owner did not know that the bill would circulate back to him in time to produce it; reading the whole story as a parable, this would be a bank defaulting on its depositors. Surely no such bank would last long in real life, but you have to cut a parable some slack for expediency.

It's not all nice and neat. How did the commerce which incurred those debts occur in the first place? The story seems to assume a previous willingness to extend credit. So maybe it's the sort of emergent order that could develop under ZMP3 if no central bank was around to print money: faced with permanent stalling of commerce, actors create a universal credit system, temporarily obviating the need for either a central planner or a helicopter dropping bags of money.

I wonder if the monetarists or -Keynesians would be happier to let such problems be solved via credit instead of currency?

Phil Koop,
yes but it is not what is normally thought of as structural employment - i.e. a sectoral imbalance, and the best remedy would seem to be selective immigration.

P.S. But you are right in another way - the same logic applies where one of the specialists is specialist investment goods.

The Unbeliever: Yep. Isn't this roughly what happens with "re-hypothecation" of T-bills?

The trouble with trade credit is that the whole system can fall apart if one person in the circle defaults. Or if it is even suspected he might default. That's why we need money, or the central clearing house, to do the multi-party cancellations.

"I wonder if the monetarists or -Keynesians would be happier to let such problems be solved via credit instead of currency?"

I would be happy to let such problems be resolved with credit, if that's what it takes, *if* there were provision for multi-party cancellations. But if it *did* have such provision, I would say that the system *is* currency (or at least a medium of exchange) with the trivial difference of not using little bits of paper that pass hand-to-hand to keep tally of who is in how much net credit. Instead it's recorded in a book, or computer somewhere.

he didn't STEAL it, he borrowed it! (I admit without permission.) But the same story would work if the money was borrowed from the Central Bank, which is the whole point of the story.

Thanks, Nick. That was helpful.

I think you represent my views reasonably well in context (i.e., consciously oversimplifying. A couple of points.

1. I don't really think that the Z should be "zero." It just has to be low enough to offset the overhead cost of hiring workers (including keeping new workers from disrupting the productivity of existing workers) and the opportunity cost of the worker's time.

2. My simplified story is the barbershop quartet metaphor.

Thanks Nick, That clarified what was a very confusing topic for me. Would it be correct to say "unwilling to spend money because they don't have enough" and "unable to sell labor because nominal wages are sticky" are two ways of thinking about ZMP3, or are they two different types of ZMP? I.e. do they lead to different policy implications for the central bank?

If only our ( U.S.) debt problem was like that of the damp little Irish town.

In our little towns , all of the debt is owed to Citibank , and Citibank is owned by a few rich folks who spend their money everywhere BUT in our little towns ( OK , maybe the hooker gets some action ). The townspeople can't spend because of their debt , and because they don't spend , they have no source of incomes to pay off their debts , and besides that , their incomes were meager even when people were spending , which is what necessitated the debt in the first place.

Money can't perform a clearing-house function unless it is directly targeted to the townspeople , allowing paydown of debts , and even then the fix would only be temporary , since they'd be forced to go into debt again. However , there are a couple ways we could make the fix more permanent :

1)The townspeople could sleep on the streets and scavenge at the dump , thereby staying out of debt.


2)We could fix the income distribution.

Option (2) is anathema to most of the political right.

I favour it highly but I'm a lefty.

Arnold: thanks. Glad I didn't misrepresent you. I agree with both your points. It's hard coming up with an example to illustrate the sort of coordination failure you are talking about. Examples should always be simple. And yet if is is simple, it fails to do justice to the difficulty a real-world entrepreneur would have in solving it, and so looks implausible. And yep, "zero" doesn't have to mean precisely zero. Just too low to make employment worthwhile.

Scott: those two things are essentially the same. It's the *real* quantity of money that is too low, *relative to the desired stock*. "Real" could mean M/W, or it could mean M/P. In my example, W=P, so it doesn't really matter. Which is my view of the world. I don't think there's any important distinction between M/W and M/P.

You can say M is too low, or W (or P) is too high. Or you can say that Md/W is too high. It's all the same thing. But M is the variable that's easiest to change. (This is my reading of Keynes' GT, by the way).

Goldilocks and Determinant: There's this meme floating around that says that debt is caused by an unequal distribution of income. And you have both just floated it above. The poor are forced by their poverty to go into debt to the rich. Bollocks! It is total rubbish.

Let me give you just one data point, but one *very big* data point, to show why it's wrong. China is poor and the US is rich. And the US is in debt to China.

Theory does not say that an unequal distribution of income causes the poor to go into debt to the rich. (Though theory does say that those with low *transitory* income will go into debt to those with high *transitory* income.)

