Posts Tagged ‘Nick Rowe’

does human (and physical) capital exist?

Wednesday, February 25th, 2015

In the heated bloggers’ debate over human capital, I was surprised by the absence of discussion of how to measure human capital, a point that was crucial in the earlier “Cambridge controversy” over physical capital. Typically, human capital is measured as years of schooling. All this is added up (sometimes with adjustment for levels of schooling – counting a year in High School or University as more than a year in primary school). The sum total is then taken to be a nation’s stock of ‘human capital’, which becomes an input into an aggregate production function for the economy. This seems wrong, to me. Some schools are terrible, whereas others are excellent. How can we take account in differences in the quality of schooling?

Nick Rowe has a clever solution to the problem. “Capital” – whether physical or human – is not really a thing, so it is not necessary (impossible?) to measure it.

We invest in increasing our skills, our strength, our knowledge, etc. It just easier to use the words

the human capital controversy

Sunday, February 22nd, 2015

Back in the 1960s there was a famous debate between economists (led by Joan Robinson and Piero Sraffa) of the University of Cambridge in England and economists (led by Paul Samuelson and Robert Solow) of MIT in Cambridge, Massachusetts. The debate, known as “the Cambridge capital controversy“, was over measurement and aggregation of physical capital. The Cambridge (England) economists argued that aggregate physical capital could not be measured without reference to the rate of return on capital. Cambridge (Massachusetts) generally agreed that the Cambridge (England) side won, though many professors of economics continue to teach aggregate production functions and economic growth theory as though the debate never took place.

A similar debate is now taking place, over human rather than physical capital. Noah Smith (HT Mark Thoma) provides a nice overview for those are interested.

Is “human capital” really capital? This is the topic of the latest econ blog debate. Here is Branko Milanovic, who says no, it isn’t. Here is Nick Rowe, who says yes, it is. Here is Paul Krugman, who says no, it isn’t. Here is Tim Worstall, who says yes, it is. Here is Elizabeth Bruenig, who says that people who say it is are bad.

Noah Smith, “Is human capital really capital?“, Noapinion, 21 February 2015.

Noah Smith offers an alternative view: human capital requires owners to work (give up leisure time) to obtain a return from it, so the more leisure is valued relative to other things, the less valuable human capital is. This will be different for each person. In consequence, you are “entitled to your own modeling conventions and definition of terms. So whether human capital is capital is up to you.”

This is an interesting, complex debate. I am still thinking about it but, as TdJ readers might predict, I am most persuaded by the arguments of Carleton University economist Nick Rowe. Before turning to Branko Milanovic and Nick Rowe, however, I would like to emphasize two points that are not always appreciated by participants in this debate. First, financial capital is not capital in an economic sense. Nick makes this point clearly, but others confuse financial capital with physical capital. Financial capital – stocks, bonds and the like – are just pieces of paper, IOUs. They are claims of lenders, and the loans may even have been made for the purpose of consumption rather than investment.

Second, even if human capital is a useful category of income-producing assets (and I think it is), it is as difficult to measure as physical capital is. In fact, it is probably even more difficult to measure. This does not really matter though, as it is impossible to measure aggregate assets of either asset apart from (only in theory!) the present value of the future income the assets produce. The problems of measurement of human capital are

inflation, deflation and price controls

Tuesday, January 20th, 2015

Here is yet another great post from Carleton University economist Nick Rowe.

I can’t think of any economist living today who has had as much influence on economics and economic policy as Milton Friedman had, and still has. Neither on the right, nor on the left. ….

We easily forget how daft the 1970’s really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.

Imagine if I argued today: “Inflation is dangerously low. In order to increase inflation, governments should pass a law saying that all firms must raise all prices and wages by a minimum of 2% a year, unless they apply for and get special permission from the Prices and Incomes Board to raise them by less.” What are the chances my policy proposal would be accepted?

Nick Rowe, “There are no Friedmans today, except maybe Friedman himself“, Worthwhile Canadian Initiative, 16 January 2015.

There is much more of interest at the link above, especially in the extensive comments.

