I, for one, would love to have a place where a rational and open-minded discussion of economics would be possible with people who have some knowledge of the subject. In my experience, and with very few honorable exceptions, economists are extremely difficult to reason with as soon as one starts questioning the logical and empirical soundness of some basic concepts in modern economics, or pointing out seemingly bizarre and illogical things found in the mainstream economic literature. You quickly run into an authoritative and stonewalling attitude of the sort that you never get by posing similar questions to, say, physicists.
I would venture to say that a radical re-examination of several basic economic concepts is probably the lowest-hanging fruit when it comes to valuable insight that could potentially be gained by a group of smart amateur contrarians. The whole field is certainly long overripe for the sort of treatment that Robin Hanson metes out to medicine.
I’m not confident enough to say that it means something’s wrong with economists, but I can never tell where the assumptions come from. The way I was taught in school, if the professor was a Rational Expectations guy, he would teach the course as though Keynes had never been born; and vice versa. It was like the blind men and the elephant. Very disappointing. I could have used an aerial view.
In my experience, and with very few honorable exceptions, economists are extremely difficult to reason with as soon as one starts questioning the logical and empirical soundness of some basic concepts in modern economics, or pointing out seemingly bizarre and illogical things found in the mainstream economic literature.
I’m sure this wasn’t your intent, but this comes across to me like a situation where you’ve been having a high-level conversation about economics and then switch to asking the conomist to explain or justify the basic premises of the field to you. While the idea that you need to be convinced of the truth of the basics before productively discussing the complexities is sound, I’m less hasty to assume that the economists’ refusal is due to a disregard for rationality. They just may be less interested in teaching you lower-level concepts of the field than they were in having the high-level conversation about it. If that were the case, the mismatch would be social, not rational.
I certainly don’t know that the above is what actually happened, but it fits my model of human behavior better than your explanation does.
I’m sure this wasn’t your intent, but this comes across to me like a situation where you’ve been having a high-level conversation about economics and then switch to asking the conomist to explain or justify the basic premises of the field to you.
The thing is, if you ask a physicist to answer a critical question you have about some fundamental thing in physics, he’ll likely be able to point you to the literature where your specific conundrum is resolved clearly and in great detail, or provide such an answer himself. I don’t know what would happen if you came up with an entirely novel question (I sure never did), but from what I’ve observed, I would expect that it would be met with genuine curiosity. Moreover, good introductory literature in physics often anticipates and preemptively answers many objections to the basic concepts that a smart critical student of the subject might come up with. Of course, if you’re being block-headed and impervious to arguments, that’s a different story, but that’s not what I’m talking about.
In contrast, in economics one rarely sees anything like this. The concepts are presented with an air of high authority, and various more or less straightforward questions about their validity that occur to me after some thinking are often left unaddressed. Mathematical models are typically discussed in a bizarre blinkered way that bears no resemblance to the ingenious modes of thought that I’ve learned to know and love from mathematicians and physicists. Even more maddeningly, one sometimes runs into literature written by prominent insiders in the field that points out such problems, but instead of provoking debate, these works are languishing in obscurity. There are many other bizarre things I’ve found in my amateur forays into the field, which could be the subject of a long essay.
Curiously, this is approximately opposite to the trend that Robin Hanson claimed to observe in popularizations. You’re not necessarily talking about exactly the same thing (Robin is talking about what the public prefers to read whereas you’re talking about how the professors react to questions) but it’s an interesting juxtaposition nevertheless. I don’t myself see quite the pure trend that Robin sees—I think plenty of economics popularizations lecture the reader from on high and I know several physics books that labor hard to explain and answer questions, but anyway, quoting Robin:
“Popular physics books, like Carroll’s, act easy and friendly, but still lecture from on high, sprinkled with reverent stories on the “human side” of the physics Gods who walk among us. They grasp for analogies to let mortals glimpse a shadow of the glory only physicists can see directly.”
“The recent popular econ book Superfreakanomics is also excellent, but very different in tone. Also easy and friendly, this is full of concrete stories about particular data patterns and what lessons you might draw from them, or you might not; hey it is always up to you the reader to judge. Such books avoid asking readers to believe anything abstract or counter-intuitive based on the author’s authority.”