Theory says, on the contrary, that those who are improvident will go into debt to those who are provident. And theory also says that those who are improvident will, over time, become relatively poor; and that those who are provident will, over time, become relatively rich.

It is not an unequal distribution of income that causes debt. It is an unequal distribution of *providence* that causes debt. (And also causes the distribution of income to become more unequal over time).

"*Whose* theory?", I hear you demand. "What sort of right-wing bastard would put forward such a theory??!!"

Paul Krugman (with Gautti Eggertsson).

China is in debt to the US because it refuses to allow the convertibility of the yuan and the consequent capital imports to complete the cycle of trade between China and the US. The US has a massive capital surplus with respect to China. That money should be returned to China to relieve China's capital deficit. China won't let this happen. It should happen if the market signals weren't smothered by regulation and the yuan peg.

China has chosen to have imbalanced trade with the US to keep its workers employed and therefore its regime in power. Beijing has quite literally chosen to buy peace from its citizenry. The cost is a massive pileup of US bonds or put another way, China is financing US consumption by loaning it the money to do so. It's a massive form of Keynesian stimulus if you consider that the quirk in this instance is that the loans to finance consumption are cycled offshore instead of the whole transaction being conducted domestically.

Which begs the question of why China considers it better to loan money to Americans to finance consumption than to loan money to Chinese citizens to finance the same consumption.

There is also the real (pun intended) question of which country is actually provident. You can't eat a US Bond. China hasn't converted its forex reserves to real goods. Why? Why leave those promises on the table instead of purchasing real goods, that is real wealth?

Nick, on the basis of your argument do you then favour heavy economic sanctions against China to allow yuan convertibility and a balance of the capital/current accounts of the US and China with respect to each other?

"Theory does not say that an unequal distribution of income causes the poor to go into debt to the rich."

Some theory says exactly that , including that of IMF economists , where the "Washington Consensus" no longer seems to be quite so consensual :


Are "memes" what economists call theories backed by DSGE modeling ? I'd use the term "myths" myself , based on what those models typically yield. Just the same , here's a paper that uses them to study the inequality/debt connection :

"This paper has constructed and simulated a heterogeneous agents model that mimics
the distribution of income in the United States in the period 1963–2003. Such a model
can explain remarkably well the endogenous dynamics of household debt. The rise in
income inequality of the 1980s and the 1990s can, at the same time, account for the
increase in household debt, the large widening of wealth inequality, and the relative
stability of consumption inequality."

Meme , myth , or something else ? I don't think it's something you can simply dismiss as "bollocks" with your facile China example. Are there conflicting models and theories ? Sure. My tendency is to look away from the theories that got us into this mess , and take a look at those that suggest ways to get out of it.

"...those who are improvident will go into debt to those who are provident"

The 'Theory of Providence'? Ha! That's a new one for me. It makes Blankfein's claim that he was "doing God's work" even more jarring when you think about all the improvidential behavior he facilitated.

Goldilocks: "The 'Theory of Providence'? Ha! That's a new one for me."

That proves to me that you either didn't read or didn't understand the second paper you linked to, and used to argue against me. Because if you had read it and understood it then the 'Theory of Providence' would not be a new one for you.

It took me literally 1 minute reading that second paper by Matteo Iacoviello to see that it confirmed exactly what I was talking about:

"The economy consists of a large number of in…finitely-lived agents who are distinguished by the scale of their income, by their discount rates, and by their access to the credit market."

See that "discount rates"? That's fancy economist talk for "improvidence". It's saying that some agents are more improvident than others. That's what's driving the model. Exactly what I was saying.

Do I need to read the first one too?

"Discount Rates = Improvidence"

Nick, care to explain why China borrows at higher rates than the United States, then?

The PBC base rate is 5.8%, the Fed's is 0.25%.

No no no, the large US borrowings are a result of Chinese policy and an inoperative capital account exchange to balance off the current account difference.

China will feel robbed if the US is forced to inflate it way out of its debt problems instead of the better course of China voluntarily repatriating its US reserves by purchasing capital goods from the United States.

Determinant: you can't directly compare US and chinese rates. China's growth is driven principally by their relative underdevelopment and to a smaller degree by exchange rate manipulation. That's the main story of rates. Additionally, Americans are currently feeling extremely "provident," thus the low rates. "Demand shortfall" seems like the definition of provident. You are right though, that manipulation is preventing the low rates from causing a collapse of the dollar.

Reason:"he didn't STEAL it, he borrowed it!"

