Giant Sucking Sound

[From Bill Powers (2004.01.14.0740 MST)]

Bill Williams 14 January 2003 3:00 AM CST --

But, despite having being set at ease about "the details having
been taken care off,"-- surely we aren't going to, mustn't under any
circumstance, forget about the details. Not when somewhere scattered
among the details are trillions and trillions of dollars, dollars
to pay for non-existent costs. I'm still puzzled by all this. I
used to teach the money and banking course. But, I have to confess
I seem to be out of my element here. And, For some reason I still
hear this enourmous sucking sound.

I can see that my lead balloon is not going to get to Mars. However, I do
have some naive questions, and I don't say this sarcastically.

I perhaps should have capitalized the part of my proposal where I said
there would be no cost TO THE ECONOMY. I seem to recall that there was
considerable skepticism in some quarters about my father's "leakage"
proposal -- several people strongly doubted that as much as 7% of the GDP
could disappear each year, and in fact challenged statements that _any_ of
it could disappear.

If money, buying power, can't disappear from the economy, then how could a
trillion dollars disappear from the economy just by spending it on the
aerospace industry? What does that industry do with the money, burn it? I
think the money would be spent on paying consumers and other segments of
the economy -- suppliers -- and that it would get spent on other things
just as surely as if we spent a trillion dollars on cosmetics, which we
don't quite do, but we're getting there.

I did note that if this much money were spent on a space program, this
would amount to a redirection of transactions from one sector of the
economy into others. The money that would have been spent in one way (say,
tax breaks for the rich or pre-emptive strikes at Axes of Evil) would have
to be spent a different way, unless we're going to flood the market with
newly printed money.

What got me thinking about this was worrying about outsourcing, the latest
stories being about all those people named Ramadramadan who now answer
helpline questions about computer problems. Are Americans doomed to a
future of taking in each others' laundry? Where will we get the money to
pay for all these cheap foreign goods and services, since the only jobs we
can get will be local service jobs? To whom will our employers sell the
goods and services they produce, since they will have stopped paying any
wages to us, their customers? I realize that this is a slight exaggeration,
but perhaps it helps to make my point.

I just can't get my head around the arithmetic involved here. And my
impression is that nobody else can, either, not even economists. But to
retain a scrap of humility, I think I need that Test Bed just to help ME
grasp what's going on. Maybe there are one or two others who can't keep in
mind all those surges and flows and exchanges and multipliers, and who
would welcome a computer program that would do it for them. I wish that the
ones who don't need such aids would give us a little help, here, but
perhaps they're just so much smarter than the rest of us that they can't be
expected to realize that we really DON'T understand what is so obvious to them.

Best,

Bill P.

[Martin Taylor 2004.01.15.1043]

[From Bill Powers (2004.01.14.0740 MST)]
I perhaps should have capitalized the part of my proposal where I said
there would be no cost TO THE ECONOMY. I seem to recall that there was
considerable skepticism in some quarters about my father's "leakage"
proposal -- several people strongly doubted that as much as 7% of the GDP
could disappear each year, and in fact challenged statements that _any_ of
it could disappear.

One of the reasons I got interested in information theory initially
(1955) was that I read an article which seemed convincing to me then
(and still does) by Samuel Bagno: "The Communication Theory Model and
Economics". IRE Convention Record 1955 Part 4. With the permission of
the IEEE, I put a facsimile copy of it on my Web site at
<http://www.mmtaylor.net/Economics/index.html&gt;\.

Two major points come from Bagno's analysis: (1) that for a closed
economy to be in a stable steady state, there must be inflation,
which hstorical records suggest ought to be somewhere around 4%
(that's just another name for "leakage"), and (2) that for the
economy to be in a stable steady state, there should be an excess of
borrowing over repayment totalled over the economy. Again, history
suggests that this should also be in the same neighbourhood of 4%.
Since national governments are essentially immortal, whereas
individuals are not, it is better that the borrowing excess be in the
public realm, meaning a deficit summed over all levels of government
that comes to around 4% or GDP. Maybe the 4% number ought to be 7% in
both cases, but that does seem to me to be a bit high.

Bagno's analysis holds only for a closed economy--meaning, nowadays,
the entire world. Any national economy can import or export some of
those requirements, as Germany did for many years in the so-called
"Wirtschaftwunder", when they had considerable growth with low
inflation at the same time as much of the rest of the Western world
had high inflation.

I know this hasn't much to do with PCT, but it does seem relevant to
Bill's comment.

Martin

[From Bill Powers (2004.01.15.0916 MST)]

Martin Taylor 2004.01.15.1043--

Two major points come from Bagno's analysis: (1) that for a closed
economy to be in a stable steady state, there must be inflation,
which hstorical records suggest ought to be somewhere around 4%
(that's just another name for "leakage"), and (2) that for the
economy to be in a stable steady state, there should be an excess of
borrowing over repayment totalled over the economy. Again, history
suggests that this should also be in the same neighbourhood of 4%.

I can understand the excess of borrowing over repayment -- that seems to be
where new money comes from -- but I don't get the inflation requirement. My
reason is that inflation is meaningless for an economy in isolation. It
costs more to buy goods, but you have to pay more to make them, and the
average standard of living doesn't change at all.

I'd like to read that paper. but it doesn't look as though I would
understand it.

Best,

Bill P.

Best,

Bill P.

[Martin Taylor 2004.01.15.1250 EST]

[From Bill Powers (2004.01.15.0916 MST)]

Martin Taylor 2004.01.15.1043--

Two major points come from Bagno's analysis: (1) that for a closed
economy to be in a stable steady state, there must be inflation,
which hstorical records suggest ought to be somewhere around 4%
(that's just another name for "leakage"), and (2) that for the
economy to be in a stable steady state, there should be an excess of
borrowing over repayment totalled over the economy. Again, history
suggests that this should also be in the same neighbourhood of 4%.

