Posted on 29 October 2020 by Philip Pilkington In some tribes studied by anthropologists it was found that members believed that animals and objects, rather than human beings, were responsible for pregnancies. Pregnant women were asked by other members of the tribe what object or animal they had seen immediately before discovering that they were pregnant. That object or animal - say, a large rock or a monkey - would then be considered to be the father of the unborn child.Please share this article - Go to very top of page, right hand side, for social media buttons.Such is a rather humorous example of what is called “animistic" or “magical" thinking. At root, it is based on spurious correlation - the belief that just because two things coincide, in this case the discovery of
Global Economic Intersection Analysis Blog Feed considers the following as important:
This could be interesting, too:
Menzie Chinn writes “Trifecta”
Menzie Chinn writes Business Cycle Indicators as of December 1st
ocanuto writes The two sides of capital flows to Brazil
posted on 29 October 2020
by Philip Pilkington
In some tribes studied by anthropologists it was found that members believed that animals and objects, rather than human beings, were responsible for pregnancies. Pregnant women were asked by other members of the tribe what object or animal they had seen immediately before discovering that they were pregnant. That object or animal - say, a large rock or a monkey - would then be considered to be the father of the unborn child.
Please share this article - Go to very top of page, right hand side, for social media buttons.
Such is a rather humorous example of what is called “animistic" or “magical" thinking. At root, it is based on spurious correlation - the belief that just because two things coincide, in this case the discovery of the pregnancy and the sighting of an object or animal, that one must have caused the other. We see such spurious correlations together with magical thinking in certain economic tribes today too.
In my last post pointing out how an Austrian blogger had grossly misused data the debate in the comments section eventually turned to the idea that inflation was a monetary phenomenon. I anticipated this was going to happen (Austrians are remarkably predictable because their theories are so simplistic that a computer program could very nearly follow and anticipate their reasoning) and so I crunched some of the numbers on inflation in advance.
First I should establish that it is true that inflation is generally accompanied by a rise in the money supply. But this is as true as the fact that the pregnant tribeswoman sees a large rock just before she discovers her pregnancy. The fact is that money does not “do" anything - just as large rocks do not impregnate women. Money is a passive medium and saying that it “causes" inflation is simply animistic or magical thinking.
The money supply expands and contracts as inflation rises and falls. This was well-known by the economist that the Austrians claim to follow: Knut Wicksell. Wicksell realised that bank credit was flexible and that money was passively “pulled" from the banking system as prices rose. He understood this because he had read and comprehended the views put forward by the great pioneer of modern monetary theory, Thomas Tooke.
The Austrians, however, together with their monetarist cousins came to forget this and today they will make animistic claims about money as some sort of active agent driving economic activity. To others this appears bizarre and amusing. Practical economists working day-to-day know that in order to understand why inflation occurs - and what drives the expansion of the passive medium known as “money" - we must study what the causes price rises. These are usually events or institutions that have all-too-human aims and goals.
It might be illuminating then to turn to the inflation of the 1970s in the US to illustrate this point. All the data used in what follows is from FRED.
Here is a graph showing the CPI and its major components between 1970 and 1982:
The two major components of inflation in this era were rising unit labour costs - that is, rising wages relative to productivity - and rising oil prices. The former was due in large part to the strength of union-bargaining power which we shall break down in more detail below. The latter was due to the oil price spike initiated by OPEC in response to geopolitical events in the Middle-East.
Let us, however, zoom in to the first outbreak of inflation and see what the data tells us:
This is a very interesting graph because it tells us a pretty solid story about the beginning of the inflation in the US in the 1970s. As we can see, it is actually the inflation that takes off before the rise in unit labour costs. The inflation begins to pick up in the 3rd quarter of 1972 while unit labour costs only begin to rise in the 1st or 2nd quarter of 1973. Unit labour costs responded quickly to the inflation because many contracts were indexed to inflation measures similar to the CPI, but it is clear from the data that the inflation came first.
The reason for this was that spending on the Vietnam War had gotten out of control in the late-60s. In his last year as president Lyndon Johnson was running a budget deficit of somewhere between 3-4% of GDP (the numbers are very unreliable for this period) while unemployment was substantially below 4%. The reason for this was that because the Vietnam War was very unpopular the Johnson administration did not want to fund it out of tax receipts and instead opted for a “guns and butter" economy.
The result of this was that inflationary pressures began to build. These pressures were initially contained by a strong, fixed dollar. This lasted until the Bretton Woods system began to falter. As the fixed exchange-rate system fell apart between 1971 and 1973 the dollar lost over 20% of its value; meanwhile the US continued to run trade deficits. By 1972 the inflation could no longer be contained and prices began to rise. Nixon put in place wage and price controls in the 3rd quarter of 1971 but these began to gradually break down, unleashing the beginning of a wage-price spiral from the then heavily unionised workers. Finally, in the 4th quarter of 1973 OPEC initiated the first oil price shock and inflation reached a high of 12% in the 4th quarter of 1974 - pushed on, no doubt, by a continuing wage-price spiral. After this the situation got completely out-of-control and was exacerbated by another oil price shock in 1979.
That is basically the story of the 1970s inflation. As we can see all the actions undertaken were by people, not by animistic monetary forces. The politics of the Vietnam War played a large part; so too did OPEC and geopolitics in the Middle-East; and so too did the unions, although there is a case to make that they were reacting rather than acting. The money supply did increase in this period but this was due to increases in bank credit together with new money spent into the system by the government.
Saying that this inflation was a “monetary phenomenon" is a bit like saying that a bruise is the result of internal bleeding; while this may be somewhat accurate, it leaves the cause of said internal bleeding completely unanswered. And maybe that’s the point. Maybe the point is not to discover true causes but to blame imaginary ones that fit with preconceived notions. It is, after all, a lot easier to say that a large rock is the father rather than admit that your brother impregnated your wife.
Make a Comment
Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.