Sunday, February 05, 2006

Part 23 - Gauss and the Multiplier

Hyperwage Theory Part 23

Hyperwage Theory Part 23

Hyperwage Theory
Part 23

Chapter 23: Gauss and the Multiplier

Hyperwage Theory will never ensconce the Nobel Prize because it strikes at the heart of all previous economic theories, which are mostly inflation-centric by the way, and all the economists are synchronized along those theories. It is the Nobel season once again, and the award goes to another ultrafine revision of existing theories.

At least, the Street Strategist is demanding that you capitulate and completely surrender your head and mind rather than split hairs over some econometric statistical deviation errors.

One of the benefits in studying Hyperwage is that the layman, or the economist for that matter, will be forced to review all the existing theories and principles of economics. And this was exactly what I did. In effect, I reviewed economics from the point of view of a contrarian, and therefore obtained lessons and principles that I would have not learned as a reluctant college student.

Again, if you are an economics teacher, you will probably add more value to your students if you assign them to write a critique on the Hyperwage Theory rather than require them to memorize irrelevant useless economic facts and figures.

Have we violated any economic principle so far? I daresay, no, we haven’t. Then why all these vitriolic reactions from PhDs? If you notice, their reactions are knee-jerk wild generalizations, which was also my weakness before. I used to dismiss Hyperwage as a folly until I saw its non-economic elegance and its economic logic.

Look at their harsh reactions. It’s all about hyperinflation, worthless paper money, unemployment, affordability, closure of businesses; all wild economic generalizations which I have been analyzing in detail in the last few chapters.

Sad to say, I tend to lose respect for their PhDs whenever they succumb to such wild generalizations. You know, I even learned to respect the businessmen more. The latter are extremely profit-oriented yet they support Hyperwage because they realize that they can sell more non-basic goods such as computers, beer, insurance, fancy food, stocks and bonds, and even business newspapers, if the people have more purchasing power.

Of what use is cheap insurance premiums if it takes a month’s salary of a domestic helper to pay for 100 Kwh of electricity? The credit card industry, the insurance industry, and the stock market will be rooting for hyperwage, not cheap modern day slavery.

Guys, given Hyperwage, all the domestic helpers will become your new market. Can you imagine the intense commercial activity surrounding the domestic helpers under a hyperwage regime? You don’t have be a PhD to know that hyperwage brings on more business, more employment, and more prosperity to the nation.

As for the overseas migrant workers, they understood Hyperwage from day one.

There once was a lazy teacher in Germany. He told his six-year old students to add up all the numbers from 1 to 100 (1+ 2 + 3 + 4 +…+ 100) so that he could gossip around the school. But before he could leave the room, one student submitted his answer in no time at all. Not only that he had the right answer in lightning speed but the boy created the formula for adding such patterns. Did the boy have a super fast brain? Was he a savant?

Here’s how the boy did it. 1+100 = 101 (that should take care of 1 and 100). And he also did 2+99=101, 3+98 = 101, 4+97 = 101. Do you see a pattern? Instead of adding all the numbers, the boy paired them, so all he had to do that count the number of pairs and multiply by 101.

What is going on here? That boy invented the formula for the so-called arithmetic progression which is a series of numbers each term being added with a constant. For example, 1+2+3+… (the constant is 1) or 1+4+7+… (increment of 3).

Not bad for a six-year old named Karl Friedrich Gauss. Before the advent of the euro currency, I brought home a German paper money with Gauss picture on it as a souvenir. (In our country, we put politicians and revolutionaries).

The formula for geometric progression soon followed. Funny, when I first studied progressions in freshman algebra, I could follow the derivation of the formula but it was only after I read the anecdote of how Gauss used pairs (1+100, 2+99) that I understood the derivation. Truly, there’s a difference between knowing and understanding. I knew how it was derived but I never understood it. You need both to be able to claim that you have learned.

Why Gauss? As usual, I will give the answer in a circuitous path.

One of the most intriguing concepts in economics is the concept of the multiplier. I never really understood what it was and my economic education was focused on microeconomics not macroeconomics where the multiplier is used.

How is the multiplier related to Hyperwage Theory?

While I was developing the theory, I was able to stand on my own using ordinary logic and price-modifies-behavior hypothesis. In case, you haven’t noticed these are non-economic arguments.

Since I lacked an overview of economic theory, I couldn’t use economics to support Hyperwage. Yet, in my mind, I had a hunch that somehow, the economic multiplier could be used to defend Hyperwage. The problem was that I did not have PhDs to confer with, and the economics graduates I knew seemed to disavow any knowledge of economics. (I forgot my economics, I am now a salesman, etc).