But there was no certainty he'd be able  to pay it back, unless all the debts were known to be risk free.  But in that case they wouldn't have had any problem in the first place. But, nobody would have felt any poorer if they owned risk free debt and they would have been able to use that debt itself as currency.  The fundamental problem is *real* credit risk.  Everybody discounts their assets but can't discount their liabilities so they all feel poor.  The answer is to increase the money supply, but a five minute loan wont do.  It should be convincingly long term (like a helicopter drop) and it should be spread around (like a helicopter drop) rather than given to the German tourist (banks) who would never, in reality, lend it for free to the inn keeper.

Nick: speaking from personal experience... It takes *a lot* more "providence" to stay out of debt when your income is low than when your income is high. So of course "providence" is a factor but to pretend that it is just providence rather than providence conditional on income that is the principal determinant of debt is in fact also "bollocks" :-) . The indebted poor are less provident on average than the rest of the poor. But you simply cannot compare their intrinsic "providence" to the rich. Not that you did, but it rubs me the wrong way not to make it explicit.

“Discount Rates = Improvidence"

Sure. One problem is that any difference in discount rates will result in increased income inequality. Another is that the starving peasant necessarily has a higher discount rate than the billionaire with his yacht. Is this improvidence, or inequality of opportunity? Indeed, once income inequality is established, we expect the vicious cycle to continue, and barring intervention, the situation to only get worse. Or should we criticize the middle class for not living in shacks on beans and rice. The problem is not the inequality of income per se, it is the instability of the system.

Consider the system at the outset, with everyone at equal income. Clearly, those with lowest discount will gain advantage. So the greatest scrooge, who lives the meanest life and consumes the least, will come out on top. So everyone is motivated to minimize consumption. But, who will be willing to produce, what no one is willing to buy? So from everyone seeking to be the “most provident,” that is from a pursuit of virtue, everyone is poor. An interesting morality tale.

The discount problem is like the producer-consumer problem: No matter how much money the consumer starts with, the producer ends up with all the money, and then the system collapses. Only when the producer gives the money back to the consumer, does the system persist. Just lending the money doesn’t do it, as we see.

Only by continuously redistributing the money, can the system remain viable. Since those with money are now refusing to do this, (and making a moral issue of it,) they are managing the collapse of the system that has brought them their wealth.

Just some terminology on "discount rates = improvidence".

There are subjective "discount rates", aka rates of time preference, which are a close kin of "improvidence". We need to disambiguate those subjective discount rates from the objective discount rates that, for example, central banks set on colateralised loans.

Improvidence is perhaps just a little bit different from having a high subjective discount rate. Improvidence/providence perhaps means not just caring about the future (pure time preference), but also has a suggestion of taking precautions for the risk of a rainy day?

K: I'm not sure. Pure theory of intertemporal utility maximisation says there should be no relationship between the scale of income and the savings rate. Everything just scales up. Unless you assume non-homothetic preferences, but that can make the relationship between savings and income go either way.

Pure theory says that those having temporarily low income will dissave and borrow from those who have temporarily high income.

And that those with high subjective discount rates will dissave and borrow from those who have low subjective discount rates.

Is theory right? I can see that when you are on the verge of starvation, so you will die anyway, there's no point in saving for the future. But we left the Malthusian world 200 years ago.

People in the past were much poorer than us. But they saved, and invested. And it's because they saved and invested that we are as rich as we are now. Has there been any secular rise in savings rates and/or fall in real interest rates over the last (say) 200 years in advanced countries?

And is it even true now that it's all the poor dissaving and going into debt? Some people *become* poor due to dissaving, of course, but that's not the point. And I read a lot of anecdotal evidence of people coming into wads of cash and blowing the lot. And people dissaving and going into debt to buy luxuries.

There is just something wrong with this meme that, just because you are poor, you can't help yourself from consuming too much. There's something intellectually and morally lazy about this way of thinking. And it bugs me. The poor aren't per se idiots, and improvident. (Though idiots and improvident do tend to end up poor, which is different). "Soft bigotry of low expectations" maybe?

Sure it's hard to live withing your means. But many poor people do it, and many rich people fail miserably. And we should stop making excuses. "They can't help it; they are poor".

This topic is striking a deep ancestral note in me. The old baptist and methodist side of my heritage is coming out. And it's the self-discipline those old Non-Conformist (using that word in the UK sense) distilled in our parents and grandparents that gave us the massive wealth and opportunities we have today. If our ancestors had listened to this "the poor can't help it" meme, we would all be starving in caves still.

Greg: "Only by continuously redistributing the money, can the system remain viable. Since those with money are now refusing to do this, (and making a moral issue of it,) they are managing the collapse of the system that has brought them their wealth."

And my grandparents reply: "Sure, reward improvidence, and we might as well all be improvident. And Greg and Nick will be on the verge of starvation like our great grandparents were. No!"

