Tuesday, September 30, 2008

Mandatory thoughts on the bailout situation

I don't have a firm opinion or grasp of the situation yet, so this will be brief.

There's one aspect of the debate that has struck me as conspicuous for its absence: the trade-off between present and future comfort.

The current crisis exists because a lot of people made a lot of mistakes. Some of these mistakes involved investors taking on more risk than they should have.

If nothing is done, the consequences will be bad for the US (and possibly other countries) in the short run. There's no question about that. At the very least, lenders will be skittish and only the most sure-fire or well-connected of projects will obtain funding. This would lead to a slowdown in job creation, output growth and industrial innovation. (Rather like a more widely spread version of the dot-com bubble crash, come to think of it.)

In the worst-case scenario, the economic slowdown could be serious and last for years. Certainly through the next administration's first term.

Suppose instead that a true bailout takes place, in that the government uses taxpayers' money to pay for the private sector's miscalculations.

There's a chance such a bailout will work flawlessly, and bring the US economy back to its usual state in record time.

This is its own problem. Institutions that are bailed out may have difficulty learning from the mistakes of the past. There is nothing to stop the crisis from happening again, in exactly the same manner, with exactly the same consequences. After all, some people made out like bandits during the mortgage bubble, and those that would have lost money were bailed out.

If lousy investors lose their shirts over this, the usual market instincts will kick in and make it less likely that this will happen again for at least a few decades.

There's a tradeoff between what is convenient for the present, and what is best for the future.

Bailout: smoother sailing today, increased likelihood of a repeat tomorrow.
No bailout: harder times today, less risk of a repeat tomorrow.

What's 'right'? That's up to the US as a whole.

There are many other possibilities between these two extremes, of course. I've ignored and oversimplified a great many relevant factors for the purpose of this brief note.

Thursday, September 25, 2008

Supply and demand?

When the word 'economics' is mentioned, many people first think of 'supply and demand'. This is considered by many to be the quintessential economic model - as close as one can get to a foundation for the discipline.

Astounding, then, that it is in large part a fairy tale.

I don't mean this as a criticism - fairy tales are useful. They teach life lessons, are memorable, and can even help to shape a culture, or provide insight on how to deal with life's difficulties.

Little Red Riding hood is a beloved cautionary tale, but few adults would think of taking it literally, or trying to attach real-world locations, names, numbers or even physical laws to the story.

To make my point clearer, consider a single farmer who owns an apple orchard. All she does is farm apples, year in and year out.

When customers at the nearby market are willing to pay more for apples, she farms more. The extra money makes the extra effort worthwhile. When these same customers are sick of apples, she farms less. It's no use farming apples that won't sell, or that will only sell at a very low price. This is supply.

Now consider the customers. When the farmer charges a high price for apples, they want to buy less of them. They can spend the money they save on oranges, or rabbit meat. When apples are cheap, they want to buy more of them. Maybe they use money that had been earmarked for a bushel of plums to buy three bushels of apples. This is demand.

Graphing supply and demand for the apple market is easy. We first draw two lines at ninety degrees to each other. We label one 'price of apples' and the other 'bushels of apples'. These are our axes. We then plot out all the combinations of price and quantity that the farmer is willing to supply at, and customers are willing to buy at. For example, maybe when apples are $1 a bushel, the farmer wants to sell 10 bushels, and when apples are $10 a bushel, she wants to sell 20 bushels. Connecting the dots will give us our 'supply curve'. Doing the same for demand will give us our 'demand curve'.

In general, the two curves will only meet once. At this point, the farmer is selling as many apples as she wants to sell, AND customers are buying as much as they want to buy. This is the 'equilibrium' point (after the Latin for 'equal weights', or 'balanced'). Economists like it, and solve for it, because the market will tend to move toward it. For example, if there's a shortage of apples - that is, the farmer sells less than people want - the price of apples will probably rise, encouraging the farmer to grow more of them. If there are too many apples, and a lot are rotting unsold or selling below cost, the farmer will lower production.

So far, so good. The model is useful, and it works.

