If your resolution for the New Year is to help your friends learn economics, here is an idea. Tell them something like that: “Except if you are venturing into the special fields of monetary or financial economics, rethink and reformulate any economic problem in terms of real resources, that is, actual inputs and the goods and services they serve to produce. Don’t think about, ‘dollars,’ ‘euros,’ or any other national currency.”
In his Treatise on Political Economy (1821; original edition: Traité d’économie politique, 1803), Jean-Baptiste Say emphasized that important idea:
The valuation of an object is nothing more or less than the affirmation, that it is in a certain degree of comparative estimation with some other specified object; and any other object possessed of value may serve as the point of comparison. A house, for instance, may be valued in corn or in money. To say that it is worth 4000 dollars conveys a more accurate notion of its value, than to say that it is worth 4000 bushels of wheat, solely because the habit of reckoning the value of all commodities in coin makes it easier for the mind to form an idea of the value of 4000 dollars in other commedities, that is to say, of the quantity of other commodities obtainable for that sum, than of that obtainable for 4000 bushels of wheat. Yet, if wheat be 1 dollar a bushel, the degree of value expressed by each is the same. (p. 284)
This understanding of relative prices—the price of a house in terms of wheat—will also help your friends grasp what inflation is: the increase in the prices of all goods (the general level of prices) in terms of a certain currency.
The basis for understanding wealth and poverty is not that pieces of paper or accounting balances are moving from one pocket or one account to another but that individuals are making choices, exchanging among themselves, and otherwise moving real resources.
Quoting a long-dead French economist provides tangential benefits. It is useful to know what intelligent people thought in the past after they raised the same questions as we do. Another tangential benefit is to put the new year in a broader, albeit very short, time-space perspective: it’s already 2022 or, alternatively, it’s only 2022! Happy New Year!
READER COMMENTS
Thomas Lee Hutcheson
Jan 1 2022 at 1:35am
Excellent advice. You actually say it better than Say.
I’d suggest that you go on to give an example, who will produce and consume more and less if we follow policy A instead of policy B.
Pierre Lemieux
Jan 1 2022 at 4:47pm
Thomas: I suggest that the vast majority of government policies have the effects you mention. For example, subsidizing a corporation will allow its customers (if the subsidy is on production) or its shareholders (if the subsidy is to prevent bankruptcy, say) to consume more, at the cost of the taxpayers who finance the subsidy and will have to consume less; imposing a minimum wage will allow low-productivity employees who keep their jobs to consume more and force the even-lowe-productivity employees who find themselves unemployed, as well as consumers, to consume less; money creation will, through (unanticipated) inflation, allow net borrowers to consume more and force net lenders to consume less; subsidizing wheat cultivation will allow wheat farmers to consume more (until more farmers or perhaps plumbers shift to wheat) and force non-farming house owners to consume less; and so on, and so forth. Even your favored carbon tax (assuming it does actually prevent the imminent destruction of mankind) will have similar redistributive effects—for example, allowing individuals living in more threatened areas to consume more while forcing those in cold areas to consume less and forego their dreams to live in Florida (plus, in this broad case, a lot of churning: consumers of electric cars will be favored as opposed to consumers of gas-guzzling Jeeps and pick-up trucks, etc.). The state is a redistributive machine.
Thomas Lee Hutcheson
Jan 2 2022 at 12:20am
I was not arguing that policies do not have redistributive effects as well as aggregate costs and benefits. Sometimes the distribution is the objective with deadweight losses being something to be traded off (minimum wage) or the reverse an aggregate benefit with unfortunate distributional consequences (tax on net CO2 emissions).
Actually, even in the fields of finance, its a good thing to keep in mind the actual resource allocative effects of policies.
Pierre Lemieux
Jan 2 2022 at 11:23am
Thomas: The question is, who does the weighing? And in whose interests? In a short conversation, I cannot do better than to quote Anthony de Jasay again:
Interestingly, Hayek, who of course is not a liberal anarchist like de Jasay, reaches similar conclusions on this specific matter. I’ll have an interesting quote in a forthcoming post (probably tomorrow or Tuesday).