I can understand the excess of borrowing over repayment -- that seems to be
where new money comes from -- but I don't get the inflation requirement. My
reason is that inflation is meaningless for an economy in isolation. It
costs more to buy goods, but you have to pay more to make them, and the
average standard of living doesn't change at all.

I'd like to read that paper. but it doesn't look as though I would
understand it.

I think you could. But I think you might find my riff on it easier
for a first go. It's at the same URL.

The reason for requiring inflation is the core. The deficit
requirement comes from it. And that reason is one you have yourself
adduced--the value of things declines with time. Objects decay,
services rendered become less important over time (e.g. hair grows
and needs to be cut again, but the same second cut would have worked
if you had never had the first one, so the value of the first one has
gone to near zero--not zero, because you might have made a different
social impression if you hadn't had it, and that impression might
still have some consequences).

The background point to Bagno's argument is that all we do is to
impose organization on what Nature provides, using the energy Nature
provides--in other words (not used by Bagno), we control our
perceptions of the mess of stuff we see around us, and turn it into
things we perceive to be useful. We induce other people to help in
that control process, by enabling them also to better control their
perceptions. The way we do that is to agree that "money" can be
exchanged for organized stuff, or for help in organizing stuff. At
bottom, it is the degree of organization (in Bagno's terms, the
information content) of stuff that gives it its value, and thereby
its price in money.

In case it isn't obvious, that "degree of organization" or
"Information content" is a perception on the part of a person
involved in a transaction, not an intrinsic property of the item in
question. Just ask people who question why the National Gallery of
Canada would pay a million dollars, or whatever it was, for a big
stretched piece of canvas with three vertical coloured stripes!

Hope this helps.

Martin

[From Bill Powers (2004.01.15.1254 MST)]

Martin Taylor (2004.01.15) --

The reason for requiring inflation is the core. The deficit
requirement comes from it. And that reason is one you have yourself
adduced--the value of things declines with time. Objects decay,
services rendered become less important over time (e.g. hair grows
and needs to be cut again, but the same second cut would have worked
if you had never had the first one, so the value of the first one has
gone to near zero--not zero, because you might have made a different
social impression if you hadn't had it, and that impression might
still have some consequences).

This assumes that goods and services "have value" in some objective sense.
I can see why, under that assumption, that the ratio of value to money must
continually decline; the price one paid represents a continually decreasing
amount of a good as the good depreciates. I have seen similar ways of
treating value in economics writings, notably Keynes. For instance, Keynes
assigns a dollar value to the benefit one foregoes by using capital
equipment for production and thus causing the equipment to depreciate
faster. I suppose his idea was to claim this as a deduction on one's tax
returns. I don't know if he got away with it. Anyway, when one attempts to
compute value as something having an existence apart from the valuer, all
sorts of ghostly entities come into being and have to be computed.

In the Test Bed, I treat money in a much less abstract way. It's simply
what one needs to pay in order to buy something. Once a transaction has
taken place, the money and goods have changed hands and no record needs to
be kept of their former locations. Thus the money one paid for something is
forgotten the moment it is paid -- it never figures in any future
transactions. I suppose that the ratio of the remembered price to the value
of the good would inflate as the good is used up or deteriorates, but that
has no effect on present transactions (unless, of course, you want to
propose an effect on the psychology of the human agents involved).

I think I want to start talking about the Test Bed now, to try to get away
from generalities and opinions, particularly those I don't seem to have the
strength to avoid offering. Mary and I are going off to Hilton Head, SC,
tomorrow morning for an IAACT meeting and returning next Tuesday, so
there's going to be a hiatus in my comments (I'll try to take my laptop,
but it's not working right and anyway airport security would be a hassel).
I'll get the ball rolling in a separate post and you guys can kick it
around while I'm gone.

Best,

Bill P.

[Martin Taylor 2004.01.15.1745]

[From Bill Powers (2004.01.15.1254 MST)]

Martin Taylor (2004.01.15) --

The reason for requiring inflation is the core. The deficit
requirement comes from it. And that reason is one you have yourself
adduced--the value of things declines with time. Objects decay,
services rendered become less important over time (e.g. hair grows
and needs to be cut again, but the same second cut would have worked
if you had never had the first one, so the value of the first one has
gone to near zero--not zero, because you might have made a different
social impression if you hadn't had it, and that impression might
still have some consequences).

This assumes that goods and services "have value" in some objective sense.

No, I don't think so. They "have value" to a person. It's a
perception by that person. A haircut has no value to a person who
doesn't mind being shaggy. Likewise, a piece of wood picked up off a
beach may be very valuable to someone who sees in it some kind of
mystic shape.

Anyway, when one attempts to
compute value as something having an existence apart from the valuer, all
sorts of ghostly entities come into being and have to be computed.

That would be true, but it doesn't apply.

Martin

[From Bill Powers (2004.01.15.1551 MST)]

Martin Taylor 2004.01.15.1745--

No, I don't think so. They "have value" to a person. It's a
perception by that person. A haircut has no value to a person who
doesn't mind being shaggy. Likewise, a piece of wood picked up off a
beach may be very valuable to someone who sees in it some kind of
mystic shape.

I have to try to avoid getting into arguments like this, because I have no
good reasons for saying anything about that paper -- just prejudices. Let's
concentrate on the practical project and see if we get anywhere.

Best,

Bill P.