Category: Economics

Language Games on the Playground

All of us probably mastered the creation and development of language games by the time we were ten years old thanks to our vast experiences on the playground at recess, or passing time in the back seat of the car on family vacations. When children engage in creative group play, role-playing “cops and robbers” or “playing house”, they are not only trying on adult behaviors to imagine how they would feel, they are learning how to negotiate evolving rule sets as an imaginary consensus “reality” is being collaboratively constructed.

It is easy to forget that the same process is continuing throughout our lives, and much of what we take for “reality” today didn’t even have words to describe it a century ago. A century from now, if there are people, their reality will be described in words that haven’t been invented yet, because the concepts don’t yet exist. This is not just because of technological developments (“If someone were to hand Leonardo da Vinci a garage door opener how would he make sense of it?”) but also many social ones. Decades ago gender roles were a “presupposed value” that can no longer be assumed in current discussions. “Privacy” is certainly different today than even thirty years ago, with different assumptions necessary. Do you even read the “updated privacy policy” notices you receive via email? I read one all the way through the other day and found that the policies, while reasonable, included many possibilities and issues that might never have occurred to me.

If you are old like me (I’m fifty-six) you might be taking for granted certain aspects of the “social contracts” in our society which have been evolving into a new reality right under your feet. Your relationship with your employer. Your rights over your property (including intellectual). Did you know you can be arrested for carrying too much cash?

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Power Context

Another crucial factor in the structure of language games is what I call the “power context.” As stated in earlier posts, language games are more than mere linguistic constructs: they involve people, and take as ‘givens’ many facts and values. The ‘play’ TrafficStopincludes activities and things in the real world. Every example of a language game I have presented also includes a power context: an unstated but inescapable configuration of relative powers of the participants. Sometimes the players are equal, but often not. To ignore the power context of a language game would be as absurd as doing astrophysics without considering gravitational fields.

Revisiting some of my earlier examples with this in mind:

  • In the operating room, the surgeon is giving commands, the assistant is responding to the commands, and the patient lies helpless on the table.
  • The police officer, with the full backing of the government, has power over the citizen in the traffic stop. The citizen has certain rights but would do well not to try to turn the tables by, say, reaching for a weapon.
  • At a wedding, the minister has been vested by the state with the power to perform the ceremony. The couple to be married stand as equals while the guests, except for one opportunity to voice an objection, are expected to tacitly lend their support.
  • In a chess tournament the individual players are considered equal and must comply with the instructions of the tournament director. The tournament itself may be conducted under the auspices of a chess federation. Participation is voluntary.
  • In a university chemistry research lab there is likely a hierarchy (professor and grad students, say). The game is played under the umbrella of not only the university, but also the chemistry profession and the greater scientific community. From another angle, the whole enterprise might be seen as an attempt to acquire the power over nature that scientific knowledge might impart.
  • In the farmers’ market the buyer and seller have different powers: the seller knows the “real story” of the produce, but the buyer has the money and free choice to walk away. A balance is presumably reached at the moment a deal is agreed to.
  • At the bank the internal auditor has great power over the manager being audited, although it could be the case that a rookie auditor is going up against a veteran senior manager. Presumably both are under the authority of a board of directors, while the banking industry is under the regulation of the government.
  • In a job interview the power context could vary: perhaps the job seeker is in dire financial straits and feels marginally qualified amongst a large number of applicants. In that case the power is with the interviewing manager. On the other hand, the position might be crucial to the operation of the company, may require a specialized skill set, and this candidate uniquely qualified. Depending on the length of the vacancy and the urgency of making the hire, the power may lie squarely with the candidate.
  • At the gym with a personal trainer, the client may feel subservient to the trainer — especially if the client is a beginner and out of shape while the trainer is super fit and experienced. On the other hand, the client is the one with the money and the trainer may be in the early stages of building their business, so it could be the opposite. Take a moment to consider a variety of factors and possibilities. Also, the power balance can certainly change over time.
  • Even in the example of the chapter in the chess book there are implicit power factors: the authority and reputation of the writer (grandmaster? coach? theoretician?), whether they utilized computer chess engines to analyze the variations, the strength of the examples from master practice, the willingness of the public to buy the book, the efforts of the publisher to sell it, the prospect of increased chess strength for the reader, etc.