I ought to blog this. "Get it off my chest". Right now I'm collecting my thoughts. I will re-read over Determinant, Goldilocks, K, and Greg.

And thanks for the comments, by the way, despite my "bollocksing". This is helping get my head straight on why I'm so opposed to this "inequality causes debt" meme.

Elizabeth Warren makes the point that, in the US at least, families are (or where) going into debt mainly through their mortgages and mainly because they where buying schools, since schools in rich areas (with expensive houses) tend to be much better than schools in poor areas. So at least in this one case, inequality is causing debt and it's driven by (attempted) providence - investing in their children's human capital.

I can't find the link right now (it was a YouTube video), but she also debunks the idea that households are going into debt by consuming too much stuff (iPhones, XBoxes, flat screen TVs etc). When you compare what people spent 30 years ago, adjusted for inflation consumer 'stuff' is just sooo much cheaper today that it more than makes-up the difference (which it what you'd expect given technological progress).

The 'h' gremlin keeps messing-up my were's and where's !!!

Need another cup of coffee.

I lean more towards the Minsky tale of long periods of stability causing an underpricing of risk, overpricing of assets, growth in debt, and increase in inequality that a crash reverses. More effect than cause although there are political channels that can reinforce and accelerate these trends once they become large.


OK. But "providence" and the presence of poverty is closely related to the cost of living. A one-bedroom apartment in Ottawa will cost you $1000 with utilities at least. Transportation is also relatively fixed. Food for one person is also less variable than income. The variance in these prices is less than the variance in the amount of income a person earns. This is the fundamental reason why we have a progressive income tax system. How else to rich people have more disposable income than poor people?

Likewise you'll barely survive on an income of $25,000. If you have family that's just not enough income. You need a second income.

When the income opportunities available to you are not enough to cover your needs for shelter, food, transportation and basic sundries, you are involuntarily improvident. It happens a lot, primarily because the cost of housing is so high and inelastic relative to income. It also happens because job searching takes time and money.

Nick wrote:

"This topic is striking a deep ancestral note in me. The old baptist and methodist side of my heritage is coming out. And it's the self-discipline those old Non-Conformist (using that word in the UK sense) distilled in our parents and grandparents that gave us the massive wealth and opportunities we have today. If our ancestors had listened to this "the poor can't help it" meme, we would all be starving in caves still."

Hear that? That's the sound of me ripping something.

Nick, that theology is 80 years out of date. But it's timely we should revisit the reasons it wound up in the dumpster.

First, if you're going to debate Methodist theology with me, you're going to lose. I am the son of two United Church of Canada ministers and I'm two degrees removed from two others in my family. My other grandparents sat on the Session and Official Board for decades. I currently sit on my congregation's Official Board and I'm heading over to the Session next month. I live and breathe this stuff.

The United Church and the Baptist Church both would have agreed with the assertion that improvident people are undisciplined and profligate until the 1930's. The Great Depression changed everything. The Social Gospel was big in Canada. The United Church has many, many churches on the Prairies and we had to watch good farmers with families who never misspent a dime get thrown into the most dire poverty because they couldn't sell enough grain. In Ontario we had to watch good men line up outside factories and still wind up with nothing. In economist's terms we had to sit by and watch a coordination problem play out where everybody did everything right and still lose.

It's not an individual's fault when the market stays broken longer than they can stay solvent. It happens a lot.

Why do you think the United Church and the NDP are so closely related? Every wonder why our clergy seem so socialist? Nobody remembers the 1930's with fondness. We come full circle 80 years later and have another depression and I see no reason whatsoever to challenge that conclusion. Get with the program Nick!

In 2, the plumber puts an add in the paper, electrican wanted. The electrician puts an ad in the paper. plumber wanted.

There are two job vacancies. The plumber puts an ad in the paper. Need your pipes fixed?

The electrician puts an add in the paper. Need your house rewired.

We have to people searching for employment.

Vacancies match the unemployed. It takes time to make the match. Output and income are zero until they make the match.

I think this is called "frictional unemployment."

I don't think this is zero marginal product of labor.

As I have argued many times, Kling also needs a no scarcity argument. The plumber wants his house rewired, but doesn't know there is an electrician. So he buys more bread instead. If none of the bakers needs plumbing at all, then there he has a zero marginal product of labor in plumbing, and needs to bake bread. If, as is more likely, they can use plumbing, and it is simply that the electrician wants it more, then the plumbers marginal value product is lower because the electrician doesn't know about him.

The same with the electrician. He needs plumbing, but doesn't know about that, and instead buys bread. Now, if none of the bakers want rewiring, then his marginal value product is zero. He needs to bake bread. More realistically, they do want rewiring, and his lack of knowlege of the plumber means that the marginal value product is less.

