Worthwhile Canadian Initiative

AK/Solow/Smith/Schumpeterian growth

More random musings, mostly to try to get my own head straight on some questions. (I should steal Robert Waldmann's idea of calling them "stochastic thoughts".) And probably not very original. But sometimes it's easier to try to reinvent the wheel than walk to the library and read all the books on "wheels"; and experiential learning is a good thing anyway, they tell me.

"AK": Ideas (about new technology) are neat, because a good idea can double output across all scales of the other inputs.

"Solow": But the trouble with ideas is that you have to learn them (investment), and that's time you can't spend working at producing consumption goods. And then you die, so that investment is lost (depreciation). So there's decreasing returns to ideas at the macro level, because more ideas to learn means less time producing goods using those ideas.

"Smith": But we have a division of labour, so not everyone has to learn everything. And the division of labour is only limited by the extent of the market.

"Schumpeter": The really good ideas are new ideas that destroy old ideas, so you don't have to learn the old ideas and can torch the ancient libraries.

Are apples non-rival?

Suppose we had an apple replicating machine, that could replicate apples costlessly and instantly. How would we go about answering the question: "Are apples a non-rival good?".

1. We could have a lovely philosophical argument about whether the original apple and the copy are two different apples or just two different manifestations of the same apple. We would need to answer that question before we could decide whether the same apple was being consumed twice, which is one way to define "non-rival" goods.

2. Or we could simply say "yes", because the answer to the first question doesn't matter for economics; what does matter is that the marginal cost of producing the second and all subsequent consumptions of the apple(s) is zero.

Are ideas really non-rival?

I was writing a simple teaching post, on ideas and increasing returns to scale, in micro and macro. I wrote down "Ideas are non-rival". Then I thought I had better explain what I meant by that. Then I thought about professors, who do research (thinking up new ideas), and teaching (communicating existing ideas to other people). Then I thought about how some professors like research but don't like teaching. Then I thought about this post.

Sure, two people can use the same idea (ideas are non-rival), but can't eat the same apple (apples are rival). But the second person can't use that idea unless the first person communicates that idea to the second person. The first has to teach it, and the second has to learn it, and teaching and learning are (sometimes) costly. The cost of communicating the idea to the second person might even be greater than the cost of the first person coming up with the new idea in the first place. Sometimes it might be cheaper to reinvent the wheel than walk to the library.

And the marginal cost of communicating the idea to the n'th person very probably will be greater than the cost to the first person of figuring out the idea, if n is large enough. Teaching and learning can be very hard and very costly at the margin, if you push the margin out far enough, and try to teach a difficult idea to everyone. If you put "number of people who use the idea" on the horizontal axis, starting with those who are easiest to teach and who find it easiest to learn, that marginal cost curve is going to slope up, eventually. Will it always eventually cross the average total cost curve, at some point? And does this matter, for how we teach the economics of ideas? But is it really the same good, as we move along that MC curve? And can you separate the activities of research and teaching (communicating research)? Professors love to argue that you can't. But then they would say that, wouldn't they?

Maybe Frances is right.

Dammit, now I've confused myself. I'm off to the cottage. Have fun.

The mechanics of exchange and non market-clearing prices

[Update: on second thoughts, maybe this post was not quite ready for prime-time. But I think it's still fun to play with.]

Here is a very simple model of a pure exchange economy where the mechanics of exchange (who can trade what with whom) determine whether very small departures of prices from market-clearing cause very large welfare losses.

A Very Brief History of Demand and Supply

I’m teaching History of Economic Thought again this year and during my progression through the material this term what has struck me is the very long road over time –literally hundreds of years - to understanding markets and value as the simultaneous interaction both supply and demand side factors culminating in the standard diagram of price and quantity determination in a market. There was recognition of separate demand and supply side factors and even adjustment to some idea of equilibrium as far back as the medieval period but the concepts were like ships passing in the night when it came to price determination.  However, what also struck me is how much of the theory of demand and supply was ultimately grasped nearly simultaneously in the nineteenth century by an assortment of economists working separately.

The Land Theory of Value

Last night I spoke with my Dutch ancestor again. Nick van Rowe told me about the Land Theory of Value, which began with the French, but was perfected by the Dutch. This is what he told me:

Science has proved that land existed prior to both labour and capital. The Universe existed billions of years before humans and their tools appeared. So if we seek the underlying source and origin of all value, we must look to land. The value of all commodities is determined by the socially necessary quantity of land needed to produce those commodities. And human labour is just one of those many commodities produced by land. So is horse labour. Human labour is just an intermediate good. Land produces wheat, wheat produces human labour, and human labour produces haircuts. So if we buy a haircut we are buying the services of the land that ultimately produced that haircut. And if one examines the underlying objective physical reality of what we call "capital", and look beneath the surface obfuscation of "finance capital" (for money itself is barren, and can produce nothing), we see that capital is machines. And machines are nothing but land transformed from one shape into another.