Many language games exist for the explicit purpose of addressing and resolving power struggles, for example: court cases, business negotiations, philosophical arguments, politics, and, of course, chess matches and sporting events. But apart from the power struggles harnessed within language games (the internal combustion engines of society!), without the structuring of the games themselves by contextual power gradients outside of them they would have no sense or function at all.

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Presupposed Values

In previous posts I emphasized that language games are necessarily finite, so they must make unquestioned use of certain background facts — among which are ‘values’, the inherent worth of certain things — in order to focus on the issues in play. Not to do so would lead to an endless cascade of preliminary meta-discussions interrogating every presupposition, running the risk of never getting to the topic at hand. (Plato’s dialogues offer many examples of language games falling backwards ad infinitum.) Here I offer a few more examples of language games and the presupposed values that are implicit in them.

  • A buyer and seller haggling over price at a farmer’s market.
    Presupposed values: the worth of money, the saleability of the produce, voluntary transactions, property rights, free market.
    In play: the factors affecting the value of produce, pros and cons of this particular produce, other opportunities available to both buyer and seller.
  • An internal auditor presenting findings and discussing recommended resolutions in a bank audit.
    Presupposed values: the rule of law, shareholder value, public reputation, performance evaluations (and the desirability of continued employment), effectiveness of internal controls.
    In play: the validity of specific findings, the effectiveness of particular remedies, the relative importance of various findings, the cost and practicality of specific remedies, fault-finding and blame.
  • Chapter in a chess manual about the Ruy Lopez opening.
    Presupposed values: playing chess itself worthwhile, being good at playing the opening in chess, durability into the middle- and end-game of opening advantages, validity of examples from games of masters.
    In play: soundness of specific lines, validity of this particular analysis, current assessments of key positions (opinions of top players), practical playability of specific lines.
  • Job interview.
    Presupposed values: good to have a job, looking good to the other party, compensated work, learning about each other, freedom to say “no,” looking for good fit.
    In play: honesty of both parties, appropriateness of fit, relevance and quality of specific items on resume, anticipated job duties of this position, personal qualifications and character.
  • Working out at the gym with a personal trainer.
    Presupposed values: fitness and health, avoiding injury, benefits of exercise, looking good, voluntary participation, professionalism, collaboration.
    In play: appropriateness of specific exercise for this client at this time, effort level, strategic goals and plan, etc.

The reader could have easily come up with these, and can no doubt come up with countless additional examples on their own. However, I hope these examples make it clear what I mean by “presupposed values”: they are not under discussion in the particular language game being played at the moment. To discuss them means stepping into a “meta” language game outside and prior to the current one.

I don’t believe it is possible to play a language game without the existence of presupposed values. For example, imagine the following statement in the blog of a person committed to “science and reason”: “Since this is a discussion based on science and reason, every effort will be made to keep statements ‘values-neutral’ and objective.” The irony is that the writer has just stated a value: specifically the value of “‘values-neutral’ and objective statements in a discussion committed to science and reason.” Nothing at all wrong here, except to point out that there is no “values-free.”

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The Language Game

Much can be said — and has been said — about the so-called “linguistic turn” in philosophy. For me it just signifies an overt recognition that all philosophic inquiry is constrained by the limits of language. The Buddha made the distinction between the moon we can each see, and a finger pointing at the moon. Language is the “finger” which essentially says “hey, look at the moon.” Once you see the moon, I can lower my hand, as it is no longer necessary. Philosophical discourse has as its aim the goal of seeing the moon together. The body of literature known as “Philosophy” is just an audit trail of the effort to come to see “what is” in a way that is satisfactory to both of us, at which point we can leave off until another day.

