tag:blogger.com,1999:blog-8764541874043694159.post5318102322500416010..comments2024-03-29T07:36:55.897+00:00Comments on Coppola Comment: The law of rotten applesFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-8764541874043694159.post-80062945957957070182013-08-28T12:13:05.330+01:002013-08-28T12:13:05.330+01:00What I am trying to say in my comment above is tha...What I am trying to say in my comment above is that we should try to make more complex models. After-all we have computers to do the heavy lifting and a couple of thousand goods and services and locations could be analysed and fit into general economic macro AND micro models.<br />Same for econ. theories that often, also are time and place dependant as we are learning at present. (inflation is always a monetary phenomenon everywhere and... blah blah)<br />chumblyhttps://www.blogger.com/profile/13012548095839667409noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-18588645854296447822013-08-28T12:03:12.309+01:002013-08-28T12:03:12.309+01:00Great post - the analysis of apples. I never knew ...Great post - the analysis of apples. I never knew all that :)<br /><br />If we are going to be valuable economists shouldn't we try to analyse every good and service, or as many as we can manage - say 100 or so. And get all its contexts such as, location - which country, psychology of buying, fashion, advertising, peer pressure to buy, health aspects. <br /><br />What is the analysis for 1) Antibiotics? <br />a) No value at all unless we need them to treat a disease then huge value, we'd pay a fortune to heal ourselves b) Cannot overdose on them bc it would be poisonous, so supply/demand curve truncated c) Only some people need some types of antibiotics, the others are not worth a penny to them. d) Huge production lead times and costs.<br /><br />2) Dry food that does not go rotten - that opens a whole new can of economic worms.<br /><br />Are generalised models good enough? Every professor will say they are worthwhile in one respect but on the other hand they are not.<br /><br />chumblyhttps://www.blogger.com/profile/13012548095839667409noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-9357499379227804242013-08-27T12:38:46.112+01:002013-08-27T12:38:46.112+01:00I did allude to over-production caused by over-inv...I did allude to over-production caused by over-investment, actually. It was subtle, but when I suggested that the farmer would diversify I meant he would cut down some of his apple trees and grow other crops instead - or leave the land fallow, or sell part of it for development. <br /><br />You've defined inflation and deflation as changes in the general price level. So did I, actually. But price changes don't happen for no reason. I looked beyond that to the CAUSES of changes in the general price level. The change in the price level reflects the balance of supply and demand. <br /><br />I completely disagree that deflation does not cause demand destruction. Persistent deflation IS demand destruction, by definition - prices fall because supply chronically exceeds demand. The deflationary spiral described by Irving Fisher and illustrated by Steinbeck in "The Grapes of Wrath" is a demand collapse, not a supply failure. And inflation does not destroy demand, it accelerates it, as people consume more in the present in the expectation of higher prices in the future: increasing consumption drives further price rises. If money remains neutral, deflation begets deflation and inflation begets inflation. To control inflation, therefore, we create artificial scarcity of money relative to goods to subdue demand. But when the problem is deflation, we need to create an excess of money relative to goods to encourage demand. <br /><br />However, the point I am making in this post is that there are occasions when tinkering with the money supply isn't enough to solve the demand problem, because the underlying problem is actually some kind of supply failure. Collapse of production causes hyperinflation when governments respond by printing money to stimulate demand instead of fixing the supply problem. Persistent over-production of goods saturates the market and causes the price to fall to zero regardless of the amount of money in circulation. When there are more apples than anyone can eat in any form, they are worthless. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-45174611237431824592013-08-27T12:18:04.370+01:002013-08-27T12:18:04.370+01:00I completely disagree that ZIRP is causing replace...I completely disagree that ZIRP is causing replacement of labour with capital. If anything it is the other way round. Businesses are seeing so few long-term profitable opportunities that they are not investing in capital equipment and are using cheap labour to operate on a day-to-day basis. I've written about this extensively. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-36333044095499660042013-08-27T10:32:19.258+01:002013-08-27T10:32:19.258+01:00You're right... an abundance of goods is, by i...You're right... an abundance of goods is, by itself, not a sufficient antidote of poverty. The problem, however, is not distribution of wealth. The problem is that the 'poor' don't get to participate in the production process. Like I've argued in a post under this topic, we pay for other people's production with production of our own. Money being merely a medium of exchange.