Of course, the plumber can see the electrician trading with the bakers. And the electrician can see the bakers trading with the plumber. So, there is no problem!

Now, suppose everyone bakes their own bread. And they are just resting with their spare time. And so, you have the electrician and plumber as you said. They don't know about each other. There is, of course, output and income. The bread. But people just enjoy leisure because no one wants any more bread. The electrican won't sell rewiring for bread because he already has all the bread he wants. The plumber won't sell new pipes for bread because he doesn't want more bread. And so, you have the frictional unemployment--the matching adds in the paper.

I believe in frictional and structural unemployment. But they have to do with change, not this no scarcity scenarios.

I think the jaded rich notion of Lord is what is going on.


Mike Moffatt thinks I'm a lefty and I'm fine with that. I like to think my politics and my religion are compatible. When I read economics I know that I'll come across stuff I find politically or morally objectionable. Or really enticing on the surface but brutal in reality, like Hayek. The thing is when I say that I'm in favour of social welfare programs I know I'm saying that for me politics/morality/religion trumps economics. I'm OK with that.

Perhaps too when you minister to people in a small open economy whose income is critically dependent on decisions taken in markets and boardrooms thousands of miles away to whom you are just a price point it is hypocritical in the extreme to preach that saving is a virtue and improvidence is a sin and a sign of your lack of grace. That point has been reinforced again and again and again over the years.

I'm curious that while many would jump on me for overriding economics with morality, you seem to want to justify your economics with appeals to morality and religion. What behind every economist there is a dead theologian now?

Determinant: that makes sense to me. I always wondered why the United Church sounded so stuck in the past. Like many of that generation, they never got over the 1930's. Socialism must have looked promising 80 years ago. They are the generals forever fighting the last war. Only, it's not the last war, but the one before that. Not that I ever recollect the United Church focussing much of its attention on monetary theory, mind you, and the 1930's, like the recent recession, was a monetary problem. But not all problems are due to monetary policy.

Bill: agreed. The big problem with ZMP2 is just that: even if they don't know about their highest VMP opportunity, is there nothing else useful they can do with their time, while waiting for the entrepreneur to discover the new opportunity?

The United Church is first of all a place of religion. We'll tolerate most economics so long as there is a safety net for people. Call that socialism if you want. In practice we'd choose a free market with a guaranteed income over a state-controlled economy with state-guaranteed jobs. Make of that what you will.

Stuck in the past? On economics, maybe, but we've never really seen a reason to switch. The free market Christ Right in the US has never caught on with us in the least.

Besides, we spent most of the 1980's on the Big Gay Question. It took up a great deal of our time.

Determinant: responding now to your 9.17:

"Perhaps too when you minister to people in a small open economy whose income is critically dependent on decisions taken in markets and boardrooms thousands of miles away to whom you are just a price point it is hypocritical in the extreme to preach that saving is a virtue and improvidence is a sin and a sign of your lack of grace. That point has been reinforced again and again and again over the years."

The risks people face now are far less than our ancestors faced, when a failed harvest could mean starvation. I would say the virtue of providence is less important now than it was in the past. But that doesn't mean it is not a virtue.

There is a difference between: *justifying one's economics* by appealing to morality and religion; appealing to morality and religion: recommending that people follow, and encourage others to follow, certain rules of behaviour. Regardless of my religious beliefs, or lack thereof, I can recognise that in some cases religious movements have created cultural practices that were good ones.

I think providence is a virtue. And if you are a preacher you ought to preach it. Do any preachers preach it nowadays? Or do they just blame the evil capitalists and sing kumbaya?

I was thinking of blogging on this: http://www.aeaweb.org/aea/2011conference/program/retrieve.php?pdfid=477. It talks about the influence the intellectual debate on predestination v. people's ability to make decision and control their destiny on Adam Smith's thought.

But fate intervened.

No, I am not a minister, I have not attended Divinity School nor do I intend to. I will be standing for election to the Session next week as an Elder.

Nick, in the greatest respect, please don't try to split hairs, your last post is nothing a teleological argument. You ARE justifying your economics by appealing to religion and morality. You aren't making an economics argument anymore but a theological one. Which is fine, but a spade is a shovel.

You are also looking at the past with rose-coloured glasses, or is the Irish Potato Famine just a fluke? Honestly, take a look at what happened. It wasn't pretty. THAT was poverty.

Societies can save in that they can invest in increased production and more productive technologies. However in a world with ever-increasing specialization there is an ever-increasing risk that that specialization won't be profitable. Specialized farming like wheat is just as susceptible to booms and busts as the factory worker with a specialized set of skills or the trader dependent on derivatives.