The problem happens when we're talking not just about apples, but about apples AND plums, say. Or, on a larger scale, when an economist wants to look at the supply and demand for all goods produced by an entire country.

Suppose our farmer farms twenty different kinds of fruits, and we want to draw a supply-and-demand graph for fruit in general.

Let's start as we did before, with our axes. We have price on one axis, and quantity on the other.

Here's a problem: quantity of what? We could just label it 'bushels of fruit', but this wouldn't be very informative. We want to know how the farmer changes her willingness to supply when prices change. A bushel of apples is very different, in terms of value and effort required to produce it, than a bushel of raspberries.

The problem would be even worse if our farmer were a part-time shoemaker, and we had to add production of shoes to production of fruit.

Economists get around this by finding the VALUE of total production, and using THAT as quantity. In other words, 'how much does the fruit sell for at market? that's your output'.

If you're scratching your head at this point, you've probably understood everything correctly.

We want to know how the quantity of fruit supplied (and demanded) changes when price changes. However, our measure for 'quantity of fruit' INCLUDES the price level. This leads to a lot of problems, because it makes it very difficult to tell what's actually going on. Suppose the price of oranges rises. Total fruit production may rise as farmers are more willing to produce oranges. Even if production did not change at all, though, we'd STILL see a rise in MEASURED production, simply because the price of oranges rose.

It gets worse. What is our measure of 'price'? When we looked JUST at apples, it was the price of apples. When we look at twenty fruits... it's not as clear what price we should use. Economists often use a price index, such as the CPI, which tracks the price of a 'typical consumer's' spending. Suppose we use a 'fruit price index', which tracks the price of a particular combination of fruits, in a way similar to how a stock index tracks the value of various stocks.

Our supply and demand diagram is now a lot less useful than it was, because we're plotting not price against quantity, but the cost of a particular subset of production (whatever combination of fruits we choose) against the cost of total production.

It's not easty to untangle the various effects from each other.

This is why 'aggregate' or 'added-up' supply and demand is pretty much a fairytale. We can THINK about it - we can pretend that we can actually measure output. Doing so gives us a lot of interesting and useful results, such as allowing us to understand how an oil shock can cause a recession AND inflation, or why price controls seldom work. However, any attempt to take the story literally and apply real-world data to it is going to run into problems.

To be fair, professional economists often use advanced statistical techniques (such as regressions) to separate out the various effects, with a great deal of success.

This does not help much with a basic problem - that the textbook theory of aggregate supply and demand has been built on an awkward mathematical foundation. Geometry and simple algebra aren't the right tools for the task.

Tuesday, September 23, 2008


Privatization is a divisive issue.

The term refers to taking something that was owned 'in common' or by the state, and granting ownership to a private individual or firm.

One famously controversial example is the British enclosure movement of the mid-1800s.

Village common land was 'enclosed' with fences and turned into private properties. What had been places where anyone could go for a walk, grazing or firewood became exlusive property.

Those for enclosure argued that the land was being used very inefficiently. The tragedy of the commons is that when the land may be freely used by all people, no people will take care of it. This is a good point. Much of the land enclosed was in very bad shape, and was not being used with any semblance of agricultural efficiency.

Those against enclosure pointed out that the community was losing rights and privileges that were important to it. This is also a good point, and one which it is difficult to overstate. For example, largely as a result of the enclosure movement, there were no green spaces available for working class Britons for much of the 19th century. Imagine a life with no greenery, no parks, no walks, no fresh air. (This is before modern sewage treatment, as well.)

Nowadays, the privatization argument is likely to center around national industries. Perhaps the government owns an electric company, and is thinking of selling it to the private sector. Or maybe a government decides to purchase a controlling share in what had once been a private investment firm.

Those for privatization argue that government industries are often poorly run and ineffective. There are a lack of incentives to excel, and a surfeit of red tape before anything can get done. The pro-privatization crew has a point, as I can attest from personal experience.

