Wednesday, July 19, 2006

economic theorizing

Yep, back to economics. I feel as though I'm getting a bit of understanding, but I'm not there yet. Hence, a return. This time, though, I'm not playing the predictive game. I'm noodling about with a monetary theory. Actually it might be a broader theory than that, but let's leave the label alone for now.

I need to start with a definition and a formula.

definition. Money is anything that is used as a representation of barter between parties displaced in time, space, and intervening trades.

formula. QxV=M, where Q is the aggregate Quantity of goods and services, V is the value of the nominal median of the aggregate of goods and services, and M is the aggregate money supply.

Now, the Austrians say that inflation is an increase in M, and whether the equilibrium is maintained by an increase in Q, V or both is immaterial. The Keynesians say that an increase in V is inflation, and again whether the balance comes from Q or M is immaterial. I personally am getting real tired of the word inflation (and its antonym deflation) given the homonymic situation and the arguments over the "one true definition" it engenders. So I'm not going to call anything inflation or deflation yet. Instead, I want to examine some apparent truisms of the model.

Truism. No agency controls the entirety of any aggregate.
Consequence: A change by an agency of the portion of an aggregate within its control can be balanced by a change in either of the other two aggregates AND/OR by a change of another component of the same aggregate. To use an example, if a nation cranks up its printing presses (M), it could result in a corresponding increase in V, and/or in Q, and/or in a decrease of another M such as credit.

Truism. All aggregates are worlds within worlds. The Q, V, and M of a nation are a subset of the global QVM. It is possible for an equilibrium change at a smaller level to be contrary in both composition and direction to one of which it's a set. Thus, the US could be experience a severe increase in V and M while the world sees things as not changing or balancing in a different fashion - for example, decreasing the portion of Q that is the US and so keeping global M stable.

Stumbling issues - what, exactly, is Q and V (and M for that matter). I keep discovering that some things can fall into both categories. For example, are loans M or V (or, for those exchanged as goods, Q)? No, that's silly. They're almost always M, and usually contribute to V. I suspect that an outgrowth of this will be an indicator of the aggregates likely to be affected by a given component. Again, if loans are reduced (thus cutting M), there's likely to be a sympathetic effect in some aspect of V.

Employment is mostly Q while wages are mostly V. Actually, I begin to think that wages are almost entirely V. They're implicity tied to one another in an odd way that is contrary to the normal method maintaining equilibrium. Normally I would expect the any changes in Q due to V to be reciprocal. However, increasing wages (increase of V) tends to have a corresponding increase in employment (increase of Q), which necessarily forces an increase in M. Equally, changes in wages tends to have a disproportionate affect on the aggregate as a whole - that is, eventually an increase in wages causes an increase in V. In other words, the worry of the fed that increased wages will cause inflation (keynesian OR austrian) is confirmed. It's just a question as to whether it's direct (increasing wages causes increase of V independently, and M moves to keep up) or indirect (increasing wages increases Q which increases M which pulls V up as M overcompensates.)

Oh - over-compensation. I think all the aggregates have what is simply described as a sort of inertia. They don't really want to change. And while they prefer to remain steady, they don't stop on a dime once moving. I think (look at all the guesses in this) that for the most part the likelihood of a component affecting the aggregate depends on the size of the component relative to the whole and the severity (both speed and distance) of the change.

Ok, that's the outline. We'll see how it works over time. Specifically, I want to ponder what it says about the confluence of oil (a very large V with lesser increase in Q) and housing (Q, V and M?) But that's prediction and I'll get to it later.


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