Saturday, November 26, 2011
Posted by dkuehn at 9:23 AM
"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" -JMK
- This is a great post by David Friedman on the interest rate as the "price of money". One thing I would add that is along the lines of what he says is that you really have to think about what money is as a good. We usually say that it's a medium of exchange, a store of value, and a unit of account. So what is a loan? Well clearly if you take a loan you have access to money as a medium of exchange (which is useful because it's still a unit of account), but you don't have access to money as a store of value. Why? Because you have to give it back! It's not an asset to you, it's a liability. So what you're really trading for is the medium of exchange function of money - it's ability to be traded - it's liquidity. That's the source of the liquidity preference theory of the interest rate. Loans can be thought of as an unbundling of the medium of exchange and store of value functions of money. I think part of the discussion of liquidity preference at a time like this is confusing, though. When we talk about increases in liquidity preference during a depression, it's really the residual of a lot of other decisions. People don't want to spend because of uncertainty about their income levels and people don't want to invest because of uncertainty about demand (i.e. - low returns on that investment), so they save and keep their money relatively more liquid than they otherwise would.
- Is this post by Bob Murphy as strange to readers as it was to me? Krugman basically says "if everyone saves at once the economy can't grow as easily". Bob essentially responds "Krugman is wrong - after all if only one person saves and everyone else spends the economy can grow". Then Daniel basically responds to him "Right - but if everyone saves at once the economy can't grow as easily". Is there something I'm missing here? What is Bob talking about? He's just talking about something completely different from Krugman and thinking he's talking about the same thing, right?
- This post by David Henderson on Robin Wells also seemed strange to me (I've got some comments in it). Isn't discussion of minimum wages, the impact of regulation on investment, unions, etc. standard fare in intro economics classes? I know it is in ours at American University, and we're not exactly some arch-libertarian school! Henderson (and again David Friedman in the comments) acts like Wells is proposing a whitewashing of economics. Friedman writes "The obvious question is whether, when she teaches economics, she feels obliged to expose students to views that don't fit her own political position, since she seems to be suggesting that people who disagree with her have such an obligation." It's amazing to me that he raises that as the obvious question. I don't think there's a single economics intro course in the country that doesn't follow this basic pattern:
1. The market is efficient because of X, Y, Z
2. Government action distorts the market and makes it less efficient - standard examples include rent control, minimum wage, regulations, and granting monopoly privileges (I challenge someone to show me a freshman text that doesn't discuss all four of these) - all the stuff that Henderson raises in his post.
3. Final exam.
That's what an intro student gets. If you continue, you get a lot more context, caveats, uncertainties - the sort of stuff that Robin Wells is suggesting we emphasize more earlier on. I agree with her. I personally think that an intro student should learn the basic market efficiency and government distortions material - the standard intro presentation. But I agree with Wells that to the extent we can hint at the complexities of the situation we should. I don't understand what Henderson and Friedman are concerned about here. They act as if intro economics courses gloss over market efficiency and government distortion, when that's essentially what these courses are about.
Labels: assault of thoughts