Land produces both labour and capital. There can be neither labour nor capital without the prior existence of land. Only someone ignorant of science, or deceived by ideological blindness, could fail to see that the bourgeois trinitarian doctrine of land, labour, and capital must be replaced by the rural monism of the Land Theory of Value. It is only deracinated city burgers, living in their high-rise superstructures, who forget that land underlies everything.

Does capital income exist?

[Ages ago, as a graduate student, I "wasted" my time (when I should have been finishing my thesis) reading capital theory, including the more "heterodox" stuff. My memory is pretty hazy, but I still think about the old questions occasionally. There's nothing really new here for economists familiar with "dated goods".]

1. Suppose I know about a technology that lets me convert 100 apples into 105 bananas. Should we count those extra 5 bananas as part of my income? Of course not. You can't add (or subtract) apples and oranges bananas. They are two different goods. They don't taste the same.

Teaching, OLG models, and the phenomenology of perception

When we teach students economics, we sometimes use numerical examples to help them understand general principles. Sometimes we make them work through those numerical examples by themselves, as an assignment. It's the only way they will really get it, and see what's really going on. But once they get it, they don't need the numbers any more, they can see the general principle that doesn't depend on any particular numbers.

As an undergraduate at Stirling I took a course on Merleau-Ponty's Phenomenology of Perception. One book for one course. Looking back on it, I have no idea what it was about. I think I learned something, but I couldn't really tell you what it was.

But I remember (I think I remember) one of Merleau-Ponty's examples. There is a row of light bulbs. The first bulb lights up, then goes out. Then the second bulb lights up, then goes out. Then the third, and so on. And we see a light moving from left to right along the row, even though none of the bulbs is moving.

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 New Keynesian case for anti-inflation price controls

Take a very standard New Keynesian macroeconomic model. The two key ingredients (the only ones that matter for this post) are: monopolistically competitive firms; the Calvo Phillips Curve. In that model, if there are no macroeconomic shocks, the equilibrium level of output and employment is below the efficient level of output and employment. Because it is a model where individual firms have market power and face downward-sloping demand curves. A temporary boom, caused by a positive shock to aggregate demand that causes output and employment to increase, is a good thing. But it's only temporary, and the central bank will need to reduce aggregate demand to bring inflation back to target, to prevent ever-accelerating inflation.

Now ban the Calvo fairy, by imposing price controls on all goods, so firms are not allowed to increase prices. Then have the central bank increase aggregate demand. Provided the central bank does not increase aggregate demand too much, firms will increase output and employment and will not ration customers and create shortages of goods. The result is a permanent increase in output and employment, which the model says is a Good Thing.

Negatively-valued (red) money in an OLG model

Samuelson 1958 (pdf) built an overlapping generations model in which intrinsically worthless green bits of paper have positive value.

It is possible to build a mirror-image of Samuelson's model in which intrinsically worthless red bits of paper have negative value.

My model actually makes more sense. Because any infinitely-lived productive asset, like land [or Frances' cast-iron frying pans], could play the role of green "money" in Samuelson's model. But only a special liability, where free disposal is not permitted, could play the role of red "money" in my model. It's too easy to dump garbage in someone else's yard, but it's easy to keep records of who owns how much money. That's what banks do.

(I don't know if anyone else has already said this. I don't even know what this post is supposed to be about, except satisfying my own curiosity. But everything that is theoretically possible probably exists, or has existed, or will exist, somewhere.)

Helicopter money is normal, or else we're doomed!

With one exception, Tony Yates strikes me as being a very sensible and very good money/macro economist. But at the mention of "helicopter money", he seems to turn into an Old Testament prophet, or maybe Private Frazer from Dad's Army, saying "We're doomed, I tell ye!" (or maybe this longer video makes my point better). (That's my payback for Tony calling us Market Monetarists a bunch of trainspotting anoraks!)

Here's Tony: "I am left being prepared to concede that helicopter drops might generate inflation, but not that they would be beneficial, since they may lead to the steady destruction of that money altogether with all the attendant costs."

If we were indeed "doomed" by helicopter money, we would be long dead. In fact, we are doomed by not doing helicopter money. Doomed to communism!

The over-investment and under-saving theory of the ZLB

This post is ironic.

I have a really neat new theory of what causes countries to hit the Zero Lower Bound. It's got a beautifully counter-intuitive policy implication. The government needs to tax investment, or subsidise saving, to help the country escape the ZLB. What I need is a co-author to help me do some math, so we can get a publication.

The collective speed limit game

Neo-Fisherite fun. Plus concrete steppes fun.

