National Prosperity

Kenneth_Kitzke_Value · July 29, 2004, 1:35pm

[From Kenny Kitzke (2004.07.29)]

It occurs to me that, if the following conclusion is true, it may alleviate the need for Bill Powers to pursue his Economic Test Bed. And, as a side effect, perhaps Bill Williams can rest easier?

Instead of spending time and money developing economic models built on PCT principles, we simply need to teach about the reality of hell!

As you may know, I accused Rick Marken of “masterbating” with the GDP data to help prove some points. I think my pun was later innaccurately quoted as though I said masturbating.

Anyway, I think this study, by a Federal Reserve Bank (is this work done therefore with taxpayer money?) is also masterbating. I surely did not complain just because it was Rick Marken’s work.

For those of you who missed the conference, it was very worthwhile. Maybe we will see you next year? I hope so.

Bruce_Gregory5 · July 29, 2004, 3:29pm

[From Bruce Gregory (2004.0729.1129)]

Kenny Kitzke (2004.07.29)]

I quote without comment:

""However intriguing that might be, it would make more sense if Americans who believe in Hell actually thought they themselves had a chance to go there. The thing about Hell is that although Americans believe in it, they believe in it only for other people. A Harris poll taken in 2003 found that only one percent of respondents thought they themselves were going to Hell.. So Hell's effectiveness as what Adam Smith called "a moral enforcement mechanism" that contributes to economic growth is clearly not a sealed deal.

In the end, the only people who are sure they're going to Hell are those of us who don't believe in it anyhow."

Bruce Gregory

"Great Doubt: great awakening. Little Doubt: little awakening. No Doubt: no awakening."

Richard_Marken2 · July 29, 2004, 4:31pm

[From Rick Marken (2004.07.29.0930)]

Kenny Kitzke (2004.07.29)--

As you may know, I accused Rick Marken of "masterbating" with the GDP data to
help prove some points. I think my pun was later innaccurately quoted as
though I said masturbating.

A pun is a play on words which have the same sound but different meanings.
"Masterbating" is not a word so I didn't see a pun. I suppose the "pun"
might have been on a decomposition of "masterbating" into "master" and
"baiting", so that you were punningly accusing me of being a master at
baiting people. That would have been a clever pun, indeed, though it seems
strange to imply that the presentation of data is "masterful baiting".

I surely did not complain just because it was Rick Marken's work.

Why, exactly, did you complain? I simply presented lagged correlations
between quarterly measures of investment and growth obtained over a 50 year
(or so) period. The results show clearly that an increase in investment
(public or private) does not lead to an increase in growth. In fact, the
results show that growth precedes investment, which makes sense if you think
about it for a moment. Businesses invest to increase production when they
know there is increased demand for what is produced. Increased investment
does increase production (growth) but that increased production has to be
sold to consumers in order to pay for the cost of the increased investment
(and to make a profit). So it's not surprising that investment would follow
growth in demand, which is what change in GDP measures since GDP is the
amount of money placed into the hands of consumers in return for their
having produced the goods and services currently available for purchase.

Richard Kennaway (2004.07.27.2016 BST)

As it happens, while control theory may be able give a description of
the Giffen effect, it can be modelled without it. As a description
of what is in fact happening when the Giffen effect is observed, it
may or may not be accurate, but it does demonstrate that such a
description is possible.

It goes like this. Let bread have a nutritional value of B per unit
price, and meat M, with B > M. Let a person's nutritional
requirement be N and their money available for spending on food G.
Let them spend X on bread and Y on meat. Then their expenditure must
satisfy the following inequalities:

       X >= 0
       Y >= 0
       XB + YM = N
       X + Y <= G

If they also desire to spend as much as possible on meat, subject to
these constraints, then the Giffen effect immediately follows:
increasing the price of bread (reducing B) will increase the amount
they buy, up to the point at which they are spending their entire
food budget on bread to achieve N.

This is the explanation I read in a microeconomics textbook way back
when (I don't recall which one). Surely this analysis is familiar to
economists? It follows directly from the (individualistic?)
description of the situation.

Thanks, Richard. This is very illuminating. I found a recent article where
this explanation was called the "subsistence" model of the Giffen effect. In
that article they say that the graphical analysis of this explanation of the
Giffen effect is found "in most intermediate microeconomics textbooks",
which is consistent with your memory of the situation. The control model of
the Giffen effect is a working implementation of the "subsistence" model in
the same as my H. economicus model was a working implementation of the
"leakage" model of the macro economy.

Best

Rick

···

--
Richard S. Marken
MindReadings.com
Home: 310 474 0313
Cell: 310 729 1400

Kenneth_Kitzke_Value · July 29, 2004, 4:56pm

[From Kenny Kitzke(2004.07.29.1245)]

I was not aware of old Adam’s position on this. So, at least I learned a little bit new.

You are a very funny man. Was that a personal claim?

My main point was how prevalent it is that people, even supposedly educated people like those I presume work at the Federal Reserve, confuse correlation with cause and draw some pretty weird and unvalidated conclusions about what is going on. I imagine that control of perceptions and not lineal cause would blow their ever imaginative minds!

Just havin’ some fun, Bruce. Nothing too serious was intended about hell, its possible existence or who might be going there.

Be nice, I’m sensitive.

Bill_Williams1 · July 29, 2004, 6:27pm

From[Bill Williams 29 July 2004 1:20 PM CST]

[From Kenny Kitzke (2004.07.29)]

It occurs to me that, if the following conclusion is true, it may alleviate the need
for Bill Powers to pursue his Economic Test Bed. And, as a side effect, perhaps

>Bill Williams can rest easier?

The connection between religious bliefs and economic performance is an old and
interesting question. Max Weber's _The Protestant Ethic and the Spirit of Capitalism_
has been the source of a lot of controversy. Similar ideas about motivation in a
secular context underly D.C. McClelland's _The Achiving Society_. If McClelland is
to be believed, the storys we tell children have a rather high correctlation with how
those children behave in economic terms. Sober and Wison made a somewhat
similiar point in their book _Darwin's Chathedral_.

Bill Williams

Bill_Williams1 · July 31, 2004, 7:02am

From[Billl Williams 30 July 2004 12:40 PM CST]

[From Rick Marken (2004.07.29.0930)]

Kenny Kitzke (2004.07.29)--

As you may know, I accused Rick Marken of "masterbating" with the GDP data to
help prove some points. I think my pun was later innaccurately quoted as
though I said masturbating.

But Kenny, it was only a small mistake-- a switch of an "e" to a "u." And, I thought I was improving your statement by making it clearer what you meant. Now I see from what you say, that you had something else in mind and hadn't just misspelled the word.

A pun is a play on words which have the same sound but different meanings.
"Masterbating" is not a word so I didn't see a pun. I suppose the "pun"
might have been on a decomposition of "masterbating" into "master" and
"baiting", so that you were punningly accusing me of being a master at
baiting people. That would have been a clever pun, indeed, though it seems
strange to imply that the presentation of data is "masterful baiting".

I surely did not complain just because it was Rick Marken's work.

Why, exactly, did you complain? I simply presented lagged correlations
between quarterly measures of investment and growth obtained over a 50 year
(or so) period. The results show clearly that an increase in investment
(public or private) does not lead to an increase in growth.

Kenny presented a perfectly good expllaination at the time why this claim can not be true. If Kenny wants to argue with you he is welcome to do so.

In fact,

No. What you are presenting is an argument.

the
results show that growth precedes investment, which makes sense if you think
about it for a moment.

