How markets convert meat into vegetables

It is Winter. It is impossible to produce food, and the people can only eat the food they have already stored. The king wants to take food away from the carnivores and give it to the vegetarians. He orders a tax on the carnivores, so they will eat less food, and a transfer payment to the vegetarians, so they will eat more food.

His economics minister says that it is impossible to transfer food from carnivores to vegetarians, because the carnivores only store meat, and the vegetarians only eat vegetables, and there is no technology to convert meat into vegetables.

But the king, being a simple man who didn't understand economics, went ahead with his tax/transfer policy anyway. And the policy worked, just as the king said it would.

The carnivores sold meat to the omnivores, so they could pay their taxes. The vegetarians used their transfer payments to buy vegetables from the omnivores. The carnivores ate less meat; the vegetarians ate more vegetables; and the omnivores ate more meat and less vegetables.

The economics minister learned from his mistake. He started studying overlapping generations models. He realised the king could also put a tax on generation 3, and give a transfer payment to generation 1, so that generation 1 eats more food and generation 3 eats less food. Even though generation 1 will be dead when generation 3 are born. All you need is a generation 2, whose lives overlap the lives of generations 1 and 3. Generation 3 are the carnivores, generation 1 are the vegetarians, and generation 2 are the omnivores.

The omnivores are the overlapping links in the chain. You can add more links to the chain if you want to make the chain longer.

Markets can do things that look like magic. It looks like they can convert meat into vegetables, and make food travel back in time.

Comments

[Lord]

Or vegetables into meat and make food travel forward in time.

[Nick Rowe]

Lord: true. But it doesn't work as well for a sexy blog post title, because people will say "so can rabbits" and "so can freezers", and you have to explain you're assuming no rabbits and no freezers.

[Kevin Donoghue]

Nick: "Markets can do things that look like magic."

A biologist would say, with rather more justification, that evolution can do things that look like magic. It can produce omnivores, which is why your market mechanism works. In a world where all creatures are either obligate carnivores or herbivores, your economics minister's Leontief-type assumption would be perfectly sound.

Similarly, your time-travel story only works for a species which is reluctant to let the old die of starvation. Such a species can form a society, which is "a contract between the living, the dead and those who are yet to be born."

I've been trying to figure out what it is that bugs me about these time-travel posts of yours. I think it's a feeling I have, that you're engaged in a kind of implicit moralizing. To say, contra Krugman, that debt is too a burden, implies that there is an injustice involved. Well, nobody denies that there is such a thing as odious debt. But you're not making it clear, to me at any rate, just what the injustice is that bothers you.

[Nick Rowe]

Kevin: "To say, contra Krugman, that debt is too a burden, implies that there is an injustice involved."

I wouldn't say that. There may or may not be an injustice. Maybe the grandkids *ought* to bear the burden. And there may not even be a burden. It depends.

The only thing that *really* bugs me about this whole thing is that Paul Krugman (among others) is teaching economics wrong. (And not paying attention to my brilliant posts refuting him.) Plus: we need to have at least an informed debate about fiscal policy, without resting our position on saying something is a fallacy when it is not a fallacy. Simon Wren-Lewis is giving an *informed* defence of fiscal deficits (AFAICT, as always).

[Kevin Donoghue]

Nick, I just took another look at SWL's "Redistribution between generations" post (link below). I don't believe Krugman would dispute anything there, or that anything he's ever written was meant to imply that government debt never involves redistribution between generations. But what comes through very clearly in that SWL post is that there must be a change in transfers between the old and the young if that latter are to be ripped off. The level of debt is irrelevant in that context.

Krugman is mostly concerned with refuting people who think that even a closed economy with $10k of debt per person must be more heavily burdened than one with $1k debt, even if the debt is rolled over. It's quite a different topic. Now, I grant you it would be nice if Krugman were to write a post endorsing the points which you and SWL have made. I don't think he will though. To see why, take a look at what SWL says about the unfunded pension scheme. There's nothing wrong with it, but it doesn't take much imagination to see how American conservatives would spin it: "Even Krugman admits Social Security is a Ponzi Scam!! LOL!!"

