I haven’t been keeping up with Scott Sumner lately, which is clearly my loss, for he has the following post.
The commenter Jason sent me a great Wittgenstein quotation, and I immediately knew I had to use it somewhere. It took me 10 seconds to decide where:
“Tell me,” the great twentieth-century philosopher Ludwig Wittgenstein once asked a friend, “why do people always say it was natural for man to assume that the sun went around the Earth rather than that the Earth was rotating?” His friend replied, “Well, obviously because it just looks as though the Sun is going around the Earth.” Wittgenstein responded, “Well, what would it have looked like if it had looked as though the Earth was rotating?”
It’s quotations like this that make life worth living. So I wondered what Wittgenstein would have thought of the current crisis:
Wittgenstein: Tell me, why do people always say it’s natural to assume the Great Recession was caused by the financial crisis of 2008?
Friend: Well, obviously because it looks as though the Great Recession was caused by the financial crisis of 2008.
Wittgenstein: Well, what would it have looked like if it had been caused by Fed policy errors, which allowed nominal GDP to fall at the sharpest rate since 1938, especially during a time when banks were already stressed by the subprime fiasco, and when the resources for repaying nominal debts come from nominal income?
OK, not nearly as elegant as Wittgenstein’s example. But you get the point.
Scott, goes on to make a slightly different point, but mine is this. Things always look like what they are. That is what it means to look like something.
The degree to which something looks like a bear is the extent to which its appearance matches the appearance of a bear. Thus a bear must look exactly like a bear.
What you mean to say is that I did not recognize it to be a bear. However, that is simply to say that you were unaware of what a bear looked like under those circumstances. Which in turn is to say that your assumptions about what a bear would look like under those circumstances were false.
Thus if you ask, why was it natural for you to assume that it was not a bear. And, you reply because it did not look like a bear, then you are saying it was natural for me to assume it was not a bear because I held false assumptions about the appearance of bears.
This tells you virtually nothing.
What you want to say is it was natural for me to assume it wasn’t a bear because in my previous experiences all bears were brown, yet this animal was white.
Or, it was natural for me to assume that the sun went around the earth because in my previous experiences treating the earth as my frame of reference allowed for the simplest laws of physics.
Or, in Scott’s case, it was natural for me to assume that the Great Recession was caused by the financial crisis of 2008 because in my previous experience using the overnight interest rate as an indicator of Fed Policy allowed for the simplest description of monetary economics.
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Wednesday ~ December 21st, 2011 at 4:01 pm
Joshua
http://awkwardmessages.com/please-dont-have-kids/
^That’s what I think of your argument.
Wednesday ~ December 21st, 2011 at 4:28 pm
bdbd
When my son was in kindergarten, there was a casual assignment to name the biggest number you can. My son offered googol. For that he was ridiculed by a particularly obnoxious child, and was told by his teacher that such a number didn’t exist. I had to help him straighten things out.
Wednesday ~ December 21st, 2011 at 4:10 pm
bdbd
It matters how well observers can distinguish among bears. For example, the term “recession” gets applied to what’s been happening lately, and also, for example, to what happened in the economy in the early 80s, at the start of the Reagan presidency. But these economic events had very different etiologies; the 80s recession was deliberately policy induced, and the current one was not (either not policy induced, or not “deliberately”). Yet one frequently hears (I heard Paul Ryan saying it on ABC Sunday morning) that “we have not yet got out of our current recession with robust growth, yet we quickly got out of our early 80s recession with robust growth, so Obama is a doofus.”
Wednesday ~ December 21st, 2011 at 7:51 pm
John D
Karl. I hate people who upset my worldview. It can’t be possible that we’ve been using the wrong monetary strategy for years and it’s now being exposed. It can’t can it? Serious people would then have to rethink their opinions of the Maestro and his understudy. That would be hard.
Thursday ~ December 22nd, 2011 at 1:19 pm
JazzBumpa
The root cause cannot possibly be Fed Policy errors, unless the Fed did something dramatically different in 2008 than they had in previous years to bring about the crisis. Does anyone remember that happening?
What happened is that something in the economy changed – I’ll posit that it was the financial crisis of 2008, while eagerly welcoming alternative candidates.
Then it’s possible that the Fed could have been responsible for not responding with appropriate policy moves under the changing circumstances. I’ll sign on to that argument, with some reservations, since it implicitly assumes the Fed could actually have made a big difference. (Which is how it LOOKS to Sumner, frex.)
But to say “Fed policy errors, which allowed nominal GDP to fall at the sharpest rate since 1938” caused the recession is to engage in shallow thinking.
Playing around with the Wittgenstein quote is cute and clever, but really sheds no light on the issue.
Cheers!
JzB