[From Bill Powers (2002.11.11.1413 MST)]
Bill Williams UMKC 11 November 2002 2:00AM CST --
THere is another quote by Robert Bork which expresses basically the idea
from a somewhat different angle,
"A simple and fundamental principle of economics is that if the
price of anything is raised, less of it will be purchased.
"If anybody could show that this is not so, he would achieve
imortality in history by destroying a centuries-old foundational
principle of economics." p. 271.
This would seem a good point at which to insert the wedge. It's obviously a
false statement, once you back away from the context in which it's
customarily understood -- meaning, once you get outside the purely economic
context, as your treatment of the Giffen effect does. Clearly, if your life
depends on buying a certain amount of something, you will buy it at any
price, no matter what else you may have to give up, no matter what laws you
have to break, no matter what false promises to pay you must make. The
normal rules of economics cease to prevail when values other than monetary
values are considered.
The Bible contains (somewhere) this nice up-a-level question: "If the salt
lose its savor, with what will ye salt it?" This phrase stuck in my mind
because I didn't get it at first (it's still not crystal clear). It was
meant to convey, I think, that some qualities are valued because they
enhance the value of other things. But what gives _them_ their value? Salt
is valued because of the way it makes other things taste to us human
beings, not because of what it is, NaCl, or how it tastes by itself. But if
salt becomes unable to give us the tastes we prefer, what can we use to
give it back that property? Salt? Obviously not.
The same thing applies to money (or anything else outside us) that we use
as a measure of value. The ultimate value of anything is that it can be
used as a means of obtaining things we want or need, for ourselves or for
others whose welfare we consider important. If that value is lost, the
thing itself loses its value.
Under proper conditions, money (or credit) can be used to get things we
value, but it often happens that in order to use money to obtain what we
want, we must give up something else that we want just as much or even more
-- for example, we must give up 40 hours per week of our labor, which is
used for someone else's benefit and prevents us from using our own
activities for our own direct benefit during that period, not to mention
taking away the ability to enjoy any benefits of what we may already
possess for that period. The well-known example is the upscale middle
manager who is raking in the money by working 80 hours a week, and is too
exhausted even to watch TV when not working. His money has lost its value
What I'm getting at, slowly and not very surely, is that the wedge has to
do not with the Giffen effect specifically, but with the conflict of values
that gives rise to the Giffen effect. The simulation I just distributed,
while not the only one that would illustrate the effect, lends itself to
generalization. We could set up a system with some indefinite number of
goods, each with a reference level and a control system with gain.
Circumstances can always exist in which obtaining one good, or combination
of goods, interferes with obtaining another good or combination of goods.
Even if money is not itself treated as a good, I think there can still be a
Giffen effect, in which difficulties in obtaining one good result in
greater efforts to get it, at the expense of efforts to get other things --
the path of most resistance, instead of the more common way of taking the
And, to bring in the "salt" idea, the "goods" that result in conflicts are
not all the economic type. I suspect that behind most economic difficulties
there are values for things that are neither material goods nor services --
for example, the value of playing with a child for half an hour. This can't
be traded, bought, or sold; "indifference curves" are irrelevant. There is
nothing else of equal value because there is nothing else of the same
_kind_ of value. It can't be translated into an equivalent value, say, in
units of high bowling scores or taste of juicy steaks -- or money. We want
to spend time with a child AND -- not OR -- do other things we value.
The simulation just distributed represents a person who wants to eat a
certain number of calories every day, AND AT THE SAME TIME save a certain
amount of money for future use. Under certain circumstances, it becomes
impossible to do both of these things. In the range where it is possible,
the only way to do it is to buy more of the less expensive food and less of
the more expensive food when the price of the less expensive food rises.
This is not a conflict: it is the _resolution_ of a conflict. As it
happens, this resolution is not perfect; the person can't eat quite as much
as wanted, and can't save quite as much money as wanted. With some
adjustments to the model, both might become possible (your graphical
solution suggests that this is true). But bring in a third preference, and
a fourth, and so on, and the best we can hope for is probably minimization
of total error, rather than total error correction. And then I think we may
well observe NOTHING BUT the Giffen effect, provided that we lack the
resources needed to accomplish everything we want at the same time. Any
stress on the system could force us into choosing what is cheaper,
shoddier, less reliable, less valuable.
So that's my pitch for trying to generalize the Giffen effect to multiple
variables. When we do, I suspect we'll be looking not at some special rare
effect, but at the way economics works for the vast majority of us, all but
the most affluent members of a society who never run out of money.
A word about obesity. I think this has been recognized, in some examples at
least, as a sort of nutritional Giffen effect. Food has to contain not just
calories, but vitamins, minerals, protein, fiber, and so on. You can go to
the grocery store and buy breakfast cereal that is touted as containing
100% of most the these things, as well as very small percentages of things
we're told we should not eat. However, it costs a lot more than just plain
old corn flakes. So if you have a certain budget for breakfast cereal, and
at the same time a desire for health, you may well find that if the calorie
count of corn-flakes goes down, you have to buy more cornflakes and less of
the more nutritional food, even if they cost the same per calorie.
People get fat in poor countries not simply because they eat too much, but
because in order to get enough vitamins, minerals, proteins, etc. and also
enough calories, they have to eat a little expensive high-value food and a
lot of cheap carbohydrates. They have to take in too many calories in order
to get almost enough of the other things..If the price of cheap food goes
up, they have to buy more of it and less of the other kind of food. So they
get fatter still.