Re: P-Q space, Money and Standardized Barter

["Jack O'Donnell" <jackodonnell@xxxxxxxx>]

Harry Veeder wrote:
>
> 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.

Aside from the short lived Phillips curve there is no correlation
between macro P and macro Q. [i.e. -- He demonstrated a coincidental
relationship for a short period of time. However, like many such
relationships discovered by statistical correlation the coincidence
disappears almost as fast as it is discovered. The point being that
statistical correlations do NOT demonstrate cause-effect relationships,
they only indicate good places to look for those relationships.]

Without a logical connection among correlated data there is no reason to
believe the relationship(s) is(are) anything but coincidental. Such
relationships MAY provide an indication for future occurrences that CAN
be useful for making money in the market, but they do NOT provide any
insight into cause. However, when the assumed relationship is based on a
tautological impossibility any causal inference is just hogwash, even
though it may still provide a risky indication of future occurrences.

With a rational relationship even the absence of correlations may only
mean the relevant data to correlate has not yet been found. That is,
there may be undiscovered variables affecting the logically discovered
relationship that is of sufficient effect to hide the discovered
relationship. This does not make the logic wrong, it only means that the
logic is incomplete.

> (**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.)

A good example of a false conclusion based on an incomplete analysis. It
is not the logical arguments of Newton that are in error, it is only the
extension of those arguments to conditions that had not been examined
that is erroneous.

> <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.

Feelings don't replace logic. P plays a very significant role at the
micro level. However, at the macro level P is defined by the weighted
average micro p so it tautologically cannot be causally related to macro
Q. At the macro level there simply is no way other than fraud to
describe a dollar's worth of stuff as anything other than a dollar's
worth of stuff, whatever derivative dimensions or ratios may be used in
an attempt to hide that fraud.

> 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.

There is one effect of macro P on macro Q. That is, because people's
belief in the future value of money affects their decisions to hold
temporarily unneeded resources as either money or substance. However,
this effect is not dependent on macro P or macro Q, it is only dependent
on people's expectations of what the future value of money and their
other choices for value storage may be. The macro Q effect from these
beliefs are neither consistent nor controllable except that the
historical record of maintaining the value of money may give confidence
to future expectations. Knowingly maintaining the value of money
eliminates the uncertainty in the future value of money. I know of no
way to remove the uncertainty in the future value of any other choice an
individual may have for value storage.

It is probably this effect that created the circumstances that Phillips
observed. That is, while the immediate previous history of money value
had been stable the future expectation was also. It takes time for the
public to discover changes in policy and the short term changes may give
the appearance of economic improvement, but the policy could just as
well lead to a new word such as "stagflation." Without a causal
connection the outcome of caused changes in money supply/value can not
be predicted. Such policies simply cannot overcome the tautological
necessity to define macro P by the micro q weighted average of micro p.

> 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.)

True, but that's micro. Macro P is the weighted average of all those
decisions.

> 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.

No, the needle movement depends on there being an identified CAUSE
relating the two effects. It is also why such instruments must be tested
and calibrated to assure their reliability and accuracy.

<<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.

True for micro, but since macro P is the weighted average of those
decisions it not only is not true, it CANNOT BE true.

> ><<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.

But, without a unit to measure energy energy is just energy -- for all
anyone would know the flame from a match could be enough to power the
world. The units of measure are significant to "flesh out" any
meaningful relationships. Looking to accomplish such a fleshing with a
tautologically impossible set of dimensions is not a particularly
enlightened way to find meaningful relationships.

<<SNIP>>

> >> 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".

A very real issue of defining when production ends and consumption
begins. I define production as an increase in economic value and
consumption as a decrease. Measured production is an arbitrary selection
to accommodate the difficulties of measurement. It is also the reason I
have mentioned elsewhere on this list the silliness of economists
ignoring the very real and significant production by entrepreneurs and
managers in making the value of companies [i.e. -- their stock prices]
greater by their skills of organization, etc.

> >> >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.

Go back to the context. Certainly debt in general has macro
significance, but the issue was the economic insignificance of
government debt redeemable by government issued money so long as the
value of the money is maintained.

<<SNIP>>
--
			-- jbod

		Tax Privilege, Not People
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