Pretentious and Unhelpful Symbols

Image result for princeton university campus

Economist William Baumol, a professor emeritus at Princeton University, passed away on May 4. I imagine he couldn't bear the thought of witnessing one more silly pseudo holiday where Yankees pretend we care about Mexican history in order to drink tequila. In that case, his timing was perfect.

Baumol is one of the two gentlemen immortalized in the name of the Baumol-Tobin model of the transactions demand for money. (The other, of course, is James Tobin who passed away 15 years ago.) Baumol's paper outlining this theory preceded Tobin's by four years, but the model seems to have languished in obscurity until Tobin's revival.

Baumol did much else, too, but I'd like to write about transactions demand today. Indeed, I'm going to criticize its role in subsequent developments. This may seem a violation of the old rule "speak no ill of the dead." So I should preface it by saying the following: I'm certain Baumol made many other contributions more positive than this one, and I don't blame him for the relative prominence of this one. His passing is merely the catalyst of my invocation of Baumol-Tobin today!

The model is quite straightforward. Developed in a pre-debt card, pre-ATM era, it posits that a given individual has a demand for money (for immediately accessible cash, in the wallet or in a pillow case or the like, or in a no-cost checking account, obtainable without any further transaction with anyone). The demand is subject to a trade-off: if my money is ready at hand then it isn't earning interest and, in an inflationary environment, it is losing value. In even simpler terms: one pays a price to have cash at hand.

Given certain simplifying assumptions (which were to be relaxed in more sophisticated versions of the model developed later), Baumol's discussion of this trade-off indicated that "the rational individual will, given the price level, demand cash in proportion to the square root of the value of his transactions."

Notice, though, that this is only transactions demand. It isn't total demand for money. It is what is left when one deletes both speculative and precautionary demand. Transaction demand is the demand that arises because of the expected normal spending that has to be done from one payday to the next. Speculative demand: some good opportunity might arise that one will want to be able to act upon quickly (I may run into a scalper with really desirable tickets). Precautionary demand is that which arises because I fear something awful may happen and 'extra' cash will help deal with it.

So the supply and demand for cash determines the price of cash. One part of the demand is the transactions demand. If we imagine supply kept constant, and both of the other elements of demand kept constant, and only transaction demand changed, then we can predict the outcome for the price.

This is the epitome of the sort of "analysis" that into which too many economists get caught up. It is in principle unfalsifiable, it is useless in a pragmatic and policy-oriented sense, and it is intellectually elegant not as a virtue but as a fault.

Baumol was in essence refuted by none other than John Maynard Keynes, who in his GENERAL THEORY (1936) wrote,

"It is a great fault of symbolic pseudo-mathematical methods of formalizing a system of economic analysis -- that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed: whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep 'at the back of our heads' the necessary reserves and qualifications and the adjustments which we have to make later on, in a way in which we cannot keep complicated partial differentials 'at the back' of several pages of algebra which assume that they all vanish. Too large a proportion of recent 'mathematical' economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols."

I'm afraid that Baumol gave rise (in the name of the elaboration of certain Keynesian theses, as it happens) to precisely this sort of maze of pretentious and unhelpful symbols.

A Story About Coleridge

This is a quote from a memoir by Dorothy Wordsworth, reflecting on a trip she took with two famous poets, her brother, William Wordsworth, and their similarly gifted companion, Samuel Taylor Coleridge. We sat upon a bench, placed for the sake of one of these views, whence we looked down upon the waterfall, and over the open country ... A lady and gentleman, more expeditious tourists than ourselves, came to the spot; they left us at the seat, and we found them again at another station above the Falls. Coleridge, who is always good-natured enough to enter into conversation with anybody whom he meets in his way, began to talk with the gentleman, who observed that it was a majestic waterfall. Coleridge was delighted with the accuracy of the epithet, particularly as he had been settling in his own mind the precise meaning of the words grand, majestic, sublime, etc., and had discussed the subject with William at some length the day before. “Yes, sir,” says Coleridge, “it is a majesti

Five Lessons from the Allegory of the Cave

Please correct me if there are others. But it seems to be there are five lessons the reader is meant to draw from the story about the cave. First, Plato is working to devalue what we would call empiricism. He is saying that keeping track of the shadows on the cave wall, trying to make sense of what you see there, will NOT get you to wisdom. Second, Plato is contending that reality comes in levels. The shadows on the wall are illusions. The solid objects being passed around behind my back are more real than their shadows are. BUT … the world outside the the cave is more real than that — and the sun by which that world is illuminated is the top of the hierarchy. So there isn’t a binary choice of real/unreal. There are levels. Third, he equates realness with knowability. I only have opinions about the shadows. Could I turn around, I could have at least the glimmerings of knowledge. Could I get outside the cave, I would really Know. Fourth, the parable assigns a task to philosophers

Searle: The Chinese Room

John Searle has become the object of accusations of improper conduct. These accusations even have some people in the world of academic philosophy saying that instructors in that world should try to avoid teaching Searle's views. That is an odd contention, and has given rise to heated exchanges in certain corners of the blogosphere. At Leiter Reports, I encountered a comment from someone describing himself as "grad student drop out." GSDO said: " This is a side question (and not at all an attempt to answer the question BL posed): How important is John Searle's work? Are people still working on speech act theory or is that just another dead end in the history of 20th century philosophy? My impression is that his reputation is somewhat inflated from all of his speaking engagements and NYRoB reviews. The Chinese room argument is a classic, but is there much more to his work than that?" I took it upon myself to answer that on LR. But here I'll tak

Jamesian Philosophy Refreshed

Search This Blog