Tuesday
May062014

Average weekly earnings

It seems very hard to find data on UK nominal wages. Last year Britmouse wrote a post where he attempted to calculate nominal hourly wages relative to per capita NGDP. He says,

The ONS does not have an “official statistic” for nominal hourly wages, but they do publish some data in a spreadsheet in the Labour Market stats, which is updated quarterly.

This can be found by searching for "EARN08" at the ONS. I'm assuming that the reason nothing happens when I click on this is because I'm on a Mac?

Either way, I can't see the historic time series is. So I thought I'd just take a look at the simplest measure from the monthly Labour Market Statistics. The easiest way to find it is by clicking on the unemployment figure on the ONS front page. In the reference tables there's two options of interest:

  • EARN01: Average Weekly Earnings
  • EARN08: Distribution of Gross Hourly Earnings (as above)

Here's the AWE data:

Monday
Apr282014

Roundaboutness

The term "roundaboutness" is often used in Austrian business cycle theory, and I'm not sure if it's a simple term being consistently applied, or something more complex. At the recent APEE meetings Nicholas Cachanosky presented a paper arguing that it isn't a mysterious concept (co authored with Peter Lewin), but I'm not sure I'm convinced. My basic understanding, stemming from Bohm-Bawerk is the following:

Roundaboutness = capital intensity. 

Cachanosky & Lewin define roundaboutness as the "average period of production", and use net present value formulae and the concept of EVA to measure it. This is a great way to operationalise the concept, but is it "roundaboutness" that is straight forward, or their method?

One of the reasons I find Tyler Cowen's "Risk and Business Cycles" unsatisfying is because he doesn't really allow for different types of risk. In his treatment "risk" does all the work, and there's no need to talk about roundaboutness. I can't help feel that this fails to do justice to the Austrian story. Hence I am always wary of the following characterisation:

Roundaboutness = Time = Risk.

We can think of the interest rate as a measure of our time preference (or the ratio of the value of present goods to future goods), or a market generates risk assesment. Must they be the same thing? All else equal the longer the production process the greater the risk, but we can conceive of production plans that are risky but immediate (e.g. fashion) and those that are not so risky but distant (e.g. oil wells). In other words risk and roundaboutness are conceptually distinct.

Consider a standard Hayekian triangle:

Now, whilst playing around with these diagrams can go too far, I think they're a good way to illustrate my point. Consider these two alternative ways of treating roundaboutness. Firstly, aa an increase in the production period:

Alternatively, roundaboutness could mean that there's more stages of production:

In the example above the final value of the consumer goods being generated is the same, but the value at all stages of production has increased. We could also show this where there's a change in the composition of the value from late stage to early stage:

And so on. It would be interesting to assign some possible applications to show that this is empirically relevant. 

When sketching out these triangles I have in mind Lachmann's notion of reserve assets, which has recently been utilised by Robert Miller with his treatment of "buffer stocks" (here and here). It's hard to measure buffer stocks, and it's tempting to use inventories as a starting point. Here's what's happened to inventories in the UK over the last few years:

What we (sort of) see here is a steady decline in inventories from 1997 - 2007, which point to two things. Firstly, they get run down because excessive optimism means that entrepreneurs don't feel that they need them. And secondly, the utilisation of inventories as a means to generate unsustainable production (i.e. go beyond the PPF). Then during the crisis there's a dramatic reduction in inventories, and the "recovery" involves rebuilding. We need to be careful though, since inventories are just one source of buffer stock (and indeed one that is particularly close to consumer goods or final stage production). Some examples of buffer stocks include:

  • Inventories
  • Cash balances and other liquid assets
  • Commodities (not only as aproduction input but also as a speculative hedge)
  • Labour
  • Any goods that are relatively less heterogeneuous that others and thus adept at fitting into an array of alternative production plans

Finally, consider a Hayekian triangle and what's supposed to happen when interest rates fall. For simplicity, let's go use a 3-stage version.

If lower interest rates induce entrepreneurs to move towards more roundabout methods we would expect resources to move from stage iii back to stage i. But stage iii is substantially larger than the early stages. Let's say we shift around 30% of the value in stage iii to stage ii, and likewise from stage ii to stage i. Here's (roughly) what we might see (original is dashed):

Is it not conceivable that the reduction in stage ii (as a result of activities being shifted to stage i) is offset by the shifted production from stage iii? In other words lower interest rates will cause unambiguous reductions in late stage production, increases in early stage production, but may also swell mid stage production? The stylised facts would be an increase in stage ii.