So, according to Robin, physics books lecture from on high (based on the author’s authority) while economics books do not.
Meanwhile, your experience is that economists present their concepts with an air of high authority (based on the economist’s authority) while physicists do not.
I haven’t read any popular book on economics, but what you (and Hanson) say about physics popular books sounds right. That’s the reason I don’t like popular books on physics (I am a physicist). The presented ideas are counterintuitive, and, at the best, the counterintuitiveness is countered by some arbitrary loose analogy, which may be reinterpreted in a completely different way without much difficulties. What is worse, people seem to like exactly this obscure quality of such books.
(Once I had read a popular book by Landau and Kitajgorodskij and I really liked it, but it was about Newtonian mechanics mainly, and I think it included several equations. A book about cosmology, quantum physics or even string theory without any equation at all—save the ever popular E=mc² - can hardly convey any meaningful information.)
Very well said, Vladimir_M—a comment I wish I could vote up twice.
That basically agrees with my experience (mentioned in the discussion you linked) that economists lack a Level 2 understanding of their speciality. That is, they cannot trace the inferential paths they rely on, all the way back to the layman level. In my estimation, this leads them to advocate truly absurd policies, since this poor understanding prevents them from identifying where a model no longer outputs policies justifiable through such an inferential path.
For example, they equate growing GDP with a good economy. And as a general rule, that’s a good measure. But you have to know where the rule breaks down, and this requires a deeper understanding than most economists have. A Level-2 economist would say something like,
“Yes, GDP generally correlates with good economic health, but in the wake of this hurricane, most of that spending is just rebuilding destroyed stuff. Now, it’s certainly better to rebuild, given the hurricane, but this is just restoring the previous level of economic health—the high GDP numbers you see can’t be taken to mean that the economy was somehow improved, in any sense that we care about, as a result of the hurricane striking.”
But we never hear anything like that.
As another example, the consensus seems to be that we have to make sub-zero interest rates to clumsy banks that just revealed themselves to be extremely incompetent, without asking whether those banks are actually satisfying genuine consumer desires better than such desires would be satisfied without such a policy.
In contrast, physicists can say, “Why do we make that assumption? Well, because you have to account for these observations, and most of that work is done by these models, which leaves you with …” That’s tracing back to the layman level, and so a Level 2 understanding. If they’re reluctant to do so, then yes, it could be a (less common) Level 1 physicist, but more likely, it’s because they realize it will take a long time to trace out the inferential path.
Unfortunately, high schools don’t show students this path very well, which I’m finding out as I “relearn” the basis of physics from some books I’ve been reading that specifically discuss how these models in physics were discovered (like Atom by Asimov).
That basically agrees with my experience (mentioned in the discussion you linked) that economists lack a Level 2 understanding of their speciality. That is, they cannot trace the inferential paths they rely on, all the way back to the layman level.
Yes, that’s a very good remark. This summarizes my frustration with economic concepts very well.
Then you may be interested in this exchange I’m having with John Salvatier, a follower of Scott Sumner, a mainstream monetary economist (MME) who really aggravates me by how he advocates those stupid monetary policies I mentioned, and his (Sumner’s) very transparent lack of a Level 2 understanding. (This is touched on in my exchange with John, in which he agrees that Sumner’s model [though perhaps not his general understanding] would not be able to give the right recommendations in cases where nominal GDP drops for good reasons, but rather, would slavishly try to force it back up, steamrolling over good efficiencies.)
Unlike the popular MMEs, John is able to take the time to cross the (enormous) inferential distance between our positions on economic policy.
That clarifies sufficiently for me to work from the assumption that your interpretation is correct; thank you.
I think your earlier comment invoked an instinct of mine that when someone says “I was in such-and-such social situation, and the other person was doing it wrong!” they have often not examined the possibility of having made an error themselves. That doesn’t seem to be the case in this instance, but I don’t regret having checked. :)
I found the next sentence of Vladimir’s significant:
You quickly run into an authoritative and stonewalling attitude of the sort that you never get by posing similar questions to, say, physicists.