On the other hand, those against privatization argue that a private company will care only about profits. Everything else, possibly including things that the community cares about (such as non-agriculturally-efficient garden spaces and grazing lands) may be lost.

For a long time, I thought privatization with government oversight was a combination that should work most of the time. If the community, hopefully represented by the government, is so concerned about garden spaces (say), then simply include their maintenance as a clause in the purchase agreement. If the garden spaces are not kept up, the land reverts back to the government.

These days, I'm not so sure this is a good idea.

IF the government representing the community and the firm have identical goals, then I continue to believe that the firm will be able to do the job far more efficiently than government.

The problem is that the goals of government and the private sector seldom overlap.

If the community owns land through the government, then there's a good chance that the government will do a half-baked job of fulfiling its objectives.

If a private firm owns the land and signs an agreement with clauses imposed by the government, then it will fulfil the letter of the contract very efficiently... but ONLY the letter of the contract, and only if it can't find a legal loophole that will allow it to slip out of the clauses that lower its profits.

My current opinion is that in many cases, a government that honestly tries to achieve the community's goals but does so inefficiently is a lesser ill than a private firm that fulfils the community's goals in an efficient but perfunctory and unwilling manner.

Advocates of privatization would probably agree that privatization brings the most benefits when government is inefficient, or when the private sector is very efficient. Unfortunately, a government that is inefficient at handling a resource is probably also inefficient at ensuring that the provisions of a contract are met. A firm that is very efficient at running a resource is probably also efficient at evading inconvenient regulations.

In other words, the very times that privatization is most helpful are the times when non-profitable community goals are the most endangered by it. The combination of a high rate of enclosures, competent landlords and incompetent monitoring certainly helped to make the village green vanish for nearly a century in the United Kingdom.

I'm not greatly attached to my opinions, so it's entirely likely that I'll be of a different mind next month, if not next week.

Thursday, September 18, 2008

Price controls

Price controls are popular, in the sense that people often ask for them. At first blush, they seem like the most reasonable response to a certain kind of problem.

The price of gas is high? Government should step in and put a cap on how much people are allowed to charge for gas.

People are starving because of a huge rise in the price of rice? Someone should force rice farmers to sell at a reasonable price.

There's just one problem with all of this: price controls seldom work. (I was tempted to write 'never' instaed of 'seldom', but I CAN think of a few isolated cases where they may actually work - not often, though.)

When a government tries to control the price of a product, the result tends to be shortages, inflation, or both. This is true even when price controls are enforced through force - just ask Zimbabwe's citizens. Rather than accede to price controls, the country now produces nothing, and much of the population survives on food aid. In the 1980s, Jose Sarney's Brazilian government tried to freeze prices in order to control inflation. I was a child at the time, but I still have vivid memories of my father waiting in line for black market chicken. None was available at the official price, even though there was no shortage of poultry.

Hopefully, my position is clear - it is my belief and experience that price controls do not work, and only lead to hardship.

That being said... I'm all for their implementation when this is clamoured for by the population of a democratically elected government (or a fair approximation of such).

If people want price controls, politicians should first try to tell them exactly what will happen if price controls are put in place: shortages will get worse, and goods will go to the well-connected or those most willing to wait in line instead of to the richest. This appeal will probably be ignored, but it allows the government to say 'I told you so' later on.

If the people of the country, after hearing arguments against them, still speak with one voice, and say that they want price controls, the government should do as it is asked.

Ideally, any price controls will be put in place when nothing else of note is going on in the national economy. In practice... well, fat chance. Usually price controls are called for as a response to some economic crisis or another.

What happens next?

Best case scenario: the controls aren't terribly onerous. Citizens are happy because they were heard. There are some lineups, perhaps a black market forms, but everyone grudgingly accepts it as an acceptable tradeoff. There is no reason to remove the price controls in this case. Good enough is good enough. If people want greater 'efficiency', they'll ask for it.

Likeliest scenario: shortages caused by the price controls cause genuine hardship. People complain about lineups, shortages and having to buy goods on an expensive and possibly dangerous black market. The population asks the government to do something about all this.

