After a bit of reading online I think I’m finally on the trail of what I’ve been searching for – how to link different ideas together across different hierarchies. Here is the situation now – I am studying economics and as I learn about key economist I want to understand where they are in the context of different schools of thought. For example, Milton Friedman is listed as “Chicago School of Economics” by Wikipedia, Ludwig von Mises as “Austrian“, and Paul Krugman as “Keynesian.” The typical presentation is a simple hierarchy, maybe in a mind map format.
It’s simple to understand the levels of the hierarchy but what I want to know is what are the cross-connections between different people. For example, which people tend to co-author articles with people from other schools of thought? Which individuals bridge the space in-between different schools of thought? Which universities are graduating people into these schools of thought? For example the University of Chicago seems to have fewer Neo-Keynesians.
As a seasoned researcher you come to expect a particular bias merely through your experience, but as someone new to the field I have a hard time placing what some of the influencing factors on the research might be. If however there was a way that I could see quickly which schools some of these main thinkers came from or worked at, I could orient myself in a broad sense quickly. When I start to ask these questions I begin to wonder if these hierarchies of thought we create are all that meaningful.
We all have an urge to categorize and sub-divide but the problem with traditional hierarchies is we are limited to a single dimension or way of sorting. The future is in “semantic” links that allow items to be linked together with meta-data describing the type of link. I will be posting more soon about some of the partial solutions I’ve found. So far nothing seems to answer the underlying problem.
We have been learning in macroeconomics class that deflation is an incredibly negative situation, especially from the perspective of central banks. Monetary policy becomes less effective in managing the economy once you have serious deflation. From there the basic argument goes that the economy may enter into a deflationary spiral causing lower prices to lead to lower production and therefore lower employment.
Another classmate asked the basic question: is deflation really all bad or is it just bad for our current system? There is no incentive to save now because of the artificially low-interest rates that set by the Federal Reserve. If interest rates reflected the cost of money, as we defined it at the beginning of class, then people would be rewarded for saving and as deflation started to take place interest rates would rise causing more savings and less consumption.
Now this increase in savings would cause aggregate demand to fall in the near-term. But what are savings? Saving is just setting aside money for future spending. No one saves with the intention of never spending the money, they just think they can put it to better use later.
So if interest rates were not set by the Fed but instead allowed to reflect the natural price of money, more people would save and be rewarded for their savings. At some point even if interest rates were 0% forever, debt taken on by individuals still means that future consumption is merely being pushed forward for present spending. That does not change the basic definition of debt as something that has to be paid back. The debt still must be paid back there is just less future consumption.
Back more to the original question now, if deflation starts and people leading up to this have been rewarded for saving, then wouldn’t people eventually buy things as prices fell even if they thought the price might fall a little bit more? Or put another way, there has to be some threshold where people would see an opportunity to invest even if prices could fall further? I’m thinking of Warren Buffett investing billions into Bank of America recently when few people wanted anything to do with the banks.
One of the counter arguments seems to go that: lower-income people will never have a large enough savings cushion to weather a true deflationary spiral with high unemployment. My question now though is, are people really better off with the current system? It looks like we have at least another year or two of slow to low growth. That hurts everyone but especially the people who cannot find jobs to get back into the economy.
If you see something I am missing here, please comment. This is a genuine question that I am trying to learn more about and answer.