My model of human behavior includes examples of both the kind Vladimir described and your alternative explanation.
In particular I expect experts to behave as per Vladimir’s explanation whenever they are weighing in on topics that are at the fringes of the their field. We can reliably find that experts overestimate the breadth and depth of their expertise. (Professional gamblers are a notable exception to this rule.)
In the case of economists it is not unusual to find an economist declaring that something will operate in accordance with one of those basic concepts and yet be unable to engage in exploring just whether the assumptions in the model are satisfied in the instance (at risk of discovering that their model is irrelevant). That would amount to surrendering intellectual territory on behalf of the tribe—something that few with the cunning necessary to become considered an authority would do unless absolutely forced.
having a high-level conversation about economics and then switch to asking the conomist to explain or justify the basic premises of the field to you
In the context of Vladimir’s response to James, this seems like a pretty reasonable thing to do. That is, if an economist condemns lay writing, the economist should be prepared to argue that economic theory applies.
To argue that it applies, certainly. I agree with you on that. But I also wouldn’t fault an economist for being unprepared to interrupt or uninterested in interrupting a high-level argument in order to lay the groundwork for the acceptance of that theory (which they presumably have spent some years learning and accepting themselves over the course of their education). One is a conversation about whatever particular situation was being discussed, and the other is a conversation about economics itself; it’s reasonable to me that the economist in question could just have been rejecting the change in topic.
But as I commented just now to Vladimir, I was just being wary of a common error which has more to do with social communication than logic; in practice, it does not now appear that the error was committed.
I once asked Robin Hanson a question that occurred to me when watching a video that was half accurate economics and half crankery. He said he didn’t know the answer because he didn’t really know much macroeconomics.
Incidentally, the question was this: If you add up everyone’s cash-equivalent assets (actual cash, checking accounts, certificates of deposit, etc.) and then subtract everyone’s debts (mortgage balances, corporate and government bonds, money a bank has to pay to depositors, etc.) is the total positive or negative? In other words, if every last dollar-denominated debt or other debt-like obligation was paid back, would there be any money left in the world?
Interesting, and indeed fundamental question—if your preferred economic system isn’t capable of handling everyone being debt free (or you don’t know how it would work that way), then there is a serious problem.
This is a different question from whether people should go into debt, or whether there can be Pareto-improvements through debt transactions; it’s asking whether you hit some kind of (small-s) singularity as a result of nobody being debt due to an extreme preference for such.
We know for a fact that there have been economies without this kind of debt—they’ve all been primitive, of course, but they sustained the existence of humans, without anything bizarre happening. So a Level 2 understanding of economics needs to be able to handle these kinds of economies without having to treat them as a super-special case.
My initial answer to the question is that, well, sure it has to be positive because the money has to be paid to someone, and some people are cash-positive after paying their debts. But then, it may not even be possible for everyone to pay off debts—it could be that attempting to engineer this will necessarily bankrupt numerous people.
And no doubt, if everyone were brainwashed by Dave Ramsey, the government would still probably try to protect banks’ inalienable right to a loan market, despite the fact that no one wants loans—and these policies would be promoted by the same brainwashed people!
I’m pretty sure it will be negative. Many long term debt instruments are ultimately backed by the promise of future productivity. Debt is essentially a mechanism for transferring wealth from the future to the present. This is why debt for investment in production is generally good for an economy and debt for consumption (most consumer debt) is less good.
Cash and cash-equivalent assets represent a small fraction of the actual wealth in the world. Wealth exists in the form of actual things of value (houses, factories, human capital, etc.). Cash is just a medium of exchange and there is no particular reason for the ratio of cash to wealth to be constant. Long term debt is backed by currently existing wealth (secured debt like mortgages) and the promise of future wealth (corporate bonds etc.). It would be a very screwed up economy where cash on hand exceeded the value of debt, in fact this would probably be a sign of the apocalypse.
Good points, but I would hasten to add that there have been economies with money where that calculation would come out positive, but which weren’t headed for an apocalypse.
Also, the government doesn’t have to pay off its debt immediately, and money could change hands numerous times, each time yielding a taxable event.