In this case, the government should, of course, remove the price controls - first, though, it should explain exactly WHY the shortages became worse.

I believe it is self-evident that price controls don't work. A crucial element in the formation of this belief, was living through them.

Just as people should be allowed to make their own mistakes, if they are to ever evolve and grow, so should nations be allowed to make their own mistakes.

IMF loans (to pick an example beloved of activists) with 'common-sense' provisions such as the immediate abolition of all price controls do no one any favours when such controls were put in place at the request of the general public. Worse, since such loans are usually given in times of dire economic crisis, such a policy may lead people to believe that the abolition of price controls worsens a crisis.

If a population with a (kind of) democratic government believes it's had enough of the problems caused by price controls, it'll say so to its chosen rulers. At that time, the country itself can get rid of them.

Until then, well-meaning 'fixers' should restrict themselves to educational campaigns. By all means, explain to people why trying to cap the price of gas may lead to gas shortages - but don't go about removing the caps yourself, unless you are asked to by the country as a whole.

Tuesday, September 16, 2008


Runway fashion has more in common with economic theory than may at first appear.

Consider the models that are required by the world's top designers.

The important thing, for a designer, is the outfit. The clothing. That's what's being shown off during a fashion show.

The perfect runway model is one that does not distract from the clothing. She must have all the features generally expected in a human being, but nothing more. No extra fat, no tell-tale shapes, no quirks of personality or appearance that would allow her to outshine the ensemble she is paid to display.

In brief, she is to be a person only in the sense that she has enough features shared by humans to avoid drawing attention to herself via their absence.

This non-beauty has often been mistaken for the ideal of beauty. The end result? Predictably tragic. Eating disorders, anxieties, and worse.

"To speak the truth," a female artist recently wrote, "I always hear guys saying something like that. Somehow media lie to us, telling that 'everyone prefers the thin tall types', but then you never find that 'everyone'..."

Exactly so. Those yearning for a model's body largely miss the point.

Economic models work in a very similar fashion to runway models.

The bare models are very seldom the point. The best constructed models are lauded for not being unnatural, for not having any feature that will draw a reader away from the world being woven to think, 'that's not right; that's not the world I live in'.

Models are as bare and featureless as possible, in their general form. The less there is to them, the more widely they may be applied.

These applications are the true point of economic models. They are the 'clothes' we put upon them. Shocks, new policies, a novel twist, these are where the excitement comes in, where the focus should be. The rest? Just a hanger, which, if it performs its duty, bears the weight of the sumptuous garment without distorting its shape.

If a basic model ever resembled an ACTUAL economy (say, that of Peru) in all its richness and complexity, it would immeditaley be rejected from use in most academic papers and policy briefs. When tacking on a rise in oil prices to a simple supply and demand model, everyone can see what the consequences are. If the same rise in oil prices were put through a 'true' model of the Peruvian economy... who knows what would happen? The peculiarities of that place and that culture at a given time would give the seemingly simple shock its own flavour, and may lead to - horror of horrors - a result or advice that cannot be generalized to other countries or times.

Similarly, if a normal, healthy woman were to model runway fashion, some of her body's personality would necessarily shine through... and this is a no-no when it is supposed to be the designer, and only the designer, on display.

For this reason, supermodels tend to be featureless, with faces like a Teflon pan. Their bodies are skinny for much the same reason that a coat-hanger is skinny: it allows the clothing to keep its own shape. A curvy woman, a woman with an actual figure, very seldom looks like another woman of the same height and weight.

It is tragic when a healthy woman decides to emulate a supermodel, mistaking glamour for beauty.

It is equally tragic when a healthy economy decides to emulate an economic model, mistaking elegance for efficiency.

Thursday, September 11, 2008


"What's going to happen to the economy over the next six months?"

That's a question often asked to economists, and one which they are ill-equipped to answer.

An economy is a complicated, moving thing comprised of a myriad interacting forces, each of which affects the others, causing repercussions by which it is affected in return.

