Possible Insight

Is Money an Emergent Phenomenon?

with 15 comments

The two economists that have most informed my view of the current macroeconomy are Arnold Kling and Scott Sumner. In both cases, their models and explanations make sense to me.  They use solid reasoning and evidence; I don’t feel I’m getting a lot of hand waving. Unfortunately, at first glance, their views seem mutually exclusive.  Kling believes business cycles are the result of many planning errors by individual agents (for example, this recent post and this follow up).  Sumner believes business cycles are the result of contractionary monetary policy by the central bank (for example, this recent post and this one).

How can they both be right? I think they are operating at different levels. Yes, individual agents make their particular planning decisions.  In aggregate, these decisions drive monetary variables like interest rates, exchange rates, liquidity demand, etc.  However, these variables then feed back into the next round of planning decisions.  Moreover, at least some of these plans take into account the effect of the agent’s actions on the monetary variables.  So you get classic chaotic/complex behavior with temporarily stable attractors, perturbations, and establishing new regimes. There may even be aspects of synchronized chaos. I think the monetary variables are the key emergent phenomena here.  They are like “meta prices” that provide a shared signal across just about every modern economic endeavor.

Food for thought.  I’m going to keep this in mind when processing future articles on the economy and see if it helps my thinking.


Written by Kevin

August 11, 2009 at 2:46 pm

15 Responses

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  1. I think you’re being too positive by asking how can they both be right. I believe that Sumner is right about our options at this point, but that’s about it.

    1. You nailed it. They both ignore the feedback of the markets. Economics is built on the faulty logic of snapshot analysis. Feedback is not a secondary pehnomenon, it’s primary. particularly in the age of internet. Thanks to google we dont’ ahve to think anymore and deman slopes the other way. woo hoo!

    2. I don’t know about Kling, but I’ve argued way too much with Sumner on his reflation ideas. I agree that the only way to prevent lack of growth is through some sort of devalution (GD1.0, Japan, and Scandianavian countries in the 90’s are the only precedents of the current environment). And that is why the blogosphere has embraced Sumner. Yes- devaluation is all we got. And I agree with him on this as well.

    A. We shouldn’t try to devalue. I don’t think that growth is a virtue. Economists oughta concern themselves with resource allocation first, becaues if incentives are … well… f*d up, then any growth will be short lived and/or unjust. So i disagree that we need to constantly target a 5% NGDP growth as he suggest. It’s an absurd goal as well. Nothing in life is constant and linear and technological progress and people’s biases will never exist in a linear fashion. He blames the Fed for “causing” the “big” crisis (fall 08+). His “causal” argument is highly semantic and only true with economic “snapshot” analysis. It’s absurd (IMO of course) to think that the highly leveraged collapse in real estate didn’t domino into a bigger crisis. It’s a bit like an atheist arguing with a priest. We dont’ buy enough of each other’s premises. But even if we assume that the economy was collapsing and the Fed didn’t act fast enough, then why has he been crying “ease more” during the bounce. IT’s true that we’re not ought of the woods, but his framework lacks (and can’t have) timing and it will always have excuses for why somethign wasn’t done perfectly as it should have been done.

    B. We can’t really devalue. This is a tougher argument, but i still think that QE in this environment is like unplugging a sink by pouring more water in. The VELOCITY of money is the issue. We gotta make the banks lend and instead everythign gets sucked into the black holes that are their balance sheets. Sumner woudl say that the AD curve has shifted and banks aren’t the problem. I don’t know. i’m not a priest though. I can’t imagine a bubble without leverage and credit participation and this ain’t china.

    3. Monetary variables are observable, and they may be “meta prices”, but we still dont’ know what the threshold for ever increasing feedback is. Sumner was complaining about the TIPS coming down when S&P was 900 something a month or so ago. Only a greed panic ensued. We dont’ have a meta-brain to interpret meta-prices for us. we need to clean the economist meta-house and focus them on resource allocation and thus INCENTIVES instead of the glory of prediction business (aka finance).

    (i followed sumner’s blog for month, but quit in frustration. so right, yet so wrong – i couldn’t take it)

    Alex Golubev

    August 11, 2009 at 4:00 pm

  2. ought=out. something = some time. sorry.

    Alex Golubev

    August 11, 2009 at 4:04 pm

  3. I think Sumner is quite a bit more right than you give him credit for. But if you’ve argued with him directly and given up, I certainly won’t try to change your mind point by point here.