Also, the government doesn’t have to pay off its debt immediately, and money could change hands numerous times, each time yielding a taxable event.
True but the government also has to pay interest on its debt. Anyway, this gets away from the original question which is whether the total value of cash and cash equivalent assets exceeds the total face value of all debt (public and private). If you make this question slightly more specific and talk about the value of US$ denominated cash and debt then the answer is ‘no, not by a long shot’. Or in the phrasing of the original question, you get a very negative number: total debt ~$52 trillion, M2 ~8.7 trillion.
This is not really a problem though. The debt doesn’t all come due at the same time for a start. Some of it will default (well, probably a lot of it actually). Some of it will be refinanced. What is a problem (and what caused problems for banks during the financial crisis) is when a bank has a maturity mismatch between its assets and liabilities or when there is a sudden and unexpected change in the estimated probability of default of the debt it holds (and so a sudden change in the net present value of that debt).
True but the government also has to pay interest on its debt. Anyway, this gets away from the original question which is whether the total value of cash and cash equivalent assets exceeds the total face value of all debt (public and private). If you make this question slightly more specific and talk about the value of US$ denominated cash and debt then the answer is ‘no, not by a long shot’. Or in the phrasing of the original question, you get a very negative number.
Looking back, it seems that Crono was asking two questions that only appear to be the same:
Incidentally, the question was this: If you add up everyone’s cash-equivalent assets (actual cash, checking accounts, certificates of deposit, etc.) and then subtract everyone’s debts (mortgage balances, corporate and government bonds, money a bank has to pay to depositors, etc.) is the total positive or negative? In other words, if every last dollar-denominated debt or other debt-like obligation was paid back, would there be any money left in the world?
One question is answered by comparing some accounting figures. The other is asking us to imagine a counterfactual in which everyone goes through and pays off debts. You’re answering the first one, while I was answering the second.
And in that case, there could be e.g. only $X in cash instruments, $10X in government debt, and yet it could still be paid off: Say, one year people earn $3X in wages, pay $0.5X in taxes, then the government pays the $0.5X of debt that just matured. Interest could kick in which is less than this amount. The people who get the money from the maturing bounds can’t making loans and so spend the money, generating wages, generating tax revenue, generating reduced government debt, and so on.
Oh, absolutely, I’m not disputing that the debt can theoretically be paid off in full—that’s exactly what I mean when I say it’s not really a problem that the accounting figure is negative. If that wasn’t the case we’d be in in real trouble. The idea that cash needs to match the face value of debt is a confusion in a debt based economy like ours.
To be honest it didn’t even occur to me that he’d confuse those two issues but I’d agree that it looks like he may have done. It did puzzle me when I first saw the question why Robin Hanson wouldn’t have just said ‘negative’.
I, for one, would love to have a place where a rational and open-minded discussion of economics would be possible with people who have some knowledge of the subject. In my experience, and with very few honorable exceptions, economists are extremely difficult to reason with as soon as one starts questioning the logical and empirical soundness of some basic concepts in modern economics, or pointing out seemingly bizarre and illogical things found in the mainstream economic literature. You quickly run into an authoritative and stonewalling attitude of the sort that you never get by posing similar questions to, say, physicists.
I would venture to say that a radical re-examination of several basic economic concepts is probably the lowest-hanging fruit when it comes to valuable insight that could potentially be gained by a group of smart amateur contrarians. The whole field is certainly long overripe for the sort of treatment that Robin Hanson metes out to medicine.
I suggest an Economics Open Thread.
I’ve been confused by economics in this way too.
I’m not confident enough to say that it means something’s wrong with economists, but I can never tell where the assumptions come from. The way I was taught in school, if the professor was a Rational Expectations guy, he would teach the course as though Keynes had never been born; and vice versa. It was like the blind men and the elephant. Very disappointing. I could have used an aerial view.
Paul Krugman has made similar criticisms.
I’m sure this wasn’t your intent, but this comes across to me like a situation where you’ve been having a high-level conversation about economics and then switch to asking the conomist to explain or justify the basic premises of the field to you. While the idea that you need to be convinced of the truth of the basics before productively discussing the complexities is sound, I’m less hasty to assume that the economists’ refusal is due to a disregard for rationality. They just may be less interested in teaching you lower-level concepts of the field than they were in having the high-level conversation about it. If that were the case, the mismatch would be social, not rational.
