P-Q space, Money and Standardized Barter

["Harry Veeder" <veed0001@xxxxxxxxxxxxxxxx>]

Jack O'Donnell wrote on, Thu, Mar 25, 1999 [Re: Saving and economic
development]:

>Harry Veeder wrote: [Re: What does big Q represent?]
>
><snip>
>> I don't quite agree with this. It is still possible to retain a belief in Q
>> but to set aside the idea that Q is (pre)determined by P. ie. put aside the
>> idea that an equilbrium is either the intersection or the overlapping of
>> AD -AS curves in P-Q space.  Or in other words, an effort should be made to
>> understand what an equilibrium is and how to measure it, before an attempt
>> is made to explain how it comes into being. I propose that we think of an
>> equilibrium as singular point or event that traces a path through P-Q space.
>> (John O'Donnell's pkt messages about points in P-Q space inspired this
>> idea).
>
>Q is not "predetermined" by P and I have never said it is.
<snip>

I Know. I was questioning your conclusion that macro P and Q have no
meaningful relationship based on the premise that P does not predetermine Q.
Even if there cannot be a functional relationship for  logical reasons**,
there is still an interesting correlation between the two. (**I don't think
logic can tell us what does or does not exist. For example, Newtonian
physics says space and time are "flat". Therefore Newtonian physics
logically implies that space and time can never be "curved", but there is
evidence which suggests otherwise.)

<snip>
> I have said
>and continue to say that macro P and macro Q are independent of each
>other.
<snip>

I feel there is a relationship between the two and that it is more than just
a correlation. There are many many factors which bring macro supply and
demand together but it is wrong to argue that macro P plays *no* role.

Price probably does play a partial role, the trouble is economics is
dominated by the belief that the only information needed to explain price
changes is price information. Or in other words, price changes can be
explained by assuming individuals make spending decisions purley on the
basis of price information or anticipated price changes. ( I suppose an
"economic decision-maker" acts purely on the basis of price information.) In
the physical sciences, this would like saying the movement of a
needle on a geiger counter is a sign of a change in the instruments electric
potential rather than being a sign of nuclear decay. Both interpretations
are "true", but the former overlooks important information. Of course, to be
aware of this it is necessary to know that there are nulcear forces
inaddition to electrical forces. Similarly, there are likely more "forces"
or information infleuncing the decisions of the spender then simply price
information. Hayek makes a similar point in his "Economics and Knowledge":

    "It has become customary among economists to stress only the need of
    knowledge of prices, apparently because--as a consequence of the
    confusions between objective and subjective data--the complete knowledge
    of the objective facts was taken for granted. In recent times even the
    knowledge of current prices has been taken so much for granted that the
    only connection in which the question of knowledge has been regarded as
    problematic has been the anticipation of future prices. But, as I have
    already indicated atthe beginning of this essay, price expectations and
    even the knowledge of current prices are only a very small section of
    the problem of  knowledge as I see it. "
    (Hayek, Economics and Knowledge. 1936)

<snip>
>There is no meaningful macro P-Q space in which to plot your
>single point. The error is in transferring valid micro economic analysis
>of Q as a function of P to the macro level. It just doesn't fly when one
>simply examines the dimensions needed to plot a point in this alleged
>space.
<snip>

As I explained above, there is a "meaningful" macro P-Q space. I don't know
if micro economic analysis is necessarily sound either. The official
research paradigm, as presented to the undergraduate student, for explaining
the origins of ANY equilibrium are supply and demand curves in P-Q space.
However, all the various shapes and combinations of S&D curves (wavy, flat,
verticle, number of intersection points, etc.) constitute *specialized*
approaches to modelling the origins of equilibrium.  They are *specialized*
because such models depend on the simplfying assumption that individulas
make spending decisions purely on the basis of current and/or expected price
information.

><<SNIP>>
>
>> >First, there is no physical measure that can aggregate things measured
>> >in such disparate physical dimensions as units, pounds, bushels, acres,
>> >etc.
>>
>> I don't think the problem is one of finding a physical measure. The problem
>> is one of identifying what should be measured. ie. What is the *common
>> element* that is the result of all production? (Once we know that, it is
>> conceptually easy to invent a measure although it maybe technically
>> challenging to execute the measure.)  I suggested in my last post that the
>> common element is information.
>
>Your right, the measure does not need to be "physical" it just needs to
>be something that can be priced per unit. Find that elusive measure and
>my argument denying a macro P-Q space dies. However, I don't see
>"information" as providing that measure.
<snip>

The concept of information is not intended to provide a measure anymore than
the concept of  energy can provide a measure of energy. It is intended to
flesh out the notion of "unit of production", and move beyond an exclusively
materialist view of production which, I feel, underlies most economic
theory. Information offers a physicalist view of production. Materialism
tends to identify production with what can be grasped or touched.
Physicalism, on the other hand, supplements materiality with more "nebulous"
entities like energy states, entropy, waves and fields. Anything that is
produced for exchange results in changes, even if minute, to these physical
properties, ie.  it results in an alteration of the information content of
the universe. Such changes would be calculated from macro economic
measurements, just as physicists use "macro" measurements like volume,
pressure and temperature to calculate changes in the energy and entropy of a
gas that is composed of trillions and trillions of interacting atoms.