I became a fan of Milton Friedman long ago, after reading his 1957 book Theory of the Consumption Function and his equally remarkable 1953 essay “The Case for Flexible Exchange Rates”, Sadly, Friedman has joined the elite ranks of classical economists: dead scholars whose works are cited but never read!

Nick: I had totally forgotten about the pet rock craze. Was that in the 1970s? I thought it began and ended in the 1960s. I remember clearly, however, the federal government’s Prices and Incomes Commission. It was set up in 1968, and was operating with full force in the 1970s. Wage and price controls were less silly than pet rocks, but without doubt more harmful.

price inflation and nominal interest rates

Monday, December 30th, 2013

Carleton University economist Nick Rowe examines the question “What effect on inflation does a Central Bank’s announcement of an increase (or decrease) in nominal interest rates have?” His answer, not unusual for an economist, is: “It depends”.

I have been arguing with John Cochrane and Steve Williamson over whether central banks announcing higher nominal interest rates is inflationary or deflationary. The very fact that economists are arguing about that very basic question tells us something important about central banks’ using nominal interest rates as a communications strategy: it sucks. This is a point that economists like Scott Sumner and I have been making for some time. Do low nominal interest rates mean monetary policy is loose or tight? It depends.

Nick Rowe, “Nominal interest rates, inflation, and central banks’ communications strategy“, Worthwhile Canadian Initiative, 22 December 2013.

I was pleased to see Nick include a 2 x 2 chart to illustrate the possibilities. Long ago, when I was a graduate student, Gilles Paquet taught me the usefulness of this simple device. Gilles at the time chaired Carleton’s economics department. He was a superb chairman, and soon became Dean of the Faculty of Arts and Science




the coming retirement revolution

Wednesday, October 30th, 2013

Carleton University economist Nick Rowe has initiated a very interesting discussion on what he calls “the retirement revolution”. Clicking on the link will take you to some ‘worthwhile reading’ at WCI.

The first big macro shock was the invention of agriculture. Productivity rose, then fell again for Malthusian reasons. The second big macro shock was the agricultural/industrial revolution. Productivity started growing so quickly it outran those Malthusian reasons.I think the third big macro shock will be the retirement revolution. Poor people, on the Malthusian margin, retire when they die (or die when they retire). Rich people retire before they die. The world population is ageing. But age per se has no macroeconomic implications. Retirement does have macroeconomic implications.

redefining inflation

Thursday, August 8th, 2013

Another great post by Carleton University economist Nick Rowe.

Some Austrians (I can’t remember which ones) define “inflation” as “a growing supply of base money”. [Update: Jonathan Finegold gently corrects me.] This used to strike me, as it strikes most economists, as a bit daft. OK, I would think, you can define “inflation” that way if you want, but

Nick Rowe, gifted teacher

Wednesday, August 1st, 2012

Carleton University economist Nick Rowe is an incredible teacher. His success, I believe, is due to his intelligence, his curiosity and – most of all – to his patience. I am always impressed by Nick’s patience and respect for those who comment on his posts, even when the comments make little or no sense. Here is a somewhat trivial recent example: an interchange Nick had last Sunday with ‘Peter N’, a person who seems to know something about accounting, but nothing about economics. Peter N insists that the term GDP (gross domestic product) is not meaningful, being “neither a stock nor a flow”.

Peter N writes (among other things): GDP … is neither a stock nor a flow …. (12:01 PM)

Nick Rowe responds: Could you explain what you mean by GDP being neither stock nor flow? Are you referring to measuring it in discrete vs continuous time? (01:26 PM)

Peter N writes: GDP is the integral of value adding flows for a defined period. While you could define a GDP flow (and IIR Keen does) I don’t see how you could measure it, given the complexities of imputation and reconciliation.

It certainly isn’t a stock. You can treat it as one if you want to compare it to itself over other periods or with its sector totals, but a true stock has a value at any given point in time, and this value is quantity, not a rate.

