From @MarieLianne What are your ideas on “Normalcy”? Working on articles/conversations with @besz and your input would be wonderful!

Normalcy, or what economists call “equilibrium” is not only undefinable, it doesn’t exist in such a pure sense. To be normal is to work within the confines of certain social orders; however, it is all along in a state of disequilibrium. In effort to not become anti-tautological, I won’t stoop to saying “normalcy is everything that is abnormal”… instead, I will use the economist’s view of equilibrium as “normalcy” and proceed hence forth.

Equilibrium is a theoretical framework for so-called economic “normalcy” that can only be achieved by the exogenous influence of academics and mathematicians (that’s supposed to be funny). Indeed, the whole idea of bringing a complex system such as human life (read: human existence) to the finite realm of an artistic inquiry into normative analysis of “normalcy” is, at first glance, thought provoking, but, in the end, wholly without meaning. Sure, economists build models to simplify their explanations of real systems; however, the experience dictates that those models will never resemble human experience because they move too close to the wanton realm of what it means to be in a state sans flux–that is, to be “normal.”

So, given that I strive to approach a definition that seeks to depart from the cliche, “chaos is order,” I will simply state that to be normal is to be labeled as such by an unwise adjudicator. And thus the impetus falls unto the individual to determine their level of normalcy. Again, if this individual is at all wise, they will see that in a system as complex as life, the achievement of normalcy is without meaning… for to be normal in any system, one has to fully understand the breadth of that system; otherwise, we are simply speaking in models. Rather stoically, I accept that to fully understand life is in itself a defeated agenda.

If it is a model of normalcy one seeks, I beg them to consider with approbation the idea that the models of morality, justice, and freedom approach an ideal of normalcy for which beings should strive.

Therefore, it is my argument that to be normal is to work within the confines of these systems–judging full while that these systems are inseparable from each other and from the society in which we most desire as “normal.”

The following is a notional letter to a CEO regarding my stance on Unemployment.

Modern news media, from both sides of the isle, seem to want to charge our executive officers for recent unemployment increases. These agencies depict Chief Executive Officers (CEOs) as corporate “fat-cats” and, on top of blaming them for the unemployment rate, these journalists claim that our executives are culpable for the collapse of global financial markets.

As Thomas Paine said in 1776, “These are the times that try men’s souls” (1). Indeed. But as should be expected from modern news media (an industry that is itself a normative tragedy of journalism) this simply couldn’t be the whole truth. So, if we cannot shift culpability to CEOs and we have difficulties tying all blame to the proletariat, to whom should we direct our anger and disappointment? It would seem that if one cannot censure the actors one should look to the system, and I think that’s where we shall find our answers.

First, we need to understand the differences between frictional, structural, and cyclical unemployment. The pundits shall not hold us accountable for frictional unemployment for this is the same unemployment that occurs when we are at “full employment.” Thus, if we are seeing an increase in the employment, we may be seeing a readjustment of the natural rate. In that highly unlikely scenario, we must conclude that the current unemployment rate is related to structural unemployment, cyclical unemployment, or both.

My contention is that there is nothing wrong with cyclical unemployment. And the reason we are seeing problems in the economy right now shouldn’t make us ask, “What’s wrong with the economy?” but, rather, we should ask, “Do we understand our economy?” Although it would seem that cyclical unemployment, forever tied to economic recessions, is an executive’s greatest fear, we must remember that the market system rewards and punishes via business cycles. Business goes up and business goes down. Some may argue (like our friendly Keynesians) that cyclical unemployment is related to decreased demand. That may be, but unless you are hoping for a corporate bail out, you may be better modeling the next few executive decisions around cutting costs, increasing productivity, and diversifying. Don’t let unemployment scare you from doing what has always been right, that which is most beneficial to the stockholders. If you do these things, you will surely avoid the tumult of structural unemployment.

