As I noted in my last post, Greg and Tom had some great discussions in the Diary of a Republican Hater comments section this week. One thing Greg mentioned was Sumner and his preference to focus on money as a MOA rather than MOE. Greg pointed out the absurd numbers Sumner has used in past posts regarding the Quantity Theory of Money (QTM) and the price level:
"But can you believe Sumner actually said this again?"
"Once you pin down NGDP, then you figure out RGDP using real growth theories, and voila, you’ve got the price level. At this point you might be thinking; “you consider ’15 to 50 times the currency stock’ to be a precise scientific solution?” No, but it gets us in the ball park. It tells us why prices are not 100 times higher than they are, or 1000 times higher. BTW, prices in Japan are 100 times higher than in the US, and Korean prices are 1000 times higher. I don’t see how other theories can even get us into the right ball park."
"Prices are a 100x higher in Japan? 1000x higher in Korea? Does he mean gas is about 300$ gallon in Japan and 3000$ a gallon in Korea? Clearly not because thats obviously false. Does he mean the cost of living is 100x more in Japan and 1000x more in Korea? I hope not cuz thats provably false too."
"I’ll start with a sticky wage model (which I prefer), but don’t worry the other examples will all be sticky prices. We have a tropical country called “Barteria”, where the workers produce fruits and coconuts on large plantations. They are paid in what they produce, and barter these goods for other fruits, so they can have a diverse diet. However their wages are denominated in coconuts, and are “sticky” in coconut terms. But they aren’t paid in coconuts! Thus suppose they were all paid a wage equivalent to one coconut per hour, and their productivity is 1.2 fruit per hour. To make the math easy, assume the market price of all types fruit is initially equal to one fruit per coconut. Thus initially the equilibrium allows the owners to earn 0.2 fruit/worker/hour in profit, and everyone has a job. Their contract specifies they be paid 8 coconuts worth of fruit per 8 hour day, which at initial prices means 8 fruit for an 8 hour day, and they trade fruit with each other in flexible price markets."
http://www.themoneyillusion.com/?p=23269&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Themoneyillusion+(TheMoneyIllusion)
He pulls out all the stops including quoting Keynes-of course in a misleading way: 'crush the barbarous relic.' Keynes actually argued that workers are not irrational in refusing to take a nominal pay cut which goes back to another part of the Neoclassical catechism: Long Run Neutrality of Money.
http://diaryofarepublicanhater.blogspot.com/2013/08/never-let-serious-crisis-go-to-waste.html
Also, is it not typical that the economy in his thought experiment is a barter economy indeed, is named after bartering? This all seems to underscore what the critics of Neoclassicism say-that it's model is of a barter economy without money much less banks.
"But can you believe Sumner actually said this again?"
"Once you pin down NGDP, then you figure out RGDP using real growth theories, and voila, you’ve got the price level. At this point you might be thinking; “you consider ’15 to 50 times the currency stock’ to be a precise scientific solution?” No, but it gets us in the ball park. It tells us why prices are not 100 times higher than they are, or 1000 times higher. BTW, prices in Japan are 100 times higher than in the US, and Korean prices are 1000 times higher. I don’t see how other theories can even get us into the right ball park."
"Prices are a 100x higher in Japan? 1000x higher in Korea? Does he mean gas is about 300$ gallon in Japan and 3000$ a gallon in Korea? Clearly not because thats obviously false. Does he mean the cost of living is 100x more in Japan and 1000x more in Korea? I hope not cuz thats provably false too."
"And when I pointed this out to him on one of his own posts abut a year ago, Nick Rowe chimed in and defended him!"
"I think this is why Scott is always saying that the most important function of money is as MOA."
"I think this is why Scott is always saying that the most important function of money is as MOA."
Greg then makes a very important comment:
"If we can get some of the professional economists to hammer him on this and point out his stupidity, then we might be able to discredit monetarism as a serious school of thought once and for all. Trouble is you and I may be in the serious minority of people, everyone else may think Scott has a great point."
This is why I think Krugman is so valuable. He has the clout in the mainstream world. Sumner and other conservatives may not like it but they can't deny his greatness. What he says carries a lot of weight. Now Krugman himself never goes all the way though he teases around the edges like his recent comment about being more skeptical of the entire Neoclassical Synthesis showing skepticism even of Samuleson and ISLM. His real value is though is he better than anyone has the analytical skills to really call people out. He usually prefers to ignore Sumner not giving him what he wants-publicity. Face it, as John Farmer clearly calculate, even getting criticized by Krugman on his column is the jackpot.