<snip>
>> >Second, why is it necessary to know the precise amount produced? If the
>> >measures used can be reasonably relied upon to reflect a significant
>> >portion of what is produced changes in the measure can serve to test the
>> >effectiveness of policy changes expected to cause improvement [i.e. --
>> >an increase] in the measured portion of output.
>>
>> Because the *ratio* of GDP-A ,that which is currently measured, to GDP-B,
>> that which currently goes unmeasured, may decline with a growth in A. Policy
>> might call for an increase or a decrease in the ratio inaddition to overall
>> growth. In crude terms, we can say the production of wealth-A is
>> significanlty driven by the "money motive", whereas the motive(s) to produce
>> wealth-B are hard (if not impossible) to pin down.  I don't wish to debate
>> the reality, meaning, or significance of the "money motive". What I will
>> defend is my theory that many many different motives are required to produce
>> *all* the things that are of value to society, and that most of these
>> motives will remain a mystery to economists.
>
>Right again. But the problem remains one of finding these better
>measures. Until then, we're stuck with the measures that can be
>reasonably made and, to maintain our own integrity, acknowledgment of
>the measurement deficiencies whenever they are questioned.
<snip>

Yes.

>> Many goods and servives have a macro P of zero (dollars).
>> Some production is supplied at a price of zero, but it doesn't necessarily
>> follow that is has zero (dollar) value.
>
><<SNIP>>
>
>Goods and services sold for a dollar are a dollar's worth, regardless of
>the cost of production. If they do not and cannot be sold then such
>goods or services would not equate to any number of dollars' worth.

I was saying, in very a roundabout manner, that we can't know precisely what
people are buying with their money. They may not be just buying the thing
that comes with the price sticker. They may also be investing in less
tangible production that won't ever be for sale, but socially goes along
with the primary purchase. Although, with these other forms of production,
the supplier is not seeking money, the buyer is giving a dollar value to his
or her indirect "investments".

>> >Also, if the government budget includes only debt
>> >payable in the issue from the same source [i.e. -- not denominated in a
>> >foreign currency or a specific good such as gold, silver, etc.] the
>> >amount of deficit is of no economic significance so long as the value of
>> >the currency is maintained by a vigilant central bank.
>> >
>>
>> Isn't of "economic significance" for the person or group that has to hold
>> the debt?
>
>It is of micro economic significance, not macro. I should have been
>clearer.

I have hard time accepting that a debt has no macro significance. I just
don't understand the rationale that a nation can borrow from itself (and
therefore *never* has to return what it borrows). It is not true that the
nation is borrowing from itself. Rather one member of the nation (ie. the
government) is borrowing from the nation.  At anyrate, to call such a
financial operation "borrowing" strikes me as being misleading and
intellectually dishonest.


<snip>
>I hold no such materialistic view of value. Value is found in whatever
>people choose to value.
<snip>

This is why I said earlier that money is not necessarily inherently
worthless. Some people may freely value money even if some (or even most)
people are compelled to value it because of state or economic coercion.
A theory of money ought to recognize this possibility.

>It would be hard to find any economic production
>that does not simply add value to something that already exists or
>simply gives pleasure, however momentary, to people willing to pay for
>it. [See my response, above, to Barkley.]


><<SNIP>>
>
>> >Meaning that to the extent that substance is used as the medium of
>> >exchange the process is better described as "standardized barter" unless
>> >the medium is actually only a promise to settle in the standard
>> >commodity and not the commodity itself.
>> <snip>
>>
>> "Standardized barter" !? And you regard the notion of a "money motive" as an
>> economist's fantasy? You are being just as fantastical as Paul Davidson to
>> put forward the idea of standarized barter.  But no matter, all theories
>> start out as fantasy.
>
>"Standardized barter" is but one of several possible methods of
>facilitating exchanges. It is not the one I favor.

It is an interesting concept. We are probably obligated to
justify to our children the use of "standardized barter" rather
than simply pounding this "fact of life" into them.

Harry Veeder