By and large (pace, time series analysis) economists gave up long ago on trying to figure out what happens to the economy as it moves. Instead, they focus their efforts on calculating what the economy will look like once it stops moving.

Wait - didn't I just say an economy is always in motion?

Quite so.

This is why shocks - stuff well out of the ordinary - are the darlings of economics. "What's going to happen in this complicated but smoothly-run economy that hasn't had a crisis in a hundred years?" is a very difficult question. "What's going to happen to the economy now that every forest in the country has burned down?" is much easier to answer.

A shock is something that happens suddenly, and has ripples that disappear in finite time. By looking at a long enough time scale, an economist can find a 'resting-point', and describe the characteristics of the economy once the shock has run its course. This can be the basis of useful advice, allowing governments and individuals to prepare and plan for the future.

The resting-points are called 'equilibria', after the Latin for 'equal weights'.

When equal weights are placed on either side of a scale, it is balanced. Eventually it will reach a state in which the two sides of the scale are at an equal height. All forces cancel each other out. The weights have no reason to rise, or to fall. The dust has cleared, and all influences have played their course.

To see how economic inquiry works, consider a kitten.

A kitten is in the living room. If you're lucky, the living room is sealed off from the rest of the house. A friend asks you, "What's the kitten going to do over the next six hours?"

It is a hopeless task to try to calculate the exact motion of a kitten in advance. There are too many uncertainties and random factors at play to be able to make anything other than a wild guess.

A reasonable non-economist would answer the question with, "I dunno. Walk around? Swat at things? Meow? Hopefully not make a mess..."

An economist would answer, "The kitten will be neither asleep nor awake, but on the cusp of both states."

(There's a reason many physicists become economists.)

"Buh?" the startled friend may answer.

This is where the economist would pull out a graph.

Assume that the kitten's behaviour can be entirely described by the changes in its exertion over the six-hour period. Everything else is, by this assumption, constant.

The two forces driving the kitten are curiosity and exhaustion. The kitten exerts itself in order to satisfy its curiosity - running over to a promising shiny thing on the other side of the room, for example. Exertion, therefore, lowers curiosity. If we plot Curiosity on a graph with Exertion as the horizontal axis, it should look like a downward-sloping... well, something.

We have no idea how it is that the kitten's curiosity varies with exertion, exactly, so we'll just assume the relationship is linear, and draw a downward-sloping straight line.

What's that you say? There could be trouble with our results if it turns out the true relationship is more of a curve, or an M-shape, or the outline of a gazebo? Or if we're out to lunch entirely and pulling our assumptions from somewhere unpleasnt? Okay, sure, but that's something for the econometricians (economists who work with real-world numbers) to figure out later. This is theory.

Now for exhaustion. Clearly, as the kitten exerts itself, its level of exhaustion rises. So we draw an upward-sloping line on our graph to represent exhaustion.

We have an upward-sloping line, and a downward-sloping line. If they cross at all, they cross exactly once - and they MUST cross.

This is actually easy to prove. Suppose the kitten has not yet exerted itself. Exertion is zero. Its curiosity must be very high, and its exhaustion must be very low. In particular, curiosity must be higher than exhaustion - otherwise the kitten would just sleep forever. Hunger? Oh, we're assuming that's constant. Yes, forever. No, the kitten won't die from starvation.

If curiosity starts out higher than exhaustion, and curiosity is a downward-sloping line while exhaustion is an upward-sloping line, eventually they MUST cross - after which they'll never cross again.

Before they cross, curiosity is higher than exhaustion. This means that the kitten will keep exerting itself, in order to satisfy its curiosity. We'll keep moving to the right on our graph, in the direction of increasing exertion.

After they cross, exhaustion is higher than curiosity. The kitten is too tired to explore, and falls asleep. Sleep can be modeled as a state of negative exertion - resting allows the kitten to recover energy and renews its curiosity, possibly due to a very short attention span and lousy short-term memory. We move left-ward on our graph, in the direction of decreasing exertion.

