How We Do Intellectual History at the New York Times

by Corey Robin on April 26, 2014

You see, says Sam Tanenhaus, it’s not just that Thomas Piketty may be right, or that he’s been doing this research for years, or even that he’s tapping into widespread concerns about inequality. No, it’s that every decade, America needs an icon of ideas, who embodies in her person (rather than merely her arguments), the dream life of the nation. In the 1960s, it was Susan Sontag. In the 1970s, it was Christopher Lasch. In the 1980s, it was Allan Bloom. In the 1990s, it was Francis Fukuyama (who wrote his essay in 1989, but decades will be decades). In the 2000s, it was Samantha Power. Yes, Robert Putnam was a “gifted thinker,” but remember the Rule of Decades: you can only have one every ten years. And, sure, Tanenhaus says you can have two or three, but you definitely can’t have two whose last names start with P. And Power has a “flowing red mane”—like Sontag had a flowing black mane, and then a flowing black mane with a silver streak—so she was the better choice. And now there’s Piketty. And he’s French, you see, which means he’s kind of like Sontag. And he’s good-looking like Sontag and Power. And he has hair too. And on Twitter they’re debating whether he’s hot or not. Which they would have done with Sontag back in the Sixties, but there was no Twitter then. And, oh shucks, let the man speak for himself:

All of which is to say that however original Mr. Piketty’s economic argument may be, he is the newest version of a familiar, if not exactly common specimen: the overnight intellectual sensation whose stardom reflects the fashions and feelings of the moment.


And that, my friends, is how we do intellectual history—no, sorry, “cultural studies” (they really use that phrase, right above the headline, which is “Hey, Big Thinker”; where is Dwight Macdonald when you need him?)—at the New York Times.

{ 448 comments }

1

Anarcissie 04.26.14 at 3:11 am

It is in the Fashion & Style section.

2

parsimon 04.26.14 at 3:17 am

Thanks to Anarcissie for that clarification, else I’d be concerned.

3

John Quiggin 04.26.14 at 3:20 am

I particularly like “She is now, of course, the American ambassador to the United Nations.”

Translation: If her name rings only the faintest of bells with you, no need to rush to Google. I’ll let you assume you really knew this all along.

4

engels 04.26.14 at 3:38 am

Mr. Piketty is by no means the first intellectual to have attained celebrity. But he may be the first to see his ideas — and his headshot — go viral. There was (must it be said?) no Twitter in 1964, when Susan Sontag

Please make it stop!

5

Meredith 04.26.14 at 3:51 am

Tracking some family history, I recently learned that my grandfather’s father, who’d deserted him and his mother (leaving her to work as a seamstress in her very arthritic late 40’s, him to quit school at 8th grade to support them both) was meanwhile cavorting in the NYT society pages of the very early 1900’s. So now it’s the Style Section. Go, Jill!

“All of which is to say that however original Mr. Piketty’s economic argument may be, he is the newest version of a familiar, if not exactly common specimen: the overnight intellectual sensation whose stardom reflects the fashions and feelings of the moment.” Yes indeed. Just a sensation of the moment, if the NYT has its way. This paper “of record” is very good at reducing it’s great city to a Dutch East India Company outpost.

6

Lee A. Arnold 04.26.14 at 4:08 am

Now Corey this is probably an accurate reflection of how New York society will treat the book. Buy it for the coffee table and not read it. And Los Angeles. And Washington. And every place else. It isn’t just how they do intellectual history at the New Jerk Rimes. The whole goddamn society does it this way. It’s not like people have the brains to even read something a tenth o’ the length. Jesus look at the comment threads on Crooked Timber. There is very little reading and thinking. Mostly attitude, sermonizing, self-regard.

7

PGD 04.26.14 at 5:18 am

Yeah, it’s in the Style section. The correct comparison is whether it is better or worse than the stylings of “Modern Love” or the latest “Vows” column. The subtext is ‘approximately one intellectual per decade becomes a name even fashion industry people need to know at cocktail parties’. Which may well be an accurate description of the relationship between intellectual life and cocktail parties attended by the fashion set.

8

A H 04.26.14 at 5:41 am

I can’t say that Krugman is doing any better at serious intellectual history either.

This is a disappointly pathetic attempt at addressing the Cambridge capitals controverys and the history surrounding it.

http://krugman.blogs.nytimes.com/2014/04/25/piketty-and-pareto/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body

9

A H 04.26.14 at 5:46 am

10

NomadUK 04.26.14 at 6:21 am

… Samantha Power?

11

John Quiggin 04.26.14 at 7:25 am

@AH If you read Palley’s (very good) discussion of the causes of the crisis
http://newamerica.net/files/Thomas_Palley_America%27s_Exhausted_Paradigm.pd

he uses the same capital aggregates as Krugman and Piketty. Similarly, this piece by James Galbraith (again, very good) makes no obvious reference to Cambridge UK views of capital
http://www.alternet.org/economy/galbraith-and-economic-destruction?paging=off&current_page=1#bookmark

Is anyone writing about either financial crisis or the growth of inequality from a distinctively Cambridge (UK) position?

12

John Quiggin 04.26.14 at 7:35 am

Actually, this looks interesting. I’ll chase it up

http://cje.oxfordjournals.org/content/early/2012/03/01/cje.ber022.abstract

13

bad Jim 04.26.14 at 8:32 am

DeLong likes Piketty. Krugman likes Piketty. Solow likes Piketty. In the eyes of the world they may not be Very Serious People, but they’re people I take very seriously. What I really want to know, though, is whether Piketty rhymes with Ligeti. Maybe there’s a dodecaphonic limerick lurking there.

14

Kevin Donoghue 04.26.14 at 9:12 am

Not sure how Ligeti is pronounced, but Piketty is pronounced pick-a-TEE or thereabouts.

15

Kevin Donoghue 04.26.14 at 9:16 am

Are going to have a replay of the CCC, this time with the right getting all steamed-up about aggregation issues and the left saying who gives a shit? Funny that Robert Solow stays in the who-gives-a-shit camp regardless.

16

Phil 04.26.14 at 10:38 am

“cultural studies” (they really use that phrase, right above the headline

“If only I had known, I should have stayed at the WEA.” – Raymond Williams

, which is “Hey, Big Thinker”; where is Dwight Macdonald when you need him?)

