Tuesday, August 12, 2014

Wendy's Old Fashioned Scientific Terms

I was reading an old book, and I don't mean to name names but it's definitely an instruction in why we need mathematical economics! Bertrand Russell once said "A good notation has a subtlety and suggestiveness which at times make it almost seem like a live teacher.". It doesn't follow that a bad notation is like a quack spreading confusion, but it is true and one can find it in old books like diseased mosquitoes preserved in unholy amber.

A Marshall

The confusion is around the economic notion of the "short run" and "long run", terms that I think were introduced by Alfred Marshall. Marshall, the old empiricist, noticed that in the beginning of the industrial revolution people tended to be immiserated by machines, then later they (not necessarily the same people, but "the people" all the same...) became exponentially wealthier because of the fruit of the capital. This was probably already known by other economists before him, but I plead ignorance about their. This was one of many things that were noticed by Marshall. Marshall was a talented monetary theorist in addition to everything else, developing the cash-balance (that is, demand oriented) version of the quantity theory of money. In so doing, he must have noticed that a bit of inflation now can give a temporary boost, but in the long run inflation tends to hurt. The modern version of this observation - which is now called "dynamic inconsistency" - got Finn Kydland and Edward Prescott a Nobel Prize.

Marshall put these two empirical eggs in one basket, perhaps wrongly. He divided the economy into two different "runs", the "short run" where inflation boosted things and new machines immiserate workers and the "long run" where better capital is the source of most wealth and low inflation is good. This is very misleading! What Marshall was after was the fact that the economy can be modeled by - in a way, "is" - different dynamical systems, some where some things are held still and others where others are held still. I think this is well known in economics, but don't feel like looking it up. There will never come a day in which we are suddenly out of the short run and into the long, or vice-versa. It is always 40 years from 40 years ago, the long run of our fathers is already here. It will always be this time tomorrow in 24 hours. The right way to think about these issues, perhaps the unique one, is the perspective of dynamical systems.

Marshall chose the term "short run" and "long run" because of the empirical facts, he was observing the industrial revolution turn from a force that throws workers on the streets to one that feeds them all healthily. You argue that he was after and dimly perceived an idea like a Kuznets Curve, but not well or forcefully. Kuznets showed that there exists some economic dynamics that can produce Marshallian runs. It doesn't take much thought to realize that there are far too many dynamic paths for just one, Malthus believed that one would get an exponentially curve during a growth phase, followed by exponential decay in the famine phase- like the following:

Since this is periodic, it completely lacks anything like Marshall's simplistic idea of runs. I'm not saying this particular dynamics is the true dynamics of the wealth of nations - in fact there is absolutely no empirical evidence that it is. What I mean is that the dynamics that Marshall talked about are not fundamental, but the terms make it seem that they are. In fact, the dynamics questions in economics are right now at the forefront of the field, both in theory and in empirical matters. Thomas Piketty's best selling book is, at root, about the empirical underpinnings of dynamic models of the economy - what features must a model have and which must it lack to resemble reality.

Mislead by Marshall's terms, several economists and writers on economics have made daffy mistakes. As I already noted, in the above book, Henry Hazlitt notes without irony that it took more than 40 years for Marshall's long run to get to workers in the garment industry. Hazlitt strangely takes this as vindication. Perhaps it is for one notion, but the theory he puts around it is filled with confusion. The notion was fundamental to the worldview of economist Joan Robinson. She thought that the greatest task facing economist was to turn idealized periods into real time, in other words to do dynamics. Sadly, she contributed nothing to this task

There has been much written about dynamics and equilibrium. A modern has no excuse for making the excuses of the esteemed ancestors written about in the previous paragraph. The book reviewed below is a good primer for the theory of dynamics in general.

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