It’s Not Just the Economy that’s Deflating

The universe shrank by 95% this year.  At least according to a recent theory of gravity by a distinguished Berkeley physicist:

HoYava’s theory has been generating excitement since he proposed it in January, and physicists met to discuss it at a meeting in November at the Perimeter Institute for Theoretical Physics in Waterloo, Ontario. In particular, physicists have been checking if the model correctly describes the universe we see today. General relativity scored a knockout blow when Einstein predicted the motion of Mercury with greater accuracy than Newton’s theory of gravity could.

Can HoYYava gravity claim the same success? The first tentative answers coming in say “yes.” Francisco Lobo, now at the University of Lisbon, and his colleagues have found a good match with the movement of planets.

Others have made even bolder claims for HoYava gravity, especially when it comes to explaining cosmic conundrums such as the singularity of the big bang, where the laws of physics break down. If HoYava gravity is true, argues cosmologist Robert Brandenberger of McGill University in a paper published in the August Physical Review D, then the universe didn’t bang—it bounced. “A universe filled with matter will contract down to a small—but finite—size and then bounce out again, giving us the expanding cosmos we see today,” he says. Brandenberger’s calculations show that ripples produced by the bounce match those already detected by satellites measuring the cosmic microwave background, and he is now looking for signatures that could distinguish the bounce from the big bang scenario.

HoYava gravity may also create the “illusion of dark matter,” says cosmologist Shinji Mukohyama of Tokyo University. In the September Physical Review D, he explains that in certain circumstances HoYava’s graviton fluctuates as it interacts with normal matter, making gravity pull a bit more strongly than expected in general relativity. The effect could make galaxies appear to contain more matter than can be seen. If that’s not enough, cosmologist Mu-In Park of Chonbuk National University in South Korea believes that HoYava gravity may also be behind the accelerated expansion of the universe, currently attributed to a mysterious dark energy. One of the leading explanations for its origin is that empty space contains some intrinsic energy that pushes the universe outward. This intrinsic energy cannot be accounted for by general relativity but pops naturally out of the equations of HoYava gravity, according to Park.

Because dark energy and dark matter comprised 95% of the universe, HoYava’s discovery means that 95% of the universe disappeared this year.

I suppose some of you out there will insist that the universe did not really shrink, but rather that we have developed a new theory of reality.  When will you guys realize that there is no such thing as “reality.”  I used to argue with my philosopher friends that dark matter and dark energy were merely social constructs, ideas that were useful to scientists.  And they kept insisting that these ideas mirrored reality; that you could zip out to distant galaxies and shovel buckets of dark matter into a barrel.

Please don’t take me for one of those left-wing post-modernists who believe knowledge is socially constructed for ideological reasons.  I am a pragmatist, and believe science is a fundamentally pragmatic enterprise.  We invent concepts (like dark matter) that prove useful.  Perhaps in the distant future the remaining 5% of the universe will no longer prove useful, and we’ll discard that concept as well.

Back in the 1930s economists did not have a complete understanding of rational expectations (although they certainly understood the importance of expectations.)  Because of this ignorance, they had trouble explaining how expected future changes in the supply and demand for money (or gold) could impact current nominal spending.  Woodford’s Interest and Prices had not yet been written.  So they resorted to mystical explanations for a sudden change in AD.  According to Keynes, there were mysterious shifts in “animal spirits.”

We now know what was really going on.  Businessmen and investors made highly rational forecasts of future expected NGDP growth.  They knew that wages and prices were sticky, and hence that any sudden change in NGDP would cause RGDP to move in the same direction.  They knew that the new supply of mined gold was fairly stable, and hence that changes in NGDP in gold terms were due to shifts in the demand for gold.  And they knew that those shifts could occur for three primary reasons:

1. Central bank hoarding of gold due to a higher gold/currency ratio
2. Private hoarding of gold (often due to devaluation fears)
3. Private hoarding of currency, which created a derived demand for gold reserves

And we know that businesses and investors responded rationally to signs that these factors were increasing the demand for gold.  For instance, central bank gold ratios rose sharply between October 1929 and October 1930.  The stock market quite rationally crashed when it saw what was coming.

Was the “animal spirits” model wrong?  That’s not the right question. The question is; “Was it useful?”  I suppose it might have had some value.  It pointed to the problem of unstable nominal spending in a market economy, and the need for the government to insure that NGDP was stable.  So in that sense Keynesian economics was a step forward.  But it is no longer a useful model, i.e. a useful social construct.  And some day my gold market model of the 1930s will also be obsolete.

When physicists developed models that didn’t need concepts like dark energy and dark matter, they threw those concepts into the trash bin.  It is time to throw Keynesian economics away.  The pre-Keynesians knew wages and prices were sticky, and that’s the only useful part of Keynesian economics.

So if we are to get rid of Keynesian economics, then where do we start from?  To which thinkers do we go back and look for inspiration?  Who is relevant for the modern economy?  How about Keynes!  This is from a 1996 interview of Paul Samuelson:

He cited one of Keynes’s earlier books, “A Tract on Monetary Reform,” in which he put much more emphasis on money and interest rates. “I think nineteen-twenties Keynesianism—the Keynes of the Tract on Monetary Reform—that is what is needed in a well-run market economy. You lean against the wind and you try to do it intelligently.” By this, Samuelson meant that during an economic downturn the Fed should reduce interest rates to stimulate the economy; when the economy has recovered, the Fed should raise interest rates to head off a speculative boom. At the time of the interview, Alan Greenspan and his colleagues were holding off from raising interest rates despite the fact that the economy was chugging along. The previous day they had again held rates steady. “I think the Federal Reserve made a mistake in not raising interest rates yesterday,” Samuelson said.

If you are someone who loves the Quantity Theory of Money and hates Keynes, you really need to read the Tract.  You will love it.  It is very short, and much better written than the General Theory.

HT:  James Hamilton, Tyler Cowen

PS.  Yes, I am half-joking.  I know that this new theory implies the universe was also 95% smaller last year, and the year before.  But I am serious about my pragmatism.

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