Be fair, Dwight Macdonald would have struggled to satirise that.

17

Dave Heasman 04.26.14 at 10:59 am

In R A Lafferty’s “Slow Tuesday Night” “A thoughtful man named Maxwell Mouser had just produced a work of actinic philosophy. It took him seven minutes to write it. “
…”This was truly one of the greatest works of philosophy to appear during the early and medium hours of the night. There were those who said it might be one of the enduring works and even have a hold-over appeal to the Dawners the next morning.”

18

dsquared 04.26.14 at 11:40 am

As far as I can tell, nothing really important in Piketty’s book depends on the capital controversy; it’s actually a book about wealth rather than capital in the technical sense. It’s just a bit irritating for people who happen to know that his use of “capital” and connected marginal concepts is wrong. Like if someone had written a really good book about climate change but kept on referring to “the temperature divided by zero”

19

bob mcmanus 04.26.14 at 11:54 am

Is this a Piketty thread? Dudes a blazing phenom! I got too many links, I’ll get all moderated. Google Gillian Tett on the “rockstar economist.”

15: Google Askblog:”What’s Wrong with the Neoclassical Production Function”

Krugman is on the verge of looking pathetic, ridiculous, desperate, and obstructive if he doesn’t start to look away from his cherished models and see that K21 has profound theoretical implications. He should understand by now that we will not get his preferred politics and policies (redistributive taxation, looser money, etc) without a radically new theoretical orientation.

Here’s my link.

Timothy Shenk in the Nation on Piketty and Millennial Marxists. Print form; long

Piketty isn’t the new Marx; he isn’t even the Engels of “Working Class in England.” More like the new Proudhon or Fourier.

I got another new David Harvey to read.

20

mattski 04.26.14 at 11:55 am

It’s just a bit irritating for people who happen to know that his use of “capital” and connected marginal concepts is wrong.

Wrong?

21

bob mcmanus 04.26.14 at 11:59 am

18:Oh hell

DeLongs Daily Piketty DeLong gets what Krugman fears…

“One thing that I had not fully realized before yesterday was just how much heavy a lift Piketty has in trying to persuade the American neoclassical growth-economics community within economics departments. Their–our–default view of the world is–very strongly–that it is characterized by a Cobb-Douglas aggregate production function, in which the rate of profit moves inversely with the L ratio and in which as a result the capital income share of total income is constant.

You may say: but if you have a model in which you assume the capital income share is constant, you then have no chance of ever explaining fluctuations in income distribution. How can you use a model in which fluctuations in income distribution do not happen to criticize anyone trying to explain why they do? And this is a more than fair cop. But that the habit of thought is not rational doesn’t keep American neoclassical growth-economists in economics departments from doing it: their–our–first reaction to Piketty is: “t That can’t be right, because in our model the capital-income share of total income is invariant to shifts in the wealth-income ratio.” And they–we–typically do not take the second step in the argument and say: “wait a minute: in our model nothing causes shifts in income distribution, so we need to model”…”

22

bob mcmanus 04.26.14 at 12:08 pm

DeLong has also taken Thomas Palley’s side (“Gattopardo Economics”) against Krugman. Again, google if you’re interested.

I am pleasantly surprised.

Krugman: “And saying that capital gets its marginal product in no way says that the people who own that capital deserve what they get.”

Horrible.

23

Main Street Muse 04.26.14 at 12:13 pm

“The 21st century has been less welcoming to big thinkers.”

Ah… the intellectual disdain dripping from the pages of the NY Times style and fashion section! So New York! I love that “how they do it” is to shove it into the style and fashion section! That’s where all “intellectual” debate belongs, next to “elaborately decorated sneakers” and “dishing on how to dish stories.

I’m just thrilled there’s an economist who’s moved past Keynes/Friedman debates. And yes, NY Times style section, there IS an American oligarchy…

24

Ronan(rf) 04.26.14 at 12:31 pm

Yeah, mane was not the right word. Locks could have been ok. Or hair.

25

Henry 04.26.14 at 12:43 pm

DeLong likes Piketty. Krugman likes Piketty. Solow likes Piketty. In the eyes of the world they may not be Very Serious People, but they’re people I take very seriously. What I really want to know, though, is whether Piketty rhymes with Ligeti. Maybe there’s a dodecaphonic limerick lurking there.

Can’t say anything about limericks, but I did compose the below ‘Piketty as Macavity’ piece of doggerel, in the course of a very frustrating conversation with one of the chief proponents of the position that Piketty should be anathematized for not paying sufficient deference to the Capital Controversy crowd …

They say that all the Cambridge gang whose wickedness is known
(I might mention Raffish Piero, that most sinister of Dons)
With their sneering lucubrations on the rate of K to P
Were nothing more than catspaws of the Controvert-in-Chief

26

dsquared 04.26.14 at 12:58 pm

20: yep, wrong. Wrong like trying to divide by zero wrong. Mathematically incoherent. All his facts are right, but some of the theoretical concepts are screwed and known to be so since the 70s. It’s one of the scandals of economics.

27

Corey Robin 04.26.14 at 1:10 pm

Henry would have you all think he’s channeling Eliot, but I know his real muse is Andrew Lloyd Webber.

28

Henry Farrell 04.26.14 at 1:17 pm

Shhhh ….

It was actually one of the required poems on the Irish Leaving Certificate (what you need to graduate from high school). But Piketty: The Musical is too wonderful an idea to be slain by so banal and uninteresting a happenstance.

29

William Timberman 04.26.14 at 1:23 pm

This promises to be one of those threads, the kind Schadenfreudistas attend with a bowl of popcorn between their knees. Being a non-economist, and worse yet, one of those unfortunates who have no wealth nor any productive capital to command, I thought Piketty’s explanation of why he’s conflating wealth and capital-in-the-factor-of-production-sense was reasonable in terms of what he was trying to comprehend. If dsquared is willing to explain in a bit more detail for us non-economists why that’s not so, I promise to pay close attention. I realize it might not be worth your while, d2, but it would certainly be worth mine. Think of it as alms for the poor, which by all accounts can be stored up as capital in heaven, and are therefore twice blessed.

30

novakant 04.26.14 at 2:18 pm

Well it did run in the style section -
and hair is important, cf. BHL.

31

A H 04.26.14 at 2:27 pm

41 “Is anyone writing about either financial crisis or the growth of inequality from a distinctively Cambridge (UK) position?”

