Monday, August 29, 2011

Making Money

After the long, rather serious series on Israel (six parts, August 11 through August 26), I thought we’d do some light economic modeling today. 

Actually, I’m just going to give an update on my Terry Pratchett reading. While I was out of town, I finished reading Going Postal (as well as the 3rd in the Fablehaven series—both of which I reviewed August 9th). So my son Economic Sphere, who is a big Terry Pratchett fan, loaned me the next Discworld book, called Making Money.

This time criminally minded Moist von Lipwig, who is bored with the now smooth running postal system, is tasked with reforming the banking industry of the semi-civilized city of Ankh-Morpork. 

Pratchett made mailing letters in his mythical place hilarious (I typed up nine pages of quotes that I had to keep for future amusement). So I think we can trust him to keep the more naturally funny economics world lighthearted. I’m only a third of the way through the story so far, so today is just sharing a few of Pratchett’s takes on the economic sphere. [Don’t worry about the length of today’s post; it’s mostly quoting Pratchett’s book and reads more quickly than you wish it would.]

Moist is taken on a tour of the inside of the Royal Bank of Ankh-Morpork by an official named Mr. Bent—a bean counter (in this case, a coin counter) of impeccable skill, who vigorously defends the gold standard:  

           “It is the metal that never fell from grace…. And it is also the only basis of a sound financial system,” Mr. Bent went on, while the torchlight reflected from the bullion and gilded his face. “There is Value! There is Worth! Without the anchor of gold, all would be chaos.”
            “Who would set the value of the dollar?”
            “Our dollars are not pure gold, though, are they?”
            “Aha, yes. Gold-colored, Mr. Lipwig,” said Bent. “Less gold than seawater. Gold-ish. We adulterated our own currency! Infamy! There can be no greater crime!” His eye twitched again.
            “Er…murder?” Moist ventured….
            “Mr. Bent waved a hand. “Murder only happens once,” he said, “but when the trust in gold breaks down, chaos rules. But it had to be done. The abominable coins are, admittedly, only goldish, but they are at least a solid token of true gold in the reserves. In their wretchedness, they nevertheless acknowledge the primacy of gold and our independence from the machinations of government! We ourselves have more gold than any other bank in the city, and only I have a key to that door!”
            .…”I read somewhere that the coins represent a promise to hand over a dollar’s worth of gold,” said Moist helpfully.
            Mr. Bent steepled his hands in front of his face and turned his eyes upward, as though praying.
            “In theory, yes,” he said after a few moments. “I would prefer to say that it is a tacit understanding that we will honor our promise to exchange it for a dollar’s worth of gold, provided we are not, in point of fact, asked to.”
            “So…it’s not really a promise?”
            “It certainly is, sir, in financial circles. It is, you see, about trust.”
            “You mean, trust us, we’ve got a big expensive building?”
            “You jest, Mr. Lipwig, but there may be a grain of truth there.” Bent sighed. “I can see you have a lot to learn, and at least you’ll have me to teach you: (pp. 36-37). 

During the tour of the Mint, Moist learns that it costs slightly more to actually coin the money than the money it represents, which is maybe the reason he is needed. He has a confusing conversation with the Mint workers about it and follows up with a debate about the relative values of gold and apples. Later he has a similar discussion with a news reporter.            

I have a section of Spherical Model, Free-Enterprise vs. Controlled Economy that covers what is wealth, and what is money (not quite as funny as Pratchett's). Money is an arbitrary, agreed-upon representative of work, to allow for easier trading of wealth (results of work, built up). Moist is going through the same thought process. I don’t actually know yet where Pratchett will come down. In our house there’s some debate about whether the gold standard is the sanest approach, or whether fiat money could work—if you could strictly align the creation of money to the creation of actual wealth, possibly equivalent to the annual GDP or some other measure. If that were possible, the dollars in circulation would actually represent work accomplished better than gold-backed dollars would. Of course, the system we use doesn’t resemble an attempt to represent wealth much at all. It’s more like the “trust us; we have a big building but don’t actually turn in the money for gold” version that is paralyzing the economy in Ankh-Morpork. 