Monte
Jan 1 2022 at 12:31pm
If you’ll indulge my over indulging:
The time value of alcohol is the widely accepted conjecture that there is greater benefit to drinking a whole bottle of champagne on New Year’s Eve rather than an identical amount the morning after. It may be seen as an implication of the later-developed concept of time preference.
Pierre Lemieux
Jan 1 2022 at 4:57pm
Monte: Let me over-indulge too. To prove that time preference (in the normal sense of preferring to consume X at time t instead of time t+1, ceteris paribus) is not involved in your example, consider the following case. It is December 26 and you have only one bottle of champagne to consume over the next ten days. You may well prefer not to drink it now and wait for New Year’s Eve. The solution of the puzzle, I think, is that champagne on December 26 and champagne on December 31 at 23:59 are not exactly the same good: it does not have the same subjective value. It has more value in the latter situation, consumed with complementary goods and rituals. Somewhat similarly, a pair of laces is worth less to you if you don’t have shoes.
Monte
Jan 1 2022 at 5:34pm
Pierre,
You’re correct, of course, in pointing out the error in my example of time preference. It was intended for entertainment value only (given the shape I was in this morning). I’ll attempt a few more examples of subjective value with a time preference then:
-Children derive much more subjective value from snow on Christmas Day than on New Year’s day.
-Most adults derive more subjective value from a cold beer or glass of wine before a hard day’s work than after.
-A full head of hair is considerably more valuable to a young man before the age of 35 than after.
Pierre Lemieux
Jan 1 2022 at 5:54pm
Monte: Have another glass, and Happy New Year!
Monte
Jan 1 2022 at 7:21pm
I meant to say after a hard day’s work…I think.
Gene
Jan 2 2022 at 4:34pm
Children value snow for A) the chance to have fun playing in it, and B) the chance they will get snow days off of school. Christmas Day snow helps them with A but can’t give them B. A New Year’s Day snow, at least if their schools start up classes again at the beginning of January, can offer both A and B. Speaking only for myself, I know I was rooting for January snow much more than Xmas snow.
Phil H
Jan 1 2022 at 9:03pm
There is a s a downside, though: it’s very difficult to understand other people’s preferences. For example, I don’t know much about the visual arts, and would never in a million years imagine that some paint on canvas could be worth many multiples of what my house is worth, unless some concrete, dollar-denominated transactions had demonstrated it to me.
Pierre Lemieux
Jan 2 2022 at 11:29am
Phil H: You are totally right, but this does not contradict anything I have said. You, Say, and I all speak of market prices. The price of “some paint on canvas” and the price of your house are both bid up until the person(s) attaching the most value to it get it.
David Seltzer
Jan 2 2022 at 7:46pm
The price of some paint on canvas is a nice example of subjective pricing. I believe the most recent Picasso painting of A Woman Sitting Near a Window sold at auction for 103.4 million dollars on October 24,2021. I suspect the cost of the paint and canvas Pablo used for that painting cost substantially less.
Pierre Lemieux
Jan 2 2022 at 7:58pm
Indeed.
Jose Pablo
Jan 5 2022 at 3:57pm
I would use Pierre/Say’s advice on that.
What are the goods and services that the buyer of the Picasso painting is giving up in exchange for the ownership of the painting?
Probably very few (if any). Particularly so, since the painting is, mainly, a “storage of value” that the owner can use at any point in time (and a much better storage of value that any government sponsored currency).
So, from this perspective he/she is pricing the Picasso as you are. Very low.
And, using this measure, the paint and canvas Picasso used were, maybe, more “valuable” … although by 1932 Picasso probably was also giving up very little consumption in exchange for the materials. The real value of the painting being, very likely, the abundant and varied sexual intercourses he was renouncing to have in order to find the time to paint it.
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