Wednesday, May 25, 2022
More Economics Confusion
Economics is a science. If you begin with fundamental economic principles, you can derive implications - laws - that are true. You can build models of the economy with them, and they will work. They'll tell you what is going on and they'll let you make good conditional predictions, that is, if this then that. And you'll be right.
On the other hand, if you build models on an arbitrary basis, your models will not be any good, except by luck. You'll ignore fundamental principles, and in effect be denying universal laws... an approach formalized in historicism. And you'll be wrong, except by accident.
With this in mind, and recalling the previous post, WaPo provides an excellent (i.e. terrible) example of confusion in economics.
“There remains a significant gap between consumers’ demand and businesses’ ability to supply it,” said Adam Ozimek, chief economist at the Economic Innovation Group. “People’s desire to consume more goods than businesses can produce is leading to a rise in prices, and consumers are going to feel that in their pocketbooks.”
Oh, those darned consumer desires! If only they didn't want so much!
Look, this is stupid. People always desire to consume more. Blaming inflation on consumer desires is ridiculous. People always desire more, but that doesn't mean inflation. Instead, consider this: The Fed greatly increased the money supply and the federal government handed out this additional money as Covid payments, or spent it itself. Either way, nothing increased the supply of goods, so more money bid up up the prices of the goods. But in addition, the federal government has been shrinking the supply of goods, first with Wuflu lockdowns, and then with increased regulation (raising costs of producing goods) and by shutting down energy production. Ozimek has no conception of causality; he simply notes disequilibrium and arbitrarily assigns the problem to unreasonable consumers.
Hey Ozimek, the government dumped extra fiat money in the economy - so when people spend it, prices go up! MV = PY. Did you sleep through Principles of Macro? If you increase the stock of money faster than the growth rate of goods and services, as the government has done, then prices will rise.
He compounds his foolishness by suggesting that when consumers demand more, suddenly they will "feel that in their pocketbooks." He's trying to blame an exogenous increase in consumption spending for inflation. But if there were an exogenous increase in demand (there isn't) this would mean increased scarcity, not inflation. An increase in demand means an increase in willingness to pay. People who are suddenly decide they are willing to pay higher prices aren't shocked by higher prices, they initiated them. It appears he slept through Principles of Micro as well.
Lesson: Modeling can done on an ad hoc basis, from arbitrary starting points. If this, then that doesn't require correct premises, but logical conclusions from false premises won't match reality. If you start from false premises, you can build an impressive house of cards. You can even apply some non-robust tests that fail to falsify it, and declare it "science," but it is nonsense and leads to false conclusions.
Don't do this!