I certainly don’t know that the above is what actually happened, but it fits my model of human behavior better than your explanation does.
Relsqui:
The thing is, if you ask a physicist to answer a critical question you have about some fundamental thing in physics, he’ll likely be able to point you to the literature where your specific conundrum is resolved clearly and in great detail, or provide such an answer himself. I don’t know what would happen if you came up with an entirely novel question (I sure never did), but from what I’ve observed, I would expect that it would be met with genuine curiosity. Moreover, good introductory literature in physics often anticipates and preemptively answers many objections to the basic concepts that a smart critical student of the subject might come up with. Of course, if you’re being block-headed and impervious to arguments, that’s a different story, but that’s not what I’m talking about.
In contrast, in economics one rarely sees anything like this. The concepts are presented with an air of high authority, and various more or less straightforward questions about their validity that occur to me after some thinking are often left unaddressed. Mathematical models are typically discussed in a bizarre blinkered way that bears no resemblance to the ingenious modes of thought that I’ve learned to know and love from mathematicians and physicists. Even more maddeningly, one sometimes runs into literature written by prominent insiders in the field that points out such problems, but instead of provoking debate, these works are languishing in obscurity. There are many other bizarre things I’ve found in my amateur forays into the field, which could be the subject of a long essay.
Curiously, this is approximately opposite to the trend that Robin Hanson claimed to observe in popularizations. You’re not necessarily talking about exactly the same thing (Robin is talking about what the public prefers to read whereas you’re talking about how the professors react to questions) but it’s an interesting juxtaposition nevertheless. I don’t myself see quite the pure trend that Robin sees—I think plenty of economics popularizations lecture the reader from on high and I know several physics books that labor hard to explain and answer questions, but anyway, quoting Robin:
“Popular physics books, like Carroll’s, act easy and friendly, but still lecture from on high, sprinkled with reverent stories on the “human side” of the physics Gods who walk among us. They grasp for analogies to let mortals glimpse a shadow of the glory only physicists can see directly.”
“The recent popular econ book Superfreakanomics is also excellent, but very different in tone. Also easy and friendly, this is full of concrete stories about particular data patterns and what lessons you might draw from them, or you might not; hey it is always up to you the reader to judge. Such books avoid asking readers to believe anything abstract or counter-intuitive based on the author’s authority.”
So, according to Robin, physics books lecture from on high (based on the author’s authority) while economics books do not.
Meanwhile, your experience is that economists present their concepts with an air of high authority (based on the economist’s authority) while physicists do not.
I haven’t read any popular book on economics, but what you (and Hanson) say about physics popular books sounds right. That’s the reason I don’t like popular books on physics (I am a physicist). The presented ideas are counterintuitive, and, at the best, the counterintuitiveness is countered by some arbitrary loose analogy, which may be reinterpreted in a completely different way without much difficulties. What is worse, people seem to like exactly this obscure quality of such books.
(Once I had read a popular book by Landau and Kitajgorodskij and I really liked it, but it was about Newtonian mechanics mainly, and I think it included several equations. A book about cosmology, quantum physics or even string theory without any equation at all—save the ever popular E=mc² - can hardly convey any meaningful information.)
Very well said, Vladimir_M—a comment I wish I could vote up twice.
That basically agrees with my experience (mentioned in the discussion you linked) that economists lack a Level 2 understanding of their speciality. That is, they cannot trace the inferential paths they rely on, all the way back to the layman level. In my estimation, this leads them to advocate truly absurd policies, since this poor understanding prevents them from identifying where a model no longer outputs policies justifiable through such an inferential path.
For example, they equate growing GDP with a good economy. And as a general rule, that’s a good measure. But you have to know where the rule breaks down, and this requires a deeper understanding than most economists have. A Level-2 economist would say something like,
“Yes, GDP generally correlates with good economic health, but in the wake of this hurricane, most of that spending is just rebuilding destroyed stuff. Now, it’s certainly better to rebuild, given the hurricane, but this is just restoring the previous level of economic health—the high GDP numbers you see can’t be taken to mean that the economy was somehow improved, in any sense that we care about, as a result of the hurricane striking.”
