So, the plan laid out in Part 1 of this series was, and still is, to discuss the idea of an inflationary vs deflationary currency, especially as it pertains to Bitcoin, and the larger Keynesian/Austrian debate. However, as this touches on one of the most controversial and fundamental arguments between traditional economists as well as Bitcoin enthusiasts, I need to touch on one point first, one that applies to most economic conversations.
Spend a few minutes on Reddit, and you will see that the emotional and rhetorical levels seen in this debate are off the charts, to the detriment of all involved. Outside of religious fundamentalism (and possibly not even there), the dogmatic approaches to economic issues are unrivaled in their violence and fervor. You are more likely to see the pope accept Buddah as his savior than you are to see a Keynesian embrace methodological individualism, or an Austrian to accept that macroeconomic forces can be modeled based on observable statistical data. This is not an argument that is going to be settled, ever, but that does not mandate or excuse the level of venom from both sides that is injected into the conversation.
So here is the biggest point to take away from everything that follows here, and anywhere else you choose to read about economics:
We are all wrong. And we are all right, insofar as none of us are provably wrong.
The real problem is that economics (the field, and those who study it) still suffers from the delusion that this is not the case. While it can be approached “scientifically,” it is not a science in the way that physics is (and for the record, that field still has huge fundamental differences in interpretation as well). Economics, despite the use of so many numbers in the mainstream practice now, is not math, but a combination of political theory, social psychology, game theory, and philosophy. Every school, every law, and every theory in the field of economics, is basically just a really fancy opinion. Now, they can be really well thought out, and based on a plethora of examples and solid theoretical underpinnings, but that doesn’t make any of them predictive, and that’s the problem.
Think of an economist the way you do a meteorologist. They have a lot of data about what has happened in the past, and a lot of theories about why they happened, and yet the prediction of the weather, even over as short a time period as a few days, remains almost impossible. There are just too many variables that can’t be measured and accounted for, and too much complexity in the system even if we could have values for all of them. So what they can do is one of two things:
1.) They can look at how weather patterns work and the forces that they know are involved, from convection to gulf streams to the condensation points at various altitudes, and try to synthesize certain principles that make logical sense based on this information (Austrian approach).
or
2.) They can collate as much of the data as possible into a huge database, and create a “dumb” model that says, “in the 100 observable situations we have measured in which case variables X, Y, and Z were found at the same time, there resulted n instances of O1 outcome, n instances of O2, outcome, and n instances of O3 outcome” (Keynesian approach).
Both of these are very reasonable ways to go about this process, and yet both contain extremely troubling methodological problems from a predictive standpoint. Each attempts to deal with the “known unknowns” by either reasoning them away (Austrian), or modeling/regressing them away (Keynesian), but neither is capable of addressing the “unknown unknowns” despite seeing their effects everywhere (In physics, this is basically where the dark matter theory came from, but the lack of absolute laws in economics prevent you from working backwards to missing data in equations).
Again, think of this in terms of weather prediction. I used to live in the midwest, and often times in the summer, we would have hot muggy air coming up from the south and cooler, drier air coming from the northwest. Every so often they would come together just right, and we would be warned that circumstances were ripe for a tornado. Weather people who favored one approach would look at what they know of how tornadoes form, then work back from there to figure out why the weather patterns that were converging on us would interact in such a way that logically we should get a tornado. Other weather people would look back at their data and say, “over the past 70 years that we have been collecting data, the combination of conditions today were present most frequently on days when tornadoes were observed, so we are most likely to get a tornado. Both are sound approaches, that arrive at the same conclusion, that there was a good chance a tornado was going to form.
Then we would usually not have a tornado.
There is a similar situation where I live now, in Oregon. Being in a valley in the Pacific Northwest, with some mountains to the east and a big warm ocean to the west, conditions are pretty perfect for rain a lot of the time. Both logically based on what we know of meteorology, and observationally based on what has happened in the past, you can often count on seeing Weather.com show you a 30-60% chance of rain at any given time here. But like all of the cliches about predicting the weather, and if you don’t like it just wait an hour, etc., etc., it’s pretty much a coin-flip whether or not they are correct in their assessment just days or hours ahead of time.