Since I didn’t understand the multiplier, I didn’t have an idea where to begin, and what books to read. I guess, it must have happened to you as well in other subjects. If I tell you to study Kirchoff’s Circuit Law, where would you begin?

Will the multiplier work against or in favor of Hyperwage Theory? I really didn’t know, and the economists I asked by email, never replied to me.

So I read about the multiplier not because I needed it for Hyperwage but because I needed to know if it was relevant at all. Was there something in the multiplier that destroys Hyperwage Theory? Or is the multiplier a completely independent idea that is irrelevant to the theory? I really didn’t know.

But when I read the textbooks, I couldn’t understand the multiplier. Sure there was a very simple formula, I understood it but I never really grasped what it meant. And one minor thing. The multiplier was dependent on a variable called the marginal propensity to consume (MPC.) Whew! What is that?

So I had to read textbooks on macroeconomics, and eventually I had to read economic history and finally, I had to read the original revolutionary book of John Maynard Keynes called The General Theory of Employment, Interest, and Money (GTEIM).

Don’t worry, we will discuss Keynesian economics soon.

Anyway, the formula for the multiplier although a very simple one, was obtuse because I had to understand the marginal propensity to consume before I understood the multiplier. But then I had to know what is “marginal” and what is “propensity” and what is “consumption” as these words are used in economics.

The formula is k= 1 / (1-MPC), thus for MPC = 80%, the k=5. In effect, for every dollar spent by the consumer, assuming the propensity to consume is 0.8, the income for the economy is five dollars. If the people spent $1 billion, the economy will grow bigger to to the tune of $5 billion.

Which essentially means that if we give or lend money to the poor say P50 billion, and they will spend 80% of it, the entire economy will grow by P250 billion, that solves our economic problem. Simple, isn’t it? Hey, that’s not my theory, that is the theory of Keynes.

What is the implication for Hyperwage? For every P20,000 that is given to the low and middle class, and if they spend 90% of it to acquire goods and services while they invest or save the 10%, then the entire economy of the country will grow by P200,000 because the multiplier is 10. Give away P20,000 it comes back to the economy as P200,000. That’s magic.

That’s not my magic, that is Keynesian magic, and I didn’t even know about this while I was developing my Hyperwage Theory.

Confused PhD
But that’s jumping the gun. Let me get back to the math.

Is the formula for the multiplier simple? Yes. Is the effect of the multiplier magical? Yes. But did I understand the formula? Honestly, no. I didn’t. Yes, I saw how the books derived the income multiplier using the marginal propensity to consume. Yet, honestly, I knew, but I didn’t understand.

I originated the Hyperwage Theory about a decade ago. I have heard of the multiplier about 15 years ago, but I only understood the Keynesian multiplier a year ago. Yes, that’s the truth. I only understood it recently.

Again, I make a distinction between knowing and understanding an idea.

Why did it take me so long to understand the multiplier? The formula is simple enough. There is only one variable, the MPC. How could a self-proclaimed genius like the Street Strategist be confused?

Do you want the truth? Do you really what to know why it took me so long to understand the multiplier even if I read the textbooks dozens of times? Do you really want the whole truth?

Well, I tell you why. Actually, it is for the same reason why it took me a decade to understand debit and credit.

The truth is, I failed to understand the concept of the multiplier for a very long time because the economists do not know how to teach it. Really, that’s the truth. I realized the problem was not with me, the poor non-economist, the problem was with the way it it taught by the economists. As I said, it’s the same scenario as with my famous problems with debit and credit.

Why? What is the problem? The problem lies in the fact that economists try so hard to teach it in a very simple way, that the student fails to grasp the sweeping implications of the multiplier. I soon found out that some PhDs do not even grasp the multiplier concept accurately.

What is the best way to teach the multiplier? I will discuss that next time including why one PhD made a monumental failure when he said that the Keynesian multiplier will not work in the same way as the money multiplier works in the banking system because the multiplier in the banking system is due to the fractional reserve banking system and there is no such fractional reserve system in the economic model.

Big words from a PhD but they merely betray his shallow understanding of the multiplier.

The concept of the multiplier is very significant in economics such that I think it should be taught in the best way possible by the best person available: The mind of a six-year old named Karl Friedrich Gauss.
(Thads Bentulan, Oct. 13, 2005)
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Table of Contents

Part 2
Part 3
Part 4
Part 5
Part 6
Part 7
Part 8
Part 9
Part 10

Part 12
Part 13
Part 14
Part 15
Part 16
Part 17
Part 18
Part 19
Part 20

Part 22
Part 23
Part 24
Part 25
Part 26
Part 27
Part 28
Part 29
Part 30
Part 32
Part 33

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