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Relativity in Economics
I don’t suppose anyone remembers in the Michael Saylor podcast episode were he profoundly described inflation as a vector? Saylor talked about the importance of viewing economic valuations, with emphasis to inflation rates, as being relative to one another. I think his examples were to view scarce objects relative to those that are super abundant ie Hampton Real estate compared to your Netflix subscription. Building on this insight I came across an interesting paragraph in Frank H. Knights book ‘Risk, Uncertainty, and Profit’ that I think echoes this sentiment;
“The fact of relativity is important, because easily and commonly lost sight of. Every valuation is a comparison; we have no conception of an absolute utility or an absolute standard of utility. The notion of value is meaningless except in relation to alternatives of choice. Not only is utility measured by another utility, – all things are measured by things of their own kind as standards, but its existence is conditioned by that of alternative; it is like a force in the physical world; action and reaction are equal, a force cannot be imaged separate from an equal and opposite force or resistance“.
Curious if anyone has any opinions on this quote?
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6 Replies
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Gary,
Years ago I read a book that spoke to the insanity of economic aggregation. It described an early economist that was sure everything could be understood once we got all the numbers totaled up for every item. The book even showed logs where he was attempting to total everything up. It really illustrated the idiocy of aggregating a bunch of prices on goods. I think of that book every time I here anyone speaking of consumer goods price indexes.
I have searched for hours to try and find where I originally read that but just cannot find it.
This quote is interesting in that it does a good job of removing money as the only focus in the value equation.
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Hey Nathan,
Was that book you are referring to by Keynes by any chance? Sounds like a lot of the concepts he discusses in The General Theory.
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Nope. This had a very detail discussion of how an economist starting recording prices in detail on paper ledgers thinking he would resolve all the math and have the system all defined. Even showed some ledgers he had developed.
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There is an excellent discussion of inflation as a vector in Ch 4 of the fiat standard. Thank you, Saifedean.
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Gary, my informed opinion as a physicist is that action and reaction of forces is an imperfect analogy. While it is true that the Earth moves when you drop your PBJ sandwich, for all practical purposes this movement is negligible.
Instead, I would say it is like the relativity of perception of motion. From Earth, the Sun is certainly moving around the Earth in our perception. Standing on the Sun gives you a different perception of who is moving.
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Hi Gary
I’ve long regretted my comment about Newton’s laws wrt your original post. While the action/reaction bit is suspect, the more important aspect of your comment is about inflation being a vector. Saylor’s point is quite true and has been adopted, now, but all the crypto experts. Last week Kathy Wood described Saylor’s idea (with reference to him) in an astute response in an interview. In retrospect, this idea seems obvious, now. She also talked about how the CPI “basket” has been changing with time hence doesn’t represent any kind of standard measure. The CPI is an attempt to hide real inflation behind scientifically convincing numbers. [Such a weak theory would never be accepted in physics, in my highly biased opinion.]
She also made a remarkable point. The continuous rise in the price of shares on the stock market for the last many years _is_ inflation! In Saylor’s model, stocks are just another “commodity” with a very high inflation rate, as are the costs of medicine and education.
The stock market rise has been a mystery to any reasonable market specialist for the last several years. Not that professional traders are infallible, but when they all say “this is weird,” then something is up.
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