And yet, I never see people fighting so viciously over weather prediction as I do economics.
The primary reason for that is that we can’t entirely separate our own political and moral beliefs from economics. We just can’t. Due to the fact that an economic argument is tied to a policy argument (i.e. I believe in X theory/school, so I want the government to do Y), we all have an agenda, from the ivory tower economics to the professional bloggers to the people fighting on Reddit, including me. By suggesting that our opponents, whoever they might be, have some bias that underlies their analysis, the implication is that we ourselves are free from such a problem, and therefore our analysis is superior, but that’s simply not the case. Everyone has an agenda when it comes to economics, without exception. It doesn’t necessarily invalidate anyone’s opinions, but it can’t be ignored either, simply because this is not a context-neutral environment.
Another big impediment to having a reasonable discussion between followers of different schools of economic thought is that very rarely are people even talking about the same thing, and if they are it is probably by chance. Let’s take the relevant concern here, in this case ‘Is it better for the economy to have an inflationary or deflationary currency?’ This is usually how the debate is phrased, or something similar to this.
What does “better” mean? How are we defining success or failure? Per capita GDP? Real wages
Further more, what is “the economy,” exactly? Is it some autonomous, ethereal collection of statistics? Is it made up of actual people who participate in commerce? Is it the entire population of a place that uses one currency? In this era of globalization, can one country really even have an economy that is separate from the global economy?
Without even defining the parameters of the debate, how can we hope to answer the central question? And yet, it’s not easy to do.
So, what’s the solution?
This is discourse, and that means that words matter. There are no absolute truths in economics, which means that we can’t speak in absolutes. We also too often use words with a moral or religious overtones, such as “good” or “bad” that have no real-world meaning in this context, as economies are non-sentient and have no agency, so they cannot recognize or ‘behave’ in a manner that is positive or negative morally. Above all, we need to explain our thought process to reveal our preconceptions and acknowledge that we are expressing opinions, rather than just shouting at eachother.
So, here is an example of a terrible way of saying something that might have value:
“Federal deficits are bad and so is anyone who disagrees!” (Absolutism, moralistic, no context)
Here is a way to say the same thing that has a great deal of value in a conversation:
“I believe that growing government deficit spending can potentially have a negative impact on future economic growth and social prosperity because increasing debt liability, combined with expansion of the monetary supply in order to cover servicing the interest payments thereof, can force governments to allocate resources in a sub-optimal manner in the long run and prevent capital from being put to its most efficient and logical use.”
See what happens there? I said everything that was in the first example, but fleshed it out and worded it in a way that is productive rather than combative.
Normal Krugman/mainstream economist response:
“You’re dumb and don’t understand modern macroeconomics.” (Absolutism, moralistic, no context)
Better response:
“I see what you are saying, and I understand the need to be cautious with deficits to prevent the cost of servicing that debt to become unmanageable (acknowledging historical examples like Weimar republic), however, in looking at the past 130 years worth of data from the 20 most developed economies in the world, sovereign debt/GDP ratios have been more than one standard deviation above where the current US ratio X times without a corresponding drastic rise in inflation or correlation to negative adjusted GDP growth.” (numbers are made up, it’s just an example argument)
Now, I realize that I am asking a lot here, especially for the internet. My point though, is that while we may disagree on an issue, if one person (Krugman, in this case) takes the time to think about a position and write several hundred words on the issue, while we (Bitcoin supporters) simply respond with a variant of “you’re wrong and I hate you,” he essentially wins by default.
You have to play to win, and most people will (correctly) assume that if you can’t articulate your position, then you don’t really have one.
Ok, NOW the next post is on to the potential effects of a deflationary vs. inflationary currency!
Ok, NOW the next post is on to the potential effects of a deflationary vs. inflationary currency!
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