Monday, March 9, 2015

Stupid Quote of the Day (March 6, 2015)

As with the last two essays ("Stupid Quote of the Day (March 4, 2015)","Stupid Quote of the Day (March 5, 2015)") this quote is drawn from a comment I found on the same blog. As with the others, it is not characteristic of mainstream thought, but in this case it does represent a particular type of thinking I have run into from time to time. I won't get into specifics until I let everyone read the quote, but let me just say I have seen the same thinking applied to government as well as economics, and, as we shall discuss both concepts are quite flawed. However, this will all make more sense after you read the quote, so allow me to print it here:
[I]t is silly and goofy to pretend you can just make the financial crisis go away by declaring it to not exist... And then you try to figure out why you can't just declare the financial crisis to not exist.[Elipses in original]
(Warning: May lead to the sudden and world-shattering realization that the entire economy is, at a fundamental level, an extremely complicated farce that only exists because everyone agrees to act as if it does)
As with the quote in "Stupid Quote of the Day (March 4, 2015)", I was pleased to see a rather sensible reply. One so sensible, in fact, I feel I should reproduce it in its entirety:
Other things that only exist because we agree to act as if they do: justice, freedom, family, friendship, morality, culture, language, history, love... My point being, just because something only exists in our imaginations doesn't necessarily mean it doesn't exist or isn't important or we would be better off without it.[Elipses in original]
A fair response, and one, which, were I a lazier writer, could be used to provide the entire rebuttal. However, being the conscientious (and verbose) blogger that I am, I cannot rest with that simple dismissal (especially because I consider it in at least one sense, as wrong as the original quote), and feel I must look into the original quote in a bit more detail.

One of the problems, and one shared by both the original and response, as well as any number of economists  (sadly), is the concept that economics is, in some sense, a fiction, a shared delusion. It is, in fact, this "wow, deep, man" concept that seems to make this sort of idea attractive to certain types of minds, from college students, to philosophers, to science fiction writers ( "Utopian Pipe Dream ", "No Such Thing as a Free Lunch, and No Such Thing as 'Post-Scarcity Economics' Either"). To them, it seems a great revelation when they "discover" that economics -- or in some cases government -- rest upon agreements between men, and thus, or so they imagine, are essentially illusory. However, this supposed discovery is flawed in one very significant way, it forgets that just because some aspects may be governed by agreements among men, that doe snot mean those agreements may not refer to very real elements far outside the realm of human imagination.

For example, boundary lines, property rights, the whole realm of property law is a fiction in one sense. After all, such lines do not exist in the real world, and the rights of use, easements and the like exist only in human thought, or documents codifying the same. And so, it would be possible for someone of this type of mindset to argue that property is a fiction. But that does not negate the fact that property law does government the very real use of very real land by very real people. And that if you negate property law, it does not make disputes and disagreements over property use go away, if anything it makes them worse. Or, to make it more concise, property law itself may be a construct, a man made fiction, but it is a fiction created to solve disputes over the use of real world assets.

And that is the same issue with treating economics as a fiction*. The specific aspect may be a human convention, interest rates, money, contracts and the lot may be human constructs, but they are constructs created in service of very real needs and very real work. You can try to declare economics an illusion, but will that feed you or clothe you? If you pretend it is all a fiction, will you be able to find shelter or build an airplane or fill your car with gas? The economy is not a fiction, there may be elements that are conventions established between men, but they serve a purpose, making transactions easier, preventing disputes and the like. Thus, if we eliminate these "fictions" we do not eliminate problems, we magnify them.

Let us just take one example, to show how it works. Interest is often dismissed by the economically ignorant as a fiction invented to allow the rich to extort money from borrowers. It is, historically, the target of more ill-conceived laws than any economic concept I can recall, from the medieval prohibitions on lending for profit, to modern usury laws and caps on "extortionate" interest.

But interest is not a fiction, it is an expression of a very real human experience, time preference. For those not up on economic jargon "time preference" means, simply, that I would rather have something today than tomorrow, and so I will value something at present more highly than the same thing in the future. There has been massive economic debate on the reasons for time preference, but for now, let me just offer two I find convincing. First, there is simple impatience. Anyone who has a child knows of this, and, from my own experiences, I have to imagine that it is inherent in human experience, separate from any reasoning about the uncertainty of the future and the like, as, from their earliest ability to talk, young children simply demand things as soon as possible. But, some may not be satisfied with the idea that impatience is an innate human trait, so allow me to offer a second argument, and one I find most persuasive, that being uncertainty. The future is inherently uncertain, we never can be sure of tomorrow, and the more distant the more uncertain. Thus, when we look to the future, we imagine all the things that could go wrong and either prevent someone from repaying us, or prevent us from being around to be repaid. As a result, the inherent uncertainty of the future implies a time preference, growing larger the more remote in time**.

All of which comes down to a very simple fact, given the choice between something now and something tomorrow, I will choose now. And thus, anyone wishing to postpone giving me satisfaction will have to provide me with a reason to choose delayed gratification.

Which is precisely what interest is. I have some money. I can spend it now on my own enjoyment, or use it to buy a business for myself, or may improve my own business. I can even just keep it on hand so that I have money on hand to spend should something better come up.

On the other hand, you want to borrow my money. What could induce me to give you $1000 for a year? The promise to repay? But that means I will have to wait one year to have the same $1000, which, given time preference, seems a net loss***. Thus, you have to offer to pay me some additional sum, as an inducement to give up my present money in exchange for a promise of future money. Far from being a fiction, interest is simply the reimbursement I receive for giving up that money for a year****.

So, what happens if we decide to eliminate this "fiction"? To prevent people from collecting or paying interest? Well, either lenders and borrowers find some way to hide interest payments as some sort of fees or other allowable expense, or, if we succeed in our goal, all lending stops and the economy begins to stagnate. In other words, just because interest exists only a a human concept does not mean it does not serve a valuable function, even that it does not represent something present in the real world, in this case a very real human preference.

Which is the whole problem with this quote, and many others of its ilk I have seen at one time or another (eg "What would happen if they gave a war and no one showed up?). Just because something is a human construct, or exists only as an intellectual creation does not mean it has no influence upon the real world, nor even that it does not, in some way, refer to some real world element. And thus, the idea that we can simply negate these fictions and make problems go away is absurd. The constructs are often there precisely to help resolve these same problems, and to eliminate them most likely will make the problems worse, not better.

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* Unfortunately, even some economists seem to be prone to this mistake. Keynes and his successors, for example, at times seem to imagine money is a fiction, and think they can manipulate it through magical mathematical sleight of hand. However, money represents (or did until 1973) a very real supply of precious metal, and is used in very real transactions, and treating it as an illusion gives rise to more problems than it solves. Especially as it solves nothing.

** This is independent of any premium added to interest rates to reflect the added uncertainty of high risk ventures, though there, clearly, uncertainty about the future is a factor.

*** There is also an opportunity cost here, as I will not have the $1000 should something come up in the next year which would require $1000. In a way, this too is part of the uncertainty element of time preference, but it is a specific type of uncertainty I felt worth mentioning.

**** There are many other aspects, such as varying rates for varying risks, etc. But the basic principle is the same. None of it is a fiction, it all is quite simply an expression of time preference. (See "When Help Hurts", "When Help Hurts II", "Help and Harm", "Debt", "To Correct Debra Saunders", "Excuse Me?", "Living Beyond Their Means")

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