Though I wish to approach these issues from an economics standpoint, to understand the heart of the problem it is prudent to recognize at least one salient political flaw, from there we can walk back into the world of markets and economics and determine root cause. Intervention. This political flaw is indeed the antithesis of Free Market intentions—and even shows itself in the problems of unionization and collective bargaining being highlighted in today’s news coverage.

Whether or not the Federal government intervenes (read: regulates) is not really as formidable a question as how much that intervention (regulation) upsets the free market—and as I would advise you not to employ union members (for the very reasons bringing down the U.S. auto industry), it is certainly not recommended to allow the government to intervene–to whatever extent you have control. Do not take stimulus money, do not take bailouts, do not allow your employees to be intimidated by Uncle Sam. Do not be fooled into thinking that because the unemployment rate keeps rising, you should act as fast as possible to seek government support.

There is indeed a time lag concerning unemployment data, and I encourage you to concentrate on technical progress, cutting costs, and “trimming the fat.” When the time comes, you will be more than ready to call your loyal workers back to work. And do not worry about the models of Unemployment hysteresis that predict that a laid off worker is a lost worker. This, as you know from years of experience, just isn’t that simple. Economic models will never achieve the breadth of human experience.

Economists use models (Keynesian, et al) in order to simplify an imperfect and complex system. Whether or not economists subscribe to a model only has direct implications on the economy when those economists are thrown into power positions that are in some way politically reinforced. If a corporation wants to use Keynesian economics, Complexity Economics, or Great Spaghetti Monster Economics to maximize profit, there should be nothing stopping them—as long as those techniques are within the legal confines of corporate responsibility. With that said, however, the role that government takes in intervention needs to rely on a Free Market system and a Free Market system only. In 2008, this is where the “free” market ultimately failed—this is where the free market is failing today with relation to unemployment.

Because government expects to maximize return on investment, when government begins to regulate how corporations act (and thus how the market acts) they do so with the thought that Keynesian economics will be able to intervene and force the market into submission, thereby saving the economy and “fixing” the free market. However, as one might assume, a market that is truly free does not need government intervention. A market that determines when assets are bad, when a company should declare bankruptcy, and when it is a bad time to invest does not need an outside regulator. And so, I say again, do not let the pundits, liberal media, or Washington elites dissuade you from the important and responsible decisions you may have to make. Look at your bottom line and decide for the sake of your stockholders, for the sake of your company, and for the sake of your own job that it may indeed be time to “trim the fat.”

(1) http://www.ushistory.org/PAINE/crisis/c-01.htm

Still reading Beinhocker’s Origin of Wealth. This is an instant classic and will become a staple of my library reference material.

~Anton

Externalities are more relevant to social science than popular culture and media leads us to believe. It seems we live in a strange time, a time where everything has to be “green” and “environmentally friendly.” It’s a good opportunity to make yourself feel better for recycling, but it’s a horrible time for understanding what the impacts of exogenous interference into the free market really mean–what the true cost of going green really is.

Let me give an example:

Suppose the government has mandated a factory to produce more eco-friendly plastic-ware–apparently, due to some eco-rationality, the plastic spoons, knives, and forks produced up to this point have been causing negative effects on the environment. Let’s suppose those effects can somehow be accounted for economically (a highly unlikely scenario, but irrelevant to the main point). Now, let’s assume that the government has now forced this plastic-ware factory to produce these new bio utensils, which cost more to produce but lead to less overal negative environmental externalities.

Sure, we are making a lot of assumptions here; however, this is just a model… and as such, seeks to explain a point.

How is it that the externalities of these new eco-utensils are accounted for? That is, at what point does “everything remain equal.” In basic economics we are taught that certain things must remain equal in order to simplify the process of economic thinking. Surely, complexity hampers some of the utilitarianism in this thinking–but, we are asked to simplify anyway.

In this scenario, we are to assume that the costs outside of the changeover from plastic-ware to eco-friendly plastic-ware are unchanged outside of the change in negative effects on the environment. However, if we are to argue that the very reason to change the production (and thus the very justification for government interactions) is related to the negative (and let’s assume economic) impacts of non eco-friendly utensils, shouldn’t we assume that we derived that fact by accounting for externalities outside of the “everything is equal” phenomenon?