One thing I haven’t covered in my discussions much is economic modeling. I understand that making predictions is one of the functions of economists—sort of like meteorologists; accuracy would be nice, but isn’t necessarily expected. Pratchett’s low-tech description of economic modeling in the bowels below the bank are better than I could come up with to describe such modeling, and possibly all you ever need know: 

           Water gurgled, sloshed, and yes, glooped along glass tubing. There was a smell of salt.
            Bent nudged Moist, pointed to an improbable wooden hatstand, and wordlessly handed him a long yellow oilskin coat and a matching rain hat. He had already donned a similar outfit, and had magically procured an umbrella from somewhere.
            “It’s the Balance of Payments,” he said, as Moist struggled into the coat. “He never gets it right” There was a crash from somewhere, and water droplets rained down on them. “See?” Bent added.
            “What’s it doing?” said Moist.
            Bent rolled his eyes. “Hell knows, Heaven suspects,” he said. He raised his voice. “Hubert? We have a visitor?”
            A distant splashing grew louder and a figure appeared around the edge of the glassware.
            …. “You’re not seeing us at our best, Mr. Lipwick,” he said.
            “Really?” said Moist.
            ….“No, we’re so close to perfection, you see,” said Hubert. “I really think we’re nearly there…”
            “Mister Hubert believes that this…device is a sort of crystal ball for showing the future,” said Bent, and rolled his eyes.
            Possible futures. Would Mr. Lipstick like to see it in operation?” said Hubert….
            “The Glooper, as it is affectionately known, is what I call a quote ‘analogy machine’ unquote. It sovles problems not by considering them as a numerical exercise but by actually duplicating them in a form we can manipulate: in this case, the flow of money and its effects within our society becomes water flowing through a glass matrix, the Glooper. The geometrical shape of certain vessels, the operation of valves, and, although I say so myself, ingenious tipping buckets and flow-rate propellers enable the Glooper to simulate quite complex transactions We can change the starting conditions, too, to learn the rules inherent in the system. For example, we can find out what happens if you halve the labor force in the city, by the adjustment of a few valves, rather than going out into the streets and killing people.”
            …. “It certainly looks very…complex, this thing of yours,” said Moist, striking out for normality.
            “Er, yes,” said Hubert, a little bit thrown. “And we are refining it all the time. For example, floats coupled to ingenious spring-loaded sluice gates elsewhere on the Glooper can allow changes in the level in one flask to automatically adjust flows in several other places in the system— …. And we’re adding fresh influences all the time. Indeed, I will not be satisfied until my wonderful machine can completely mimic every last detail of our great city’s economic cycle!”
            Something clanked, and colored waters began to foam and slosh along the bigger pipes. Hubert raised not only his voice but also a long pointer.
            “Now, if we reduce public confidence in the banking system—watch that tube there—you will see here a flow of cash out of the banks and into Flask 28, currently designated “The Old Sock Under the Mattress.’ Even quite rich people don’t want their money outside their control. See the mattress getting fuller, or perhaps I should say…thicker?”
            ….”Now see how bank lending is emptying as the money drains into the Sock?” Gurgle! “Watch Reservoir 11, over there. That means business expansion is slowing…there it goes, there it goes…” Drip! “Now watch Bucket 34. It’s tipping, it’s tipping…there! The scale on the left of Flask 17 shows collapsing businesses, by the way. See Flask 9 beginning to fill? That’s foreclosures. Job losses is Flask 7…and there goes the valve on Flask 28, as the socks are pulled out.” Flush! “But what is there to buy? Over here we see that Flask 11 has also drained…” drip
            Except for the occasional gurgle, the aquatic activity subsided.
            “And we end up in a position where we can’t move because we’re standing on our own hands, as it were,” said Hubert. “Jobs vanishing, people without savings suffering, wages low, farms going back to wilderness, rampaging trolls coming down from the mountains—“
            ….”You believe all that could really happen?” said Moist. “A bunch of tubes and buckets can tell you that?”
            “They are correlated to events very carefully, Mr. Lipswick,” said Hubert, looking hurt. “Correlation is everything.”…. “I just can’t get rid of the leaks,” said the little man, looking crestfallen. “I’ll swear that every joint is watertight, but we never end up with the same amount of water that we started with.”
            “Of course not, Hubert,” said Moist, patting him on the shoulder. “And that’s because you’re close to achieving perfection!”
            “I am?” said Hubert, wide-eyed.
            “Certainly. Everyone knows that at the end of the week you never have quite as much money as you think you should. It’s a well-known fact!”
            …. “Now demonstrated by the Glooper!” Hubert breathed. “I shall write a paper on it!”
            “Or you could write it on paper!” said Moist, shaking him warmly by the hand. “Okay, Mr. Bent, let us tear ourselves away! (pp. 62-67). 

Indeed! Economics is so much fun, it is hard to tear ourselves away. At least the way Pratchett describes it in Discworld 

In the future, it would be wise, in our world, to remember that economic predictors can be counted on for accuracy just about as much as Hubert and his Glooper—if they have put as much careful thought into the correlations has Hubert has. Trusting the experts—ever, under any circumstances—to know better how to spend your money (or whether to keep it in your sock or mattress) is never a good idea. Good rule of thumb.

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