The end result? There is only one equilibrium in this model: the point at which exhaustion and curiosity are exactly equal to each other. The kitten is not exploring, since curiosity is not higher than exhaustion, but neither is it sleeping, because exhaustion is not higher than curiosity. The two forces are completely balanced. Should the kitten by some random accident wander away from this equilibrium, circumstances would conspire to move it back to this odd state, as we have argued above.

Hence, the answer to the question "What will the kitten do for the next six hours?": "The kitten will be neither asleep nor awake, but on the cusp of both states."

I DID mention economists were lousy at talking about the motion of a smoothly-functioning economy, right?

Introduce a shock, though...

Suppose that the living room is flooded with poison gas while the kitten is still inside. If the economist is again asked the same question, she will answer correctly: "The kitten will eventually be dead, and will remain in that steady state for the rest of time, assuming that there are no (presumably electrical) shocks to its system."

I leave the diagram for that situation as an exercise to the reader. It's distressingly similar to the one I walked you through.

I've been reading Naomi Klein's Shock Doctrine at the request of a student. It's an excellent book, and well worth reading by anyone who feels comfortable with the English language. The discussion is more about psychology, power and politics than economics, but it does talk a lot about economists and the phenomenally tragic consequences that can follow their mistakes.

One thing that struck me while reading the book is that many of the worst economic mistakes it refers to were made by people who appeared to have taken economics's focus on equilibrium literally. That is, these people acted as if they believed that because equilibria are what economists solve for, they must therefore be the only relevant thing, and everything else should be swept aside. The results are predictably tragic.

Consider our kitten example, and a well-meaning but much too enthusiastic economist. After modeling the kitten's situation, she comes to the following conclustion:

"No matter how you draw the two lines of curiosity and exhaustion, the result is always the same: the only equilibrium, and the point the kitten will move toward, is the twilight state of 'barely awake'. The only thing that distinguishes one equilibrium from another is the amount of exertion at which this state is reached."

The policy implications? That's clear enough. The economist's advice would be as follows:

"Clearly, it's better to be at an equilibrium with low exertion than one with high exertion. It is more restful, and on the rare occasions when due to random chance the kitten stumbles into momentary wakefulness, there is a higher level of curiosity, which is good for the mind. I will therefore drug the kitten with morphine, so that it is always in this twilight state, even when its body tells it that it is fully rested."

What about possible side effects from giving morphine to a kitten? Addiction? Shouldn't the kitten be fed once in a while? Wasn't it going to be in the living room for only six hours?

None of those considerations are in the model. And if they were, well, those are matters for other specialties to consider. The economist has done her job, and besides, the reasoning is mathematical and ironclad.

It's not terribly difficult to see how an economist who is too enthusiastic about models can wreck an economy.

At the same time, an economist can be of great help to an economy. That's why I'm in the profession, after all. I truly believe that educating others about economic thinking can help the world - more than that, I believe that economic education is absolutely necessary if the world's situation is to improve. At least as much harm has been done through ignorance of economics as by its earnest misapplication (see Zimbabwe).

The economist's profession is one of the few that can actually help to end world hunger. This is a great opportunity, and a terrible responsibility - the same force that can end starvation may also inflict it, if misapplied.

Thursday, September 4, 2008

What is economics, anyway? (Part 2: Goddesses)

In the last post, I suggested that it might be fruitful to look at the similarities between the Greek and Roman goddesses of household management. The idea was that by finding where they overlap, we could gain insight into the basic nature of economics. After all, not only were they goddesses of the hearth and household (microeconomics), but also of the state (macroeconomics).

As it turns out, this wasn't easy. Or flattering to economists.

Although Hestia and Vesta were considered extremely important deities, not much is known about them. Their cults were results-driven. As long as the state and household survived, they were paid lip service. When things went south, the goddesses were invoked with unusual fervour, and their followers punished. In neither case was the history, personality or nature of the goddess the point.

This is not entirely unlike the cult of economics today. Most people know that economic thinking exists, and have a vague idea that it has something to do with spiky graphs, dollar signs and an unfortunate fashion sense. As long as the economy is thriving, economists and their discipline are paid lip service. When things go south, magic words ("Trickle-down!" "Free trade!") are invoked with unusual fervour, and practitioners of economics are punished. In neither case is the history of economic thought or the nature of current economic thinking the point.

