Hungry Logic

Originally posted by telerion
Ok allow me to explain myself more clearly.

Assume:

1) The marginal cost of printing fake money is lower than the marginal cost of obtaining real money,

2) The agent knows that (s)he won't be caught

3) The agent does not pr ...[text shortened]... print counterfeit money and use it to purchase consumption goods.

I have a question about (3). Is it intended to extend to mean that if everybody simultaneously introduced that same "not enough money," then there would still be no significant impact on the aggregate money supply?

In other words, suppose we have one guy counterfeiting within your constraints. Does the addition of another such counterfeiter violate constraint (3), or is that allowed?

Originally posted by DoctorScribbles
I have a question about (3). Is it intended to extend to mean that if everybody simultaneously introduced that same "not enough money," then there would still be no significant impact on the aggregate money supply?

No, I was just assuming away the case where the individual prints 109,834,092,840,820,489 fake dollars.

Originally posted by telerion
No, I was just assuming away the case where the individual prints 109,834,092,840,820,489 fake dollars.

Very well.

Tell me, then, why doesn't the U.S. Treasury continually saturate the economy with newly printed money up to the threshold dictated by (3)? Isn't that always the rational thing to do? After all, it's just as much counterfeit as the kind that somebody could print in his basement, as it represents no real value, and you have said that such counterfeit is rational.

Originally posted by DoctorScribbles
In the scenario you present, you have two competing components of the utility function: amassing money and adhering to ethics concerning earnings. Before one can answer the question of whether choosing hte $10 is rational, you first have to describe how those components balance.

If you tell me that adherence to ethics overrides any other conc ...[text shortened]... formulated desires. In the example you gave, adherance to ethics is also part of your desires.

OK. That's true for any choice. We may decided that we will get more "benefit" from ignoring our principles - but this itself is usually irrational because we have not reasoned correctly - we have let our urge for immediate pleasure override what we would have deduced based on our principles.

The other option is deciding that our principles are not reasonably correct - and are therefore not really principles. In other words - if we go with desire fulfillment as the maximizing utility - then that itself becomes our ethical system.

Reasoning either keeps us withing our ethical system - or we are not truthful about our ethics and we are being irrational.

Originally posted by DoctorScribbles
Very well.

Tell me, then, why doesn't the U.S. Treasury continually saturate the economy with newly printed money up to the threshold dictated by (3)? Isn't that always the rational thing to do? After all, it's just as much counterfeit as the kind that somebody could print in his basement, as it represents no real value, and you have said that such counterfeit is rational.

Ha! I knew you were going there. The treasure has a rational for adding additional money (unearned currency). At least I assume there's a good reason for it.

Originally posted by Coletti
Ha! I knew you were going there. The treasure has a rational for adding additional money (unearned currency). At least I assume there's a good reason for it.

My point is that if you accept counterfeiting as rational, then the Treausary doesn't even need any other good reason to print the money --- it's always the right thing to do, for to not print the money would be irrational.

Originally posted by DoctorScribbles
Very well.

Tell me, then, why doesn't the U.S. Treasury continually saturate the economy with newly printed money up to the threshold dictated by (3)? Isn't that always the rational thing to do? After all, it's just as much counterfeit as the kind that somebody could print in his basement, as it represents no real value, and you have said that such counterfeit is rational.

Right, inflation. If they print a bunch of money at a rate faster than the rate of growth of the economy, then the value (in real terms) of the currency falls.

I don't think this really applies. What incentive does the U.S. Treasury to print extra money beyond what is necessary? We don't usually think of the US Treasury as having a utility function.

Now the agent has a very strong incentive to print fake money. Before printing money, the agent set the Marginal Utility of consumption = real wage*Marginal Disutility from working (assume that the only way to earn money outside of printing counterfeit is to work).

Now if the Marginal Cost of printing some fake money is lower than the (marginal disutility of working)*real wage, at the former equilibrium level. Then the agent sets the MU of Consumption = MC of printing money. Given that the utility function is concave in consumption, then a lower MUC implies a higher level of consumption which implies greater utility.

In equilibrium everyone will do this and prices will go through the roof.

Originally posted by DoctorScribbles
My point is that if you accept counterfeiting as rational, then the Treausary doesn't even need any other good reason to print the money --- it's always the right thing to do, for to not print the money would be irrational.

No, the Treasury needs to control the money supply because of the equilibrium that I described.

We could use the same logic to ask why the gov't spends so much money to have the Secret Service hunt down counterfeiters.

Originally posted by telerion
What incentive does the U.S. Treasury to print extra money beyond what is necessary? We don't usually think of the US Treasury as having a utility function.

It operates as an agent of the U.S. Government. The U.S. Government is an economic agent. The U.S. Government has creditors. It could pay those creditors with fake money just as the individual can buy hot dogs with fake money.

