Economic theory Value

Aristotle contra the math stick: Magic numbers redux

In the last post I explored how magic numbers, such as a 90% debt-to-GDP ratio or a 2% inflation target, at once over-simplify and stifle economic policy debate. The role of magic numbers raises more general questions about “the rule of number” in economics. The math stick used to browbeat those who enter economic policy debates can be so effective in part because quantity has primacy over quality and means have primacy over ends in economic debate. Bear with me here, but to see this more clearly we should go all the way back to Aristotle. Things might get a bit abstract, but I’ll try my best to reign them in.

Aristotle asked what seem to be fairly naïve questions. For example, he ruminated on why it is that a particular number X pairs of shoes trades for one house. How is that two very different things – one for walking in and one for living in – are brought into a very specific quantitative relationship through human trade? Sometime towards the end of the 19th century, economics stopped asking such questions, precisely deeming them naïve and nonsensical in the process. A house “costs” five pairs of shoes because someone is willing to offer five pairs of shoes for another’s house. The first will get as much out of the house as the second from the shoes and exchange, usually via money, in a particular ratio allows them to come to this conclusion – simple and pat. End of story.

Not quite, says Scott Meikle, author of Aristotle’s Economic Thought. Ending the story here actually leaves ends completely out of the picture:

The consequence [of this commensurability is] that the question of ends cannot be formulated within economics. It is perhaps the most important question that can be asked in respect of economic matters, and whatever answer may be favoured, it does not reflect well on a theory if that theory is incapable of even formulating the question.

Economic theory Value

There is no good value

A piece in the Financial Times from several days ago has finally pushed me to scribble down a few initial thoughts on value – a topic I been thinking about more and more. Titled “The attack of the rentier killers”, the article argues that the wealthy who hold and receive income from assets will fight low interest rates and rising inflation tooth and nail because it lowers the value of their assets. Paul Krugman has recently picked up on this topic as well, while the notion that only sustained low interest rates can “euthanize” a dangerous, politically-motivated rentier class originally comes from Keynes.

There is much to be said about this claim. One question is whether there currently exists a well-defined rentier class whose interests are opposed those of a class of capitalist producers. The growth of finance and its increasing integration into all other aspects of the economy challenge this idea. Furthermore, the current application of extraordinary monetary policy has produced a combination of low interest rates and low inflation. The former decreases the flow of gains from interest-bearing assets; at the same time, the latter means that all assets better maintain their value. Finally, current policy has led to a greater concentration of assets (I posted some thoughts on this here), which has disproportionately benefited the wealthy.

In writing this, however, I was motivated by a smaller point that comes right at the end of the Financial Times article:

Based on [the previous] analysis, the surest sign that our society is on the verge of […] a secular stagnation story is the increasing frequency and severity of bubbles today. But if they’re really symptomatic of the death throes of the rentier class, then perhaps they shouldn’t be feared by central bankers at all?

Instead, central bankers should start thinking about ways to create entirely new forms of positive value in society based on social, educational, sustainable or even humorous activity? Carbon credits, RINs, energy rationing units, brownie points and Dogecoins, and so forth.

I want to focus on the phrase “positive value.” I take this to be opposed to “negative value.” A likely example of the latter would be the financial returns that accrue to rentiers while asset price bubbles are being inflated; with the problem being that these same bubbles also end up harming others when they burst. The argument is that rather than continue to allow for the creation of financial bubbles that have negative economic impacts, we should instead create sinks into which rentiers can pile their money looking for higher returns, but which will also be socially-useful. Tongue firmly planted in cheek, the author even suggests feel-good brownie points as a worthwhile “positive value”-generating asset bubble vehicle.