Costs and Priorities Isn’t About Describing Price Dynamics, It’s About The Implications of Prices and Politics, Within A Cultural Context.
Last time I talked about money and prices. Money is a scoring system, and prices are set by humans.
I need to expand or ammend what I was saying in that post. For a money issuer, prices are simply set. They do this based on their role as the issuer of points. Others will accept their scoring system to varying degrees for many reasons. If earned points are money used for exchange, those who accept a scoring system must negotiate prices with one another internally. But most scoring systems aren’t specifically designed for facilitating exchange.
The most basic reason people accept the influence of a scoring systems, as I described in my last post, is because it is information. The relevance, importance, and influence of this information is a cultural phenomenon.
Scoring systems can have great influence based on information alone, but that isn’t enough to give earned points purchasing power. By that I mean that the influence of the points in the scoring system is usually limited to certain activities in a specific context.
In a soccer game, the influence of the points is limited to directing the behavior of the players on the field. Reddit karma and gold have little or no influence outside of Reddit. Monopoly money all goes back into the box when the game is done. But within the right time and place, these points are the most important thing in the world.
Culture makes a scoring system influential or relevant, but politics is power.
When scoring systems are recognized both culturally and politically, they become particularly potent.
To have purchasing power, a money system must allow for exchanging points and facilitate exercising political authority over resources. Entities can’t issue currency or other assets unless they have some kind of political authority, whether it is a state issuing fiat, or a business giving out stock. Political authority allows issued assets to represent valid resource claims.
Currency issuers still must negotiate, but their negotiations aren’t specifically about price levels. They negotiate all political terms of rights, roles, obligations, and power dynamics needed to establish sovereignty. Prices are only one aspect of these negotiations.
Chartalism and MMT
These ideas about money are based on chartalistism, including MMT. I subscribe to both these schools of thought.
I’m not aware of chartalism or MMT exploring the relative importance of culture vs politics on monetary scoring systems.
MMT/Chartalist thinkers are still somewhat distracted by the obsession in econ and finance with prices and inflation. Finance fundamentally seeks to exploit price dynamics for expansion of personal wealth and influence. Financiers should be more concerned with effective resource management, and view expansion of personal wealth and influence as a positive side effect of good finance and common abundance.
To their credit, many finance people approach finance with this mindset, but precious few outside of MMT appreciate and articulate the huge problems created by our political and financial programs for resource management.
I will explain why, even with MMT, price dynamics are complex and sometimes unpredictable. MMT is best applied as a tool for maintaining essential priorities and monetary value, even when faced with unpredictable market and price dynamics.
MMT is accessible and understandable, but traditional financial and political ideas create mental hurdles that make it less accessible than it would be otherwise.
Price Dynamics Involve Cultural, Economic, and Political Aspects
I am not a fashonista. It seems somewhat silly to me. But the way I look still affects what people think of me and the way I interact with other people. I don’t always do a great job with this.
Dress and appearance is interpreted in a cultural context. Again, I appreciate this, but I don’t understand how it works.
I love reading what Noah Smith writes about Japan. Japan will f*** up your macro models pretty quickly:
It seems to me, that cultural aspects are a huge part of Japan’s unusual economic environment. Noah cited “shrinking population”, “inefficient labor markets”, and an “economy out of touch with the rest of the world” as things that make Japan unusual economically. These pecularities seem to be rooted in aspects of Japan’s culture. They have strong traditional values when it comes to family and careers. These traditions have similarities and differences with cultural expectations in other parts of the world, and they play a big role in different economic dynamics.
Economists are as much an authority on social cultures, as I am on the latest fashion trends. Recognizing it is important is a first step, but we shouldn’t expect econ to fully describe price dynamics because culture is a huge part of it.
Even If We Can’t Predict/Control Prices, We Can Appreciate Their Effects, And Respond Effectively
Chartalism/MMT could potentially greatly improve our ability to predict and/or control prices. Warren Mosler is a junkie for understanding price dynamics and inflation on his blog, titled “The Center of The Universe”
In Mosler’s book, “7 Deadly Innocent Frauds of Economic Policy”, he describes an important channel whereby government could exercise a great deal of control over “inflation” or nominal market value of currency:
Let’s return to the first part of the statement — “the price level is a function of prices paid by govt. when it spends.” What does this mean? It means that since the economy needs the government spending to get the dollars it needs to pay taxes, the government can, as a point of logic decide what it wants to pay for things, and the economy has no choice but to sell to the government at the prices set by government in order to get the dollars it needs to pay taxes, and save however many dollar financial assets it wants to.
