Economic analogies furiously sleep in the collective unconscious

Via Matt Cowgill, I was pointed to this Nick Rowe post. An exerpt

1. Watch what happens on a really steep uphill bit of road. Watch what happens when the driver puts the pedal to the metal, and holds it there. Does the car slow down? If so, ironically, that confirms the theory that pressing down on the gas pedal causes the car to speed up! Because it means the driver knows he needs to press it down further to prevent the speed dropping, but can’t. It’s the exception that proves the rule. (Just in case it isn’t obvious, that’s a metaphor for the zero lower bound on nominal interest rates.)

Which has a similar analogy to me when I could post more freely.

Instead lets use a differing analogy of a central banker driving a car along an undulating road. Her task is to keep to a constant speed. In Australia under inflation targeting this speed is 2-3% CPI growth, but it could be steady growth in nominal GDP if you are so inclined. At boom times the car is heading down a hill and goes faster, with higher credit growth and inflation. The banker eases off the throttle. In bad times the car hits a climb and starts to slow, and the banker puts her foot down in order to maintain a constant speed. On any given slope there is an appropriate level of throttle for the desired speed.

Now imagine the car has hit a steep slope. She obviously responds by opening up the throttle. But she is unsure about whether the slope will get steeper still. Should she refrain from pushing the accelerator too much so she can push it harder if the slope does get steeper? Should she be saving accelerator just in case?

That wouldn’t make any sense. If the road gets steeper it won’t matter if she is able to push the pedal down from a higher starting point. If a pedal to the floor can’t make the car go fast enough up the hill, it doesn’t matter how early or late you pushed it there.

This seemed very obvious to me, so I’m not surprised at all that the same analogy occurred elsewhere.

What really interests me is that I sometimes use a rule of thumb that states if an idea is good, someone else has or will have it. But I think that is the case with bad ideas as well – I have met innumerable people who have independently derived the superficially plausible tenets of Austrian Business Cycle theory. A more rigorous rule of thumb would descend into interminable philosophy of science arguments though…

About Richard Tsukamasa Green

Richard Tsukamasa Green is an economist. Public employment means he can't post on policy much anymore. Also found at @RHTGreen on twitter.
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