    I do fundamentally disagree with you assertion that growth isn’t a virtue. Every expert on developing nations that I ask says growth is the number one thing that makes people’s lives better. That seems pretty virtuous to me.


    August 11, 2009 at 7:39 pm

  4. I’ve been interested in econ and finance since HS. I majored in finance and had very good grades in econ and finance. I’ve read countless books and articles outside the curriculum and have a CFA designation. I don’t like that people consider me an expert. if anythign, i’ve learned what not to do and even that is questionable.

    I don’t agree that there is such thing as an expert. They may have spent the most time on it, but in economics there are no experts. There is may be a handful of ideas that have survived 50 years. So I’m not digging the argument from authority.

    Growth is only correlated with quality of life. I’m not exactly sure how “experts” get causality. If growth and resource allocation isn’t fair or efficient, the same effect won’t happen. Even if the agents within the system tell you that theyr’e happy cause they now have a cell phone instead of a land line. They’re missing the part where 50% of their assets got erased. I think it’s hard to see what CAN be possible while being within the system. (BTW i moved here from ukraine in ’93). I’m talking about the paths that history didnt’ take. Kinda like the argument in the Black Swan about our analysis history focusing too much on the path taken instead of all the paths that could have been taken.

    Manufactured inflation is nothing more than taxation of savers for the benefit of the debtors. Once again, i agree that the ends justify the means to prevent collapses, but not to create “growth”. MSFT might have benefited everyone, but i’m not sure if they were entitled to that much money. increased homeownership benefited americans on average partly due to it being our “American Dream”, but noone’s analyzing what should have happened. Incentives are highly assymetric and they lead to unnecessary risks and volatility which require drastic measures of wealth REdistribution for the sake of the “system”. within the system it makes sense, but i’m saying the system is flawed.

    i think you’re right. it will be hard to change my mind. 🙂

    Alex Golubev

    August 12, 2009 at 8:24 am

  5. It seems like you’re evaluating economics within the framework of some as yet unspecified conception of social justice. If you don’t disclose this premise and accept arguments about it, then it will be impossible for anyone to change your mind on any topic .

    I do not think this a good strategy, either for trying to find the “truth” or establish your status as a man of ideas.


    August 12, 2009 at 10:16 am

  6. I’m pretty sure it’s a very consistent and understandable conception of social justice. I was saying that an expert on monetary policy doesnt’ concern himself with something much more important than growth. Just incentives are more important than cumulative growth is what i mean when i say “growth is not a virtue”. I’ll try to keep this one short so as not to distract with aspects and implications of that prioritization.

    Alex Golubev

    August 12, 2009 at 10:46 am

  7. My point is that other people probably don’t agree with you on what “just incentives” are. So it seems rather silly to dismiss their arguments on the basis of what you personally consider “just”. My advice would be to avoid this tactic in the future because it signals that you _may_ be an idealogue and not worth engaging in constructive debate.

    Presumably, you do want to expand your knowledge and perspective through such debate.


    August 13, 2009 at 11:14 am

  8. The real estate collapse was caused intentionally by companies like JP Morgan Chase and Bank of Mellon New York. They most likely have shares in the Federal Reserve and had the most to benefit from a depression/recession. The only experts in economics are the ones working for the Federal Reserve and Goldman Sachs to destroy the economy and buy up stocks and land cheap.


    August 13, 2009 at 12:37 pm

  9. Well. Sorry, i must be very unclear. I’m guessing i really sidetracked you with my longwinded comments initially, because i tried to fastforward through how the argument has generally flowed for me. I’ve also discussed this with many people at a couple of places of employment, friends, and bloggers, so i’m hardly an idealist. I’ve shaped this argument only in the last few months and definitely hope that with the power of the internet we can break down reinforcing processes of money/power that is our political system and manage to solve the agency problems that create the inefficiencies that monetary economists suggest we fix with broad strong handed measures.

    People might definitely disagree with me that there is a huge moral hazard in bailouts, one year bonuses without any clawbacks (not amounts) particularly when enhanced with leverage, bankruptices, loan modifications, and even free healthcare. And i’ll gladly entertain the discussion. I would anticipate it leading to an argument whether advancing humanity as a whole is more important than allocation at any point in time. Don’t get me wrong, i don’t think all those things are bad. Just presenting some examples of incentive/freerider/agency problems that are widely known and discussed.

