Tuesday, December 27, 2016

"equals" equals "equals"

// C=64

Back in the days of the Commodore-64 there was a program that would make the computer talk. I think it was called "Sam".

Anyway one day my son was playing with it. He typed in a whole bunch of "equal" signs and hit ENTER. The computer started saying equals, equals, equals equals...

Just then his brother came into the room, listened to it, and asked: Why is it saying "cosy, cosy, cosy?"

// ... fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption ...

"Saving equals investment". So it is said. Some people, many people, seem to think that's the same as saying "saving IS investment", or that an act of saving is an act of investment, or that an act of investing is an act or saving. Or some other idiotic variation.

When I hear things like that I always fall back on Schumpeter, who said that if we don't make distinctions we can't say anything interesting.

Now maybe you like the idea that saving is the same as investment. It might make you feel good to think that when you save you are doing the world a service by investing. And maybe there is a mote of utility in the thought that investing is, in some strange and strictly limited way, a form of non-monetary saving.

Maybe we should just adopt Schumpeter's idea and shorten the discussion by saying that everything is the same as everything else. That could save us the time and trouble of having the discussion at all.

// In every computer language I ever used, the equal sign assigns the value on the right to the variable on the left

I said it:
In every computer language I ever used, the equal sign assigns the value on the right to the variable on the left: Result <-- Value. So, when I see

I naturally read it as: Take Real GDP, factor prices in, and you get Nominal GDP. Sure, the math is correct. But you don't start with "real GDP". You start with GDP at actual prices -- called "nominal" -- and figure out real GDP...

Yeah but maybe economists don't have to think in terms of the assignment of values, and my experience with computers is not relevant in their world. Okay. But it still should be pretty easy to see that NGDP is equal to RGDP times the price level.

That does not mean that NGDP is the same as RGDP times the price level. NGDP is a number. RGDP times the price level is a calculation. A calculation is not the same as a number. Calculations give numbers as results.

And that brings us back to right-to-left assignment.

// and this all comes to mind because ...

At Naked Capitalism back in 2014, Philip Pilkington wrote
The essence of monetarism is in the transformation of an identity put forward in Irving Fisher’s classic 1911 work The Purchasing Power of Money into a supposed causal relationship... Fisher laid out the following identity:

That equation reads: “The amount of money, M, multiplied by its velocity, V, is equal by identity to the sum of the quantity of goods and services purchased, Q, times the sum of their prices, p.” Note the clause “equal by identity”. The equals sign with an extra bar indicates that this is a tautological statement. It simply must be true...

The monetarists ... converted this identity into a behavioral equation. This equation ran as follows and should be read running from left to right:

Note ... the fact that we have converted the “equal by identity” sign into a standard equals sign. This implies causality running from left to right. So, the left-hand side of the equation causes the right-hand side.

No. The equal sign does not "imply causality", not in any direction. Not for anyone who can do arithmetic. Three plus one equals four, but three plus one does not cause four. Pilkington's assertion is ridiculous.

The word "equals" does not mean "causes". Equals means "has the same numerical value as".

It's drivel like Pilkington's that prevents progress in understanding the economy.

1 comment:

The Arthurian said...

Hey, I don't know: Maybe Pilkington meant the monetarists were saying that the equal sign means MV causes PQ. But in that case it should have been Pilkington, not me, saying No, the equal sign does not imply causality.

He didn't do that.