Did you notice what I did in the previous paragraph? I used language to talk about philosophy in general terms. I painted a word-picture of the process of doing philosophy and invited you to see it with me. If you bought into it, great. It was a linguistic exercise which required the imagination of both the writer and the reader to flesh out the intended meaning. It was “meta-philosophy” — philosophizing about philosophy itself. It was a “language game.”

Ludwig_WittgensteinThe idea of philosophy as a language game comes from Ludwig Wittgenstein. Language games, for Wittgenstein, are more than just linguistic constructs: they also include players, moves, rituals, physical reality, etc. The scientific method carried out in a chemistry lab, for example, is a language game. The scientists, apparati, chemicals, procedures, data — even the scientific theories — are all part of the game. The “scientific method” structures the playing of the game, which has as its goal the pursuit of scientific knowledge. Even the notion of “scientific knowledge” is a linguistic construct that helps structure the game. The overall process of what goes on in a chemistry lab is a perfect example of a language game. Many parts of the game are not linguistic in nature (people, chemicals, beakers), but they are every bit as essential to the “game” as the linguistic elements.

To say that Philosophy is comprised of language games (and nothing more) is to “make the linguistic turn.” At the end of the day there are people, chess boards, moons, and beakers — these things exist. But when it comes to answering the question “what is Philosophy,” we are left with what we can say about what we can say about such things.

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External Analysis

The analytical frame of mind seeks to break a thing apart to look at elements, mechanisms, or internal structures to understand how it functions. But I often find that an “external analysis” of boundary conditions, contexts, inputs and outputs — really just treating the thing as a “black box” — can answer questions without having to delve into the inner workings.

Of course, I don’t necessarily mean physical things. It could be anything from a job description you are writing to an economic theory. An example of an external analysis might be the design of fire-retardant chemicals. Since the purpose is to make something that won’t burn, if you succeed, it won’t oxidize easily or perhaps not even break down at all. From that simple external assessment, it is pretty clear that such a chemical will likely be a potential environmental contaminant, since it would hang around for a long time. Its toxicity would depend on other features, of course. Polychlorinated biphenyl (PCB), for example, is very stable because the active sites on the hydrocarbon frame (two benzene rings) are occupied by chlorine atoms. (This is internal analysis now.) The molecules are chemically inert, but the chlorine atoms are very electronegative. These two facts — that the molecules are inert, and that they have electronegative sites — explain the carcinogenic properties. The PCB molecules hang around in the body long enough to find their way into the cell nuclei where they can disrupt DNA replication. So the internal analysis explains the particular mechanism of one particular chemical (PCB), but the external analysis (characteristics of a fire retardant) are enough to warn you that it may be dangerous.

I had to dig deep into my thirty-five-year-old memories of organic chemistry class to come up with that example, but here is another one that is of more general interest: supply-side versus demand-side economics. Part of the fun of external analysis is that it can be quite simple-minded and still be useful. A fundamental “law” of economics is that of supply and demand, which is actually a theory about how prices are determined in an open, competitive market. (In a controlled market, prices are either set by a government or a monopoly/oligopoly.) The idea is that when demand equals supply, prices will be at an equilibrium. Viewed externally, it is easy to imagine that in a demand-driven economy supply is lagging demand, so there is upward pressure on prices. In a supply-driven economy, supply is ahead of demand, so prices are softening. (External analysis saves us from having to do any math here.)

It makes sense that when Ronald Reagan was elected he was wanting to implement supply-side policies: inflation was in double digits and investment was weak. Now, after decades of supply-side policies, we see the specter of deflation all over the developed world while capital exceeds legitimate investment opportunities — flat growth, flat markets! So perhaps we need policies that stimulate demand. “Austerity” has the opposite effect: it is deflationary. Time for some long-overdue fiscal stimulus a la Keynes.

