Sunday, December 16, 2012

A Monetary Model of Spending

Steve Roth has a great, simple economic model of spending and redistribution in a purely monetary economy. After reading this post, I realized that this is roughly how I've been picturing the economy for a long time. What matters is how people want to spend their money, investment is a response to human need, not some kind of heroic Galtian genius driving the economy through wise investment and sound management.

I urge you to go read the post, I won't try to reproduce it here. The major takeaway is that under this model, redistribution towards the poor leads to much faster economic growth, which matches well with the observed empirics on economic growth. Hopefully this will be developed further, the investment centric model of the economy normally employed both by economists and libertarians emphasizing the need to give high returns to individual risk takers always seemed to me to match very poorly with observed reality, though it fits really well with known biases towards motivated reasoning.

The big problem I always had with the heroic, investor centric model is that virtually any successful business plan seems to be independently arrived at by multiple people in multiple places (same goes for most major inventions, think Darwin and whats-his-name) rather than having a single origin point. That only one, or a few, of these originals survives is usually a story about uncontrollable, unforeseen complications (better known as luck) than it is a story about the superiority of one initiator over another; leading to survivorship bias. This leads me to believe that systemic factors are dominant, individual characteristics are usually secondary and non-determinative. Thinking about spending rather than investment would help align our thinking with how the world actually seems to be behaving, it is far easier to think of the great mass of consumers spending their money as a systemic factor than it is to think of investment, which generally leads to us thinking of individualistic capitalist investors rather than the systemic drivers of that investment behavior.

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