We'll start our analysis with Hestia. Hesiod mentions her a few times in his Homeric hymns.

First, in a hymn to Aphrodite:

"Nor yet does the pure maiden Hestia love Aphrodite's works. She was the first-born child of wily Cronos and youngest too, by will of Zeus who holds the aegis, -- a queenly maid whom both Poseidon and Apollo sought to wed. But she was wholly unwilling, nay, stubbornly refused; and touching the head of father Zeus who holds the aegis, she, that fair goddess, sware a great oath which has in truth been fulfilled, that she would be a maiden all her days. So Zeus the Father gave her an high honour instead of marriage, and she has her place in the midst of the house and has the richest portion. In all the temples of the gods she has a share of honour, and among all mortal men she is chief of the goddesses."

In other words, Hestia doesn't care much for passion, and would rather stay at home than marry the richest gods - Apollo, of medicine, music and the sun, and Poseidon of the seas.

The second mention of Hestia in the hymns makes her decision all the stranger:

"Hestia, you who tend the holy house of the lord Apollo, the Far-shooter at goodly Pytho, with soft oil dripping ever from your locks"

Although Hestia refused to marry Apollo she is his housekeeper. And has hair so oily that it drips. (I did say this wasn't flattering to economists.)

This minor mention is important combined with the last - it shows that Hestia's nature is management. This is what fulfils her; this is what she does willingly, even as she refuses the conjugal advances of a sun god.

A sacred fire, representing the hearth, was an important part of her cult. It was not just a sacred fire, it was the sacred fire, and so a share of any sacrifice to the gods was reserved for Hestia.

Now on to Vesta.

Not much is known about Vesta herself. She is mentioned a few times in the Aenid, mostly invoked or sworn by in times of great duress.

We do know a lot about her followers - the Vestal Virgins.

Yes, that's right. One of the shared attributes of the goddesses is the focus on chastity and an utter lack of interest in the carnal.

Did I mention this wasn't flattering to economists?

The most important duty of the Vestals was maintenance of the sacred fire, representing the goddess's protection. If the sacred fire went out, it was often assumed that one of the Vestals had broken her oath of chastity. This was punishable by live burial. The Vestals were also responsible for making a special flour that was a required ingredient in public offerings to any god.

When we overlap Vesta and Hestia, what do we get?

1. Both were virgins. This was a Big Deal.
2. Both were hearth goddeses, the hearth being a symbol of the home.
3. Both had a sacred fire that must not go out.
4. Both were considered essential for the well-being of the state.
5. Both had a part in sacrifices to any god.
6. No one seemed terribly interested in the personality or history of either.
7. No one felt the need to explain their roles in detail.

Points six and seven are more important than they may appear at first - another case of a dog not barking in the night.

We know these goddesses were extremely important. Hestia the 'first and last', Vesta, state goddess of Rome. This suggests a very basic function. That this function was never explicitly named in turn suggests that either it was very difficult to summarize, or (and?) it was so obvious that it did not bear mentioning in a literary work.

Household management and its extension to the national 'household' fit these clues. Everyone lived in a household, and everyone knew what was involved. The moment the phrase 'hearth goddess' was uttered, it summoned images of cooking, budgeting, hospitality, planning and so on. No further explanation was needed, and in fact, any explanation at all would have been overly pedantic.

The lack of personality and lack of stories involving the goddesses goes hand-in-hand with their virginal status. Zeus's monumental libido made for great stories. Hestia's scrupulous chastity? Not so much.

There was no passion, no emotional drive to the actions of the hearth goddesses - they could not afford such. They had to be pragmatic and in a sense, compassionate, taking into account not their choices, but those of the household members when making their decisions as managers.

This enforced neutrality may well be the reason why Hestia was invoked in matters of law, and Vestals were given privileges when in court, such as not having to swear the customary oath.