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Independence

I read something a long time ago by the 20th century evangelist E. Stanley Jones that so impressed me that not only did it stick, it has guided my thinking ever since. We are all born completely dependent on others for our survival. As adolescents we naturally must exert our independence — physically, mentally, socially. But as adults, when we are fully mature in our understanding, we come to see that we are interdependent. Individual humans are weaker than other species, but together we dominate the planet. The greatest achievements of humankind are not individual acts of heroism, but the creation of civilizations that are vast and complex webs of specialization and interconnection.

It seems natural that one’s political orientation might evolve along with these stages of development. Early in life we might wish to be taken care of. Later, when our strength is greatest, we seek to sharpen our blades against brave challenges. But sooner or later we encounter failure, bad luck, or simply our own limitations. We gain the perspective that there is really no such thing as a “self-made man.” We come to see that we all have different capacities at different times in our lives, and virtually none of us could survive long in the absence of the contributions of others. A mature political outlook sees society as a vital shared resource. Yes, it imposes burdens and obligations, but without the public goods it offers, very little economic activity could occur. Nurturing and protecting the common good becomes a priority. On the other hand, a political view that clings to adolescent notions of liberty and independence — especially decrying the burdens of regulation and taxation — is not just immature, it is literally anti-social.

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Three Big Ideas (Part 2)

Hysteresis

…is a controversial concept, and the answer to the question of whether or not it really is a “thing” will have implications in the ongoing competition between “Classical” and “Keynesian” type theories. (More on that later, of course.) For this first, simple explanation, think of “memory foam.” The question is: does the economy ‘forget’ a downturn after it bounces back to its original path of growth (classical equilibrium model), or does it retain a more or less permanent impression–a new, lower path–going forward (hysteresis, not necessarily accepted by all “New Keynesians” at this point).

The policy tradeoff between the unemployment rate and the rate of inflation (expressed by the “Phillips Curve”) is widely accepted by the economics profession. There are a variety of mechanisms invoked for this relationship, but they result in virtually the same model, where a policy that lowers inflation leads to higher unemployment. Here is one easy intuition: imagine a factory owner is facing a higher sales price for her product (due perhaps to increased demand in the marketplace). She will want to ramp up production, which in the short run will require more workers. (Investments in machinery–including robots–are long-run, not short-run, factors.) As the labor market tightens, it may become necessary to offer more money (wage inflation). This feeds the inflationary pressure on the general price level while lowering the unemployment rate. Now imagine the exact opposite process when demand is dropping: things go on sale (sometimes permanently) while the demand for labor drops. This is a period of “disinflation”, where wages and prices drop while economic output shrinks.

Notice how I have described a microeconomic mechanism while (with a slight of hand) extending it to the entire economy. This is called “giving macroeconomics a micro foundation.” There are many ways to go about this, since economics suffers from the problem (familiar to all scientists) that the data are underdetermined by theory. Which is to say, there are any number of theories that could explain the same result. An alternative theory explains inflation and unemployment rates through “imperfect information” about future price levels, but gets to the same result.

Let’s not play dumb here. It is easy to imagine that a short run variation in demand can lead to quick adjustment to the labor force under normal conditions, and therefore a lot of resilience in supply. We see it happening when a business gives its part-time staff more hours to work when a busy season is underway, then cuts back when things slow down again. But everything could change when the slowdown is deep and long lasting. Imagine the business has to close “temporarily.” People will look for other jobs and may not be available when it is time to re-open. When industries lay off hundreds of thousands of workers for several years at a time, it is unlikely that those same workers (along with their skills) will be readily available if and when the economy gets better.

The classical (non-hysteresis) theory depends on the “natural-rate hypothesis,” where the economy taken as a whole has a certain “potential” at any given moment, a sort of maximum output level where all resources (especially human) are fully utilized. Even at this level of output there will be a “non-accelerating inflation rate of unemployment” (NAIRU), because some people are always between jobs for a variety of reasons. However, the rate of unemployment is not as simple a thing as one might think, since it is a ratio of the number of people who haven’t yet found a job to the number who want a job at any given point in time. It turns out that the workforce participation rate (against which the unemployment rate is calculated) actually changes all the time.

We will see that Larry Summers presents data from the past few decades to show that there do seem to be more or less permanent changes to the workforce with every economic downturn. I will do some of my own drilling into the vagaries of measuring unemployment as well.

Next time: Secular Stagnation

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Three Big Concepts (Part 1)

We are continuing with Larry Summers’ talk at the N.A.B.E. in early 2014 entitled: “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound.” As gibberishical as that sounds, it is less so than a lot of academic paper titles. Nevertheless, many of my readers will be seeing familiar words used in a new way here, perhaps wondering, “Zero lower bound of what?” and “Hysteresis sounds Freudian,” and even, “Is the earth’s rotation slowing?” I will give a simple definition of each of these concepts in order of increasing complexity, which puts them in the reverse order from Summers’ title. In future posts we’ll explore them at some depth.

Zero Lower Bound:

This refers to interest rates, which must always be above zero if they are to have any meaning. You loan me $100 at 6% interest, and I pay you back $106. A 0% interest rate would mean I pay you back exactly $100. A negative (-6%) interest rate would be when we agree that I will pay you back only $94. The last one doesn’t make any sense: we never see loans with “negative” interest rates.

But actually–when there is inflation–it is possible for an interest rate to be negative in inflation-adjusted terms. Let’s say the rate of inflation is 2% and you loan me $100 at a rate of 1%. Fast-forwarding a year, when I pay you $101 it is worth slightly less now (when adjusted for inflation) than the $100 dollars was worth when I borrowed it. On the other hand, it is worth slightly more than the $100-dollar bill that you stuffed under your mattress, which is now worth only the equivalent of $98.04 in last year’s dollars. By comparison, the $101 I just gave you is worth $99.02. 2% inflation over the past year means that today’s $102 is worth exactly the same as $100 was worth a year ago. To stay even with inflation, you would have had to charge me a nominal interest rate of 2% to match the expected rate of inflation. In that case, the real interest rate would have been 0%. In the case where inflation was 2% and the loan was at 1%, there was a negative real interest rate of 1% – 2% = -1% (nominal interest rate minus inflation rate equals real interest rate). So sometimes interest rates are negative when inflation is taken into account. (You may have figured out by now that for economists, ‘real’ is shorthand for ‘adjusted for inflation’.)

What professor Summers is talking about is a key interest rate for the economy which is set by the Federal Reserve, the “Fed Funds Rate,” which is what banks charge each other for overnight deposits. The Fed can’t control this rate directly–there is no chalkboard at the main entrance with today’s special rate posted. Instead, they influence the rate by buying and selling securities. When they buy securities from the open market, there is more cash “out there.” When they sell them, they are sucking up cash from the market. This adjustment to the money supply leads to changes in the interest rate according to the forces of supply and demand. They set a “target rate” and buy and sell securities until the going rate is close enough to the target. (As an example of how indirect this control is, the Fed Funds Target Rate has been 0.25% for quite a while, but the effective market rate is only 0.13%–they seem to be having trouble getting it up.)

Because banks always have the option of just sitting on cash rather than lending it, it is impossible to get the rate to go below zero. This is a problem for the Fed when the economy is in recession and they want to cut interest rates to stimulate investment. Once they hit the zero lower bound, there is no place else to go.

OK, I am out of time for today, but tomorrow I will take up hysteresis, and probably get to secular stagnation in the post after that.

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The Context of Professor Summers’ Speech

I don’t imagine that the majority of my readers have degrees in economics. Even having one myself (albeit a mere bachelor’s) I am often befuddled by the jargon and mathiness of professional academic papers. I even find myself googling terms and references just reading Bloomberg, the Financial Times, or The Economist. My goal, then, is to fill the gap between the professional economists and my readers who, while intelligent and curious, have other specialties.

So let’s begin with the title of professor Summers’ talk: “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound.” I have run these terms by several people and have confirmed that they are meaningless to the average person. I said in my previous post that I would do my best to translate, so here goes.

The general topic is, of course, U.S. Economic Prospects. Dr. Summers has been invited to give a speech to a group of business economists — as opposed to academics. This means they work as economists for companies (think ‘applied math versus pure math’), and as such are always interested in what the current data actually mean for the immediate future. Summers emphasizes his understanding and appreciation of this distinction in the introduction of his speech, saying

Indeed, I think it is fair to say that some of the themes that are today central to discussions of academic macroeconomists, but that had receded from the debate for many years, were always kept alive at the National Association for Business Economics.

Another way of understanding this is that in the world of business, it is more important to be right in a real-world sense than to take credit for having the latest, greatest theory. Which takes us to the bigger question of “what is macroeconomics for?” Summers explains that the world of macroeconomics today is different in substantial ways from that of just a few years ago, thanks to the major disruption to financial markets that began in 2007. Prior to the crash, macroeconomists were convinced that the days of large-scale depressions were in the past, that during recent decades a “great moderation” had taken hold. As if, “we know too much to fall into the errors of the past: our sophisticated models give our central bank the power to use minor tweaks to keep the economy on a steady upward path of growth.” No longer would we be victims of wild swings in the business cycle.

The Great Recession gave the lie to that notion, and rudely at that. So Summers sees the opportunity to question everything: to do meta-macro (as a philosopher might say), or, if you like, macro-macro, where even the business cycle itself comes under interrogation: “As I shall discuss, there is room for doubt about whether the cycle actually cycles.” He doesn’t need to point out to the economists in the room that the “recovery” since 2009 (when the recession technically ended) has been anemic by most measures. The big question he wishes to pose is whether the very slow growth we have seen in the past five years is symptomatic of a gradual rebound from a severe low in the business cycle, or if it is indicative of a “new normal,” a much flatter growth curve going forward. For the latter to be the case there would have to be structural reasons for it, such as shifts in demographics or technology that make the prospects for future economic growth permanently and broadly diminished — secular stagnation.

In my next post I will define the three terms in the speech’s title: secular stagnation, hysteresis, and the zero lower bound, after which we will have to drill into each of them at some depth.

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“Start at the top.”

When stumped, it’s sometimes useful to consult a 10-year-old. I have been gathering material for this blog and sketching out the strategy for the first dozen or so posts, but there is just so much to write about. I have urgent interests in macro-economics, meta-ethics, power dynamics, philosophy of science, and statistics, to name a few. (I also have long-running obsessions ranging from game theory to “the meaning of the word ‘meaning'”). And in just the past few days current events have included the bursting of a stock market bubble in China, the completion of a nuclear deal with Iran, the steamrolling of Greek sovereignty by the “Euro Group”, and a declaration from Pope about the reality of (and moral implications of) climate change. Where do I even begin? Trying to describe my predicament to a nearby 10-year-old, I came up with the metaphor of a “eating a plate of spaghetti the size of this house.” How do you even decide where to take the first bite? “Start at the top,” she replied simply. OK, then.

Having just recently completed undergraduate degrees in economics and philosophy, I have a huge backlog of books and papers to read, as well as a list of topics to explore and write about, accumulated during the past few semesters in the form of “notes to self.”

To start I will be walking through a talk by Larry Summers given to the National Association for 220px-Lawrence_Summers_2012Business Economics in early 2014 (eventually published in their journal as “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound”). I think this is a useful starting point for this blog because it raises a wide range of questions and leads to a very interesting conclusion — unfortunately buried near the end. Having been a candidate for Chairman of the Federal Reserve, he speaks in the same “sharp as a feather pillow” language as Janet Yellen, designed perhaps to avoid offending large egos on the one hand and unnecessarily alarming the hoi polloi on the other. I suffer from no such constraints, so I will happily translate for him as well as I am able. The paper is complex enough that it will take as many as a dozen posts just to summarize and explain the points. If you wish to read the paper yourself, it is available on his web site here.

Posted on by Kirk