Yes, if you are Rick Marken and think about it, _for a moment_ and only I might add for a moment, this may make sense if you are Rick Marken. There is a mixing here of two arguments, two definitions.

Businesses invest to increase production when they
know there is increased demand for what is produced. Increased investment
does increase production (growth) but that increased production has to be
sold to consumers in order to pay for the cost of the increased investment
(and to make a profit). So it's not surprising that investment would follow

growth in demand,

Which investment are you talking about? By my count we are up to three equvocations.

which is what change in GDP measures since GDP is the
amount of money placed into the hands of consumers in return for their
having produced the goods and services currently available for purchase.

Rick once again confuses the meaning of the income definitions.

Richard Kennaway (2004.07.27.2016 BST)

As it happens, while control theory may be able give a description of
the Giffen effect, it can be modelled without it. As a description
of what is in fact happening when the Giffen effect is observed, it
may or may not be accurate, but it does demonstrate that such a
description is possible.

It goes like this. Let bread have a nutritional value of B per unit
price, and meat M, with B > M. Let a person's nutritional
requirement be N and their money available for spending on food G.
Let them spend X on bread and Y on meat. Then their expenditure must
satisfy the following inequalities:

       X >= 0
       Y >= 0
       XB + YM = N
       X + Y <= G

If they also desire to spend as much as possible on meat, subject to
these constraints, then the Giffen effect immediately follows:
increasing the price of bread (reducing B) will increase the amount
they buy, up to the point at which they are spending their entire
food budget on bread to achieve N.

This is the explanation I read in a microeconomics textbook way back
when (I don't recall which one). Surely this analysis is familiar to
economists?

In an orthodox economist's perception whatever this is worth it may not be an explaination. An orthodox explaination ought to use the principle of maximixation as a description of economic agency.

It follows directly from the (individualistic?)

description of the situation.

This doesn't follow, however, from the economists conception of economic behavior-- not in the slightest.

This isn't the sort individualism which has been assumed by orthodox economists. If this description conformed to the economist's understanding then the Giffen effect would not be a paradox.

Thanks, Richard. This is very illuminating. I found a recent article where
this explanation was called the "subsistence" model of the Giffen effect. In
that article they say that the graphical analysis of this explanation of the
Giffen effect is found "in most intermediate microeconomics textbooks",
which is consistent with your memory of the situation.

Not quite. RK states XB + YM = N. The orthodox theorists assert that the rule is that more is better. RK says that N is a constraint. Orthodox theorists would say that XB + YM >= N. So, there really isn't the consistency that you suppose.

The control model of

the Giffen effect is a working implementation of the "subsistence" model in
the same as my H. economicus model was a working implementation of the
"leakage" model of the macro economy.

The "Leakages" model was never a model in the sense of being internally consistent-- at least this was the conclusion that Bill Powers apparently came to when he said that it would take some explaining to account for how his dad came to the conclusion that A = B, and A = C and C does not equal B.

Rick's "H. economicus" wasn't a "model", as far as I know it never it "worked," not in the sense in which I understand work and While Bill Powers may now which that he had never said it, he did say that E economicus was "a giant leap in the wrong direction." If Bill Powers couldn't explain what was wrong, I am not inclined to try. I have said a lot of stuff and I don't see any neccesity to say anything more-- unless it suits my inclination.

It seems to me that one of the problems that have plagued the economics thread may have resulted from a fundamental misapprehension on the part of PCT people as to what orthodox economics is about. Orthodox econmics is about maximization. Orthodox economists have been of the strong opinion that demand curves must slope downward ( increase the price of a commodity and the amount purchased will decrease) and that supply curves must slope upward.

Now, in the Post that Richard M copies from Richard K, Richard K asys,

>>It follows directly from the (individualistic?) description of the situation

By this "IT follows" I assume that Richard K means the paradoxical effect in the Giffen case of an increase in the price of a commodity.

However, if this analysis actually followed directly from the situation then why is it that the Giffen effect is described as being paradoxical? The reason for this is that according to orthodox theorists there is a Law or "principle of demand" that demand curves slope downward.

Now, Richard K says,

Surely this analysis is familiar to economists?

Well, yes. But, the sense in which economists, orthodox econmists that is, are familiar with the Giffen question is in the context in which the Giffen effect is a paradox that is fundamentally in conflict with the fundamentals of the orthodox system. The whole point of the Giffen phenomena, if it is accepted as a genuine phenomena, is that it over turns the basis of the orthodox conception of the economy-- in particular that demand curves slope downward, and that equilibrium prevails.

So, it all depends upon what sense the orthdox economists are "familiar" with the Giffen paradox. The introduction by the Chicago school, Frank Knight in particualar, of a compensated demand analysis was intended to justify ignoring the Giffen paradox by showing that by redefining the concept of consumer demand the Giffen effect could be defined out of existence. My sense of the offering of micro-economic textbooks is that most all of them dismiss the possiblity of a Giffen effect in the case of a compensated demand curve. They are mistaken, the Giffen effect still pops up in the case of the compensated demand curve, but an understanding of why the Giffen anomoly would pop-up is not availible to orthodox economists and in this sense it could be said to not be "familiar" to the orthodox economists. For an orthodox economist becoming familiar with the significance of the Giffen paradox would require abandoning their assumption that Economic Man and economic agency consist of the economic principle of maximization, and this amounts to abandoning the orthodox position-- including the orthodoxy's conception of individualism.

Bill Williams

Richard_Marken2 · August 1, 2004, 4:01pm

[From Rick Marken (2004.08.01.0900)]

Bill Williams (30 July 2004 12:40 PM CST) --

Rick Marken (2004.07.29.0930) to Kenny Kitzke

Why, exactly, did you complain? I simply presented lagged correlations
between quarterly measures of investment and growth obtained over a 50 year
(or so) period. The results show clearly that an increase in investment
(public or private) does not lead to an increase in growth.

Kenny presented a perfectly good expllaination at the time why this claim can not be true.

The claim that cannot be true, I presume, is that investment does _not_ stimulate economic growth; that an increase in investment does _not_lead to an increase in growth. This claim was based on the relationship I observed between quarterly measures of investment and growth for the years 1953 to 2002 that were obtained from the US Department of Commerce. I don't remember hearing any explanation of why this claim cannot be true. I would certainly like to hear that explanation. In case you've forgotten what I found, I've attached the data showing the lagged correlations between private investment and GDP growth (as well as the results of two different model runs).

the
results show that growth precedes investment, which makes sense if you think
about it for a moment.

There is a mixing here of two arguments, two definitions.

Actually, I didn't defined anything in those comments. The Department of Commerce defines one of the variables I used in the analysis as "gross private domestic investment" and the other "gross domestic product" (GDP), from which I calculate growth as [GDT(t) - GDP(t-1)]/GDP(t).

Which investment are you talking about?

According to the Department of Commerce "Gross investment [which is what I used as my measure of investment] consists of purchases of new structures and of equipment and software ... net purchases of used structures and equipment, and own-account production of structures and of software". Sounds like investment in capital equipment to me, precisely the kind of investment that is supposed to "stimulate" growth.

Rick's "H. economicus" wasn't a "model", as far as I know it never it "worked," not in the sense in which I understand work

This is true. My model "worked" in that sense that it controlled variables (two aggregate economic variables, actually) protecting them from continuously varying disturbance. Your model, on the other hand, "worked" in the sense that it caused a different array of points to be plotted on the screen on each iteration of the program; however, it didn't control any variables at all.