    My biggest concerns are the one year bonuses that execs and money managers get, not because of the amount, but because it encourages risk taking by having limited to no downside and a huge upside.

    However, I don’t think i ever said anything about PERSONAL definition of just. I am quite confused, because i dont’ know where you got that. If you don’t see why the examples above may seem unjust, i will gladly ELABORATE. I said that monetary economists don’t concern themselves with the topic of resource allocation and agency problems as much as they concern themselves with growth and i believe it’s like trying to cure the flu with tylenol. Yes you can definitely use the market and “meta prices” to judge what the market is doing, but the what CAUSED the imbalances are AGENCY PROBLEMS and we need to treat the cause and not the symptom.

    I believe I present plenty of arguable, testable, and implementable premises and there’s nothing i like more than a CONSTRUCTIVE argument.

    I thought about it some more and i think you may be sayign that i am an idealist because i said “it will be hard to change my mind”. I’m really sorry i wrote that, because i was expressing a prediction about the strength of the argument, not my faith in it. but once again, i didnt’ arive at this through internal processes. it was through debate with a variety of people.

    Alex Golubev

    August 13, 2009 at 12:49 pm

  10. You haven’t _clearly_ presented any testable premises related to the original topic. They may be hidden somewhere in your voluminous comments, but I don’t know what they are.

    Both Kling and Sumner are against bailouts. Kling is for the reform of financial executive incentives. Such reform is below the level at which Sumner is concerned. He’s concerned about reforming the Fed.

    But this post wasn’t about bailouts or incentives. I’ve done other posts on those topics. This one was about money as an emergent behavior. If you have a non-trivial, testable hypothesis about that, please share. Otherwise, I would appreciate you not hijacking the post.


    August 13, 2009 at 1:52 pm

  11. I’ll try to stay in the contex of the post and it was never my intention to hijack anything.

    I fully agree with http://emergentfool.com/2009/03/16/climate-shifts-as-a-complex-systems-property/ and think it’s brilliant. The Fed does attempt to monitor “meta prices” in it’s firefighter role to prevent a phase shift into deleveraging and subsequenty systemic shutdown.

    I think they underestimated the importance of shadow banking and “shadow leverage”, which i’d argue are one of the most important of “meta prices”. Leverage is the main feedback mechanism and should be watched like a hawk. shadow banking, options, futures, cdo’s etc…

    On top of that, i’ll say that Sumern’s 5% NGDP growth targetting woudl work if he shifted some focus to LEVERAGE and meta prices other than the interest rate target.

    I still urge you to not throw incentives by the wayside…. otherwise we’ll end up with 5-10% of the population twisting their thums cause noone wants to buy a house or a car.

    Alex Golubev

    August 13, 2009 at 2:49 pm

  12. One more thing. Synchronized chaos and the brain:


    I think it’s fascinating and highly relevant. Brain activity sounds very similar to an economy. I really don’t know the right way to send you this without dropping it into comments.

    Alex Golubev

    August 13, 2009 at 3:26 pm

  13. From Broken Symmetry

    “George Dyson explains:
    In any hydrodynamic system, the non-dimensional Reynolds Number characterizes the ratio between inertial forces (the result of mass and velocity) to viscous forces (the result of the inherent stickiness of the fluid). When the Reynolds number reaches a certain critical value, the system changes from laminar to turbulent flow. There is an equivalent to the Reynolds Number for an economic system: the ratio between the speed (and amplitude) at which currency is flowing through the system to the viscosity of the financial medium. The Reynolds number of our electronically-mediated economy has recently gone way up, with destabilizing results. The latest problem is that automated programs — -the barnacles of the New Economy — -are now trading *within* the frequency spectrum of the turbulent boundary layer. If this happens to a ship, it will slow down, and if it happens to an airplane, it will go into a stall. Where’s the anti-fouling paint?
    I was unimpressed with the Rushkoff essay to which Dyson is responding. The historical arguments are far too selective in their use of evidence. What about the invention of double-entry bookeeping or the perfection of the patent system in the 19th century? Markets are neither purely constructed nor purely ecological — a key point made by Vernon Smith in his latest treatise.”

    Alex Golubev

    August 19, 2009 at 3:54 pm

  14. […] I have written before, one of my goals is to resolve the differences between Arnold Kling’s and Scott […]

  15. […] I have written before, one of my goals is to resolve the differences between Arnold Kling’s and Scott […]

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