I can’t think of anyone. JW Mason would probably know, and may be writing one himself.

My problem with Krugman ins’t so much that he is wrong, rather his critique is unserious. It is argument by assertion. It’s annoying because if he tried he would probably have interesting things to say, but he has a weird blind spot regarding hetrodox economics, despite becoming more and more hetrodox himself after the crisis.

@ 29, Here is a good write up on the controversies, though it does get a bit technical,

http://nakedkeynesianism.blogspot.se/2012/03/capital-debates-brief-introduction.html

32

LFC 04.26.14 at 2:39 pm

I don’t know/don’t remember which Eliot poem Henry is riffing on. (Though I assume I will recognize at least the title as soon as someone supplies it.)

33

A H 04.26.14 at 2:41 pm

Here is a Galbraith piece where he addresses the issue directly. http://utip.gov.utexas.edu/papers/utip_02.pdf

34

Henry 04.26.14 at 2:55 pm

Well it did run in the style section -
and hair is important, cf. BHL.

If BHL and Leon Wieseltier were to have a hair-off, who’d win?

35

Barry 04.26.14 at 3:28 pm

AH: “I can’t say that Krugman is doing any better at serious intellectual history either.”

They are doing wonderful things with speech therapy these days.

36

Donald Johnson 04.26.14 at 3:31 pm

Not to distract–the neoclassical bashing is more interesting–but, yeah, Samantha Power? Well, sure. Power criticized our sins of omission. Washington types love to be told they’re too naive to understand real evil and need to get out there and start intervening. If she’d focused on our sins of commission, she’d be a regular guest on “Democracy Now” and nowhere else.

37

Walt 04.26.14 at 3:39 pm

The heterodox position in the Cambridge capital controversy manages to simultaneously be completely correct and a bizarrely overhyped issue. A reliable measure of how useful it is to read a heterodox economist is one over how often they mention the controversy, rather than the one million other issues with mainstream economics. It is completely correct that you can’t aggregate capital. You also can’t aggregate labor, or consumption, or form a well-defined concept called “inflation rate”. Nothing in the national accounts reliably proxies for what economists take it to proxy for. And yet aggregation of capital gets singled out.

Many economists are pretty confused about their own theory, so I can’t rule out that economists think there’s some sort of theorem that allows them aggregate capital. Papers do not routinely assert the existence of such a theorem. The Kydland and Prescott paper “Economic Fluctuations and Time to Build”, which did more than anything else to create the current macroeconomic orthodoxy, has different vintages of capital, and never claims that you can aggregate them.

I don’t get its totemic significance, unless it’s just because Samuelson admitted he was wrong, and somehow he proxies for the mainstream. The use of a single capital good in the standard macroeconomic model is unrealistic, but every singe other ingredient of the model — the fact that there’s a single representative agent, that there’s one kind of labor, that you can turn factories back into food if you need to, that everybody already knows the correct probability of every possible event in the future, that everybody gets paid their marginal product — are equally unrealistic.

It’s such a terrible argument, because it’s so easy for the mainstream to wiggle out of it. There are certain claims that depend on having a single capital good, but the big overarching claims — that in theory the price system could solve all the world’s problems, and that market outcomes are efficient — don’t depend on it. In general economists are happy to believe that if there are 7 different kinds of capital goods that each capital good earns its marginal product, just like if there are 7 different kinds of jobs, each worker earns their marginal product.

It’s as if every argument about the Bush administration revolved around the fact that George Bush appointed Josh Bolton to be the US ambassador the UN. Now, Josh Bolton was a terrible choice for the job, perhaps the worst in US history, but I recommend not making it the centerpiece of your case against Bush.

38

bianca steele 04.26.14 at 3:46 pm

The style section’s worldview is presumably Glinda the Good’s:

Celebrated heads of state or
specially great communicators–
Did they have brains or knowledge?
Don’t make me laugh!
They were popular!

39

bianca steele 04.26.14 at 4:00 pm

40

bob mcmanus 04.26.14 at 4:25 pm

33 should answer 37, although the MMT types don’t care about taxes. “Just spend, already.”

I’ll quote Krugman again, this time at a little length. From “Frustrations of the Heterodox,” Friday

“You fairly often find heterodox economists insisting that to accept the idea that capital and labor are paid their marginal products, even as a working hypothesis to be modified when you address things like executive pay, is to accept that high inequality is morally justified. But that’s obviously not the case: there are plenty of economists who are willing to use marginal-product models (as gadgets, not as fundamental truth) who don’t at all accept the sanctity of the market distribution of income. “

Notice Krugman shifts the Piketty to income. Either he doesn’t get the Piketty or he doesn’t like the Piketty or he is being shifty.

Cause one point of the Piketty is that capital, not capitalists, but capital itself doesn’t have a marginal productivity and Piketty although indeed wanting higher taxes on income also wants his wealth tax, in other words wants to directly tax and diminish capital, investment, accumulation, profits and profit share.

Now find me the mainstream economists who will enthusiastically get behind a program of attacking investment, demanding less investment.

41

dsquared 04.26.14 at 4:37 pm

Brad DeLong has a better explanation up on his website than anything I’m going to be able to cobble together. Should emphasise though that there isn’t really a fundamental problem with Piketty’s book; you just have to do a mental find and replace.

42

mattski 04.26.14 at 4:38 pm

Mathematically incoherent.

No disrespect, but you have a ‘mathematically coherent’ definition of capital? I’d like to see it.

http://www.interfluidity.com/v2/716.html

43

dsquared 04.26.14 at 4:43 pm

There are certain claims that depend on having a single capital good, but the big overarching claims — that in theory the price system could solve all the world’s problems, and that market outcomes are efficient — don’t depend on it.

I don’t agree with this, and the Piketty book is a good example of why. A lot of criticism of the book has revolved round the action that the return on capital has to fall as the stock of capital grows, more or less just because. That’s a statement which “neoclassical” (speaking loosely) economists make because they think about homogenous capital models in a Cobb Douglas framework, in which declining returns on capital fall naturally out of the model. The point that Piketty himself makes; that the rate of profit is determined by social and political realities rather than technology, is much harder to get to if you start of by thinking about homogeneous capital.

44

mattski 04.26.14 at 4:44 pm

mcmanus,

I strongly suspect you are full of shit. Show us explicitly where Piketty attacks investment. Please.

