Re: Interest Rates and inflation

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

"Alan G. Isaac" wrote:
>
> On Fri, 22 Dec 2000, John O'Donnell wrote:
> > So many words to say that the Phillips curve has nothing
> > useful to say.
>
> John,
>
> Your reply is truly bizarre.
> First you get all in a lather because you
> think that economists use the Phillips curve
> to say something that they patently do not.

I'm still not in a lather and I still say the same thing
I've been saying all along. There is no meaningful
relationship between inflation expected inflation,
unexpected inflation, changes in the rate of inflation
whether expected or not and the level of employment or
production. Whatever correlation exists is coincidental, not
evidence of a causal relationship.

<<SNIP>>

> You need to ask yourself why it is that
> Phillips curves are an important component
> of so many macro models, who predictive accuracy
> is (despite Gunnar's untethered critiques) not
> bad for such a young discipline.  The answer,
> which was contained in my last post, is that
> **proximate** causality is an important part
> of the description of a dynamic system.
> And yes, issues of proximate causality are
> an important part of short-run policy making.
> They just do not imply that economists make
> the kind of silly policy claims that you
> (used to?) say they do.

A claim of "proximate cause" is still a claim of cause. Use
of such excuses in models does not change the fact that they
do not represent reality. Worse yet is basing policy
decisions on such beliefs. The irrefutable fact remains that
no matter how you slice it, dice it, or correlate it the
tautological certainty is that the only way to aggregate
economic totals is by their value, price or some other proxy
for value. They can not be meaningfully aggregated by there
weight, area, volume or any other physical dimension.
Because of that fact and the equally certain fact that every
dollars worth is worth a dollar, every standard hours worth
is worth a standard hour, etc. so that any representation of
changing the size of the dollar, standard hour or any other
proxy of value can not directly in itself affect physical
production either beneficially or in any other way. The only
thing that happens when the size (value) of the measuring
stick is changed by inflation or a change in the inflation
rate or whatever other monetary manipulation proposal is the
DISTRIBUTION of purchasing power of the existing and future
money issue.

Because the effect of such changes on distribution are
neither known or even knowable, neither can the effect of
changes in inflation on the distribution be known. Read
Keynes. The aggregate propensities to save and consume (i.e.
-- the distribution of purchasing power) are the motivators
that must be affected in a beneficial way in order to effect
a beneficial outcome on the economy. It is just unfortunate
that one of his suggested ways of accomplishing that end was
monetary policy which has subsequently been adopted by some
economists as the preferred remedy in every economic
downturn regardless of the historical evidence of actual
outcomes. It will likely take a lot of suffering before the
zealots of this fallacy are defeated.

--
			-- jbod

		Tax Privilege, Not People
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