Of course, as you mention, it doesn't do this because the rational concern is to not devalue its own currency. Similarly, I think it's irrational for individuals to counterfeit for the same reason -- again, they are pissing in their own punch bowl.

Originally posted by DoctorScribbles
My point is that if you accept counterfeiting as rational, then the Treausary doesn't even need any other good reason to print the money --- it's always the right thing to do, for to not print the money would be irrational.

But it would irrational be based on my principles. Counterfeiting benefits an individual by stealing. At some point it's reasonable that someone will know that the currency has no value - and the person holding the bills has been robbed. Or it devalues the total currency and steals from everyone.

I don't know the reasoning of the treasury for adding currency. I do know that the treasury is not an individual - it is the government - who supposedly represents the people governed. There may be a rational argument that shows there is a benefit to everyone for the treasury to add currency. And as long as that argument strives to be logical, it is rational. It does not have to be perfect in reasoning to be rational.

Originally posted by DoctorScribbles
It operates as an agent of the U.S. Government. The U.S. Government is an economic agent. The U.S. Government has creditors. It could pay those creditors with fake money just as the individual can buy hot dogs with fake money.

Of course, as you mention, it doesn't do this because the rational concern is to not devalue its own currency. Simi ...[text shortened]... dividuals to counterfeit for the same reason -- again, they are pissing in their own punch bowl.

Again one has to wonder why we have laws preventing counterfeiting, and why our gov't spends considerable money preventing just this type of crime. Further when you look at the banking system in 19th cent. US, we find that counterfeiting (and other nefarious monetary schemes) were rampant. The US gov't printed money to cover debts at times. Why would this be the case if it was irrational behavior?

The US gov't can be thought of as an agent. It considers the impact of printing money and does not print more than necessary. It considers the aggregate welfare of the citizens.

Individual citizens however are profit maximizers, unless otherwise specified they are not altruistic. Thus, they do not internalize the effects that their fraudulent behavior has on the whole economy. They create a negative social externality. It's much like pollution.

Let's go back to looking at Nash Equilibria. If everyone is choosing to print fake money, then I want to print money as well. If I do not, then the real value of my wealth will decrease rapidly, so I need to print money very quickly to slow this wealth loss.

Now if nobody is printing fake money, given the assumptions I listed above, then I have an incentive to print fake money to buy more consumption goods which increases my utility.

Either way printing money is a weakly dominant strategy. The first best solution is not sustained without enforcement constraints that make individuals internalize the social costs of forgery.

Originally posted by Coletti
But it would irrational be based on my principles. Counterfeiting benefits an individual by stealing. At some point it's reasonable that someone will know that the currency has no value - and the person holding the bills has been robbed. Or it devalues the total currency and steals from everyone.

I don't know the reasoning of the treasury for ...[text shortened]... rives to be logical, it is rational. It does not have to be perfect in reasoning to be rational.

The Treasury needs to print money to facilitate the transaction of goods. As an economy grows the amount of stuff increases. If the money base did not also grow, then money would be in very short supply. Money would become ultra-valuable. People who had money would hold onto it. Other people would struggle to make transactions because they lacked liquidity.

The most likely outcome would be that people would quit using the government printed money. They would either go back to barter (inefficient) or they would come up with their own money for exchange.

As long as the Treasury doesn't get out of control with their printing then everythings fine.

Originally posted by telerion
The Treasury needs to print money to facilitate the transaction of goods. As an economy grows the amount of stuff increases. If the money base did not also grow, then money would be in very short supply. Money would become ultra-valuable. People who had money would hold onto it. Other people would struggle to make transactions because they lacked liqui ...[text shortened]...
As long as the Treasury doesn't get out of control with their printing then everythings fine.

I'd say that's reasonable enough to be rational. 😉

Originally posted by DoctorScribbles

I don't believe that I am under the influence of any discipline whose tenets are frequently contradicted by empirical evidence. Are you?

I wasn't attributing a view to you in particular, but commenting on the influence this one social science has around the world today.

Originally posted by DoctorScribbles
A decision is rational if and only if the chosen course of action is such that no other available course of action can be logically deduced from all available information to better satisfy the agent's utility, where utility is best described as that which compels the agent to attempt to make the correct decision in the first place.

Would you agree that, by what you've said here, that we can't judge whether another's actions are rational or not without knowing what they know and more importantly what motivates their actions?

To me it's a rather neat and clinical definition but it seems more than just a little problimatic that the utility function is taken as a given. Ultimately that which motivates us (ie that defines our utility as set out above) is our values. If these are screwed up, as they too often are in people, then the "rational" persuit of them leads to attocities of the worst kind.