RSM

···

---
Richard S. Marken
marken@mindreadings.com
Home 310 474-0313
Cell 310 729-1400

Bill_Powers1 · August 1, 2004, 5:22pm

[From Bill Powers (2004.08.01.1040 MDT)]

Rick Marken (2004.08.01.0900)–

Arguing with Bill Williams is futile, Rick. But worse than that, his
method of argumentation is catching; you start doing it yourself. The
method is this: you pick some phrase that sounds convincing and assert it
as a fact. Then, no matter what anyone else says, you keep using the same
phrase again and again, ignoring denials, refutations, facts, or anything
else that might make it appear untrue. If you keep saying it, it must be
true.

You have said before, and say again of Bill’s “marching band”
model,

Your model, on the other hand,
“worked” in the sense that it caused a different array of
points to be plotted on the screen on each iteration of the program;
however, it didn’t control any variables at all.

In fact his model does control two variables for each marcher: their x
and y positions. Each marcher is given a reference level for x and y
position, and adjusts its perceived (and actual) position to match the
reference position. So that is a set of controlled variables.

What is not controlled is the variable Bill says is controlled, the
relative spacing of the marchers. That is set by calculating the required
set of reference positions, open-loop, with no feedback from sensing the
relative positions. Exactly the same behavior would be seen if the
control systems were eliminated and the marchers were placed at the
positions indicated by the reference signals. So the control systems are
irrelevant to the behavior pattern of interest.

Your position is weakened in the eyes of onlookers if you offer
counterarguments that are not true, even if your adversary does not
adhere to the same implied rules.

Another problem is the argument about investment. Williams has objected
that you are using gross investment instead of net investment, which
judging from this post is true. Whether that is the wrong thing to use is
another matter. He has never explained what is wrong with using gross
investment, and apparently it is against his principles to offer such
explanations, but that is what your dispute is about, not the lags
between gross investment and GDP. Simply pointing out that changes in GDP
lead changes in gross investment gives Williams the excuse he wants,
because you are not using the data he thinks you should be using. He can
ignore the fact that changes in gross investment do not cause changes in
GDP, because he wants to talk about net investment which is apparently
much more variable than gross investment (and therefore has no provable
relation to GDP, but Williams is not concerned with little side-issues
like that). Also, since no extended data are available for net investment
(that I was able to find), his objection can’t be refuted. It can’t be
supported, either, of course.

When you argue with someone who doesn’t play by normal rules, you gain
nothing and risk a lot. Your adversary will never admit defeat, but will
leap on every mistake you make – and when you get irritated, you are
likely to reply too fast and make mistakes. I think the best course of
action is to ignore this man, or large boy, despite his taunting,
chip-on-the-shoulder attitude. Let’s just get on with business and let
him rail into the silence against his imaginary demons.

Best,

Bill P.

···

Bill
Williams (30 July 2004 12:40 PM CST) –

Rick Marken (2004.07.29.0930) to
Kenny Kitzke

Why, exactly, did you complain? I
simply presented lagged correlations

between quarterly measures of investment and growth obtained over a 50
year

(or so) period. The results show clearly that an increase in investment

(public or private) does not lead to an increase in growth.

Kenny presented a perfectly good expllaination at the time why this claim
can not be true.

The claim that cannot be true, I presume, is that investment does not
stimulate economic growth; that an increase in investment does _not_lead
to an increase in growth. This claim was based on the relationship
I observed between quarterly measures of investment and growth for the
years 1953 to 2002 that were obtained from the US Department of
Commerce. I don’t remember hearing any explanation of why this
claim cannot be true. I would certainly like to hear that explanation. In
case you’ve forgotten what I found, I’ve attached the data showing the
lagged correlations between private investment and GDP growth (as well as
the results of two different model runs).

the

results show that growth precedes investment, which makes sense if you
think

about it for a moment.

There is a mixing here of two
arguments, two definitions.

Actually, I didn’t defined anything in those comments. The Department of
Commerce defines one of the variables I used in the analysis as
“gross private domestic investment” and the other “gross
domestic product” (GDP), from which I calculate growth as [GDT(t) -
GDP(t-1)]/GDP(t).

Which investment are you talking
about?

According to the Department of Commerce “Gross investment [which is
what I used as my measure of investment] consists of purchases of new
structures and of equipment and software … net purchases of used
structures and equipment, and own-account production of structures and of
software”. Sounds like investment in capital equipment to me,
precisely the kind of investment that is supposed to
“stimulate” growth.

Rick’s “H. economicus”
wasn’t a “model”, as far as I know it never it
“worked,” not in the sense in which I understand work

This is true. My model “worked” in that sense that it
controlled variables (two aggregate economic variables, actually)
protecting them from continuously varying disturbance. Your model, on the
other hand, “worked” in the sense that it caused a different
array of points to be plotted on the screen on each iteration of the
program; however, it didn’t control any variables at all.

RSM

Richard S. Marken

marken@mindreadings.com

Home 310 474-0313

Cell 310 729-1400

Richard_Marken2 · August 1, 2004, 6:53pm

[From Rick Marken (2004.08.01.1150)]

Bill Powers (2004.08.01.1040 MDT)]

Arguing with Bill Williams is futile, Rick.

I know. I'm just interested in discussing economics and I use his posts as a basis for continuing the conversation.

You have said before, and say again of Bill's "marching band" model,

Your model, on the other hand, "worked" in the sense that it caused a different array of points to be plotted on the screen on each iteration of the program; however, it didn't control any variables at all.

In fact his model does control two variables for each marcher: their x and y positions. Each marcher is given a reference level for x and y position, and adjusts its perceived (and actual) position to match the reference position. So that is a set of controlled variables.

As I recall, his control loops went something like this:

o = k2(r-p)
p = k1 (o+d)
p = r

This gives one iteration of control for each change in r (if d is constant, as it was in Williams' program, then r and p don't change after the first iteration). I think it's fair to say that this is not a control loop -- at least not much of one.

What is not controlled is the variable Bill says is controlled, the relative spacing of the marchers.

Yes. That is certainly true.

Your position is weakened in the eyes of onlookers if you offer counterarguments that are not true, even if your adversary does not adhere to the same implied rules.

The onlookers who see merit in Bill Williams' arguments are not going to find any merit in my position even if I somehow managed to make only true statements all the time. I try my best to make true statements but I know that I'm going to be wrong sometimes (as will everyone). People who are opposed to my fundamental position will, indeed, use these mistakes to impugn the merits of my arguments, so it's certainly nice if I could try to avoid making mistakes. But even if I made no mistakes these people would use whatever they can to knock me. Look at the "ignorant slut" slander that was used against me (and the "biting" incident that bit you;-).

I think most of the mistakes I make are honest mistakes: for example, I really do think that Williams' program does not control any variables, in the sense of continuously acting to maintain a variable in a reference state while protecting it from disturbance. I assume that when I make mistakes like this (if it is a mistake to say that Williams' program doesn't really control anything) I will be corrected. That's how I think intelligent discussion should work.

Another problem is the argument about investment. Williams has objected that you are using gross investment instead of net investment, which judging from this post is true. Whether that is the wrong thing to use is another matter. He has never explained what is wrong with using gross investment, and apparently it is against his principles to offer such explanations

I was actually hoping (and still expecting) that someone other than Williams would give me the explanation.

When you argue with someone who doesn't play by normal rules, you gain nothing and risk a lot. Your adversary will never admit defeat, but will leap on every mistake you make -- and when you get irritated, you are likely to reply too fast and make mistakes.

I know this is true. That's why I don't argue with Williams. I am just trying to use his posts as a basis for getting people who can discuss these things like grown-ups to participate in a discussion about economics.

