Saturday, May 12, 2012

Thinking in terms of stocks: From Fisher to Fischer

In an older post, Scott Sumner had an interesting comment:
The most recent inflation rate in Greece is 1.7%, whereas Spain has 1.9% inflation. I don’t know about you, but I find those figures to be astounding. That’s not deflation, and yet Tyler’s clearly right that they are being buffeted by powerful deflationary forces. I’d make several observations:
1. This shows the poverty of our language. Economics lacks a term for falling NGDP, even though falling NGDP is arguably the single most important concept in all of macro, indeed the cause of the Great Depression. So we call it “deflation” which is actually an entirely different concept. I wouldn’t be the first to find connections between the poverty of our language and the poverty of our thinking.
He's right that deflation is sort of catch-all phrase, and this imprecision in our language doesn't help out our thinking. By catch-all, deflation can simultaneously mean falling prices, falling NGDP, or most commonly, a  fall in NGDP accompanied by falling prices. A word like stagflation is much more precise, since it describes a simultaneous fall in NGDP and rising prices. What is the word for rising NGDP and falling prices? Productivity norm? Benign deflation? The fact that we don't have a commonly accepted word for this phenomenon prevents us from properly discussing it. Calling such a phenomenon "deflation" is all the more unhelpful since deflation is often used as a scare term

This reminds me a lot about what Nick Rowe calls the Borges problem. We can get very different results depending on how we choose to categorize the world.

In a recent post called Identity Economics, Nick returned to the Borges problem, specifically in the context of using either MV=PY or Y=C+I as a way to understand the world. He thinks the MV=PY method of categorization is a more useful way for understanding cycles. I asked:
But why can't I find any macroeconomic identity that uses the language of stocks and not flows? Y=C+I+G is purely flows, and MV=PY is stocks and flows.
The System of National Accounts structures not only the collection of national income data, but also national balance sheet data. This is stock data. Is this data in search of an identity? It seems that monetarists' language is built around the MV=PY identity, Keynsians around Y=C+I+G. Which group of macroeconomists try to work off a balance sheet identity?
This is the same question I had in an older post of Nick's:
The idea of a flow of antiques or money is very unintuitive to me. Why not go the other way? Not flows of consumption and investment, but stocks? Thus you have and individual's goods C, I, A, and M, which are all stocks. Sum them all up and you have S (the noun form of S, not the verb). This S can rise or fall. As a solution to the Borgian categorization problem, this configuration makes more intuitive sense to me.
In response to the newer question, Nick suggested I take a look at "any sort of Tobinesque analysis of portfolio choice". My guess is that this is going to lead me in the end to Fischer Black and his book Business Cycles and Equilibrium.

Here is Perry Mehrling (pdf) on Black's thinking:
Most significant, Black seems to have taken his overall vision of the economy from Fisher. Fisher’s accounting system presents a unified picture of the economy as a stock of wealth moving through time, throwing off a flow of services as it goes. In Fisher’s formulation all wealth is capital, not just machines and buildings, but also land and even human beings. Indeed for Fisher human beings are the most important form of capital because the most versatile. Thus, at the highest level of abstraction, there is no distinction between the traditional categories of labor, capital, and land. All produce a stream of income (services) so all are capital, and their income discounted back to the present is their capital value. Similarly, at the highest level of abstraction, there is no distinction between the traditional categories of wages, profit, and rent. All are incomes thrown off by capital, hence all are forms of the more general category of interest, which is the rate at which income flows from wealth.
Which is exactly the style of thinking I am looking for. A quantity of wealth moves through time, throwing off a flow of services. This flow's value can be discounted back and represented as some stock dollar amount. According to Mehrling, this line of thought proceeded from one Fisher to another (ok, small spelling difference). So Irving Fisher's book The Nature of Capital and Income will also be stopping point for me.

Additional: Here is Brad  DeLong on how ISLM combines both Y=C+I+G and MV=PY, and two older posts by Lars Christensen called Most people do “national accounting economics” – including most Austrians and How I would like to teach Econ 101.

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