Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Middlesex News 7/19/89 – Don’t confuse numbers with measurements One of the most difficult problems in economics is obtaining appropriate measurements. Without these we would not know whether to be surprised, worried or pleased by the events we observe. In fact, without appropriate measurement it would be impossible to test our economic theories. Many people, including legions in the media, tend to confuse number with measurement. Just because we can assign a number to something does not mean that we have an appropriate or meaningful measurement. Sometimes it is easy to see the difference between these concepts. Persons in a photograph, for example, can be identified by placing a number next to them; then each name can be listed separately with the corresponding number. These numbers are arbitrary and convey no meaningful information; they are useless for any kind of measurement. Sometimes, however, the difference between the concepts is ignored. If a person earns three times as much as another, we may causally say this person is three times better off than the other. Yet when we say that we express a naïve view of what human welfare is all about. Both the rich and the poor commit suicide and we have to think that all the people doing so feel distressingly bad. It is common in economics to take some plain number and change it in such a way that it will yield more meaningful information. This gives rise to the distinction that is made between nominal and real variables. Nominal variables are numbers given in plain dollar terms. For example, your income may be stated as $500 per week. We say that this number is a variable because your income can change over time; it is a nominal because it does not make reference to anything else. Suppose, though, that we wanted to know more about this $500 figure. How much does $500 really amount to? The answer to that depends on the prices of goods and services. If you could only buy an ice cream cone with $500, then your real income was low; if you could buy a tractor with that money, your real income would be high. Real variables make reference to something else and hence they can express some meaningful relationship or measurement. Let’s see why this is so important. People lend money with the expectation that they will receive more than the original sum when they are paid back. This expectation, however, must be interpreted in real terms. Money is a claim upon resources, and when lenders are paid back they hope to receive not just more money but a larger claim upon resources. Think of lending a ton of wheat, rather than money. If you get back the principal plus a positive interest, then you will get back more than a ton of wheat. If you don’t, then you would be lending wheat at a negative real rate of interest. No supplier of funds or goods would like that at all. Suppose that you went to buy apples and the seller said that they cost minus 20 cents. Ridiculous, you would say, and then grab as many as possible. No one needs a degree in economics to figure out that the supply of apples, at this negative price, would dry up and that soon people would have to change their eating habits. Would the media report such an event? You would hope so, especially if the market in question involved not billions but trillions of dollars in transactions. We would expect the media to express concern, deep concern, for such a market would likely collapse and could bring down the economy with it. Sometimes the media have an excuse, if the event takes place far away. In Argentina, for example, real lending rates have been negative for most of the last 20 years. Ten years ago the rates reached the astonishing figure of minus 84 percent. Think of this. For every dollar that you lend, the principal plus interest would amount to 16 cents. Argentina is far away but it is not alone. This is a story that is repeated in many countries. It is not surprising, then, that many immigrants are astonished that in America one can lend money at positive real rates of interest. For most of us, this is really incredible. No wonder that in America the economy is strong and healthy. But wait, what am I saying? When we look at the American experience in the last 41 years, we find that during 11 of those years American lenders also faced negative real rates of interest. However, only once did these real rates go lower than minus 3.3 percent, which is relatively insignificant compared to the experience in foreign countries. Negative real rates prevailed in this country from 1973 to 1979 but we have not seen them again since. They had the potential of destroying the viability of the American financial markets. This period was one of crisis for the American economy. From 1975 to 1978 people actually expected to “pay” these negative real rates when they borrowed money. Since these events took place right here, you would have expected a thorough coverage of them. Yet, somehow, they were missed. That is the danger of confusing numbers with measurement; when the media report plain numbers we are likely to miss the big stories.