In a world where the frictional costs of changing careers (by which I mean income-earning activity) are substantial and entail substantial risk, technology and education make for high productivity standards in most industries relative to demand and with competition ensuring that no income is guaranteed, there will always be unfortunates who just don't have enough money to meet their needs. We'll get a macro result that a society can save but at a cost of creating a permanent set of people who are unemployed, have poor prospects and don't have enough money to either provide for themselves or change their situation. There is also no implication that the existence of general saving means that individual saving will be sufficient in all circumstances. The two don't follow each other.

Actually Nick reminds me of Margaret Thatcher's "Sermon on the Mound" to my dear cousins the Church of Scotland.

After she was done blustering they handed her a report on poverty in Scotland which was taken as a rebuke to her diatribe.

Determinant: You are no longer arguing with me. You seem to be arguing with some figment of your imagination. To take just one example:

"You are also looking at the past with rose-coloured glasses, or is the Irish Potato Famine just a fluke? Honestly, take a look at what happened. It wasn't pretty. THAT was poverty."

What?! The whole point of what I have been arguing in the above comments is that people were much poorer in the past than they are today. And you come out with that!

It would be like me saying: "Determinant: learn to do math, 2+2 is NOT equal 5. And workers are NOT all evil"


Nick: Never mind the bollocks. Looking forward to your post.

One thing I would consider though. I've been involved a fair bit with start ups and venture capital. Entrepreneurs are about the most improvident lot I've had the pleasure of knowing. They take huge risks, much greater than they generally realize, and they grossly overestimate their odds of success. Only about one in five vc investments are successful, but all of them think they have a 90% chance of success, and that includes the ones that don't even get funded. Most telling of all, they happily borrow money at rates of that frequently exceed 10-15%, and often personally guarantee those loans. Hardly the picture of providence. They are however a big part of the reason for all our modern wealth, in many ways much more so than the providence of your grandparents.

K. Hmmmm. You have a point. They aren't improvident in the same way that dissolute celebs who blow the lot on consumption are. But you sure wouldn't describe those over-optimistic risk-taking investors as "provident".

And yes. It needed both those risk-taking investors plus the provident savers to get us where we are now.

Nick: “K: I'm not sure. Pure theory of intertemporal utility maximisation says there should be no relationship between the scale of income and the savings rate. Everything just scales up.“

This seems counter-intuitive to me. I cannot imagine the savings rate is constant across all levels of income. How to explain the increasing disparities in wealth and income? Let’s check: 2007, according to the FED in:

Table 1:

__-94.3___-13.6_____6.0____18.2____35.9__ by quintile, after taxes. But that’s just one year.

“People in the past were much poorer than us. But they saved, and invested. And it's because they saved and invested that we are as rich as we are now…”

Savings is usually with the expectation of spending in the future, (except for those who have saved so much they will never spend it.) Investment is with the expectation of increased consumption in the future. In a certain peculiar sense, our prosperity is built on improvidence as well as providence. Demand must grow along with supply.

Nick: “Sure it's hard to live within your means. But many poor people do it, and many rich people fail miserably. And we should stop making excuses. "They can't help it; they are poor".”

I don’t know. Are you demanding of the poor higher standards than of the wealthy. Are you demanding that they take a lower discount rate, that they be more “provident” than the wealthy, when they must make greater sacrifices to do so? If the distribution of subjective rates of discount is the same among rich and poor, then statistically, it seems to me, it’s just going to happen: A larger percentage of poor will have, because a higher percentage of their income must go to ‘necessities,’ a higher realized discount rate than the wealthy.

“Greg: "Only by continuously redistributing the money, can the system remain viable…”

Nick: “And my grandparents reply: "Sure, reward improvidence…No!"

I’m just being practical here. It’s really not a moral issue at all. (Well, it is, but in a different way.) Consider trade, with just a two country system. If they trade, with any difference in discount rates, the one with the higher discount rate will become impoverished, and the other will end up with all the money. And all the assets. And then what? And we are not talking ‘improvident’ here.

The same with individuals, in a market economy. Take two. They trade. If one individual makes nine cents on the dollar, and the other ten, the one who makes ten cents will eventually come to possess everything the other owns. Should we punish the one who only makes nine cents with abject poverty? Is the one who makes ten cents so morally superior, that he deserves everything? He cannot be. Someone slowly inflicting poverty on his neighbor is- sick, so morally inferior, and undeserving of his wealth. Scrooge is not just mean, he is damaging to the economy.

It is simply in the interests of the wealthy to keep “giving away” the money, and yes, rewarding a certain amount of ‘improvidence.’ My criticism of the wealthy is that they are not pursuing their proper self-interest.