45

Bruce Wilder 04.26.14 at 4:44 pm

Walt @ 37

Yes, “it is all wrong”, but then, “what?”

46

dsquared 04.26.14 at 4:51 pm

42: no I don’t. Because it’s impossible for there to be one.

47

mattski 04.26.14 at 4:54 pm

@ 46

???

You just accused Piketty of the same!

48

bob mcmanus 04.26.14 at 4:57 pm

41: Since you didn’t give a link or even a title, and there are dozens of recent posts at DeLong’s…but he does quote this from Suresh Naidu, which is exactly what I had been looking for this morning. There’s more

“There is another story about this, one that goes back to Keynes. And the idea here is that the rate of return on capital is set much more by institutions, norms and expectations than by supply and demand of the capital market.

This political dimension of capital, the difference between the valuation written down in the balance sheet and the real power to dispose of the asset, is something that the institutional view of capital can capture better than the marginal product view. This is, I think, also a fruitful interpretation of what was at stake behind the old capital controversies.

The policy stakes from this are also potentially large, because if it is just a very high substitutability, a variety of labor market reforms are taken off the table, as firms just replace workers with machines if you try to raise the wage.”

44: Ok, got your copy of K21? Search for “Liliane Bettencourt” at least once.

LB has a net worth of $33 billion and a taxable income of, IIRC, $2 million. The $2 million is obviously not her annual return on her net wealth. She is not “cheating,” she reinvests the vast majority of her “real” income and thus becomes ever richer and richer. And this, reinvestment of returns from capital since the 0.01% can’t or don’t need to spend it is what creates the massive, permanent and accelerating inequality. Piketty might not phrase it the way I did, but it is probably the central point of his work.

Can’t remember where I read it today, but an oligarch was asked to define “rich”

“Living off the interest on my interest” was his answer. Really rich means rich and getting richer.

49

Ben 04.26.14 at 5:04 pm

Capital by Thomas Piketty
reminds me a lot of Ligeti.
As inequality’s stressed
I feel doom in my chest
like Requeim Part II Kyrie.

50

bob mcmanus 04.26.14 at 5:04 pm

51

bob mcmanus 04.26.14 at 5:16 pm

A lot of criticism of the book has revolved round the action that the return on capital has to fall as the stock of capital grows, more or less just because.

Piketty I don’t think discusses this directly involving the CCC.

IIRC, Piketty’s story has to do more with oligarchic control of government in order to make sure returns on capital don’t fall, and his historic example is the what, 75 years of austerity (and low inflation) the British forced on its populace in order to pay back the debts from the Napoleonic Wars.

52

bianca steele 04.26.14 at 5:22 pm

@39 For God’s sake, if you do a search on that, DON’T click on any videos. I’ve never seen such crap choreography in my life. I don’t even know where to start. If you already did by accident watch this to make it better. The seventies were bad. Sorry OT.

53

William Timberman 04.26.14 at 5:23 pm

I think that this: Oy, Vey! (My Title For It) is what d2 is referring to. Anyway, DeLong does indeed gnaw away at the problem of a homogeneous definition of capital, or at least at a homogeneous definition of r, and does so in an entertaining way. (Never mind that in being entertained by an economics essay, I probably most resemble the guy in the pit at the Globe, gnawing on a chicken bone and guffawing at the gravediggers.)

54

Kevin Donoghue 04.26.14 at 5:31 pm

AFAIAC the CCC is a bore which nobody really needs to endure, but one of the more readable accounts from the Neoclassical side is Stiglitz (1974), freebie here:

http://academiccommons.columbia.edu/catalog/ac:160624

55

William Timberman 04.26.14 at 5:33 pm

bob mcmanus @ 51

John Bull can’t stand 2% seems to have an inevitably necessary corollary: who gives a damn about coal miners or crofters or foretopmen? Definitely the political part of political economy that, eh what?

56

bob mcmanus 04.26.14 at 5:35 pm

Mattski it is very simple and obvious if you read and understood the book.

1) r > g inexorably increases inequality.
2) Piketty is not hopeful that at the “technological frontier” or in the developed economies or based on the historical record there is any way to increase “g” much over 1-2%
3) Ergo, to make incomes more equal you must decrease “r” probably before income taxes or before realization of capital gains, and to really make progress, you must make r < g. So tax away any and all ROI greater than 1%.

My interpretation of Keynes Ch 25 "euthanasia of the rentier" says much the same thing. Nice footnote in GT: "John Bull will accept a lot, but he will not accept 2%"

57

Bruce Wilder 04.26.14 at 5:43 pm

bob mcmanus @ 51: in order to pay back the debts from the Napoleonic Wars.

If we took economics seriously, we would never say, “pay back” in such narratives. We would say, “fund”. And, everyone would understand why it matters.

58

Lee A. Arnold 04.26.14 at 6:04 pm

@Ben #49: As best I can hear, “Ligeti” is a dactyl, and “Piketty” is an anapest. Though he is one of my favorite composers, our modern-day Schubert, I pronounced “Ligeti” for 30 years as an amphibrach. I was corrected by someone who once sat next to him at a concert.

59

Bruce Wilder 04.26.14 at 6:19 pm

Lee A. Arnold @ 58 (4/26 6:04 pm) is surely a CT classic.

60

Lee A. Arnold 04.26.14 at 6:22 pm

I always try to throw in everything.

61

LFC 04.26.14 at 6:26 pm

@bob mcmanus 48:
She is not “cheating,” she reinvests the vast majority of her “real” income

Question: If you own 5 or 50 or whatever shares of Widget Corporation and you ‘reinvest’ the dividends — i.e. you buy more stock of Widget Corp. with them rather than having them sent to a bank account — don’t you still have to pay taxes on those dividends and aren’t they considered part of your taxable income? My definite impression is that under U.S. tax laws the answer is: yes. If that is correct, I don’t understand your point about Liliane Bettencourt reducing her taxable income through ‘reinvestment’. (Though no doubt, not being a billionaire, there is a lot about the tax code I don’t know.)

62

LFC 04.26.14 at 6:29 pm

@bianca steele
Thanks for the Wiki link @39, which I haven’t read yet. I won’t click on any videos.

63

LFC 04.26.14 at 7:05 pm

p.s. to 61:
Of course (assuming L. Bettencourt is French), the French tax laws may be different in this respect; I don’t know.