Well, ok, we are supposed to account for costs and benefits then… usual, and complex. So, instead of delving into the myriad of costs associated with the changeover, let’s just assume that we have the cost of operating two machines– (these machines could be representative of the basic input output systems at play along the entire production cycle, but will suffice to make our point if they are considered stand-alone production machines).

So, we have machine A (for producing the non eco-friendlies) and machine B (for producing the eco-friendlies). What we must determine is not whether or not producing more eco-friendly plastic-ware is necessary, but the true cost (vice benefit) of doing so. If we are to assume that we are being more eco-friendly, everything else equal, we must then, assume that the machines (machine B in our case) that produce these eco-friendly units are themselves eco-friendly… but, how are we to be for sure that machine B is eco-friendly?

In past thinking, the free market determined the true cost of things… whether that cost is allocated to a consumer or the consumer’s environment. So, given the complex task of determining the true cost of products and the processes used to make those products, isn’t exogenous intervention shortsighted, at best, and, at worst, counterproductive.

My fear is that the cost of the process for making eco-friendly goods outweighs the economic benefit. Obviously, we cannot account for either of those costs because they would be too complex, but, if we rely on evolutionary theory and the idea that markets and humans are complex adaptive systems, we should realize that the self-regulation involved (over time, of course) should be enough to counteract negative environmental factors… without exogenous government intervention and without counterproductive expenses.

As one of my Macro professors notes, “The Solow growth model predicts that a country with a low savings rate can achieve the same living standard as a country with a high savings rate as long as both countries have the same rate of population growth and access to the same technology” (Irina P. Vlasova, 2009).

This neoclassical model implies that as wealth is divided among the population, as long as that population continues to grow and employs the latest technology, a country that does not save may still grow, but how fast is related to savings. This makes sense because if money is not saved but is, rather, invested in other ways (saving is actually itself an investment) and as long as factors of production are utilized to their fullest extent (i.e. full-employment), GDP will continue to grow and the standard of living will improve over time. A country with less savings, everything else equal, will grow slower over time than a country with more savings, everything else equal… so, standard of living would be better for the faster growing economy.

A German tourist drinks Canadian beer in an American restaurant. What happens to the GDP?

First, the German tourist likely exchanged German currency into American currency. Without getting into the technicalities of exchange rates as they relate to GDP, the employment of an American exchange service to change the German currency resulted in an increase of current output (increased U.S. GDP).

So, this German dude, let’s call him Hans, and his fancy, crisp $100 bill board a taxi headed straight to the closest American restaurant that sells Canadian beer… clearly the procurement of this taxi service increases U.S. GDP the same way changing currency increased GDP.

Next our friend Hans enters the restaurant and purchases one new (to him) Molsen Draft. As this Canadian brew has incurred multiple steps in its processing, the most important value for the determination of a pint of its effects on GDP come from looking at the final product and its entire added value at each phase of production. Seeing as though this is a Canadian brew, the increased GDP in this case would occur within Canada… (much earlier) and only when the restaurant purchased the beer originally.

Now, as the restaurant hopes to profit off of the sale of this Molsen, it would likely have increased the price of the beer over what it paid to Canada (mind you, I am vastly oversimplifying the International Beer Trade here) during its initial purchase. This increase over wholesale would thus become a profit for the restaurant and would figure into the incomes received by the owners and employees… this income would then be considered payment for labor/service and would be factored as a increase in GDP.

One could go on from here, belaboring Hans’ day, and nitpicking Hans’ purchase’s effects on GDP; however, this should be explanation enough.