Best

Rick

···

---
Richard S. Marken
marken@mindreadings.com
Home 310 474-0313
Cell 310 729-1400

Kenneth_Kitzke_Value · August 2, 2004, 3:01pm

[From Kenny Kitzke (2004.08.02)]

Kenny Kitzke (2004.07.29)–

As you may know, I accused Rick Marken of “masterbating” with the GDP data to
help prove some points. I think my pun was later innaccurately quoted as
though I said masturbating.

My pun was that I perceived you playing with the GDP data for your own pleasure/purpose in a way similar to someone who is masturbating is playing with their genitals for their own pleasure. I don’t know if this pun is something clever or not. Nor does it matter very much to me.

I surely did not complain just because it was Rick Marken’s work.

<Why, exactly, did you complain? I simply presented lagged correlations
between quarterly measures of investment and growth obtained over a 50 year
(or so) period. The results show clearly that an increase in investment
(public or private) does not lead to an increase in growth.>

I believe I explained the reason for my complaint quite succinctly. You did not respond. It is not important enough to me to go back through the archives to resurrect the dialogue to win an argument.

But, since you ask again, I will recall briefly what I do remember. The economy and what makes it tick is of interest to me.

It seems you were/are determined to prove a conjecture from T. C. Power’s Leakage theory that the popular belief that investment produces economic growth is wrong. You attempted to use historic GNP/GDP data to prove you point.

As I recall, your analysis produced a weak correlation (less than 0.5) between investment and GDP. To me, that would be sufficient reason to not draw any conclusion about cause and effect, either way. It would be time to move on to other types of study.

I pointed out that investment is a component of GDP and therefore one would expect some correlation between increases in Investment and GDP. In fact, that is exactly what the data suggests. It is a mathematical necessity.

Of course, when the other components of GDP (which are always much larger than Investment) go up or down, they swamp/mask the effect of Investment.

Instead of recognizing such economic realities and moving on, you now turn to “lagged correlations” to try to prove your speculation that increases in Investment DO NOT necessarily increase GDP. You massage the data searching for a time interval delay where the correlation increases.

First, lagged correlations DO NOT prove any cause and effect relationship any more than any correlation does. Second, not one statistics book I posses even mentions this method of analysis as a valid technique for showing which phenomena is causing the other. Can you provide a reference so I can check what can be done with lagged correlations and whether what you did comports properly with such a method?

Even if there is any validity to your method of analysis, as I recall the lagged correlation was still so low that most people would still question the veracity of any speculations based on them. I believe Bill Powers even advised you this way. But, you seem to ignore both of our pleas, continuing to resist any disturbances to your desired belief.

I pretty much gave up at this point. While there may well be interesting results of a PCT, or negative feedback loop, analysis of an economy compared to classic cause-effect models, I could not see either your approach, or even Bill Power’s Test Bed, as likely to productively model the actual economy the USA in any reasonable time frame.

Your analysis DOES NOT show that growth always precedes investment. I say balderdash. And, Bill Williams has questioned whether you are even using the right variables for your analysis: new investment vs. net investment. That you don’t seem willing or able to actually learn the meanings of the variables you claim to correlate, analyze and then reach declarative conclusions about. Isn’t it obvious to you that if net economic investment falls, even if new investment increases, that GDP would not be expected to increase?

Of course, what is profound in that observation? Who needs a lagged correlation analysis to reach such a conclusion?

Balderdash. Increased investment increases GDP concurrently. It is one of the components of GDP. If the investment also increases production, it would further increase GDP as you say.

Periods of economic growth, measured by GDP, provide more funds for investment. But, increased GDP DOES NOT cause increased Investment. And, GDP can increase without any increase in demand. It is called inflation. The fact that a car that used to cost $2,000 in 1964 now costs $20,000 can have a large effect of GDP without any increase in the demand for cars/units. So, one has to be very knowledgeable about the economic variables and how to use them in models or analyses to even begin to draw conclusions like you seem to draw so confidently.

It is also not always true that people only invest when they know there is increasing demand. I know this first hand. I invested in an office for my consulting business before I knew there would be any demand for my services. Risk taking is fundamental to our form of economy. I suspect that millions of small entrepreneurs make Investments and open stores or businesses hoping there will be demand, with no assurance that demand or GDP will be present, much less because it is already there.

Are you any closer to understanding why I complained about your analyses and especially your conclusions?

Bill_Powers1 · August 2, 2004, 4:18pm

[From Bill Powers (2004.08.02.0922 MDT)]

Kenny Kitzke (2004.08.02) –

[to Rick]

It seems you were/are determined to
prove a conjecture from T. C. Power’s Leakage theory that the popular
belief that investment produces economic growth is wrong. You
attempted to use historic GNP/GDP data to prove you
point.

That’s not quite what TCP was doing. I assume that unlike Bill Williams,
you have read TCP’s book before commenting on what he says, but for the
sake of onlookers who have not read it, here is a figure showing some of
the data (much more, to the same effect, is shown in tables).

This covers 15 years; similar results are found over the span from 1868
to 1985, with the great majority of years showing the same relationship.
In brief, the points that lie along the lower line (with remarkably
little scatter) show that over this particular span, 80% of the total
cost of production was spent on consumer goods and services. I have
backtracked all the sources TCP used and found that he did not omit any
available data: he reported what he found.
The meaning of this is that 20% of the total cost of production was spent
on capital goods and services (including profit), with very little
variation, plus or minus two percentage points. The same relationship is
seen over the entire history of the US economy from 1865. That is the
capital investment that has been required to maintain the production
facilities and produce goods at whatever level existed in any given year.
The percentage is totally unrelated to Gross National Product. I don’t
think that TCP interpreted this fact quite correctly, but it is certainly
a fact.
This is not theoretical deduction: it is a report on data from the
historical record. Your impression that TCP was “trying to
prove” some conjecture about investment is incorrect; he began
with these data from the historical record, and tried to find an analysis
that could take them into account. Other economists have assumed that
of course increasing investment must increase GDP, but if they are
to maintain that assumption, they will have to explain data like these. I
think there is an explanation, but before that can be discussed, one has
to accept the facts instead of pushing them aside.

You can certainly find fault with many things in TCP’s approach,
including his recommendations for what to do about the problems he saw.
But he did pay attention to the facts, a novel approach which seems not
to be popular in some other circles. I would really advise finding out
what he said in print, and not basing your opinions on biased reports
from other people – especially other people who admit they are judging
the book by its cover, or by what its author said he might publish 15
years before he did it. Have your ideas ever changed over a span of 15
years?

Best,

Bill P.

Kenneth_Kitzke_Value · August 2, 2004, 5:10pm

[From Kenny Kitzke (2004.08.02.1230EDT)]

Kenny posting to Rick Marken:

It seems you were/are determined to prove a conjecture from T. C. Power’s Leakage theory that the popular belief that investment produces economic growth is wrong. You attempted to use historic GNP/GDP data to prove you point.

<That’s not quite what TCP was doing. I assume that unlike Bill Williams, you have read TCP’s book before commenting on what he says, but for the sake of onlookers who have not read it, here is a figure showing some of the data (much more, to the same effect, is shown in tables).>

My main point was that Rick seemed to be manipulating data to try to prove that increased investment DOES NOT increase GDP. In fact, he claims it is the other way around.

What your father actually was doing or observing or claiming is not really relevant to my point. I could have omitted the reference. But, I do believe Rick’s forray into economics was fueled by the work of your father (accurate or inaccurate).

If your father never made that conclusion or observation from the data he analyzed, I apologize for implying he did. Carefully observe the “It seems” in my statement. I was not intending to make any declarative statement or judgment about your father, or his work.