I don’t really like the concept of inflation. I think it is poorly defined and ambiguous. Inflation is a digest of nominal price levels and asset purchasing power. It is a useful metric, but an invalid concept, because it’s not clear how you are supposed to define it. How you measure and weight the terms in your Consumer Price Index will lead to different measurements of inflation.
Questions of inflation are covered by a more general investigation into price dynamics and the relative purchasing power of different individuals, and the required actions for securing that purchasing power.
We don’t really care about prices directly. They are just the intermediate step between “What do I get?” and “What do I have to do?”
I appreciate what Mosler was saying: Government can decide what it wants to pay for things. I stated earlier that currency issuers sets prices on activities to encourage those activities.
But this price setting power only gives government a single channel of influence over nominal price levels. It allows government, through tax and spending levels, to increase or decrease the purchasing power of saved government assets, which affords private entities more or less relative purchasing power. (Contracts denominated in terms of government assets are also affected, but they could be renegotiated if nominal prices changed significantly).
What it doesn’t afford government, is control over relative prices, or power to immediately change nominal price levels. If government needs a particular thing at a particular time, then it must set a relative price level that markets will respond to just like the rest of us. If government adjusts its offered prices down across the board, it must wait for the tax burden to kick in, increasing market demand for currency. This is complicated by the fact that people may be inclined to spend their savings due to lowering prices or decreased incomes, and the targeted deflation can be offset by this trend.
Government exercises significant control over price levels through taxing and spending, but even so, there are limits to this influence. We may face situations where government’s authority to tax becomes jeoparadized(panama papers?), or situations where people can’t or won’t fulfill government spending objectives/employment opportunities.
In a recent medium post(on philosophy of mind, not econ), I talked about how identity and narratives are closely related. Cultural narratives play a HUGE role in how we relate to one another both politically, socially, and economically.
I think our cultural narratives are failing us, it’s not just institutions, corporations, and public policies. This is an anthropological phenomenon. We can’t predict how we will respond to this or fix it. We can’t know what the culture of the future, or the future of culture, will look like.
Because culture is so important, and nearly impossible to describe with traditional analytical tools, I feel strongly that we should give up on trying to predict or influence certain trends from a policy/institutional level. Instead we should appreciate them and know how to respond to them.
The Real Job of Economists
If economists aren’t supposed to predict or describe all price dynamics, then what are they to do?
I see two main parts of economics that can credibly be investigated in a rigorous way.
Costs are real world limitations that aren’t confused by the complex human agents in the middle of it.
Rocket science is the easy part here people. If you want to travel to the moon, it will require this much fuel. Economists should be very concerned about costs. They should help us see the real costs of the things we want to do, to help us decide whether we want to do them.
Economists also, regretably, need to be concerned about human decision making. But it is not their job to disect the human agent and human society.
Instead, their job is to say, if you make your decisions in this way, this is the outcome. I think things like rational choice theory have merit, not for predicting how humans behave, but to help us decide if we want to behave a certain way or not.
DSGE can be useful! A properly constructed model can tell us, if we convince everyone to behave a certain way(which is what econ and business have been trying to do for ages), then this will be the outcome.
I suspect current DSGE models aren’t really looking for the dynamics we really need care about, stuff like inequality and legal/property rights(debt? anyone? Steven Keen?)and institutional policy can create emergent resource problems or social problems.(Perhaps it is the equilibrium part of DSGEs that is problematic)
DSGEs or not, agent modeling can be a useful and powerful tool of econ. But we should understand the agents don’t represent humans, it’s humans who assimilate the behavior of these agents.
Costs is about real world limitations. Priorities is the word I chose to represent the complex world of human and societal decision making.
Limitations and decision making are what econ boils down to. This is my thinking behind the “Costs and Priorities” conceptual framework.