This distinction is made more important by the peculiar nature of GDP. Because it combines results from (at least) 3 different forms of accounting and contains a significant component of imputations, it’s difficult to compare it with stocks at known times. The result of accruing across the different systems is only meaningful compared with other examples of itself. (02:14 PM)

Nick Rowe responds: Peter N: OK. I would say that GDP is strictly a flow, but if you measure any flow in discrete rather than continuous time it becomes a stock, rather than a flow. A PITA theoretically, but not a big deal. GDP is a flow. Stats Canada measures a discrete time stock approximation to that flow. (02:17 PM)

Nick Rowe, “Can you please read a first year textbook?“, Worthwhile Canadian Initiative, 29 July 2012.


Saturday, July 28th, 2012

What should we call inhabitants of the eurozone? ‘Europeans’ cannot be correct, because not all Europeans use the euro as their currency.

Carleton University economist Nick Rowe has a suggestion: Eurozoners. Sounds good to me.

This problem may not last for long, however. See:

Nick Rowe, “Kill the Euro now?“, Worthwhile Canadian initiative, 26 July 2012.

Rowe on retirement

Monday, February 6th, 2012

By saving, and by paying taxes to support government pensions for retirees, we smooth consumption over our lifetime. In striking contrast, we don’t smooth our ‘consumption’ of leisure, taking much of it in one large chunk (known as ‘retirement’) in the last years of life. Nick Rowe asks, Why?

If real interest rates were higher than your subjective rate of time preference, then you would choose a consumption path that is smoothly growing over time. You would consume more when old than when you were young. For all other consumption goods, some people act a bit like that, and others don’t. Some people consume a bit more when old than when young, and others consume a bit less when old than when young. But when it comes to the consumption of leisure, we don’t act at all like that. We consume roughly the same amount of leisure every year. And then we suddenly go on a massive consumption binge for the rest of our lives. Why?

As we have gotten richer over the last two centuries, we have chosen to spend a greater proportion of our lives consuming leisure rather than working. But I think I’m correct in saying that by far the biggest increase in our leisure has been in that big bunch of leisure at the end of our lives. Most people used to work until they died. Now most people stop working and then consume a decade or two of leisure before they die. Proportionately, the growth in leisure taken in retirement massively exceeds the growth of coffee breaks, lunch breaks, evenings, weekends, and holidays. The income elasticity of demand for retirement leisure massively exceeds that of all other forms of leisure. Why?

Nick Rowe, “Retirement and the non-smoothing of consumption of leisure“, Worthwhile Canadian Initiative, 4 February 2012.

Observe and participate in the discussion over at Worthwhile Canadian Initiative.

Nick Rowe on saving

Friday, January 13th, 2012

Carleton economist Nick Rowe wants to abolish “saving”. He means the concept, not the activity. He develops a tiny macro model that is convincing, even to a microeconomist like myself.

Let’s take a very simple macro model with no exports, imports, government spending, or taxes. There are four goods: a flow of newly-produced consumption goods C; a flow of newly-produced investment goods I; a stock of antique furniture A; and a stock of money M. ….

Saving isn’t a thing, it’s a non-thing. It’s a residual. It’s defined negatively, as not consuming part of your income. So when an individual increases his saving, for a given income, all we know for sure is that he is reducing his consumption. He must be increasing something else, but we don’t know what it is he is increasing. We know (in this model) that he must be: buying more investment; buying more antiques; or hoarding more money. But we don’t know which. And it really matters which. As I shall show. ….

“What is the effect of an increase in desired saving by all individuals?”

What a badly-posed question. We know they all want to buy less consumption goods, but what of those three possible things do they want to do more of? The question does not say. So lets take all three in turn.

1. Investment. Demand for newly-produced consumption goods falls and demand for newly-produced investment goods rises by an equal amount. …. No recession.

2. Antique furniture. Demand for newly-produced consumption goods falls, and demand for a flow of antique furniture increases by an equal amount. What happens? …. [There is a fixed supply of antique furniture, so individuals will have to change their plans and buy more consumption goods (no recession), buy more investment goods (no recession), or hoard money (recession).] ….

3. Money. ….