1. Suppose you don't care what speed you drive. Anything between 0 and 200 is all the same to you. But the cops do care what speed you drive. They want you to drive at exactly the speed limit S*, neither faster nor slower. (They have a symmetric target.) So the cops announce that if your speed is Si, you must pay a fine Fi, where Fi=(Si-S*)², for driving either faster or slower than the speed limit. In equilibrium you drive at exactly the speed limit, and never pay the fine.

In equilibrium, the cops do nothing, and you expect them to do nothing. It is your counterfactual conditional expectations that matter -- what you expect the cops would do if you did do something you won't in fact do.

Why are lawyers against higher inflation?

An extremely quick Google search convinces me that lawyers are massively over-represented in the Canadian Parliament. I am quite sure that something similar is true in other countries too. Lawyers are far more powerful in setting government policy than are ordinary middle-class people like me.

So if we want to understand why monetary policy is so tight, we really need to ask the question: why are lawyers opposed to higher inflation?

Why the Roman Empire Really Fell

Research Memorandum

From: Office of Historical Research Studies, Time Travel Division, Open University of the Inner Solar System, September 3, 2476

To: Board of Solar Regents, Open University of the Inner Solar System

On the bi-millennium of the official fall of the Roman Empire as dated by the overthrow of Romulus, the last of the western Roman emperors in 476 C.E., we are pleased to report on preliminary results from the Historical Travel Team’s visit to the event period.  We apologize for the length of time it has taken to submit our preliminary report but time-line decontamination and infection control procedures on the return complicated matters.   Several team members left assorted personal possessions behind in Pompeii and retrieval took longer than expected.  As well, there was the matter of a minor funding shortfall, which delayed fully assembling the Clio Visualization Cube for subsequent analysis.

Tim Hortons

A lot of US econobloggers are talking about the Tim Hortons-Burger King merger. But all they seem to talk about is corporate tax rates.

I think they are missing the big picture. The big picture is here:

[I can't figure out how to embed that picture in Typepad. That's okay, I did - SG]

To my eyes, it looks a lot like that satellite picture of North and South Korea at night, only the dots of light are in red, and North and South are switched.

Now I really like travelling in the US. And the US is a great country. And in many ways the US is a very advanced country. (You hear a "but" coming, don't you.)

But the US is sadly lacking in Tim Hortons.

(In July I drove for two days across Minnesota, Wisconsin, and Michigan, without seeing a single Tim Hortons. We were desperate by the time we re-crossed the border at Sault Ste. Marie.)

I mean, if you were talking about the economics of Nixon going to China, and China opening up for foreign investment, would you spend your whole time talking about relative corporate tax rates in the US and China? Of course you wouldn't!

This is primarily a question of development economics.

Can't we at least get a decent class analysis of this question? There are two sorts of people: Starbucks people; and Tim Hortons people. And this class distinction is far more important than anything based on superficial differences like income and occupation. As a Tim Hortons person, who feels deeply ill-at-ease in a Starbucks, and who does not understand the menu, I cannot stop myself asking the "barista"(?) the subversive question: "Can I have a small double-double please?"

Is all the economic analysis of this merger being done by SWPL Starbucks people, who can only see their own class perspective?

(I am only half-joking.)

What's in a Name?

We all know that the word “economics” comes from the Greek “oikonomia” which refers to the thrifty management of household affairs. By extension, the origin of the term “economy” is closely related to the same term as it is from the Latin “oeconomia”, which is again from the same Greek “oikonomia”.  From all this, it is not difficult to see an economy as simply the agglomeration of individual households when it comes to the European language tradition.  In a sense this nicely encompasses both our micro and macro traditions, as macroeconomics simply becomes the study of the sum of many individual household behaviours. What about economics when to comes to other languages – especially non-European languages?

The Economist on WCI

The Economist has a story on the state of the Canadian economy and it features an appearance by Livio Di Matteo:

Yet luck played a large, unacknowledged part, says Livio Di Matteo, an academic and contributor to Worthwhile Canadian Initiative, the world’s best-named economics blog.

It's official: WCI is now the best-named economic blog. Take that, Marginal Revolution!

Within versus Between Sample Variation, or Why an Equal Marriage Means More Sex

It's clickbait, New York Times style: "Does a More Equal Marriage Mean Less Sex?" Spurred by findings of a paper by Sabrino Kornrich, Julie Brines and Katarina Leupp published in the American Sociological Review, the article argues that, "too much similarity in egalitarian marriages leads to boredom and decreased sexual frequency". In general, "the less gender differentiation, the less sexual desire.” "On an emotional level, “kindred spirits” sounds lovely. But when it comes to sexual desire, biology seems to prefer difference." 

But do these findings really stand up to serious scrutiny?