Nick: “People in the past were much poorer than us. But they saved, and invested. And it's because they saved and invested that we are as rich as we are now…”

The first two sentences are not at all obvious. Think about home ownership rates. In the US (the one place I could find info on), in 1900 less than half of male household heads were home owners, and less than one quarter of black household heads were. Since home ownership is far and away the largest asset most people hold, it would take a huge amount of non-home savings to put all of those 1900 non-home owners at a level comparable to 2011 average people. Here's a paper a discussion of the history of home ownership: http://www.vanderbilt.edu/econ/wparchive/workpaper/vu00-w12.pdf. Or land ownership in England - historically 80 to 90% of land was worked by tenant farmers who didn't own the land they tilled (sorry, can't find anything ungated, I got that stat from the first page of this article: http://www.jstor.org/pss/2597481.

The last sentence doesn't follow from the first two, anyways. As you know, a very small fraction of the population own the overwhelming bulk of the wealth (is it 20% own 80% or 10% own 90%? I don't remember). And that's been true for a very long time.

"Mike Moffatt thinks I'm a lefty and I'm fine with that."

I wouldn't read too much into that. George Carlin has a bit where he says that anyone that drives slower than you is an idiot, and anyone who drives faster is a maniac. Same principle applies here.

Frances: Hmmm.

All assets must be owned by someone. Someone must have done the savings. A couple of differences I can think of:

1. In the past, since people were poorer, their labour supply was much greater, so they worked till they died. No retirement savings motive. Standard permanent income hypothesis. You save when your current income is above your permanent income.

2. In the past, land + houses were a much larger share of the total stock of assets. For example, if land and houses were the only form on non-human wealth, you would expect to see the distribution of ownership of land and houses as unequal as total distribution of non-human wealth is today.

3. Total inequality of income and wealth was greater in the past?

Reminds me of that book you lent me. Biography of that women living in very poor hamlet in England late 19th century. The one couple in the village who had financial savings were childless. The rest saved and invested in their kids. The kids were the retirement plan.

Greg: "In a certain peculiar sense, our prosperity is built on improvidence as well as providence. Demand must grow along with supply."

Agreed. But that demand can come from either consumption or investment. We can have a higher or lower share of savings (=investment) in GDP.

"If they trade, with any difference in discount rates, the one with the higher discount rate will become impoverished,.."

Yep. This has always been something that bothered me. Take the simplest example of what you are talking about: 2 infinitely-lived agents, identical except that one has a slightly higher discount rate than the other. Each with a constant stream of income (before interest payments). The equilibrium rate of interest will be between the two discount rates. So one saves, and the other dissaves. And there is no long run stationary equilibrium. The impatient one starts out with higher consumption, but has declining consumption over time, with consumption asymptotically approaching zero, which means in the limit the patient one consumes both their incomes.

The only way out of this nasty conclusion is for the discount rate, at the margin, to increase with permanent consumption and wealth. The poor need to be more provident than the rich. And saying it's OK for the poor to be less provident than the rich just makes things worse.

And I don't think that transfers from rich to poor will prevent it either. Because you take those future transfers into account when you make your savings decision. The person with the higher discount rate will save even less in anticipation of those future transfers.

So, what would work? Something like a TFSA (for non_Canadians: where each person can save $5k tax free) would maybe help? Because that $5k is a bigger percentage of income for the poor than the rich. So, the after-tax return on savings is greater for the poor than the rich, at the margin? I think that's right.

Yep. I *think* (not sure) that the only policy that could work in the long run is one which gave the poor a higher marginal after-tax rate of return on savings than the rich.

These comments are good, by the way. Helping me get my head clearer on it all. Thinking about the policies that would and would not work is what's important.

By the way, I *hate* Dickens for what he did to Scrooge. Scrooge (in the dream) died having spent much less than he earned. He gave it all away on death. Scrooge was *much* more charitable than all those other useless improvident self-satisfied idiots. We are rich now because of Scrooge. And that *bastard* Dickens does a ritual humiliation of Scrooge worthy of the Red Guards in the Cultural Revolution. Christmas Carol is hate literature. We join in the annual hate-fest while consuming the wealth that the object of our hate created.

Scrooge did not impoverish anyone. He enriched us.

WCIers - book Nick refers to at 9:56 is Lark Rise to Candleford.


"All assets must be owned by someone. Someone must have done the savings."

Isn't the traditional method of land acquisition (a) taking it by brute force and then (b) passing it one to one's children? (see, e.g. the Americas, Africa, India, etc.) Given your point (2) above, this means implies that historically savings haven't been particularly important for many people.

