Ever noodle a half-baked idea incessantly in your head only to find that you can’t grasp at its essence, give it shape or form, and consequently, fail to communicate it to your meagre readership. I have and it kills me on a daily basis. In this particular, I’m talking about economics, finance and the framework within which they should be approached by anyone who claims to have a serious desire to understanding both. And then you come across a piece of writing which saves you from going through the trouble. Pure bliss. Let me set the stage first.
See this post for the full conversation, although its not needed. I’m posting the relevant excerpts to my post anyway.
Zolltan: …So it’s not that some bankers don’t care what they’re doing (which, granted, they may also not), it’s that they just don’t know what they’re doing. That’s not a very useful revelation, but it sure is infuriating…
Zuuko: Bankers, of course, know nothing. Bankers know that they know nothing but I’m beginning to think the point is more subtle than that. I think people have this expectation of what a banker should know and what his concerns, motivations and incentives should be. But it’s a bit of a motherhood-and-pie thing, without any basis in practicality or reality…
Once, when I was expressing my frustration in my usual colorful language when we were going through the shitstorm of legal battles over our restaurant, our lawyer said to me point-blank, “What you need to understand is that it’s not a justice system, it’s a legal system.” That shut me up.
I’m trying to think of a similar expression that can be applied to banking but all I can come up with is a weak one that doesn’t get the point across by itself (a testament to my lack of wit, I guess). What you need to understand is that it’s not a financial system, it’s a banking system…
Since that exchange a few months ago, my situation with my wit still hasn’t changed, despite my feeble attempts at trying to craft a post that elaborates and builds on my pet peeve. Thus, I’m forced to lean on the shoulders of the giants at Worthwhile Canadian Initiative and this post, The macroeconomics of doing nothing. Go and read the whole thing but I’ll point out specific passages that appealed to me.
Suppose there is an increase in desired saving, and the monetary and fiscal authorities do nothing. What happens?
That’s the most important practical question in macroeconomics over the last few years. And it’s also a really stupid question.
It is? Why? Well, I’m glad you asked.
And understanding why it’s a really stupid question, and changing the way that question is asked — not just in academia, but in the real world — is the most important practical task of macroeconomic theory today.
I see. Can you please elaborate? Perhaps with an example?
Let’s start with “saving”. In macroeconomics, “saving” is defined as “not spending part of your disposable income on newly-produced consumption goods and services”. It’s a purely negative definition. And it invites the supplementary question: “OK, so if you are not spending it on newly-produced consumption goods and services, what are you doing with your disposable income instead?”.
But few macroeconomists would ever ask that question. Which is unfortunate, because the answer to that question matters a lot. For example, suppose you were a Keynesian of some sort. Your immediate instinct would be to answer my original question by saying that an increase in desired saving, if the monetary and fiscal authorities do nothing, would cause a recession. But if you stopped and asked the supplementary question, and I answered “they decide to buy newly-produced investment goods instead of newly-produced consumption goods”, you would stop talking about a recession.
hmmm… you may have a point.
For example, if you say that the average Canadian owes $45,000, you think one way. If you say the average Canadian is owed $45,000, you think another way. But in a closed economy, or one with no net foreign debt, debits equal credits, so the two are the same.
Expectations matter. I mean real people’s expectations matter. Economics is about those real people… Economists, in part, need to be ethnomethodologists. We need to think about how people construct their own economic models, and how they think about “doing nothing”. But, like anthropologists, we need to stand apart from the natives’ own way of viewing their world. We don’t have to believe it ourselves to recognise that they believe it. And sometimes we need to be missionaries, and suggest that other ways of viewing the world might lead to better outcomes.
Given Zolltan’s curious interest in anthropologists, I’m sure he just had a semi right now.
The point I was trying to make to Zolltan a few months ago was that I’m not sure I agree with what economists, bankers, financi-people in general are being blamed for. There is cause for blame and, and if you are so inclined, it starts with looking at the systemic failings of my professional class, geared to our rather feeble and narrow world view. WCI’s post does an admirable job of starting to put a very blurry picture into focus.
As an aside, I have a list of half-formed blog topics, which when I get around to finishing the write-ups, end up being posts here. In a weird and surreal coincidence, I can’t help notice some of the same… I don’t know what… issues of mental frame of mind in Zolltan’s last post.