64

bob mcmanus 04.26.14 at 7:07 pm

If that is correct, I don’t understand your point about Liliane Bettencourt reducing her taxable income through ‘reinvestment’.

I never said anything about “reducing her taxable income.”

You know how it works, LB owns X shares of L’Oreal and L’Oreal reinvests L’Oreal’s income ( or does “stock buyback” Google it + Apple for fun), causing LB’s shares to increase in value and LB to get richer. Actually, it may be a diversified trust of some kind.

Now yeah, I guess you can say LB doesn’t have any money at all until she cashes out her shares; or her heirs do; or her shares aren’t worth anything much until she sells them. Etc, whatever. Oh, Piketty understands very well how the rich protect their capital. Read the book.

One line against Piketty: “Doesn’t Piketty understand risk?” Well, yeah, he wrote a whole book with a ton of times-series graphs to show that there ain’t all that much aggregate risk for the superrich. P does think it is interesting that stocks became safe investments in addition to land and bonds. It wasn’t so in the 19th.

65

Main Street Muse 04.26.14 at 7:38 pm

@58, @59 & @60, thank you very much for the entertainment today!

66

Main Street Muse 04.26.14 at 7:57 pm

Okay, I have not read Piketty’s book. I did read the NY Time review, and now this review in Reason.com: http://bit.ly/1rxpNMS

I am growing alarmed that the discussion of modern “capital” may not include the rampant fraud within the financial sector. And it does not appear that the conversation on capital includes mention of how companies like WalMart (largest employer in the US) and McDonalds and others subsidize their profits via wages so low its employees rely on federal assistance (like food stamps.) Does Piketty’s book look at how companies like Duke Energy collect profits over the years, in part by not spending on maintenance that would prevent catastrophes like the Dan River spill? Or is none of this relevant? (The Reason.com review inspired this chain of thought.)

67

Mark Field 04.26.14 at 8:11 pm

LB has a net worth of $33 billion and a taxable income of, IIRC, $2 million. The $2 million is obviously not her annual return on her net wealth. She is not “cheating,” she reinvests the vast majority of her “real” income and thus becomes ever richer and richer. And this, reinvestment of returns from capital since the 0.01% can’t or don’t need to spend it is what creates the massive, permanent and accelerating inequality. Piketty might not phrase it the way I did, but it is probably the central point of his work.

Actually, Piketty phrases it pretty much exactly like this.

68

Ian 04.26.14 at 8:37 pm

I have gradually come around to the unshakeable belief that the entire Sunday “Styles” section is satire, the NYT’s covert attack on the appalling people their advertisers seek to reach.

69

William Timberman 04.26.14 at 8:47 pm

Ian wins the thread, or at very least the apertura.

70

Theophylact 04.26.14 at 8:49 pm

Just a side comment on #25 and #49: Please don’t attempt limericks or any other kind of strict verse form if you can’t handle either rhyme or scansion. Those made me want to gouge my eyes out and pour molten lead into my ears.

71

mattski 04.26.14 at 9:14 pm

@ 67 (Ahoy there VC compadre!)

What mcmanus said that I found to be recklessly absurd was,

Now find me the mainstream economists who will enthusiastically get behind a program of attacking investment, demanding less investment.

And what I’m saying to bob mcmanus is try this for starters.

Take special note of the author.

Mattski it is very simple and obvious if you read and understood the book.

bob, you are a chaff machine. That is what is simple and obvious.

72

Mark Field 04.26.14 at 9:49 pm

Ahoy yourself and good to see you. Former compadre, I’d say. Not because of you but because I gave up on VC when they went to the Post.

73

mattski 04.26.14 at 10:02 pm

Mark,

:^) I think I abandoned VC before you did!

I see I should have included more text from bob m above.

…Piketty although indeed wanting higher taxes on income also wants his wealth tax, in other words wants to directly tax and diminish capital, investment, accumulation, profits and profit share. .. Now find me the mainstream economists who will enthusiastically get behind a program of attacking investment, demanding less investment. (emphasis added)

74

Mark Field 04.26.14 at 10:06 pm

:^) I think I abandoned VC before you did!

Premature anti-Conspiratist!

75

john c. halasz 04.26.14 at 10:42 pm

@71:

Really Mattski, Rogoff?

76

LFC 04.26.14 at 11:01 pm

@mcmanus:
I never said anything about “reducing her taxable income.”

You didn’t, but I read you to be implying that; evidently a misreading on my part. Re-reading what you wrote, I think I now see the pt.

77

mattski 04.26.14 at 11:45 pm

jch,

I was only citing Rogoff (apart from being lazy about google searches) to further undermine mcmanus’s apparent claim that mainstream economists who would support a tax on wealth are quite rare. Of course Rogoff in turn cites the IMF which cuts further against our friend bob.

I haven’t read Piketty yet. I have read a fair amount of commentaries & reviews. I just read the Yglesias-Piketty interview, further confirming the ludicrous gloss mcmanus wants to put on Piketty’s views…

78

Ronan(rf) 04.27.14 at 12:53 am

79

Ben 04.27.14 at 12:53 am

mattski,

That Rogoff link doesn’t support your argument.

In addition, the IMF issued a statement denying that the report Rogoff cites supports a tax on wealth. That’s abundantly clear if you actually read the report. Score another point for dsquared’s “don’t trust known liars” heuristic.

80

Ronan(rf) 04.27.14 at 12:54 am

Have I just begun a meme?

81

Clay Shirky 04.27.14 at 1:12 am

As a Crooked Timber PSA, if you want to see what the Piketty argument from Silicon Valley is going to look like, scroll backwards through Marc Andresson’s recent tweets: https://twitter.com/pmarca

-c

82

Henry Farrell 04.27.14 at 2:30 am

Theophylact – Self admitted doggerel, but scans perfectly well, thanks. And if near rhymes work for Hudibras they work for me. But then, anyone who could possibly read this as an attempted limerick may not be quite the expert on meter they take themselves to be ;)

83

Lee A. Arnold 04.27.14 at 2:39 am

Clay #81 — There is the economist’s educational challenge, in a nutshell.

84

Lee A. Arnold 04.27.14 at 2:43 am

Or rather a series of nutshells, an intercalation of errors.

85

mbw 04.27.14 at 2:54 am

for McManus and his critics.
I haven’t quite finished the book yet, but have read the part that seems to address the way that returns depend on capital. Obviously he rejects the conventional constant-return regardless of capital model, since it flatly contradicts the data. He cites three components contributing to returns:
1. for consciously directing capital to where it’s needed for productive purposes
2. luck
3. theft.
(1) involves something that maybe could be approximated as marginal productivity. (2) seems to also be like that in the aggregate, although not for individuals. (3) obviously doesn’t fit that mold. Apparently when capital is sufficiently concentrated and important compared to current labor, (3) is enabled by all the mechanisms we know so well.
I really doubt that all this is anything that Piketty, deLong, and Krugman would have any major disagreement about.
I don’t see anything in Piketty that opposes investment per se. How else could you get new technologies and any growth, especially with a static population? Since he sees that in practice private capital tends toward extreme concentration, by a variety of mechanisms involved in generating the power-law tail, the obvious implication is that we need public investment. In other words the recent tendency of public capital to fall to zero should be reversed. That’s what increased taxes on wealth can do. I don’t see the McManus interpretation in there, at least not by page 456.

86

bad Jim 04.27.14 at 6:58 am

The serious sorts are persnickety
About the proposals of Piketty:
“A capital tax?
Such vicious attacks
Are an economic iniquity.”

87

bad Jim 04.27.14 at 7:25 am

See also F. deBoer’s non-review of Megan McArdle’s non-review of a work not by Lemony Snicket.

88

bad Jim 04.27.14 at 8:54 am

We’ve heard why they don’t care for Piketty
They complain his foundations are rickety
“Only pirates say ‘r’
There’s more there by far.”
They mostly resent his ubiquity.

89

bob mcmanus 04.27.14 at 11:36 am

85: Certainly Piketty (and I hate to speak for him but neither do I want to paste battling quotes from a very long book) does not want to tax away all wealth. His recommendation is a 1-2% annual tax on private wealth, importantly undifferentiated, a tax on all forms of private wealth…in addition to the usual laundry list of taxes on income, higher inheritance taxes, very high marginal rates. These in combination should go a long way toward reducing the rate of accumulation and concentration. Whether he would go further is a different question, one purpose of a wealth tax is to effectuate full disclosure, frankly we don’t know where about a third of private wealth is.

2) When I said “Piketty might not phrase it this way,” which was misinterpreted, I meant exactly that Piketty would tax “wealth” or “capital” whereas I would phrase it as “taxing investment.”

I do this because a tax on wealth/capital (and again Piketty would tax all forms of wealth equally) has, and will, encounter the arguments listed or implied in 85, i.e., distinctions among “socially productive” or “growth enhancing” private wealth. A gold toilet is different from a Renoir from Google stock from ownership in a hospital from municipal bonds, and should all be taxed differently in order to promote social welfare.
A common argument is that we should tax “savings” or “spending/consumption” to promote “investment” which should be taxed at a lower rate, if at all, because “investment creates jobs.” Obviously the 1% can use such arguments to their great advantage.

Is taxing wealth taxing investment? Is Bettancout’s stock in L’Oreal “socially productive wealth?” I use my phrasing because underneath Piketty’s more politic language, as DeLong realizes at 21, is a very radical paradigm shift for macroeconomics.

Leave public/government investment out of it. Piketty does discuss it late along with other social spending, but it is not the core of the book.

90

mattski 04.27.14 at 12:06 pm

Ben,

That Rogoff link doesn’t support your argument.

It doesn’t? What did you perceive my argument to be? Also, would you care to provide a cite for the IMF statement? And broadly, are you denying that there is any support for a tax on wealth among “mainstream” economists?

For example, who is this guy? http://www.taxresearch.org.uk/Blog/richard-murphy/

91

mattski 04.27.14 at 12:17 pm

bob,

I use my phrasing because underneath Piketty’s more politic language, as DeLong realizes at 21, is a very radical paradigm shift for macroeconomics.

You like your phrasing like you like your guillotines.

You know, we agree that extreme inequality is bad, bad, bad all around. But I think we don’t agree that extreme equality is necessarily a good thing. At least not in the foreseeable future.

Not to mention that there isn’t any conceivable means of bringing about extreme equality without massive human atrocity…

92

Main Street Muse 04.27.14 at 12:51 pm

“You know, we agree that extreme inequality is bad, bad, bad all around. But I think we don’t agree that extreme equality is necessarily a good thing. At least not in the foreseeable future.

Not to mention that there isn’t any conceivable means of bringing about extreme equality without massive human atrocity…”

WHO is advocating for “extreme equality?”

To those who’ve read the book, does Piketty not call for living wages? An end to profitable global corporations paying so little that full-time employees need food stamps?

Wealth taxes are not enough. Wages that people can live on are a key part of the solution. Anyone advocating for that? Or will not that work in the academy setting, which is so reliant on the under-paid work of adjuncts?

93

LFC 04.27.14 at 1:09 pm

@bianca steele
Have glanced through the Wiki entry you linked @39. The stuff at the end, sourced from tabloids, about a cat in the W.Midlands who rides the bus by himself, perhaps to get to a fish-and-chip shop, and whom the bus drivers have named Macavity, is mildly amusing.

94

LFC 04.27.14 at 1:13 pm

p.s. the story appears to date from ’07, so the cat may no longer be alive.

95

J Thomas 04.27.14 at 1:26 pm

“Wages that people can live on are a key part of the solution.”

From Robert Sheckley’s Mindswap

They stood face to face, Flynn slack-jawed, McHonnery clam-mouthed. Several seconds of silence ensued. Then McHonnery said: ‘Look, kid, this ain’t no goddamned peep show and I ain’t no goddamned freak. If you got something to say, spit it out. Otherwise take a walk for yourself before I break your back.’

Marvin could see at once that this man was no fawning, honey-mouthed body salesman. There was no hint of obsequiousness in that rasping voice, no trace of ingratiation in that downturned mouth. Here was a man who said what he wanted to say, and took no heed of the consequences.

‘I – I am a client,’ Flynn said.

‘Big deal,’ McHonnery harshed. ‘Am I supposed to turn handsprings or something?’

His sardonic retort and blunt, inner-directed demeanour gave Flynn asensation of confidence. He knew, of course, that appearances could be deceiving; but no one had ever told him what to judge by instead of appearances. He was inclined to trust this proud and bitter man.’I am going to be dispossessed of this body in a matter of hours,’ Marvin explained. ‘Since my own body has been stolen, I am in desperate need of asubstitute. I have very little money, but I – I am quite willing and prepared to work.’

McHonnery stared at him, and a sardonic grin twisted the man’s tight lips.’Prepared to work, huh? Ain’t that nice! And just what are you prepared to work at?’

‘Why – anything.’

Yeah? Can you operate a Montcalm metal lathe with light-sensitive switchboard and manual cull? No? Think you could handle a Quick-GreezeParticle Separator for the Rare Earths Novelty Company? Not your sort of thing, huh? … I got a surgeon on Vega who wants somebody to run his Nerve-Impulse-Rejection Simulator (the old model with the double pedals). Not exactly what you had in mind? Well, we got a jazz band on Potemkin II which needs astomach-horn man, and a restaurant near Boötes which could use a short-order cook, with working knowledge of Cthensis specialities. Doesn’t ring a bell? Maybe you could pick flowers on Moriglia; of course, you’d have to be able to predict anthesis without more than a five-second variation. Or you could do spot-flesh-welding, if you’ve got the nerves for it, or boss a phylopod reclamation project, or draw up intermediate creeper systems, or – but I don’t guess none of them strike your fancy, huh?’

Flynn shook his head and mumbled, ‘I don’t know anything about any of those jobs, sir.’

‘Somehow,’ McHonnery said, ‘that doesn’t surprise me as much as you might think. Is there anything you can do?’

‘Well, in college I was studying–‘

‘Don’t give me your goddamned life story! I’m interested in your trade, skill,talent, profession, ability, whatever you want to call it. What, specifically, can you do?’

‘Well,’ Marvin said, ‘I guess when you put it that way, I can’t do anything much.’

‘I know,’ McHonnery said, sighing. ‘You’re unskilled; it’s written all over you. Kid, it may interest you to know that unskilled minds are common as dirt, commoner. The market’s glutted with them, the universe is crammed to overflowing with them. It may interest you to know that there is nothing you can do that a machine can’t do better, faster, and a damn sight more cheerfully.’

‘I’m sorry to hear that, sir.’ Marvin said, sadly but with dignity. He turned to go.

‘Just a minute,’ McHonnery said. ‘I thought you wanted to work.’

‘But you said–‘

‘I said you were unskilled, which you are. And I said that a machine can do anything you can do better, faster, and more cheerfully, but not more cheaply.’

‘Oh.’ Marvin said.

‘Yep, in the cheapness department, you still got an edge over the gadgets. And that’s quite an achievement in this day and age. I have always considered it one of the glories of mankind that, despite its best efforts, it has never completely succeeded in rendering itself superfluous. You see, kid, our instincts order us to multiply, while our intelligence commands us to conserve. We are like a father who bears many sons, but contrives to dispossess all but the eldest.We call instinct blind, but intelligence is equally so. Intelligence has its passions, its loves and its hates; woe to the logician whose superbly rational system does not rest upon a solid base of raw feeling. Lacking such a base, we call that man – irrational!’

‘I never knew that,’ Marvin said.

‘Well, hell, it’s obvious enough,’ McHonnery said. ‘The aim of intelligence is to put the whole goddamned human race out of work. Luckily, it can never be done. A man will outwork a machine any day in the week. In the brute-labour department, there’ll always be opportunities for the unwanted.’

‘I suppose there’s a certain comfort in that,’ Flynn said doubtfully.

96

Anarcissie 04.27.14 at 1:42 pm

@91 and @92 — I would be glad to argue for extreme equality (communism), but before doing it to a roomful of clever liberals like this one I’d want to do some careful preparation. The arguments are floating around out there, though.

We’ve come a long way in a hundred years if communism is simply off the boards, haven’t we? But I digress. The Times has spoken; someone who describes important defects in capitalism is another fad. Susan Sontag. Tut-tut.

97

Anon 04.27.14 at 1:47 pm

Ian 04.26.14 at 8:37 pm

“I have gradually come around to the unshakeable belief that the entire Sunday “Styles” section is satire, the NYT’s covert attack on the appalling people their advertisers seek to reach.”

I’m pretty sure the Styles section is the only part of the NYT that is NOT satire.

98

Peter K. 04.27.14 at 1:57 pm

Tywin Lannister: Your mother’s dead. Before long I’ll be dead, and you and your brother and your sister and all of her children, all of us dead, all of us rotting underground. It’s the family name that lives on. It’s all that lives on. Not your personal glory, not your honor… but family. You understand?

[Jaime nods quietly. Tywin thrusts the knife at the table and wipes his hands clean with a cloth]

Tywin Lannister: You’re blessed with abilities that few men possess. You’re blessed to belong to the most powerful family in the kingdoms. And you’re still blessed with youth. And what have you done with these blessings, eh? You served as a glorified bodyguard for two kings… one a mad man, the other a drunk.

The future of our family will be determined in these next few months. We could establish a dynasty that would last a thousand years… or we could collapse into nothing, as the Targaryens did.
—————
Interesting that Stannis’s Hand Davos had the princess Shireen write to the Iron Bank of Bravos on behalf of Stannis. What will the Iron Bank think when the letter from Stannis has all the lowercase “i”s dotted with hearts?

99

J Thomas 04.27.14 at 2:05 pm

“The Times has spoken; someone who describes important defects in capitalism is another fad.”

Is it in fact a fad?

Intellectuals and dilettantes will discuss it some. It’s a big long book and very few people will really get into the details. A lot of credulous people will accept somebody’s word why it’s deeply flawed and they’ll repeat those criticisms whenever they hear it discussed.

Meanwhile the people who get paid to do whatever they do will keep getting paid to keep doing the same old things.

What would it take for new ideas to be more than a fad? Or even old ideas that have been rejected before in some different context, maybe rejected just by refusing to pay people to do anything about them, and waiting until they were old news….

100

Main Street Muse 04.27.14 at 2:18 pm

To Anarcissie @ 96 – Once upon a time, I went to the USSR back in my student days. In looking at the shortages of consumer goods all around us, in looking at the absolute lack of individual freedoms needed to prop up the Soviet way of life, I realized that communism as implemented in ancient Russia was a dreadful curse.

