Controls, Measures and Relevance

["John B. O'Donnell" <jackodonnell@xxxxxxxx>]

Since things seem a bit quiet lately, I thought I might give you
all a target. Rather than try to post all my arguments here [They
are be a bit long for a mail list and can be found on my web
page.] I will only quote the major conclusions from my _Three
Steps to Economic Freedom_ and provide a short explanation of
each. First the conclusions from Table 4 of Three Steps, etc.
[Formatted in fixed pitch ASCII]:
_______________________________________________________________

                        TABLE 4

         Measures, Goals, Controls and Assumptions

FUNCTION         STEP I           STEP II           STEP III

Measure:         Money Value      Tax Revenue       Gross
                                                    National
                                                    Product

Goal:            Stability        Growth            Growth

Control:         Federal          Tax rates         Citizen
                 Reserve                            Dividend
                 Open Market
                 Activity

Assumption:      Credit           Monopoly          Opportunity
                 availability     abuse hinders     fosters
                 affects          economic          economic
                 money value      growth            growth

___________________________________________________________________

The first issue to address is a thing called Ashby's rule of
requisite variety. I'm not certain the version I present here is
the correct statement of the rule, but it serves my purpose --
"For each control a measure and for each measure a control."

The significance of this rule is that if one tries to use two
controls to influence the outcome of one measure there is no
rational way to decide which control to adjust, but if the two
controls do, in fact, affect the same measure the consequences
are merely present a difficulty of selecting which control to
use. However, if one tries to adjust a single control to
accommodate two measures [Say attempting to control an interest
rate and the value of money both by the same control.] the result
when the two measures diverge is more than just a nuisance of
choice. The outcome of ignoring one measure to concentrate on the
other can have very dire effects. It is for this reason that I
assign only one measure for each control and limit each control
to one measure.


The selection of goals to be accomplished are my arbitrary
selections but I doubt that many will disagree with the choices
of stability for the unit of value measurement; growth for tax
revenue [Which is tautologically related to the growth rate of
capital. (See the arguments in 3 Steps, etc.)]; and, growth for
total economic activity as measured by the Gross National
Product. The more significant issue is the relationships of the
controls, measures and assumptions needed for the relationships
to be true.

In the instance of the effect of Federal Reserve System open
market activities of buying and selling securities that monetize
government debt or extinguish previous money creation, the
consequences are usually recognized as including an effect on the
value of the currency. It is just that it is usually assumed
[generally correctly] that there will also be an effect on an
interest rate and possibly even employment from these activities.
But, as noted above in the discussion of Ashby's rule, using one
control for two measures is not a good idea. I will address the
consequences of controlling the interest rate and employment a
little later. for now, let it be sufficient to accept or reject
that FED open market activity does or does not affect money
value. For those who choose to not accept this fact there is no
hope, for those who recognize it as reality, I shall continue.

The most significant consequences of making a choice is the
effects that thereby become relegated to side effect status.
However, whatever choice is made, all other effects are in fact
relegated to this status. For example -- we could [As is often
done.] select an interest rate as the measure of choice for
monetary policy. This leaves the value of the currency as a side
effect. This choice requires the specific value of an interest
rate to be occasionally changed when inflation gets intolerable.

On the other hand, if a stable value of the currency is selected
as the measure of choice the long term interest rate will have a
zero inflation component. A long term rate ia not the usual
choice of an interest rate measure to be used in conducting
monetary policy but starting with a long term rate  makes the
analysis a bit simpler. This is because the rate curve from short
to long is normally reflective of the higher risks associated
with longer periods of time. This is to say that so long as the
curve is normal, a lower long term rate will encourage a lower
short term rate.

The thing that can make the curve abnormal is all but exclusively
the result of corrective actions that become necessary because
the short term rate used as a target for monetary policy has been
held too low for too long and excising the resulting inflation
requires the short term rate to be raised significantly above
what would be required to merely restrain inflation from
occurring in the first place. The consequence of this is that the
market may assess that a high short term interest rate will be
successful in defeating the inflation and long term rates do not
rise to incorporate the new higher interest for the entire extent
of the term of the debt.

I will refrain from such lengthy explanations for the rest of
issues raised and wait to see if anyone gives a damn that a new
look at economic cause and effect relationships just might be
worthwhile. I am, of course, willing to enter into discussions of
any and all of my arguments on or off list.



			-- jbod
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