Paul Dirac on economics

by on October 4, 2009 at 7:14 am in Economics, Science | Permalink

This was from his 1933 Nobel acceptance speech (!):

I should like to suggest to you that the
cause of all the economic troubles is that we have an economic
system which tries to maintain an equality of value between two
things, which it would be better to recognise from the beginning
as of unequal value. These two things are the receipt of a
certain single payment (say 100 crowns) and the receipt of a
regular income (say 3 crowns a year) through all eternity. The
course of events is continually showing that the second of these
is more highly valued than the first. The shortage of buyers,
which the world is suffering from, is readily understood, not as
due to people not wishing to obtain possession of goods, but as
people being unwilling to part with something which might earn a
regular income in exchange for those goods. May I ask you to
trace out for yourselves how all the obscurities become clear, if
one assumes from the beginning that a regular income is worth
incomparably more, in fact infinitely more, in the mathematical
sense, than any single payment? In doing so I think you would
then get a better insight into the way in which a physical theory
is fitted in with the facts than you could get from studying
popular books on physics.

I thank Eric R. Weinstein (Twitter!) for the pointer.

Of course you can read this paragraph as offering differing (better?) microfoundations for a liquidity trap argument.  The problem is not expectations of unfavorable interest rate changes (no one buys bonds with cash), but rather no one parts with bonds to receive goods and services.  Is it a behavioral argument, namely that no one wants to give up the feeling of "forever" for the feeling of getting something which is only "temporary."  Or is it a maximizing argument, namely that a kind of zero discount rate hyper-rationality takes over the people who won't spend?  Does the argument require that consols are the dominant form of bonds?

Diversity October 4, 2009 at 7:32 am

The argument is properly marginal, as one would expect from Dirac. As one would also expect from Dirac, it is sub specie aeternitatis. When we begin to think that we will live forever (there was a forcast the other day that the majority of those born in 2000, in rich countries, would reach their century), Dirac’s thesis may point to a major problem in inter-temporal re-balancing of the world economy.

david October 4, 2009 at 9:27 am

I genuinely wonder what the Austrians who occasionally comment here think about this.

Noah Yetter October 4, 2009 at 9:40 am

I’ll be the first to admit, I have no idea what he’s driving at.

Ben Ho October 4, 2009 at 10:03 am

Yeah, I really don’t know what he’s talking about either. But perhaps it is related to the Dirac delta function or Impulse? Basically the derivative of the step function, that takes on an infinite value, but finite area.

anonymous October 4, 2009 at 10:29 am


The problem is not expectations of unfavorable interest rate changes (no one buys bonds with cash), but rather no one parts with bonds to receive goods and services.

Is this the sentence all you folks are having trouble with? Perhaps he means this:

In this situation [liquidity trap], the problem is not that people expect unfavorable interest rate changes (and are consequently unwilling to spend their cash to buy bonds), but rather that they are unwilling to cash in their bonds to buy goods and services.

David October 4, 2009 at 10:41 am

I think Tyler’s interpretation makes perfect sense. Dirac is saying that our marginal propensity to save is not linear with yield. To spur consumption with lower interest rates requires that society doesn’t reduce its discount rate in tandem, but Dirac’s thesis—and Japan’s experience, for example—is that we do. “Infinitely more” probably refers to a positive marginal propensity to save even at zero yield. I’m not sure I understand the difference between a “behavioral” argument and a “maximzing” argument, but I’m going to pick the former.

dearieme October 4, 2009 at 12:01 pm

“Dirac already had an eternal income guarantee in the form of tenured professorship.” Not quite; the retirement age at Cambridge is 67 (or rather, the end of the September after your 67th birthday) – it may have applied in his time too (born August 1902, retired 1969). Of course, he’d have received a pension.

Constant October 4, 2009 at 2:11 pm

1) I do not know what he is saying.

2) My best theory of what he is saying (which I do not strongly hold) is that, rather than saying anything new, he is repeating the ancient religious criticism of interest – i.e. usury (where “usury” meant not “excessive interest” but “any interest at all” – since any interest was considered excessive).

Since this is Dirac, I would prefer to imagine that he is saying something that is going over my head, but the question is, what?

rob October 4, 2009 at 2:42 pm

1) Maximizing
2) I don’t think he is addressing “economic troubles” in this speech. He is giving one example of how one might try to fit a theory with facts, more generally. He is also showing how (if you read the preceding paragraph) trying to fit a theory with facts is a similar process in any numeric field, whether it is physics or economics.

Ryan October 4, 2009 at 2:57 pm

Oops, I take it back. Rob is right. I should have read the whole speech first, ha ha…

mulp October 4, 2009 at 4:11 pm

The first thing that strikes me is the change in expectations then to now. Who would stay with an investment adviser that told you, “The course of events is continually showing that the second of these, receipt of a regular income (say 3 crowns a year) through all eternity, is more highly valued than the first, the receipt of a certain single payment (say 100 crowns).”

I have constantly challenged those who claim a return on investment in the 10% range is nuts, only to have the response be something like “history says that a dollar invested in the stock market will return 10%, so Social Security is a bad investment.”

Granted, econolib’s encyclopedia has a more conservative article that gives 6.8% but it offers no contrarian view.

I note this because when I grew up, 3% rate of return was the kind of returns that was the standard set for retirement incomes of the widows living off the savings of their husband’s life long work, as taught in middle school civics.

John October 4, 2009 at 6:35 pm

I think you guys are reading too much into this. He was certainly a great scientist, but this does not means that everything he says is smart (much more so when it comes to other disciplines). Einstein was a great scientist too, but his comments on economics were… not that good.

His argument is that regular income always beats a lump sum of money. And this is not exactly right. Sometimes a lump sum of money is better than regular income.

Sometimes even great geniuses commit mistakes.

cg October 4, 2009 at 8:26 pm

Perhaps I’m misreading, but it seems to me that Dirac is not talking about economics. Economics is only used here to frame the way he thinks about physics research and the Nobel he just won. The long, difficult process of doing physics research provides a lifetime of satisfaction, whereas the big lump sum of a Nobel is ultimately a less satisfying reward. He was a very polite fellow, and I think he was trying to find a way to soften his opinion that the prize he just received pales in comparison to what he does every day.

Bob Murphy October 4, 2009 at 9:33 pm

Sorry but upon an initial read I didn’t get it. I know Dirac is very smart so maybe he is getting at something deep, and just botched the point. But it sure sounds like he is saying nobody ever sells land for cash. I’m pretty sure they do.

Jenny Davidson October 4, 2009 at 9:58 pm

And one other Dirac anecdote, from Gino Segre’s FAUST IN COPENHAGEN: ‘We were on the steamer from America to Japan, and I liked to take part in the social life on the steamer and, so, for instance, I took part in the dances in the evening. Paul, somehow, didn’t like that too much but he would sit in a chair and look at the dances. Once I came back from a dance and took the chair beside him and he asked me, “Heisenberg, why do you dance?” I said, “Well, when there are nice girls, it is a pleasure to dance.” He thought for a long time about it, and after about five minutes he said, “Heisenberg, how do you know beforehand that the girls are nice?”‘

anonymous October 5, 2009 at 1:08 am


Dirac already had an eternal income guarantee in the form of tenured professorship.

This is getting off topic, but in the fateful year 1933 or very soon thereafter, quite a number of professors were forced out of their jobs (admittedly, in a country other than the UK). There are no eternal guarantees.

Ricardo October 5, 2009 at 4:52 am

I think what Dirac is getting at is simply this: Economic theory says that for a given lump sum D, each agent has a value r for which he or she is indifferent between receiving D at t = 0 and receiving the income stream rD out to infinite.

Dirac appears to be saying that this indifference result is either wrong or else that people pay enough of a premium for the stream rD that you cannot interpret r as a revealed discount rate.

When I saw this, unlike Tyler, I thought immediately of the equity premium paradox. People are willing to pay a premium for a guaranteed stream of income compared to a very uncertain stream of future dividends plus the option of cashing out of the market at a very uncertain price.

kristen October 5, 2009 at 3:38 pm

I do not find Dirac’s theory to be true in today’s economy. One would have to assume that they were going to live forever in order to make 3 crowns per year for an eternity. In today’s generation it seems that everyone wants everything NOW. We would much rather take the 100 crowns now than have only 3 per year and save up our whole lives. The opportunity cost of the 100 crowns all at once is much too great to give up. However, we must consider the time that Dirac proposed this economic theory.
This was a time of fear and uncertainty in America caused by the Great Depression. It is very probable that when asked to choose between 3 crowns per year for the rest of your life, or 100 crowns now, that an average American would choose 3 crowns per year. Security was a huge issue and there was no job security during this time. People would have settled for anything that would have given them a sense of security. If 3 crowns per year would have allowed their family to eat everyday, then that was a good choice.
The problem in the economy at this time, was not scarcity, as Dirac has stated, but was a lack of resources to consume. There was not enough money in the system and what little money people had, they were not going to spend, but save. These unceratin times in America lead to underconsumptin. I agree with Dirac in his statement, that a regular income would hold more value during this time.

cheap r4i software February 3, 2010 at 11:56 pm

I should like to suggest to you that the cause of all the economic troubles is that we have an economic system which tries to maintain an equality of value between two things, which it would be better to recognise from the beginning as of unequal value.

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