Dr. Pangloss in the house

By Razib Khan | March 27, 2010 6:14 pm

Daniel Gross has a piece out on the rise of the cash economy, Cash Is King I found this section interesting, though not surprising:

…During the go-go years, it was common to hear theorists talk about the “discipline of debt.” On paper, high debt loads force managers (and homeowners) to make tough, swift decisions to stay solvent. Default, and you lose the company (or the house). But in reality, rather than scrimp, overextended borrowers are more likely to walk away from mortgages, or push companies into Chapter 11 bankruptcy protection. Americans are now discovering that cash exerts a superior discipline. The real discipline of cash may be that it causes executives, consumers, and investors to think twice—and to think about the long-term consequences—before spending. The need for instant gratification is part of what created the current mess.

There’s theory, and then there’s reality. I really don’t know if cash is so much better at enforcing discipline, but I’m sure theorists can invent a new rationale for why it is superior to debt financing in maximizing economic utility. Economic behavior is the most amenable in the social domain to theorizing, but too often it seems to fall prey to false certainty and after the fact rationalization of the status quote as the timeless equilibrium. This of course does not mean that we should not think logically, or deduce inferences from what we know a priori. Rather, in the social domain we should be extremely self-aware of our uncertainty as to the validity of our inferences based on the lessons of history. For example, there’s an obvious straightforward possible social consequence in regards to the spread of cash envelope usage, more break-ins. The greater utilization of relatively concrete paper currency* and its consequent drawbacks will probably make us more cognizant of the benefits of more abstract financial tools such as revolving credit card accounts (e.g., you lose cash, you’re screwed, you lose your credit card, you’re insured).

* Paper currency is itself a relatively new invention over the scope of human history

CATEGORIZED UNDER: Economics
MORE ABOUT: Economics, Finance
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  • Prasad

    “Cash” here is used to refer to all cash like instruments – debit cards, revolving fund accounts and cheques are all “cash” – in this sense.
    While the example doesnt work (for me), this statement is spot on.
    “I really don’t know if cash is so much better at enforcing discipline, but I’m sure theorists can invent a new rationale for why it is superior to debt financing in maximizing economic utility.”
    Think you are right in making us wary of conclusions based purely on economic theory and not real actual behavior perceived on the ground

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This blog is about evolution, genetics, genomics and their interstices. Please beware that comments are aggressively moderated. Uncivil or churlish comments will likely get you banned immediately, so make any contribution count!

About Razib Khan

I have degrees in biology and biochemistry, a passion for genetics, history, and philosophy, and shrimp is my favorite food. In relation to nationality I'm a American Northwesterner, in politics I'm a reactionary, and as for religion I have none (I'm an atheist). If you want to know more, see the links at http://www.razib.com

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