When it comes to your representation of your father’s discovery that Investment stays a relatively constant percentage of GNP, I have already posted about this. I have heard this from other sources who have also noticed this and I never heard them give any credit to your father’s work (as if perhaps they were never aware of it).

Now, I would suggest that you might want to carefully review the meaning of Investment in the claim that it does increase GDP and what the graph you show means. If the graphed variable includes capital spending and profit, then it is not a pure measure of Investment and belies any claim that Investment does not have any major effect on GDP. Even in my own post, I pointed out that what people with GDP Income do with respect to Investment or Profit is indeed a separate matter and varies depending on many factors.

I stand corrected. Like I said, it was my impression that Rick was “trying to prove” a conjecture about investment (one that I may have assumed also came from your father’s work/book). But, its Rick’s work that I complained about, not your father’s. Others clearly complained about your father’s work. They speak for themselves.

Based upon your own impression of the validity of your father’s work, I would not be inclined to want to read his book.

With the conventional meanings of the terms, I have no doubt that increasing Investment also increases GDP, ALWAYS. It is a mathematical necessity. As I explained, other factors can reduce GDP more than the increase in Investment does. So, a generalization about Investment and GDP behavior, without being careful about the meanings of the titles corresponding to the data, can lead one astray. It seems to me they may have led you and your father and Rick astray.

Of course, if you can refute my claims and complaints, then I would learn something. That would be helpful. Any implication that I accept the critiques of Bill Williams about you, your dad or his economic wisdom without evidence would be off the mark.

···

Richard_Marken2 · August 2, 2004, 6:01pm

[From Rick Marken (2004.08.02.1100)]

Kenny Kitzke (2004.08.02)

My pun was that I perceived you playing with the GDP data for your own
pleasure/purpose

Doesn't everyone do whatever they do for their own pleasure/purpose (to
reduce error)? Is there something wrong with that?

Why, exactly, did you complain? I simply presented lagged correlations
between quarterly measures of investment and growth obtained over a 50 year
(or so) period. The results show clearly that an increase in investment
(public or private) does not lead to an increase in growth.>

As I recall, your analysis produced a weak correlation (less than 0.5) between
investment and GDP. To me, that would be sufficient reason to not draw any
conclusion about cause and effect, either way. It would be time to move on to
other types of study.

Which I did. I then looked at the lagged correlations to see if the trend
was in the "right" direction (higher correlation when investment leads
rather than lags growth) and, of course, it wasn't. The simultaneous
correlation between investment and growth is closed to .2, not .5 by the
way.

I pointed out that investment is a component of GDP and therefore one would
expect some correlation between increases in Investment and GDP.

That confound is eliminated by using investment/GDP as the measure of
investment, which, of course, is what I used in all my analyses.

Of course, when the other components of GDP (which are _always_ much larger
than Investment) go up or down, they swamp/mask the effect of Investment.

Nevertheless, a consistent relationship between investment (as a proportion
of GDP) and growth always shows up in the lagged correlations, even when
you look at different countries. Investment is always negatively related to
to future growth and positively related to past growth.

Instead of recognizing such economic realities and moving on, you now turn to
"lagged correlations" to try to prove your speculation that increases in
Investment DO NOT necessarily increase GDP. You massage the data searching
for a time interval delay where the correlation increases.

What economic realities did I not recognize? The only one I can see is that
investment will be highly correlated with GDP, which is unquestionably true.
When GDP grows, investment grows. That is why, in all my analyses, the
measure of investment is investment/GDP. Also, I didn't "massage the data"
looking for a time delay when the correlation increases. As I said above, I
looked at the lagged correlations because the simultaneous correlation
between investment (as a proportion of GDP) and growth was rather low. So I
thought of looking at the lagged correlations as a way to get more evidence
regarding the relationship between investment and growth. I reasoned that,
if investment really does cause growth, then prior investment should be more
positively correlated with growth than current investment. I was surprised
to find that, in fact, prior investment was _negatively_ related to present
growth and that subsequent investment was _positively_ related to present
growth.

First, lagged correlations DO NOT prove any cause and effect relationship any
more than any correlation does.

That's true. That's why I did the modeling. Models are the only thing that
tells you how cause and effect might be working.

Second, not one statistics book I posses even
mentions this method of analysis as a valid technique for showing which
phenomena is causing the other.

After doing my analyses I found that the lagged correlation has been used in
economic analysis to evaluate causality. It's called "Granger cause",
apparently because it was developed by C. Granger. Here's a reference to the
method: Granger, C., and Ling-Ling, H., ��Evaluation of Panel Data Models:
Some Suggestions from Time Series,�� discussion paper 97-10, University
of California, San Diego (1997).

Can you provide a reference so I can check
what can be done with lagged correlations and whether what you did comports
properly with such a method?

Yes. Here's a paper that uses lagged correlation to examine the relationship
between (among other things) investment and growth.

Attanasio, O., Picci,L. and Scorcu A. (2000) SAVING, GROWTH, AND INVESTMENT:
A MACROECONOMIC ANALYSIS USING A PANEL OF COUNTRIES, The Review of Economics
and Statistics, 82(2): 182�211. They found, among other things, that "
investment rates Granger cause growth rates with a negative sign and growth
rates Granger-cause investment with a positive sign". In other words, they
found exactly what I found, before I found it. Again, I found this paper
after I had done my analyses.

Even if there is any validity to your method of analysis, as I recall the
lagged correlation was still so low that most people would still question the
veracity of any speculations based on them.

As well they should. There is still plenty of work to be done. But I think
the analyses make it clear that the relationship between investment and
growth is not one where investment causes growth. Something more complicated
is going on which I think can only be understood if we develop models that
can account for this and many other observations of economic phenomena.

I believe Bill Powers even
advised you this way. But, you seem to ignore both of our pleas, continuing
to resist any disturbances to your desired belief.

Actually, my look at the investment-growth relationship had nothing to do
with any "desired beliefs" of mine (whatever they may be). I was just
checking to see what the data say about a commonly articulated economic
"truism": that investment causes growth. What I found is that this truism
must be based on something other than the data. If you look at the data,
what you find is that growth seems to cause investment. I've done the same
thing for taxes and growth because another economic truism is that increased
taxes lead to decreased growth. So I wanted to see if there was evidence of
this in the data. What you find when you look at the data is that growth has
been greatest during periods of high (progressive) taxation, exactly the
opposite of the truism.

What this suggests to me is that economists who propound these truisms are
not looking at the data.

Your analysis DOES NOT show that growth always precedes investment.

I didn't say it did. It shows that there is a negative relationship between
prior investment and current growth and a positive relationship between
subsequent investment and current growth.

I say balderdash.

But that won't change the facts.

And, Bill Williams has questioned whether you are even using the
right variables for your analysis: new investment vs. net investment.

Why should I care what Bill Williams questions? He has never said what is
wrong with the variables I used nor has he said what variables I should use.
I think he once said that I should use net rather than gross investment. But
I haven't been able to find net investment listed in any database. My
accountant thinks that the only thing net investment could mean is
investment less overhead costs (broker expenses, closing costs, etc). So net
investment is going to be very highly correlated with gross investment and I
suspect that the results of an analysis using net investment will show the
same thing as the analysis using gross investment.

That you don't seem willing or able to actually learn the meanings of the
variables you claim to correlate, analyze and then reach declarative
conclusions about.

I'm willing to learn. And I am learning from the producers of the databases
I use. I'm certainly not learning from you and Bill Williams since you seem
more interested in condemning than teaching.

Isn't it obvious to you that if net economic investment falls, even if new
investment increases, that GDP would not be expected to increase?

It's not obvious to me at all, largely because I don't know the difference
between net investment and new investment. How can net investment fall while
new investment increases? Where are the measures of net and new (gross?)
investment to be found so I can see how they vary over time?

Increased investment
does increase production (growth) but that increased production has to be
sold to consumers in order to pay for the cost of the increased investment
(and to make a profit).>

Balderdash. Increased investment increases GDP concurrently. It is one of
the components of GDP. If the investment also increases production, it would
further increase GDP as you say.

You are only looking at one side of the closed loop. I agree that increased
investment does increase production (and, thus, GDP). But increased GDP, if
reasonably equitably distributed, also allows the consumption of the goods
and services produced. There is a closed loop. And it looks like, within
that closed loop, increased investment follows increased demand rather than
vice versa.

Periods of economic growth, measured by GDP, provide more funds for
investment. But, increased GDP DOES NOT cause increased Investment. And, GDP
can increase without any increase in demand. It is called inflation.

All the GDP measures in my analysis are in constant dollars (inflation
adjusted) of course. So the growth I am looking at is real growth in demand.

It is also not always true that people only invest when they know there is
increasing demand. I know this first hand.

I do too. The aggregate analysis averages over speculators and on-going
business enterprises. That's probably one reason why the correlations are
relatively low.

Are you any closer to understanding why I complained about your analyses and
especially your conclusions?

I actually do understood why you complained about my analyses from the
start.

Best regards

Rick

···

--
Richard S. Marken
MindReadings.com
Home: 310 474 0313
Cell: 310 729 1400

Bill_Powers1 · August 2, 2004, 6:50pm

[From Bill Powers (2004.08.02.1131 MDT)]

Kenny Kitzke (2004.08.02.1230 EDT) –

Now, I would suggest that you might
want to carefully review the meaning of Investment in the claim that it
does increase GDP and what the graph you show means. If the graphed
variable includes capital spending and profit, then it is not a pure
measure of Investment and belies any claim that Investment does not have
any major effect on GDP. Even in my own post, I pointed out that
what people with GDP Income do with respect to Investment or Profit is
indeed a separate matter and varies depending on many
factors.

Your point about investment being included in GDP is a good one. It
should really be subtracted out before any relationship is calculated.
Rick, take notice.
find a cause-effect relationship in a closed-loop phenomenon. Increasing
money spent on the means of production will probably make more production
possible. But if this is done before there is an increase in demand,
there will not be enough buying power in the hands of the consumer to
purchase the increased output (speaking in terms of macroeconomics, of
course). On the other hand, if there is an increase in (potential) demand
before production increases, there can be no increase in production until
purchases of as-yet-nonexistent goods occur. Buying and selling, supply
and demand, are always in equilibrium because they are just two views of
the same transactions. So we appear to have a conflict here.
In my view, the proper analysis has to start with the closed loop, and
the closed loop has to contain both inventories and cash reserves as well
as paths by which transactions take place. And in a model constructed
like that, the natural equilibrium between buying and selling can’t be
disturbed more than transiently just by increasing or improving the means
of production. Well, there is one way, but it hasn’t been tried much. If
there are increases in productivity, this can lead to an increase in the
flow of goods and services provided that prices drop at the same time to
accomodate a finite supply of money, so the increased output can be
purchased. Of course in money terms this will leave GDP or GNP unchanged,
but it will lead to an increase in the standard of living by requiring
less work to meet consumer needs and wants, or an increase in consumption
without requiring an increase in work, or some conbination of the two
effects.
If more money is available, then an increase in productivity can bring
about both an increase in GNP and an increase in standard of living. To
the extent that money is needed to increase productivity (it often
helps), increasing investment can produce an increase in GNP, and indeed
is required if both GNP and consumption per unit of work are to increase.
But the net effect is not causal: GNP and investment rise and fall
together as, for example, the money supply increases and decreases, and
as productivity changes for whatever reason.
The relationships among variables, both scalar and cumulative, require
differential equations to be expressed correctly, and causation is far
from obvious. It’s the same situation as in any control loop – see the
paper on Properties of Negative Feedback Control Systems that I
distributed at the meeting. In a control loop, the variables
p,e,qo, and qi are related to each other by functions you encounter as
you go around the loop. But when you solve the equations, you find that
each variable is a function of only two variables that are not
even in the loop: the reference signal r and the disturbance d. The local
relationships inside the loop are entirely misleading when it comes to
predicting how the variables in the loop will change.

The way this translates into the closed-loop economic model, as far as I
can see right now, is that we find that the money used for investment and
the overall activity measured as GNP vary in a ratio of 20 to 80
(empirically determined), not causally but as a consequence of changes in
demand (consumer reference levels) and productivity acting together on
the balances in the closed loop. When the real controlling factors
change, both investment and GNP change, remaining in the ratio found by
TCP in the data.

With the conventional meanings of
the terms, I have no doubt that increasing Investment also increases GDP,
ALWAYS. It is a mathematical necessity.

The mathematical necessity, in the light of my closed-loop analysis, is
simply that increasing production requires an almost proportional
increase in investment in the means of production; that is, the
investment required is found to remain at about 20% of the increase in
production measured in dollars. But you can’t make this happen by forcing
any variable in the closed loop to a different value. Rate of consumption
and rate of production have to be in long-term balance, and the monetary
books have to balance. The only independent variables in this loop are
consumer desires, the desire of owners and creditors to extract money
from the system, and the ingenuity of those who get more output from the
same labor. Once the independent variables are set, all the others are
determined.

I can’t prove this yet, but I think that when investment is translated
into productivity changes, we will find that there is a specific
“market for investment” that is determined by the independent
variables in the system. If there is either over or under investment,
imbalances will occur that force investments back to the (apparently)
optimum value of 20% of whatever change in GDP has become possible. When
interest rates are included in the model, we will begin to see the
mechanisms behind the market for investment. Some year. I think I need a
couple of extra lifetimes.

Best,

Bill P.

···

From my point of view ( not TCPs), the problem here is one of trying to

Kenneth_Kitzke_Value · August 3, 2004, 12:47pm

[From Kenny Kitzke (2004.08.03)]

Thanks for the credit, Bill. I do not comprehend why Rick can’t see his error or can’t appreciate the helpful feedback he claims to desire but does not feel he gets from Bill Williams re economics. I do not claim to be an expert in economics, but I have a fair amount of education and experience and success in economics from a business standpoint. Where I can help you, when you want help with the Test Bed, I certainly will offer ideas and concepts.

Some capital investments increase production capability. Some do not. In business, many capital equipment investments are aimed at speeding up production, or reducing human labor, to save time or money; not to increase capacity. The automation of one step in a production process happens all the time in companies when the overall system production capability remains limited by other steps, often called the “bottleneck”.

I have tried to explain before that a “transactional” model of the economy, where produced products (goods or services) are exchanged for money is more properly called a model of a market economy or of a supply and demand economy. Now, you get into accounting methods and conventions with equalities such as dual ledger bookkeeping and all its rules.

But, Bill, surely you recognize that the economy of a busines or a nation has non-transactional elements? Concepts of weath, value, assets, etc., are not measured soley by transactions. An economy is a complex web of loops and definitional challenges.

This is your view and your approach. Go for it. See what you can discover. I do not want to rain on your parade. But, I see this as a tiny start in one concept of economic activity model and one that leaves out important processes in a nation’s actual economy. So, I have a hard time getting very excited about a model that does not refect the nature of the reality. I guess it is similar to my conviction that understanding behavior is helpful in understanding an important part of human nature, but the part can’t define the whole or explain the whole when the whole is what is of value.

In this, you show an appreciation of the difficultly in modeling a complex economy with a few simple control loops which disturbs me. But, you have also acknowledged making a start and then expanding the model to better match the economic system that operates/behaves every day. I do like that and believe your Test Bed could be revalational compared to other models and theories.

I have no problem here. I think this is similar to your concept of a behavior control loop where acting, perceiving and comparing are continually operating. They are not linear, sequential functions.

Are you saying that neither of these statements are always true about the economy?:

a) Increasing Investment increases GDP

b) Increasing GDP increases Investment.

If so, isn’t this contrary to Rick’s conclusions? What is your explanation?
<The relationships among variables, both scalar and cumulative, require differential equations to be expressed correctly, and causation is far from obvious. It’s the same situation as in any control loop – see the paper on Properties of Negative Feedback Control Systems that I distributed at the meeting. In a control loop, the variables p,e,qo, and qi are related to each other by functions you encounter as you go around the loop. But when you solve the equations, you find that each variable is a function of only two variables that are not even in the loop: the reference signal r and the disturbance d. The local relationships inside the loop are entirely misleading when it comes to predicting how the variables in the loop will change.>

Wow. BTW, that paper is the only one from the Conference that I have not gotten around to reading. I surely will now.

The emperical fact that Investment is an essentially constant proportion of GDP in our economy, does not preclude or prove that increasing Investment increases GDP does it?

These are sensible theories Bill. And, your models may well help test them against past performance. Then, if verifiable, they would be helpful presumably in future economic decision making. If you don’t have the time, perhaps the seeds will be planted for others to complete? You would have added great value to economics if that were to happen.

I can’t help but notice your use of “optimum” which seems to relate to what Bill Williams refers to as something like the “maximation” theory of economics. I hope he will chime in constructively. I think that the desire to maximize profit, or value creation, is a reasonable goal for an economy, for a society, for a company and for an individual, especially if you believe in Hell (tongue in cheek). How about you?

Kenneth_Kitzke_Value · August 3, 2004, 2:14pm

[From Kenny Kitzke (2004.08.03)]

<Doesn’t everyone do whatever they do for their own pleasure/purpose (to reduce error)? Is there something wrong with that?>

Certainly: whenever it hurts or deceives other people. And, that is common as rain. Check the news of the day. HPCT does not help humans much with these experiences. It is ethically neutral science.

I pointed out that investment is a component of GDP and therefore one would
expect some correlation between increases in Investment and GDP.

See Bill Powers remark to you. Investment/GDP is not a valid measure of Investment. So, neither are your conclusions about Investment valid.

<Nevertheless, a consistent relationship between investment (as a proportion
of GDP) and growth always shows up in the lagged correlations, even when
you look at different countries. Investment is always negatively related to
to future growth and positively related to past growth.>

Only as you defined/measured Investment. See my other comments to Bill P. about the proportion of Investment in GDP, and the meaning of the Investment parameter. Does it include Profit too?

That “Investment” is a mathematical component of GDP. Thus, when Investment increases, it automatically, ALWAYS, increases GDP to that extent. And, measuring Investment as I/GDP does not elimate the confounding of your analyses of economic reality.

<Also, I didn’t “massage the data”
looking for a time delay when the correlation increases. As I said above, I
looked at the lagged correlations because the simultaneous correlation
between investment (as a proportion of GDP) and growth was rather low. So I
thought of looking at the lagged correlations as a way to get more evidence
regarding the relationship between investment and growth. I reasoned that,
if investment really does cause growth, then prior investment should be more
positively correlated with growth than current investment. I was surprised
to find that, in fact, prior investment was negatively related to present
growth and that subsequent investment was positively related to present
growth.>

Again, positive or negative correlation relationships, lagged or otherwise, are no proof of cause and effect or lack thereof. My use of the word “massage” may have a connotation of deliberate manipulation. That is not how I mean it. I mean the way you can keep looking at and using data to prove things to yourself and others that may not be justified. You know the quote, “There are lies, damned lies and statistics.”

First, lagged correlations DO NOT prove any cause and effect relationship any
more than any correlation does.

<That’s true. That’s why I did the modeling. Models are the only thing that tells you how cause and effect might be working.>

Unless I missed something, I did not see any working models other than statistical analyses. As far as “Granger cause” I will try to explore this, but I don’t know when I will find the time. I do not sense they are mathematicians. Other people using lagged correlations to even study Investment vs. GDP and drawing cause and effect conclusions from it would have the same questionable problems for me that I have pointed out to you.

And, I suspect that the “something” may have more to do with how you define and measure Investment and GDP and analyze their relationship. You simply have not proved that Investment (the way economists or politicians conceive it) DOES NOT increase GDP (with the same qualifier) in subsequent time periods. Just the fact that even the lagged correlations are so low should be a red flag about trying to draw general conclusions from that relationship.

You may have shot down a straw man and taught all of us to be more precise with the kind of general claims and sound bites that politicians tend to make concerning the behavior of complex systems like economies. But, you seem to be doing the same on very weak relationships. If that is all you have done, so be it, it might still be worthwhile. I agree more work should be done.

It might help if you cleaned up your words. What you found in your analysis is a relationship. “Seems to cause” is simply speculation, not proof. I do not find it remarkable that Investment tends to rise as GDP rises. I find it highly plausible. Did you expect to find the opposite?

<I’ve done the same
thing for taxes and growth because another economic truism is that increased
taxes lead to decreased growth. So I wanted to see if there was evidence of
this in the data. What you find when you look at the data is that growth has
been greatest during periods of high (progressive) taxation, exactly the
opposite of the truism.>

Here we get into tax rates, proportions of taxes as a fraction of income, and many confusing and confounding variables similar to the relationships betweeen Investment and GDP. Are you really concluding from historical data that to grow the economy fastest we need to have tax rates of 100% of income?

Your analysis DOES NOT show that growth always precedes investment.

OK. But what you did say is that “Growth seems to cause Investment.” And you said the data refutes that Investment causes Growth. I think we are into word gymnastics.

As an accountant looks at it. We are not studying accounting. We are studying economics. Monetary investment in an economy has the element of adding capital expenditures and subtracting depreciation allowances to determing net book investment. Both are taking place in an economy and ignoring the second element and just concentrating on the added investment is just plainly jaded. But, I am not a certified economist. Perhaps you should listen to one?

<I’m willing to learn. And I am learning from the producers of the databases
I use. I’m certainly not learning from you and Bill Williams since you seem
more interested in condemning than teaching.>

Your characterizations of what others are doing or intending has made you many enemies in the CSG, people who do not want to dialogue with you any more. I resent your characterization of me. I have offered you constructive criticism. Bill can see it. I have no idea why you can’t learn from me. But, I think it is your problem if you reject sound advice. In any event, I will not stop dialogue with you. I respect you too much.

I am out of time to comment more except for your closing.

Are you any closer to understanding why I complained about your analyses and
especially your conclusions?

Then why near the start of this very post did you say, “Why, exactly, did you complain?” Are you internally inconsistent. Do you read minds? Dare to expose this understanding publicly or privately?

Bill_Powers1 · August 3, 2004, 3:01pm

[From Bill Powers (2004.08.03.0857 MDT)]

Kenny Kitzke (2004.08.03) --

Thanks for the post on economics, Kenny. I think we will eventually see eye
to eye. I feel hampered right now because I'm not working on the model,
having too much else to do, and don't know when I will be able to get back
to it to start checking out some of my conjectures. But your encouragement
counts and makes me want to get back to it so I can get more encouragement :-).

Best,

Bill P.

Bill_Powers1 · August 3, 2004, 3:20pm

[From Bill Powers (2004.0.8.03.0905 MDT)]

Kenny Kitzke (2004.08.03)--

(Rick)That confound is eliminated by using investment/GDP as the measure
of investment, which, of course, is what I used in all my analyses.>

(Ken)See Bill Powers remark to you. Investment/GDP is not a valid measure
of Investment. So, neither are your conclusions about Investment valid.

Valid/invalid is a bit of an overstatement. Inaccurate is more like it.

Rick, consider this. Let I be the rate of investment, and T be the rate of
all other tranactions. GDP is then equal to I + T, since an investment is a
transaction and counts toward GDP (I believe this is what Kenny is
referring to). Obviously, even totally unproductive investments will
increase GDP because they are transfers of money or value. Correct me,
Kenny, if this isn't what you meant. As a result, you should measure the
lagged correlation between I and (GDP - I), so as not to be looking at the
correlation of I with itself. You should find a lower correlation.

Kenny, Rick is not "manipulating" numbers to prove a point. When you do a
lagged correlation, you test all lags from negative (preceding) to positive
(following). The results could have come out with the changes in GDP
following the changes in investment, which would support the usual
assumption about causation. They happened to come out with the maximum
amount of relationship occuring when GDP is correlated with later rather
than earlier investments. There's no way to force that answer to come out
one way or the other: the record of changes in GDP and investment
determines it. The only way you can throw out that result is not to do the
test in the first place.

Best,

Bill P.

Kenneth_Kitzke_Value · August 3, 2004, 5:09pm

[From Kenny Kitzke (2004.0.8.03.1235 EDT)]

(Ken)See Bill Powers remark to you. Investment/GDP is not a valid measure
of Investment. So, neither are your conclusions about Investment valid.

If one uses inaccurate data for the measure of Investment to draw conclusions about what Investment does or does not do, I would suspect that the conclusions would be invalid.

<Rick, consider this. Let I be the rate of investment, and T be the rate of
all other tranactions. GDP is then equal to I + T, since an investment is a
transaction and counts toward GDP (I believe this is what Kenny is
referring to).>

Well, if we want to be picky about words, rate of investment and Investment are different things; have different meanings. As I understand the supposed “truism” that Rick claims the data he has used, and his analysis of the data, refute is that Increasing Investment increases GDP. The truism in question, the conventional economic perception under investigation, IS NOT about what changing the rate of investment does to GDP. Your above sentence seems to interchange quantities and rates and is itself confusing. I can guess what you really mean, but why should I have to guess?

<Obviously, even totally unproductive investments will increase GDP because they are transfers of money or value. Correct me,
Kenny, if this isn’t what you meant.>

This is how the data is defined. I am pretty sure. I even checked. Yes, all current Investment (productive or not) increases current GDP. This is just mathematically factual.

Of course, I suspect that conventional economists, and politicians, when they claim that increasing investment will grow the economy as measured by GDP, they expect GDP to grow by MORE than the Investment. I also do not think they are very specific about how much later in time after the Investment the GDP will increase above the Investment made. This adds difficulty to validly refuting the claim.

And, a bigger point is that the correlation is already so low that drawing any valid conclusions about how things work (what is causing what) is suspect.

<Kenny, Rick is not “manipulating” numbers to prove a point.>

OK, it just seemed to me like that is what he may be doing. I would hope that it is not the case.

If the test does not reveal any significant correlation, and if the test in no ways proves that one thing causes the other even if there is a significant correlation, I can and do throw out the result that the data shows the conventional truism is untrue. That may not be manipulating the numbers to prove a point, but it surely seems like reaching a conclusion that is not necessarily valid (no evil intention implied).

Richard_Marken2 · August 3, 2004, 5:21pm

[From Rick Marken (2004.08.03.1020)]

Kenny Kitzke (2004.08.03) --

I pointed out that investment is a component of GDP and therefore one would
expect some correlation between increases in Investment and GDP.

<That confound is eliminated by using investment/GDP as the measure of
investment, which, of course, is what I used in all my analyses.>

See Bill Powers remark to you. Investment/GDP is not a valid measure of
Investment. So, neither are your conclusions about Investment valid.

I recalculated investment as a proportion of GDP less investment
(I/(GDP-I)), rather than just as I/GDP So, for example, private investment
was calculated as Ip/(GDP-Ip). I've attached the results. The results are
almost exactly the same as when I used I/GDP.

Nevertheless, a consistent relationship between investment (as a proportion
of GDP) and growth always shows up in the lagged correlations...Investment
is always negatively related to to future growth and positively related to
past growth.

Only as you defined/measured Investment.

No. It also happens when investment is defined in the way that you say is
valid. See attached graph.

But I think
the analyses make it clear that the relationship between investment and
growth is not one where investment causes growth. Something more complicated
is going on which I think can only be understood if we develop models that
can account for this and many other observations of economic phenomena.

And, I suspect that the "something" may have more to do with how you define
and measure Investment and GDP and analyze their relationship.

See attached graph. Your suspicion is incorrect.

You simply
have not proved that Investment (the way economists or politicians conceive
it) DOES NOT increase GDP (with the same qualifier) in subsequent time
periods.

See attached graph. It proves that investment (in the way you say that
economists and politicians conceive it) does not lead to an increase in GDP
in subsequent time periods. Clearly, the idea that investment leads to
growth comes from somewhere other than observation of the data.

If you look at the data,
what you find is that growth seems to cause investment.

It might help if you cleaned up your words. What you found in your analysis
is a relationship. "Seems to cause" is simply speculation, not proof.

It's neither proof nor speculation. It is a description of a perception of a
relationship between variables. It _looks like_ a causal relationship where
prior changes in growth lead to subsequent changes in investment.

Are you really concluding from historical data that to
grow the economy fastest we need to have tax rates of 100% of income?

No. I am concluding only that one can observe that when tax rates have been
higher growth has been greater. This is what the data show. The explanation
of why that happens is the job of models. The control model of the economy
explains this as a result of redistribution which increases net demand.
It's not the tax rate that matters but the distribution of taxes over
income. Taxation must be progressive so that there is redistribution of
income through government spending. If there were a flat tax, there would be
little redistribution and, thus, very little increase in demand.

Your analysis DOES NOT show that growth always precedes investment.

I didn't say it did. It shows that there is a negative relationship between
prior investment and current growth and a positive relationship between
subsequent investment and current growth.>

OK. But what you did say is that "Growth seems to cause Investment." And you
said the data refutes that Investment causes Growth. I think we are into word
gymnastics.

But growth does seem to cause investment. And the data certainly do refute
the idea that investment causes growth. If nothing else, the data suggest
that the notion that investment causes growth -- the basis of Bush's tax
cuts mainly for the rich -- is based on something other than observation of
the relationship between investment and growth.

I'm willing to learn. And I am learning from the producers of the databases
I use. I'm certainly not learning from you and Bill Williams since you seem
more interested in condemning than teaching.

I resent your characterization of me. I have offered you constructive
criticism. Bill can see it. I have no idea why you can't learn from me.

The one piece of "constructive criticism" I got was to subtract investment
from GDP. I have taken your advice and recalculated and found exactly the
same result as before (see attached graph). Now the question is whether you
can learn from me.

But, I think it is your problem if you reject sound advice. In any event, I
will not stop dialogue with you. I respect you too much.

Thanks.

Regards

Rick

···

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Richard S. Marken
MindReadings.com
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