Unless one purchases new construction or one purchases a house that has had some improvement made to it in the form of construction that hasn’t been paid elsewhere, buying a house alone does not raise the level of economic activity with relation to a country’s Gross Domestic Product (GDP). GDP accounts for final goods and services (not intermediary goods) and, as it relates to economic activity, GDP only accounts for output that is current. With that said, any service that is involved in the sale of that house which is in and of itself a new service would contribute to the overall GDP and would clearly be a sign of economic activity. So, in an example where one buys a house and then a year later decides to sell, all activities related to the sale of that house, which involve preparing to take it to market would be considered added-value. This value addition involved in selling the house would clearly be a contribution to economic activity.

Some people think that selling a house in the same year you buy it means that economic activity is not necessarily increasing. I selling a house (no matter how old) definitely raises economic activity… due to the fact that new services are employed each time a house is sold (whether it’s the first time or the second). Therefore, because the sellers or buyers of the house will pay a realtor, a lawyer, or an inspector, or all of them, these services increase economic activity.

If we ask ourselves, “What is economic activity, anyway?” it becomes clear that by utilizing the economic perspective, unlimited wants and limited resources result in a choice oriented society, the choice to sell a house results in the forgoing of that house so that others may benefit from its utility–this is economic activity. And employment of services during the sale of a house result in the choice to pay money towards those services versus somewhere else–this too is economic activity (opportunity cost).

It seems that anytime one brings buyers and sellers together economic activity will increase. However, don’t believe that it will necessarily raise “wealth”… Though many people believe that a rising GDP indicates increased wealth, this may not necessarily be the case. If that rising GDP results in negative-externalities that remain unaccounted for, those negative-externalities could potentially decrease the overall wealth of a nation, even if the GDP is increasing.

~Anton

An often overlooked aspect of the Phillips curve is that the curve doesn’t really account for inverse correlations in the way that it accounts for the speed of those two correlations and how as one moves upward the other begins to slow. This is a tedious difference, but it is important nevertheless.

So, while we are seeing “high” unemployment (which is debatable in that 5% unemployment is actually just about right to maintain growth), we must remember that the Phillips curve suggests that the inflation rate will slow (not necessarily go back to zero). Indeed, if you look at the CPI for All Urban Consumers at the Bureau of Labor and Statistics you’ll see that the inflation rate has indeed slowed over the past two years.

We still have higher inflation than we did in 2000 (when the CPI was at about 170—compared to about 212 where it currently sits); however, unemployment in 2000 was only about one percent lower than it is now (4% then to 5% now). Of course, if unemployment ever hits close to 10% (like it did in 1982), we might see inflation move back down to a CPI in the sub-hundred levels—but whether that would be a good level of inflation is also debatable. (All of these stats can be found at the BLS; I used this for the unemployment rates and I used the inflation calculator tool for my CPI data).

And what is the Federal Reserve’s role in all of this? The Fed is controlling the money supply hoping that (in the Keynesian tradition) by intervening they will be able to use the money supply to control inflation which in turn may affect unemployment rates. I think they may be attempting to seek some sort of equilibrium, which, as this website points out is known as the NAIRU or the non-accelerating-inflation rate of unemployment: “The rate of unemployment at which inflation neither speeds up nor slows down” (link).

One of the biggest factors in a high inflation rate is the money supply. As Government prints more money it lowers the value of the dollar and thus increases the inflation rate because it drives prices higher. The biggest policy happening right now affecting the inflation rate (and the inflation rate for years to come) is fiscal spending. With every deficit, the Government incurs a larger and larger national debt that will one day come due… in order to pay that debt, Government must rely on taxpayers or print money or both. Seeing as though high taxes still won’t get us out of our multi-trillion dollar debt, Government is going to have to print more money—and many economists believe this will raise inflation rates.

~Anton

I just took a survey at Carl Milsted’s site www.quiz2d.com in order to find where I stand politically.

Here’s my chart:

~Anton

Fall for the Book recently posed the question:

During Fall for the Book, economists Robert Samuelson and Liaquat Ahamed will look to history for insights about today’s financial situations. Do you think they will find that the past provides the key to the future? Or will they need new answers for new times?

Here is my reply: