Sunday, May 20, 2012
Robert Schiller opens his New York Times column today on a promising note, pointing out the power that metaphors have over our thinking about economics. A particularly nefarious motif is “belt-tightening”, conjuring up the idea that running an economy is like managing the finances of a family. When family income falls, under normal circumstances a proper response is to cut spending too: live within your means. It’s a misleading guide to macroeconomics, however, since it takes the outside world, the place where our money comes from, as given and looks only at how we can respond to it.
Unfortunately, Schiller’s alternative, while fine for some purposes, also misses the point. He suggests “a winter on the family farm”, where, while when the land is covered in snow, it makes sense to invest time in repairing old equipment, investing in new methods, and so on. He’s right of course, except that his metaphor also sidesteps macro. It too takes “winter” as an exogenous force and fails to illuminate how economic winters are created by the behavior of the farmers themselves.
I’ve been looking for the right metaphor, and I don’t have it yet, but I do have a story. It is the farm family version of the baby sitting coop, sort of. Apparently we all have peasant roots and respond better to yarns about hardscrabble agriculturalists than yuppies looking for a place to park their babies.
It goes like this: there is a far-off land with just two farmers and their families. One grows wheat, the other raises cows for milking. Each produces for itself and sells the rest to the other farmer. One day, the dairy farmer decides to try out a low-carb diet and reduces her family’s wheat purchase. The wheat farmer’s income drops, and his family holds an emergency meeting to figure out what to do about it. “Our income is down,” he says, “and we have no alternative but to tighten our belt. This means we have to cut down on milk.” And so they do. But then income falls over at the dairy farm, and they too hold a meeting, and the result is even less wheat buying. And so it goes, around and around, until neither family has any income at all, and everyone’s diet is terrible.
Yes, I have left out prices, and there is nothing about expectations. It’s just a story, and the point is to make as vivid as possible the core macroeconomic insight that spending is income—that they are two sides of exactly the same thing. Every dollar or euro the government spends is income for someone, and if income is dropping and the government responds by cutting its spending, that dries up the flow of income even more.
Nothing profound here, and I’m sure most readers are asking, why bother? The answer is that none of us has time to book up on every subject of importance, and we need metaphors and simple stories to help us get through the rest. That’s how it is for most people and economics. How can we create potent little macroeconomic memes and send them out into the world where they can do some good?