Skip to main content

The Borges Problem part II

Nick Rowe writes a post called Macroeconomics and the Celestial Emporium of Benevolent Knowledge.

It is a conjunction of a bunch of themes he has touched on in the last few weeks, including the great debt debate and categorization.

I asked him:
In your previous post, you advocated adopting the most "useful" way of dividing up the world into categories. But what does that mean? Useful in terms of teaching students, reaching the layman, articulating theory amongst other economists, calculating statistics, conducting policy?

Are you saying that economists should have multiple "categorical universes" in their head? Or is their "one ring to rule them all" way of dividing up the universe that you are trying to tease out?

One useful reason for having one standardized way of splitting the world into categories is it makes conversation easier. Having multiple ways adds subtlety but confusion.

I am learning that the core of economics (or at least near to it) is about words. We create meanings for things in the real world using some of our existing words, and this creates categories, but since other words can also be used to create similiar-though-not-overlapping categories, we have to choose between categories. This process comes prior to mathematical econ, since the math needs categories like C and I before mathematical phrases can be put together. 
The last bit about mathematics reminds me of an exchange I had with Daniel Kuehn a while back about the use of words and math in economics. 

Here is Nick's response:
I'm not sure on the answers to all your questions. Even if we all agreed on what the true theories were, we might want one theory for one purpose and a different theory for another purpose. And each theory would have its own most useful set of categories.

Yep, it might make conversation harder. But maybe some conversations would be impossible if we had to stick to one set of categories that didn't fit the topic at hand.
I can't disagree with him. Is this an argument in favor of heterodox economic? After all, entire schools can form around a divergent way of categorizing the world. Should economists be fluent in multiple economic viewpoints? The blogosphere is surely a great place for that. Actually, this reminds me of a recent Perry Mehrling post on which I participated. Here is Mehrling:
...it is important to emphasize that each of these heterodox schools exist, and persist, because it is organized around some essentially correct insight about how the banking system works... The problem is that, so far as I can see, each of the heterodox schools has part of the truth, not the whole thing. The same could be said about the orthodoxy against which the heterodox schools define themselves... We don't therefore want to choose which school to belong to; rather we want to determine which of these correct insights provides the most useful explanatory frame for whatever issue is currently at hand. Today it might be one; tomorrow it might be another. That is what the debate is about, or should be anyway.
See an earlier and related post.
Labels:

Comments

Post a Comment

Popular posts from this blog

Shadow banks want in from the cold

Remember when shadow banks regularly outcompeted stodgy banks because they could evade onerous regulatory requirements? Not any more. In negative rate land, regulatory requirements are a blessing for banks. Shadow banks want in, not out. In the old days, central banks imposed a tax on banks by requiring them to maintain reserves that paid zero percent interest. This tax was particularly burdensome during the inflationary 1970s when short term rates rose into the teens. The result was that banks had troubles passing on higher rates to savers, helping to drive the growth of the nascent U.S. money market mutual fund industry. Unlike banks, MMMFs didn't face reserve requirements and could therefore offer higher deposit rates to their customers. To help level the playing field between regulated banks and so-called shadow banks, a number of central banks (including the Bank of Canada) removed the tax by no longer setting a reserve requirement. While the Federal Reserve didn't go as f...
Post a Comment
Read more

The bond-stock conundrum

Here's a conundrum. Many commentators have been trying to puzzle out why stocks have been continually hitting new highs at the same time that bond yields have been hitting new lows. See here , here , here , and here . On the surface, equity markets and bond markets seem to be saying two different things about the future. Stronger equities indicate a bright future while rising bond prices (and falling yields) portend a bleak one. Since these two predictions can't both be right, either the bond market or the stock market is terribly wrong. It's the I'm with stupid theory of the bond and equity bull markets. I hope to show in this post that investor stupidity isn't the only way to explain today's concurrent bull market pattern. Improvements in financial market liquidity and declining expectations surrounding the pace of consumer price inflation can both account for why stocks and equities are moving higher together. More on these two factors later. 1. I'm with...
Post a Comment
Read more

Does QE actually reduce inflation?

There's a counterintuitive meme floating around in the blogosphere that quantitative easing doesn't do what we commonly suppose. Somehow QE reduces inflation or causes deflation, rather than increasing inflation. Among others, here are Nick Rowe , Bob Murphy , David Glasner , Stephen Williamson , David Andolfatto , Frances Coppola , and Bill Woolsey discussing the subject. Over the holidays I've been trying to wrap my head around this idea. Here are my rough thoughts, many of which may have been cribbed from the above sources, though I've lost track from which ones. Let's be clear at the outset. Inflation is a rise in the general price level, deflation is a fall in prices. QE is when a central bank purchases assets at market prices with newly issued reserves. In equilibrium, the expected returns on all goods and assets must be equal. If they aren't equal then people will rebalance towards superior yielding assets until the prices of these assets have risen high...
Post a Comment
Read more