Friday, March 25, 2016

When would you know?

Not happy with Steve Keen's spreadsheet, as noted yesterday. He predicts recession, and shows it in a spreadsheet. But in the spreadsheet he makes recession happen by suddenly changing the growth rate of credit.

Now... that's probably practical and realistic and it sounds exactly like what happened back in '07. But it didn't happen because somebody changed a number on a spreadsheet. It happened in the economy.

You could argue that people were looking at their spreadsheets and playing with the numbers and suddenly said to themselves, Hm, this doesn't look good, I'm going to have to cut my borrowing and unload some debt.

Maybe that is what happened. Something like that. But I always separate the decision-making process from the economy. The decisions arise within us -- in response to economic circumstance, sure, but within us -- and the decisions we make emerge from us, from our nature, human nature. And I don't think it's good for economists to muck with human nature.

You can't change human nature. That's what was wrong with "From each according to his abilities, to each according to his needs". If you want to change the economy, you have to do it without trying to change human nature. You have to induce people to make the decisions you want them to make. You have to create the economic circumstance that makes people want to do the things you want them to do. That's what economic policy is all about.

If you're not good at it, you end up making a circumstance in which people are induced to do things out of fear and desperation.

The whole trick is to understand the economy.

Anyway, the sudden change in the growth of credit, the one that had an effect on the economy, it wasn't a change in a spreadsheet. It wasn't a change in plans. It was a change in actions. It was the sudden cutback in borrowing, in the economy.

But when would you know? How soon can you see it happening?

Graph #1: Private debt, quarterly data, percent change from previous quarter
There is no hint on this graph as of 2007 Q2, what would happen over the next year. How far to the right would you have to look on this graph, before you had an idea what was happening?

// edit 25 march
"the economic circumstance that makes people want to do what you want them to do"
"the economic circumstance that makes people want to do the things you want them to do"

1 comment:

The Arthurian said...

You could look at the bottoms, maybe. The two most recent lows before the tagged date seem to be pointing down. O crap, now I have to do more graphs.