Love and passion would introduce bias, and so were out of the question. Hestia would gladly be Apollo's housekeeper, but never his wife. A Vestal who broke her oath of chastity would withdraw the goddess's protection from the city, and be sentenced to death. Vesta's servants could show no bias of this sort.

The goddesses were essential to the state, because of their status as household managers - the allocation of scarce resources among competing needs and desires is the business of the state. Their fires could not be allowed to go out. Even among the feasts and festivals, a thought must always be given to these considerations, or the state, like any unminded household, would collapse.

What of the final attribute, the share in any sacrifices to the gods? It did not matter whether the prayer was for love, wealth or victory - at its source, and at its granting or denial, it had to interface with a world of scarcity. Where there is scarcity, there is the need for management.

Such is the essential nature of economics according to the ancients, then. The practical management of the household, be it a family or a nation. Economic considerations are found in all things, and must never be lost sight of or be allowed to go astray through momentary passion or an inordinate fondness for one group or individual.

On Tuesday, I'll talk about the concept of equilibrium. And kittens.

Tuesday, September 2, 2008

What is economics, anyway? (Part 1: Etymology)

Someone coming across the word 'economics' for the first time could be forgiven for thinking it was a dislike of sustainably-produced food: 'eco-' is clear enough, as in 'ecology', 'nom' is an onomatopaeia that refers to the eating of food, as in 'nom nom nom', and '-ics' refers to ickiness.

Hence, 'eco-nom-ic(k)s' - the state of finding ecologically sound food icky.

Organic food is expensive, so that would explain all the mentions of money, interest rates and loans. As for international trade, well, that's how the best products are obtained. Coffee from subsistence farmers in Tanzania, bananas from Costa Rica, and so on.

Our hypothetical amateur etymologist would not be entirely wrong. All of this is in fact covered by economics, but the subject is at the same time far more general and far more basic. So basic, in fact, that the ancient Greeks had a goddess of economics, and considered her among the most essential of their pantheon. The Romans also had such a goddess, and placed her at the center of one of their most important cults.

The Greek and Roman goddesses are very similar to each other - so similar that they are often mistaken for 'copies' of each other, when in fact they were developed by each culture, independently.

This is very promising.

By looking at the traits that are shared by these goddesses and their cults, we may gain some useful insight into the essential nature of economics.

How so?

Suppose you've only ever seen a pig in the form of spam. This is akin to modern economics, a heavily refined and modified version of the original material that includes other ingredients, some of which are difficult to decipher, and others whose relevance is not obvious at first sight. If you were to take spam as your point of reference, you might reasonably conclude that a pig was some sort of sponge, or possibly a fungus.

Now suppose you're curious about what this 'pig' thing looks like before it goes through the spam factory. Despite your best attempts, you are unable to find a live specimen, but you do have the next best thing: two statues, each one a religious icon from a culture that worshipped pigs. They share a lot of things in common, but one has wings, and the other has six legs.

By noting what the statues have in common, you may hopefully come away with an idea of what an actual pig looks like. Any significant differences between the statues are likely to be attributable to historical or cultural influences. (This is interesting in its own right.)

This is the technique that we'll be using to understand what lies at the root of economics.

Before we do this, we should stop and consider the true etymology of the word 'economics'.

It comes from ancient Greek - oikos, for 'house', and 'nomia' for 'management'.

At its roots, economics is the study of household management - of how to make the best use of a family's limited resources in order to satisfy the many competing needs and wants of its members. If the baby needs a new cot, it must be paid for. Will it be through more work, or reducing existing spending? Who will work more? Doing what? What expenses will be cut? For how long? Is it possible to build a cot from scratch? What about borrowing?

The 'household' can range from an individual to a family to a firm to a nation and beyond, but the issues remain remarkably similar. This is perhaps why both Hestia, the Greek goddess of household management, and Vesta, her Roman counterpart, were deities of both the family and the state...

...but that is a topic for the next post, where we'll begin our analysis of classical goddesses as signposts for the essential nature of economics.