In a 'speak of the devil moment' Sumner has a new post about MOA vs. MOE. You got to hand it to him- unreasonable, irrational workers are the problem:
"I’ll start with a sticky wage model (which I prefer), but don’t worry the other examples will all be sticky prices. We have a tropical country called “Barteria”, where the workers produce fruits and coconuts on large plantations. They are paid in what they produce, and barter these goods for other fruits, so they can have a diverse diet. However their wages are denominated in coconuts, and are “sticky” in coconut terms. But they aren’t paid in coconuts! Thus suppose they were all paid a wage equivalent to one coconut per hour, and their productivity is 1.2 fruit per hour. To make the math easy, assume the market price of all types fruit is initially equal to one fruit per coconut. Thus initially the equilibrium allows the owners to earn 0.2 fruit/worker/hour in profit, and everyone has a job. Their contract specifies they be paid 8 coconuts worth of fruit per 8 hour day, which at initial prices means 8 fruit for an 8 hour day, and they trade fruit with each other in flexible price markets."
"Then a coconut blight kills many of the coconuts, so coconut worker productivity falls in half. The price of coconuts in terms of other fruits soars, and yet workers continue to insist on being paid (the equivalent of) one coconut per hour. So if the price of bananas fell to 1/4 coconut, the workers would insist on being paid 4 bananas, so that they would be earning the one coconut that their contract specified. Unemployment results, as they are just not that productive. (Although liberals would accuse me of blaming the victim.)"
"Think my example is far-fetched? Think the workers would be happy getting their usual one fruit per hour? Think again. In 1930 the workers of the major industrial countries were paid in gold. Not gold itself, rather their wages were denominated in terms of so much gold per hour, paid in some other medium. Then in 1930 global gold hoarding caused the value of gold to soar. The price of the commodities that workers buy fell in terms of gold. You might think workers would say to their boss; “We understand that gold has become more valuable, and thus we don’t need as much to buy our usual purchases, so you can pay us an amount of MOE that buys less gold, as long as we can buy our usual goods.” But the workers did not say that. Why not? What’s the title of this blog? They said “We insist on being paid in gold, even though there isn’t enough gold in the world for full employment. We don’t care that our gold wages will now buy more goods and services, we demand payment in gold.” And keep in mind that many workers never owned a gold coin in their life. They were poor. Yet it remained a token with mystical powers to the workers, a sort of barbarous relic. The workers crucified the owners on a cross of gold. (Wow, I’m inventing some great metaphors phrases today!)"
"BTW, America’s labor leaders opposed FDR’s devaluation."
http://www.themoneyillusion.com/?p=23269&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Themoneyillusion+(TheMoneyIllusion)
He pulls out all the stops including quoting Keynes-of course in a misleading way: 'crush the barbarous relic.' Keynes actually argued that workers are not irrational in refusing to take a nominal pay cut which goes back to another part of the Neoclassical catechism: Long Run Neutrality of Money.
http://diaryofarepublicanhater.blogspot.com/2013/08/never-let-serious-crisis-go-to-waste.html
Also, is it not typical that the economy in his thought experiment is a barter economy indeed, is named after bartering? This all seems to underscore what the critics of Neoclassicism say-that it's model is of a barter economy without money much less banks.
I dont really understand Sumners use of MOA to be honest. There is a lot of variability in the way MOA or MOE is used by different people. Just as endogenous or exogenous are not broadly agreed upon as to use/definition.
ReplyDeleteWhen I make a distinction between MOE and MOA I like to say that MOE are dollars and MOA is prices in dollars. MOA just says how much MOE it takes to purchase it. So Sumners statement that MOA is more important makes no sense to me. If you are going to control a quantity it must be the quantity of MOE, the number of dollars printed for example, or the number of bank deposits. These levels then, of course, play some role in determining prices. I see MOA as a derivative of levels/frequency of exchanges with MOE.
Regarding his comments about Japan and Koreas prices, Tom thinks he means something different but he clearly (to me) was making the statement that Japans prices were100x higher than ours. To say they are higher than ours you must be able to price them relative to the same standard. IOW as an American it should take me 100x more of my dollars, after I convert them to Yen. And that is CLEARLY not true. A friend was in Tokyo recently (last six months) and while he said things were expensive they werent 100x more expensive. They were about like a lot of expensive American tourist cities.
Check this out
http://www.numbeo.com/cost-of-living/compare_countries_result.jsp?country1=Japan&country2=United+States
Frankly the only reason I would care if Japans prices were 100x ours if it actually cost me 100x more if I went there. I couldnt care less that Japanese people have bank accounts with two more zeros than I do.
Here is there average salaries in various sectors
http://www.careercross.com/en/salary_survey.php
Yes, I don't really know what the disticntion between MOA and MOE really amounts to either. I tend to think you're right on the price level question.
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