Wednesday
Apr232014

Gross Output makes The Wall Street Journal

Mark Skousen has an opinion piece on 'Gross Output' in today's Wall Street Journal. Last week I presented estimates for the UK economy at the APEE conference in Las Vegas. You can view my presentation here. The chart below shows Gross Output for the UK economy (relative to GVA):

I plan to revise this shortly when the Supply and Use tables are published in July 2014, so this is only a rough treatment and I've not published the working paper. The data is released as separate tabs in an excel file but if anyboday would like the time series that I've created email me.

I also presented a measure of UK Payments. This also has data availability issues, with January 2010 figures simply missing from the data set. But here's what it looks like:

Tuesday
Apr222014

Bob Murphy on Hayek vs. Sraffa

I confess that I've never read the original sources of the Hayek vs. Sraffa debate, and suspect that it would be worthwile to do so. But I was never convinced that they would overturn or seriosuly challenge my existing understanding of Austrian business cycle theory. I recently read two accounts of the Hayek vs. Sraffa debate, and they validate this.

The first is Bob Murphy's "Multiple Interest Rates and Austrian Business Cycle Theory" (.pdf) He spends several pages outlining Sraffa's critique of Wicksell (and thus Hayek), several more pages discussing Hayek's response, and then even more on Lachmann. He essentially upholds Sraffa's point that in a world of multiple markets there is no singular natural rate of interest - "the" natural rate is a function of whichever good one arbitrarily decides to use as a numeraire. Murphy attempts to solve the problem of whether or not a natural interest rate exists in a barter economy by appealing to a concept of dynamic equilibrium. To be fair he credits Hayek with the basis for a dynamic, rather than static equilibrium construct, but he defines it as the following:

Austrians... should define a dynamic equilbrium construct where quantities, prices, resources, technologies, and even "spot" consumer preferences can evolve over time, but in a perfectly predictable manner

But in 'Prices and Production' Hayek cites "correct anticipation of future price movements" as one of the three criteria for neutral monetary policy (others being constant total income stream, and perfectly flexible prices, see p.131). This struck me as a solution in search of a problem.

In "The Clash of Economic Ideas" Larry White deals with the Hayek vs. Sraffa debate a lot more quickly. He says

Sraffa mistook Hayek's goal, which was not to replicate all the properties of a barter economy, but simply find a monetary policy that would not drive a wedge between savings and investment (p.92)

Isn't that the nub? When Austrians talk about "the" natural rate of interest it isn't because there is only one interest rate, but that there is one particular market that matters for intertemporal coodination. The market that bridges savings and investment. The market for loanable funds. Murphy's 40+ pages of text fail to mention "loanable funds" at all

Sorry Pierro, but I still don't see what the fuss is about.

Thursday
Mar132014

Bank of England on money creation

The Bank of England have published an interesting note on money creation. Given that Kaleidic publishes our own measure of the UK money supply, there is plenty that could be written about it. For now though, I just want to nip some of the crowing being done by MMTers. The way I understand the "money multiplier" is that there's a ratio between narrow and broad money. It's a bit like saying that there's a link between changes in human generated CO2 emissions and in average global temperatures. But identification of a ratio says nothing about causality. In the case of global warming, it seems that there is a large and vocal group claiming that the ratio (or correlation) is stable, predictable, and underpinned causaility. There's others who dispute this. There's probably even some who argue the causation runs the other way.

In the BoE report they say:

Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. 
central banks implement monetary policy by choosing a quantity of reserves. And, because there is assumed to be a constant ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank loans and deposits
And then the killer argument:
While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates
Obviously this depends on the textbook. In mine, I explain how central banks can affect the supply of money (through open market operations) or the demand for money (through interest rates) and the links between the two. I also mention that there is a ratio between broad money and narrow money. But I don't claim that the ratio is "constant". The term "multiplier" implies some sort of mechanistic causality. I think that's a strawman. I believe that considering the ratio between narrow and broad money, and the factors that cause that ratio to change, to be important. 
I suspect that the reason the "money multiplier" is used so much is because it's descriptive and intuitive. The MMT crowd have a grain of truth in their critique. The challenge is to present an alternative that is more accurate but also just as usable. Whenever people criticise "textbook" economics, I wonder if they've actually read any. Or at least if they recognise that textbooks are starting points, and *not* the codification of everything we know and claim to be true.