SWL has the luxury of living in a country which, in some respects at least, enjoys more sober debates.

http://mainlymacro.blogspot.ca/2014/10/redistribution-between-generations.html

[Nick Rowe]

Kevin: " The level of debt is irrelevant in that context."

A change in the level of debt implies a change in the level of transfers from young to old (unless r < g).

I liked SWL's post. I see nothing (important) to disagree with (I'm still thinking about the *size* of the burden question, thinking about a good simple way to talk about this).

Yep, PK has sort of dug himself in. He is going to be vulnerable to spin if he gives an inch, or talks about r < g. Those of us who don't wear our politics quite as much on our sleeves have an easier time. But I still think he just doesn't get it. It took me ages to get it. One of those duck/rabbit things, where it's very hard to see both perspectives at once.

[reason]

Nick,
A CHANGE in the level of debt, is NOT the same as "the LEVEL of debt".

[reason]

P.S. Isn't this model also missing something. The privileged generation 1 will eventually die. What happens to generation 4?

[Jussi]

I think a raise in the level of debt implies always (in the model) that older generation consumed more. And truly someone down the line needs to pay that consumption.

But it would be more general to say that when older generation consumes more it needs to sell its assets to younger generation as a payment. "Asset" can be here anything that is worth something. All the talks about "debt" is IMO a diversion.

[Bob Murphy]

Kevin wrote:

Krugman is mostly concerned with refuting people who think that even a closed economy with $10k of debt per person must be more heavily burdened than one with $1k debt, even if the debt is rolled over.

OK Kevin, in the kind of apple model that Nick has been using (and see my example in the middle of this post), suppose the government only runs a deficit in T=1. Specifically, it borrows some apples from the young people and makes a transfer payment to the old people.

Then from T=2 forever afterward, the government rolls the existing level of the debt over.

Now consider the old and young people who will be alive in, say, T=10. Are you saying that Krugman has been arguing that the people alive in T=10 cannot possibly be affected by the size of the deficit back in T=1? For example, that they will be indifferent to whether the deficit was 1 apple versus 20 apples?

Krugman thinks it's a wash within time period 10, because if the debt is higher it just means the interest payments within time T are higher. But the whole point of what Nick has been doing is to show that that's a misleading way to look at it. The lifetime utility of the people in T=10 can definitely be lower because of what happened in T=1, and yes it does indeed hurt them more if the deficit is 10x bigger in T=1.

[Bob Murphy]

If anybody cares, here is a numerical counterexample to Kevin Donoghue's claims above that if the debt is being rolled over, it can't hurt future generations passing it along. So since he above said that was all Krugman had been trying to argue, we see Krugman is wrong, per Kevin's own attempted rehabilitation.

[reason]

Jussi
"I think a raise in the level of debt implies always (in the model) that older generation consumed more. And truly someone down the line needs to pay that consumption."
No this doesn't make sense in a macro point of view. Production cannot be transferred from the future to the present and payments are always made between the living. Look at his model. Generation 1 receives subsidies from generation 3 when they alive not afterwards - not DOWN THE LINE. The point is that generation 3 miss out on their turn later on. (Of course if FOREIGNERS are involved this is a different story.)

[reason]

Everybody I think is misinterpreting this point. If debt can be a transfer between generations, but that is not intrinsic to debt - that is just because of where the spending goes. If the increased spending all went of education and the old mostly bequeathed the bonds what happens to the argument?

There used to be a meme that has now disappeared it seems, that my parents generation was the lucky generation. Born too late to serve in the war, benefiting however from subsidized education, cheap housing, good public services, generous family tax reductions and genuine full employment, and then with good pensions, cheap health insurance and low taxes when they are older. And other generations were not so fortunate. But this was due to the timing of particular policy CHANGES, not intrinsic to being of that generation.

[Min]

Your moral really should be this:

The economist realized his mistake and switched to biology.

;

His mistake, OC, being that he did not know that omnivores existed.