Skip to main content

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.


Popular posts from this blog

England as a Raft?

In a lecture delivered in 1880, William James asked rhetorically, "Would England ... be the drifting raft she is now in European affairs if a Frederic the Great had inherited her throne instead of a Victoria, and if Messrs Bentham, Mill, Cobden, and Bright had all been born in Prussia?"

Beneath that, in a collection of such lectures later published under James' direction, was placed the footnote, "The reader will remember when this was written."

The suggestion of the bit about Bentham, Mill, etc. is that the utilitarians as a school helped render England ineffective as a European power, a drifting raft.

The footnote was added in 1897. So either James is suggesting that the baleful influence of Bentham, Mill etc wore off in the meantime or that he had over-estimated it.

Let's unpack this a bit.  What was happening in the period before 1880 that made England seem a drifting raft in European affairs, to a friendly though foreign observer (to the older brother…

Cancer Breakthrough

Hopeful news in recent days about an old and dear desideratum: a cure for cancer. Or at least for a cancer, and a nasty one at that.

The news comes about because investors in GlaxoSmithKline are greedy for profits, and has already inspired a bit of deregulation to boot. 

The FDA has paved the road for a speedy review of a new BCMA drug for multiple myeloma, essentially cancer of the bone marrow. This means that the US govt has removed some of the hurdles that would otherwise (by decision of the same govt) face a company trying to proceed with these trials expeditiously. 

This has been done because the Phase I clinical trial results have been very promising. The report I've seen indicates that details of these results will be shared with the world on Dec. 11 at the annual meeting of the American Society of Hematology. 

The European Medicines Agency has also given priority treatment to the drug in question. 

GSK's website identifies the drug at issue as "GSK2857916," althou…

Francesco Orsi

I thought briefly that I had found a contemporary philosopher whose views on ethics and meta-ethics checked all four key boxes. An ally all down the line.

The four, as regular readers of this blog may remember, are: cognitivism, intuitionism, consequentialism, pluralism. These represent the views that, respectively: some ethical judgments constitute knowledge; one important source for this knowledge consists of quasi-sensory non-inferential primary recognitions ("intuitions"); the right is logically dependent upon the good; and there exists an irreducible plurality of good.

Francesco Orsi seemed to believe all of these propositions. Here's his website and a link to one relevant paper:

What was better: Orsi is a young man. Born in 1980. A damned child! Has no memories of the age of disco!

So I emailed him asking if I was right that he believed all of those things. His answer: three out of …