But we never hear anything like that.
As another example, the consensus seems to be that we have to make sub-zero interest rates to clumsy banks that just revealed themselves to be extremely incompetent, without asking whether those banks are actually satisfying genuine consumer desires better than such desires would be satisfied without such a policy.
In contrast, physicists can say, “Why do we make that assumption? Well, because you have to account for these observations, and most of that work is done by these models, which leaves you with …” That’s tracing back to the layman level, and so a Level 2 understanding. If they’re reluctant to do so, then yes, it could be a (less common) Level 1 physicist, but more likely, it’s because they realize it will take a long time to trace out the inferential path.
Unfortunately, high schools don’t show students this path very well, which I’m finding out as I “relearn” the basis of physics from some books I’ve been reading that specifically discuss how these models in physics were discovered (like Atom by Asimov).
SilasBarta:
Yes, that’s a very good remark. This summarizes my frustration with economic concepts very well.
Then you may be interested in this exchange I’m having with John Salvatier, a follower of Scott Sumner, a mainstream monetary economist (MME) who really aggravates me by how he advocates those stupid monetary policies I mentioned, and his (Sumner’s) very transparent lack of a Level 2 understanding. (This is touched on in my exchange with John, in which he agrees that Sumner’s model [though perhaps not his general understanding] would not be able to give the right recommendations in cases where nominal GDP drops for good reasons, but rather, would slavishly try to force it back up, steamrolling over good efficiencies.)
Unlike the popular MMEs, John is able to take the time to cross the (enormous) inferential distance between our positions on economic policy.
That clarifies sufficiently for me to work from the assumption that your interpretation is correct; thank you.
I think your earlier comment invoked an instinct of mine that when someone says “I was in such-and-such social situation, and the other person was doing it wrong!” they have often not examined the possibility of having made an error themselves. That doesn’t seem to be the case in this instance, but I don’t regret having checked. :)
I found the next sentence of Vladimir’s significant:
My model of human behavior includes examples of both the kind Vladimir described and your alternative explanation.
In particular I expect experts to behave as per Vladimir’s explanation whenever they are weighing in on topics that are at the fringes of the their field. We can reliably find that experts overestimate the breadth and depth of their expertise. (Professional gamblers are a notable exception to this rule.)
In the case of economists it is not unusual to find an economist declaring that something will operate in accordance with one of those basic concepts and yet be unable to engage in exploring just whether the assumptions in the model are satisfied in the instance (at risk of discovering that their model is irrelevant). That would amount to surrendering intellectual territory on behalf of the tribe—something that few with the cunning necessary to become considered an authority would do unless absolutely forced.
In the context of Vladimir’s response to James, this seems like a pretty reasonable thing to do. That is, if an economist condemns lay writing, the economist should be prepared to argue that economic theory applies.
To argue that it applies, certainly. I agree with you on that. But I also wouldn’t fault an economist for being unprepared to interrupt or uninterested in interrupting a high-level argument in order to lay the groundwork for the acceptance of that theory (which they presumably have spent some years learning and accepting themselves over the course of their education). One is a conversation about whatever particular situation was being discussed, and the other is a conversation about economics itself; it’s reasonable to me that the economist in question could just have been rejecting the change in topic.
But as I commented just now to Vladimir, I was just being wary of a common error which has more to do with social communication than logic; in practice, it does not now appear that the error was committed.
You’d think that with his economics knowledge he’d be able to do the same thing...
I once asked Robin Hanson a question that occurred to me when watching a video that was half accurate economics and half crankery. He said he didn’t know the answer because he didn’t really know much macroeconomics.
Incidentally, the question was this: If you add up everyone’s cash-equivalent assets (actual cash, checking accounts, certificates of deposit, etc.) and then subtract everyone’s debts (mortgage balances, corporate and government bonds, money a bank has to pay to depositors, etc.) is the total positive or negative? In other words, if every last dollar-denominated debt or other debt-like obligation was paid back, would there be any money left in the world?
