Typography

The (Great) Tower of Babel , 1563, Bruegel the Elder. "Therefore is the name of it called Babel; because the Lord did there confound the language of all the earth" People bandy the term fiat currency around a lot, but what exactly does it mean? None of us wants to live in a Babel where people use fiat to indicate twenty different thing. So let's try to zero in on what most people mean by playing a game called fiat-or-no t. I will describe a monetary system as it evolves away from a pure commodity arrangement and you will tell me when it has slipped into being a fiat system. (The technique I am using in this post cribs from a classic Nick Rowe post ). So let's start the game. 1) An economy in which gold coins circulate as the medium of exchange. Fiat or not? I think we can all agree that there is nothing fiat at all here. (For simplicity's sake let's assume for the duration of this post that taxes can be paid with anything, and that there is no legal tender.)...

The way we ascribe labels to things results in the creation of categories, and this in turn affects the construction of our mental landscapes—best to get the words and categories right from the start lest our thinking goes astray. In this post I quibble with some of the common words and categories we use to describe trade. Walking out the front door last night, I told my wife that I was going to buy a few items at the grocery store. But as I trekked down the street, I asked myself why I hadn't chosen to tell her an alternate version: that I was going to the grocery store to sell my cash. The problem with this wording, I figured, was that if I was to be the one selling stuff in the upcoming transaction, then by process of elimination the grocery store could no longer be the seller in the deal but the buyer—of my cash. And that would be a weird way to view things. Linguistic convention requires that there be a seller and a buyer in any trade. One side spends, the other receives. That...

I've learnt enough about the terms income , savings , consumption , investment , capital , and other major macroeconomic categorizations to pass a basic economics exam. But I've never been a big fan of the style of thinking these terms force on me. Am I just being lazy? I'll lay out my points and give an alternative. Squarely Rooted recently commented on the somewhat arbitrary nature of the boundary economists set between consumption and saving, opining that travel should be thought of as investment, not consumption. On twinkies as savings, here is Squarely Rooted from an earlier post : Think of a Twinkie. Twinkies are an odd product; on the one hand, they are a cheap, delicious, unhealthy snack; on the other hand, they are (at least according to legend) practically immortal. So is buying a Twinkie consumption or saving? Does it depend when you eat it? And for those who will say “but Twinkies aren’t an investment, they bear no interest, they just sit there” – so does mone...

Paul Krugman points to Japan's apparent resurgence in GDP and asks: "There seems to be some kind of lesson here about macroeconomics, but I can’t quite put my finger on it …" My comment: The lesson here is that one needs to be careful when trying to understand natural disasters using flow-based identities like Y=C+I+G. The latter fails to account for large draw-downs in national wealth due to, say, tsunamis. Using a stock identity, and stock related data like national net worth, will be more helpful in this situation. For a proper accounting treatment of Japan's experience, Krugman should refer to the 722 page UN System of National Accounts Manual ( pdf ). Krugman wants to use the production accounts for his analysis, which are represented as flows. He should be using the wealth account, in particular new worth , which is a stock. The tsunami will have resulted in a large fall in Japan's net worth. This is elementary, so I don't know why a Nobel-prize winnin...

In an older post , Scott Sumner had an interesting comment: The most recent inflation rate in Greece is 1.7%, whereas Spain has 1.9% inflation. I don’t know about you, but I find those figures to be astounding. That’s not deflation, and yet Tyler’s clearly right that they are being buffeted by powerful deflationary forces. I’d make several observations: 1. This shows the poverty of our language. Economics lacks a term for falling NGDP, even though falling NGDP is arguably the single most important concept in all of macro, indeed the cause of the Great Depression. So we call it “deflation” which is actually an entirely different concept. I wouldn’t be the first to find connections between the poverty of our language and the poverty of our thinking. He's right that deflation is sort of catch-all phrase, and this imprecision in our language doesn't help out our thinking. By catch-all, deflation can simultaneously mean falling prices, falling NGDP, or most commonly, a  fall ...

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 abo...

I didn't comment much on the great debt debate, stirred up a Krugman post called Debt Is (Mostly) Money We Owe to Ourselves , but followed it quite closely. Nick Rowe taught me ( here , here , here , and here ), and Bob Murphy clarified ( here , here , here , here , here , here , here , and here ), that present generations can indeed take resources from future generations via debt issuance. I also learnt via Daniel Kuehn here and here that if you use a very unintuitive definition of "generations", than this is not the case. Basically, you can swap the meanings of terms to argue your way out of a tight spot. My comment is from a Murphy post : I’ve learnt that the method by which one aggregates individuals into groups, and the labels that one attaches to such groups, can have an important influence on a debate’s ability to reach resolution. If people are aggregating differently, and using non-standard words for their categories, then the debate will degenerate into shouti...