<br />I pose that this situation is a result of the zero interest rate policy (ZIRP). Today, financing is too cheap and this leads to a scenario where entrepreneurs are replacing human labor with capital equipment at a rate so fast that labor doesn't have time to re-adjust. In short, the low interest rate regime is hurting the ability of people to participate in production.Johnsonhttps://www.blogger.com/profile/16147769199494946998noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-35390658451711483532013-08-27T10:20:54.416+01:002013-08-27T10:20:54.416+01:00Useful analysis... I always like using Robinson Cr...Useful analysis... I always like using Robinson Crusoe. Makes a lot of things easier to explain. I can always introduce Man Friday to the economy and so on and so forth.<br />You have developed a couple of issues such as inflation and deflation... as well as production, trade, innovation, recession and destruction of produce. <br />I, however feel, you've mixed issues. Inflation is a general increase in pricing levels while deflation is a general reduction of pricing levels. The cause matters. Deflation doesn't cause demand destruction... but inflation does.<br />Overproduction and underproduction may or may not imply overinvestment and underinvestment. Overproduction as a result of apple tree giving birth is not within the control of the producer. Overproduction as a result of over-investment, however, is. Overinvestment, according to Austrian economists, is exposed by overproduction and the structural realignment process is what causes a. deflation and b. recession.<br />I also see a glossing over the importance of production to an economy. Jean Baptiste Say taught a long time ago, what many people misunderstand as Say's law, where he says we pay for other people's production with production of our own... i.e. production creates demand. The definition of money 'as a medium of exchange' fits snuggly in this world view. Many economists think that money is wealth and Bastiat points this out... however, the correct proposition is that money is a store of wealth as a result of production of other citizens. This may raise the issue of money being non-neutral non-neutral but that is a derivative of three problems in finance- principal-agent problem (problem between the citizen and the central bank), the problem of information asymmetry (inflation leads to purchasing power collapse which lags the process of money creation and therefore cause-effect is hard to determine) and the problem of adverse selection (expressed as Gresham's law).Johnsonhttps://www.blogger.com/profile/16147769199494946998noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-51475042616091162202013-08-26T14:02:58.815+01:002013-08-26T14:02:58.815+01:00There is a possibility that in the Western world, ...There is a possibility that in the Western world, at any rate, we are reaching the point where too many goods are produced. We still have poverty, but that is caused by distributional problems rather than supply shortages. We have abundance of goods, but too many people don't have enough money to buy them. I think this is the cause of the disinflationary trend in most Western economies. <br /><br />My inflation example is indeed caused by a negative AS shock. I did say I would put this in econospeak if anyone wanted me to! <br /><br />On the upside, yes I would agree that monetary policy should have no effect on aggregate wealth, generally. I'm simply questioning the view that people necessarily "choose" to save money instead of spending. If goods really are abundant (positive AS shock!), people simply are not able to consume enough in the present to absorb all production in the present. Clearly, if abundance is cyclical (as in my example), the supply side needs to transform excess production into forms that can be consumed in the future when there is scarcity - hence cider - and people will hold money in order to enable them to consume those transformed goods in the future (mulled cider at Christmas, yumm). But persistent over-production of goods that have a short shelf life can severely damage the supply side unless some means is found of supporting prices. Our farmer really can go out of business if the price of apples falls to the point where it is not worth his while picking them. Governments tend to support farm gate prices when there is over-production for exactly that reason. <br /><br />I did intend this as a post about AS effects on inflation and deflation, actually - I've been meaning to write about that for a while. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-43728587330168036372013-08-26T13:07:45.706+01:002013-08-26T13:07:45.706+01:00Frances,