The problem a tenant farmer faces in attempting to buy his/her own land is that to acquire the capital to do so, he has to produce more than the rent on the land, but why would a landowner set rents that low?

1. "In the past, since people were poorer, their labour supply was much greater, so they worked till they died.

They worked until they reached the point of ZMP (1 or 2, don't remember which). Which could, especially for women, be a fair time before they died. Hence the 1960s stories of old women eating catfood.

3. "Total inequality of income and wealth was greater in the past?" Depends when/where.

Am very much looking forward to your post on this, Nick.

One of the most forceful attacks on 19th/early 20th century religious preachings on the virtues of thrift etc comes from George Bernard Shaw. He articulates it well in An Intelligent Woman's Guide to Socialism and Capitalism. It's in my office, I'll pick it up for my response to your post, which may come before your post at this rate!

Frances: "Am very much looking forward to your post on this, Nick."

Thanks. But I'm not ;-)

Realising: first, just how touchy a subject this whole thing is (not just religion plus neoclassical economics plus debt plus inequality plus "How dare you blame the poor for their improvidence!"; and second, because getting my head clear, and then writing it clearly, is going to be bloody hard.

Yep. Lark's Rise to Candleford was a great read.

GBS (I haven't read it) was probably pushing the vulgar Keynesian savings-glut line. I wonder. Nice pubs around Ayot St Lawrence, where he retired. Often used to go drinking there.

There are two parts to land acquisition: getting the raw land, which usually means stealing it from someone else; clearing, draining, getting rocks out, etc. People always underestimate the importance of the second. It's the second that is savings and investment. Productive land is mostly capital, in other words. There is almost always an extensive margin, where raw land is not scarce.

In a simple model land rents should equal VMP land. So the tenant farmer must use savings from his own labour and return on capital if he wants to buy land. In a more complex model there's a problem of asymmetric information between landlord and tenant farmer. Because it is hard for the landlord to observe the tenant's investment in the land. The tenant can exhaust the soil, or improve it. It's tricky to write this into the lease and monitor. So the VMP of land farmed by an owner can be higher than the VMP=rent of tenanted land. So if a tenant farmer can save enough for a downpayment, he can sometimes afford to pay off the mortgage partly from the difference between the two VMPs.

"They worked until they reached the point of ZMP (1 or 2, don't remember which). Which could, especially for women, be a fair time before they died. Hence the 1960s stories of old women eating catfood."

That's ZMP1. But isn't inflation what impoverished those retirees? Plus increased tax rates on "unearned" income?

Nick: "They aren't improvident in the same way that dissolute celebs who blow the lot on consumption are."

Maybe. Providence is a loaded word. Krugman uses the word "patient," which strikes me as a lot more objective and relevant. As far as being "impatient" I don't see a big difference between the entrepreneurs and the celebrities.

The biggest differences between the entrepreneurs and the poor are:

1) Nothing. Some entrepreneurs end up poor.  It's just risk.
2) Work ethic.
3) Innate skill.
4) Luck (monopoly). This one is by far the biggest. Numbers 2 and 3 can effect income by an order of magnitude. This one accounts for the next six zeros. There are millions of people with the skills of Bill Gates. None of them lucked upon an emerging natural monopoly for operating systems. Bryn and Page happened to be working in fields relevant to an emerging monopoly on search. Most brilliant grad students aren't.

I don't agree with your premise that the principal consideration in evaluating redistribution is effectiveness. You ignore the extent to which wealth is the result of monopoly, ie the natural wealth of the earth plus aggregate demand alone. This is the case for a citizen's dividend. Entitlement, not welfare. And if you want to figure out how to prevent that income from being appropriated by, eg the banks, due to their lower discount rate (which results principally from their seignorage monopoly), I think you should look at the state refusing to enforce claims against that income. Or maybe refusing to enforce any loans over and above handing over the collateral. Then we could get rid of the incredibly wasteful bankruptcy process at the same time. 


Frances really made my point for me in her post. I was trying to find the words but didn't make it. K drove the nail home.

It is a fallacy to think of everyone in the past as poor, provident savers.

For example, on clearing land Nick, Peterborough, ON was settled in 1827 by the Canad Company. They had Crown grants galore, brought the settlers over from Cork and the deal even included most farm implements, provisions, even a cow. The race was against time to get crops in and yourself set up.

Thanks all commenters. I've now posted. Let's stop this discussion here and switch this discussion to the new post. Because we were all way off-topic here (my fault).

From now on, only comments about ZMP here.

By the way (breaking my own rule) feel free to re-state any of your comments here on my new post, if you think they are still applicable after reading it. Because otherwise people might not find your critiques.

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