Interesting, and indeed fundamental question—if your preferred economic system isn’t capable of handling everyone being debt free (or you don’t know how it would work that way), then there is a serious problem.
This is a different question from whether people should go into debt, or whether there can be Pareto-improvements through debt transactions; it’s asking whether you hit some kind of (small-s) singularity as a result of nobody being debt due to an extreme preference for such.
We know for a fact that there have been economies without this kind of debt—they’ve all been primitive, of course, but they sustained the existence of humans, without anything bizarre happening. So a Level 2 understanding of economics needs to be able to handle these kinds of economies without having to treat them as a super-special case.
My initial answer to the question is that, well, sure it has to be positive because the money has to be paid to someone, and some people are cash-positive after paying their debts. But then, it may not even be possible for everyone to pay off debts—it could be that attempting to engineer this will necessarily bankrupt numerous people.
And no doubt, if everyone were brainwashed by Dave Ramsey, the government would still probably try to protect banks’ inalienable right to a loan market, despite the fact that no one wants loans—and these policies would be promoted by the same brainwashed people!
I’m pretty sure it will be negative. Many long term debt instruments are ultimately backed by the promise of future productivity. Debt is essentially a mechanism for transferring wealth from the future to the present. This is why debt for investment in production is generally good for an economy and debt for consumption (most consumer debt) is less good.
Cash and cash-equivalent assets represent a small fraction of the actual wealth in the world. Wealth exists in the form of actual things of value (houses, factories, human capital, etc.). Cash is just a medium of exchange and there is no particular reason for the ratio of cash to wealth to be constant. Long term debt is backed by currently existing wealth (secured debt like mortgages) and the promise of future wealth (corporate bonds etc.). It would be a very screwed up economy where cash on hand exceeded the value of debt, in fact this would probably be a sign of the apocalypse.
[ETA] The US national debt already exceeds M2.
Good points, but I would hasten to add that there have been economies with money where that calculation would come out positive, but which weren’t headed for an apocalypse.
Also, the government doesn’t have to pay off its debt immediately, and money could change hands numerous times, each time yielding a taxable event.
True but the government also has to pay interest on its debt. Anyway, this gets away from the original question which is whether the total value of cash and cash equivalent assets exceeds the total face value of all debt (public and private). If you make this question slightly more specific and talk about the value of US$ denominated cash and debt then the answer is ‘no, not by a long shot’. Or in the phrasing of the original question, you get a very negative number: total debt ~$52 trillion, M2 ~8.7 trillion.
This is not really a problem though. The debt doesn’t all come due at the same time for a start. Some of it will default (well, probably a lot of it actually). Some of it will be refinanced. What is a problem (and what caused problems for banks during the financial crisis) is when a bank has a maturity mismatch between its assets and liabilities or when there is a sudden and unexpected change in the estimated probability of default of the debt it holds (and so a sudden change in the net present value of that debt).
Looking back, it seems that Crono was asking two questions that only appear to be the same:
One question is answered by comparing some accounting figures. The other is asking us to imagine a counterfactual in which everyone goes through and pays off debts. You’re answering the first one, while I was answering the second.
And in that case, there could be e.g. only $X in cash instruments, $10X in government debt, and yet it could still be paid off: Say, one year people earn $3X in wages, pay $0.5X in taxes, then the government pays the $0.5X of debt that just matured. Interest could kick in which is less than this amount. The people who get the money from the maturing bounds can’t making loans and so spend the money, generating wages, generating tax revenue, generating reduced government debt, and so on.
Oh, absolutely, I’m not disputing that the debt can theoretically be paid off in full—that’s exactly what I mean when I say it’s not really a problem that the accounting figure is negative. If that wasn’t the case we’d be in in real trouble. The idea that cash needs to match the face value of debt is a confusion in a debt based economy like ours.
Understood. So do you agree Crono really is asking two very separate questions, even though it may seem like they’re the same?
To be honest it didn’t even occur to me that he’d confuse those two issues but I’d agree that it looks like he may have done. It did puzzle me when I first saw the question why Robin Hanson wouldn’t have just said ‘negative’.