This is an interesting post, but I don&#...Frances,<br /><br />This is an interesting post, but I don't think your stylized model (I now have a craving for apple pie!) maps into the GE framework. Because the market for apples is supposed to represent a composite market of all goods, to have "too many apples to consume" literally means there are too many goods produced that nobody could ever want anything! But given levels of childhood hunger and other obvious examples of scarcity, this seems very unlikely.<br /><br />I would also want to add to your pest example. Clearly, if a pestilence wipes out the apple stock, then this is a reduction in aggregate wealth. So no matter what the central bank does, on aggregate society would be worse off. In this case, inflation is bad because it's the result of a negative AS shock.<br /><br />But by thinking about money and apples, it's clear why central bank monetary policy should have no effect on aggregate wealth. While it's true that apples have a higher "price", it's only because people are holding more money! They can still afford to buy the apples, and therefore they won't rot on the trees! Of course, if price fluctuations are severe enough that production loses value too quickly, it could be that the supply side is hurt.<br /><br />As a more general point in the two examples, the focus should be on shifts in aggregate supply, and not just inflation. You do it, but perhaps a more explicit treatment would have been good.Yichuan Wanghttps://www.blogger.com/profile/15398092824604478764noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-34096761440245808822013-08-26T11:31:18.287+01:002013-08-26T11:31:18.287+01:00in the top right hand corner it should say 'de...in the top right hand corner it should say 'design' next to 'sign out'. Click on 'design'. This takes you to the template page. There should be a small image of your blog under the heading 'live on blog'. Click on 'customise' under that image. This takes you to the blogger template designer. In the top left hand corner under 'templates' it says 'adjust widths'. Click on that and you can change the text box width. philnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-63505960259833652502013-08-25T18:56:12.697+01:002013-08-25T18:56:12.697+01:00Now introduce apple Prepay. ie tokens returnable i...Now introduce apple Prepay. ie tokens returnable in payment for (say) a kilo of apples.<br /><br />Farmers now have the option of funding themselves by selling apple tokens at a discount to the market prices and using the proceeds to pay costs of production instead of getting into debt with banks.<br /><br />Investors may sell the tokens to other investors, or simply use them to pay for apples from the producer or even - possibly - apples from other producers who are members of the Apple Clearing Union.<br /><br /><br /><br />ChrisJCookhttps://www.blogger.com/profile/04210399176675359293noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-55539308178628857032013-08-25T18:38:23.873+01:002013-08-25T18:38:23.873+01:00I have no idea how to do that! I have no idea how to do that! Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-70496844229857756762013-08-25T15:54:41.861+01:002013-08-25T15:54:41.861+01:00Nice post.
By the way, you can make the main text...Nice post.<br /><br />By the way, you can make the main text box wider in blogger, so it fills up more of the screen. (Just saying, in case you didn't already know)philnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-25345646654009603052013-08-25T10:45:57.932+01:002013-08-25T10:45:57.932+01:00Their actions suggest they think the problems are ...Their actions suggest they think the problems are demand-side - extensive use of monetary easing is a demand fix. This is consistent with the view that the economic problems stem from the financial crash and are mainly caused by a badly damaged financial system. But I think there are are supply-side problems that are not being addressed, notably high energy prices which have clobbered industrial production for the last three years. I've written about this before. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-52511498827736375402013-08-25T10:38:23.317+01:002013-08-25T10:38:23.317+01:00Question is, do western governments believe the cu...Question is, do western governments believe the current problems lie with demand or supply? Their actions seem rather schizophrenic.<br /><br />Perhaps they simply don't have a clue and are trying to sit on the fence?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-63108420410340607652013-08-25T10:19:08.421+01:002013-08-25T10:19:08.421+01:00If there are no substitutes for the crops that hav...If there are no substitutes for the crops that have failed, giving people more spending power merely pushes up prices - as I said in the post. Supply-side failures need supply-side fixes. The problem is that they can look like demand failures: it is easy to interpret people starving because they can't afford food as a problem of tight money and unequal distribution, when it may actually be a supply failure. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-13761514811826295682013-08-25T10:09:35.264+01:002013-08-25T10:09:35.264+01:00Helpful explanation Frances, however, the "cr...Helpful explanation Frances, however, the "crop failure" scenario begs the question: Will giving more spending power, via whatever route to the general populace, actually achieve any kind of recovery?<br /><br />That, of course, depends on one's perception of prevailing shortages. Anonymousnoreply@blogger.com