When we left Moscow, everyone clapped and cheered as the plane lifted off from the Soviet runway – happy to be released from the gray land of little to all and not much according to need.

A key theory I developed as a result: a political/economic system that could not supply toilet paper and tampons to its citizens is perhaps not the best system to implement. Communism as a theory was damaged by Soviet communism in practice.

101

mattski 04.27.14 at 2:19 pm

@ 92

WHO is advocating for “extreme equality?”

Oy. Are you kidding me? WHO do you think I’m engaging in this thread?

102

mattski 04.27.14 at 2:23 pm

The Times has spoken; someone who describes important defects in capitalism is another fad.

I shouldn’t have to say this but maybe I do. I don’t think there is a hair’s worth of difference between Piketty & Krugman. And yet some here manage to work themselves into a mild lather at Krugman while praising Piketty.

103

Anarcissie 04.27.14 at 2:31 pm

Main Street Muse 04.27.14 at 2:18 pm @ 100 — What was going on in the Soviet Union was not communism.

104

Main Street Muse 04.27.14 at 2:48 pm

To Anarcissie @103 – And what we have in the US – and what Piketty talks about in his book – is not really capitalism. Info is never perfectly shared; the rich exert too much influence; banks and car companies get bailed out; rationality is often shoved aside to make way for emotional behaviors based on greed, fear, anxiety; government is the backstop of most big businesses in one way or another; money is the root of all power, etc.

Capitalism in America now bows too frequently at the altar of shareholder value. That’s why companies like WalMart, etc. can get away with paying people so little – the profits are what matter, not the fact that the profits require massive federal subsidies in the form of Medicaid and food stamps for its workers. Or, in the case of Duke Energy, today’s profits will be subsidized in the future when infrastructure failures (due to lack of investment) create polluted water sources that the government must then clean up – or the company passes clean-up costs onto consumers.

Communism is too idealistic to be implemented. We’re not made to share at that level. (Lesson learned while raising identical twins who share the same DNA but are not always fond of sharing anything else.) There is something to be said about creating incentives to work. In today’s capitalistic communities, we’ve just skewed the incentives away from certain kinds of work. Yearning for the days when unions had the power to match wits with the capitalists!

105

William Timberman 04.27.14 at 2:56 pm

bob mcmanus @ 89

If this is what the job-creators want to argue, at some point they’ll have to contend with Bruce Wilder’s observation that the accumulation of wealth by our nascent oligarchy is itself one of the most powerful forms of disinvestment around. Piketty’s r > g isn’t just any old outcome, it’s at least partly the outcome of a strategy of seeking the greatest yield at the least risk, which, in the seemingly inevitable course of its devolution, has lead us to the financialization — I’d call it the casino-ization — of the global economy, a drop in aggregate demand regardless of the demographic trends, and, one fears, pitchforks and torches at the end.

Unless I’ve missed something, socially productive wealth, if we’re to end up with any at all short of war or revolution, will at this point have to come from the public side. People who believe that a radical taxation of private wealth is unthinkable, yet cherish peace and the democratic ideal, should realize that this is a test. If we fail it, the consequences aren’t likely to be any more benign than other such failures in the past.

106

J Thomas 04.27.14 at 3:09 pm

#100

“Communism as a theory was damaged by Soviet communism in practice.”

That’s like saying that Jesus’s teachings were damaged by the Catholic Church.

Or that Thomas Paine’s anti-monarchism was damaged by the US experience.

107

Main Street Muse 04.27.14 at 3:17 pm

TO J. Thomas. Yes.

108

J Thomas 04.27.14 at 3:39 pm

MSM, I don’t get it.

The existence of Microsoft Windows does not at all imply that it’s a bad idea to have an operating system. The existence of the corn-ethanol gasohol system does not imply we should not try to conserve oil. The existence of George W Bush does not imply we should not have a US president. (Though I’m kind of wobbly on that last one.)

In general, if somebody claims they are trying to do something and they emphatically do it badly, that is not enough to say it should not be done well.

109

Anarcissie 04.27.14 at 4:03 pm

Arguments from ‘human nature’ require a rather more complete and definitive description of ‘human nature’ than is available to me, anyway.

110

mbw 04.27.14 at 4:06 pm

#89 So we all agree that there should be a wealth tax. Is there any content to your choice of saying that it’s to discourage investment, or is that just a semantic twist? I think there’s content, with which I disagree. A key point of the wealth tax is to break up enormous concentrations, ones that not only enable people to pointlessly consume huge amounts in zero-sum competitions but also destroy democracy. Investments by union pension funds, public employee pension funds and government capital projects don’t have much of those bad effects. They do allow the growth or at least flexibility to deal with a changing environment that we need, and that Piketty persistently speaks positively of. So the distinction in practice is less about categorizing uses of capital (great idea except complicated and particularly corruption-prone) than about who owns it. Investment -tax policies don’t care, wealth-tax policies do.

111

bob mcmanus 04.27.14 at 4:32 pm

Is there any content to your choice of saying that it’s to discourage investment, or is that just a semantic twist?

Lots! I am a Keynes-Kaldor-Kalecki spending kind of guy. But that, and more, is probably not directly on topic of Piketty and K21.

1) For the nonce, Piketty IIRC mostly wants to tax the wealth of individuals, not corporations, NGOs, or governments. He does, as I have said, want a wealth tax initially in order to get a public accounting and disclosure of where the wealth is, and how it is hidden, disguised, and protected.

How Wal-Marts Waltons Maintain Their Billionaire Fortunes …Bloomberg, Sept 11, 2013

“These trusts are often called “Jackie O.” trusts after Jacqueline Kennedy Onassis, the former First Lady who died in 1994 and whose will called for one. According to IRS data, the Waltons are by far the biggest users of Jackie O. trusts in the U.S.

The money put into these trusts is ostensibly for charity. If the assets appreciate substantially over the years, though, the trusts have another desirable feature: they can pass money tax free to heirs.

A donor locks up assets in these trusts, formally known as charitable lead annuity trusts, or CLATs, for a period of time, say 20 or 30 years. An amount set by the donor is given away each year to charity. Whatever is left at the end goes to a beneficiary, usually the donor’s heirs, without any tax bill.”

But even more basically than these games, as the Marc Andreeson tweets above show, every individual owner of wealth will claim her particular accumulation or protected property rights serves a socially useful purpose. Innovation! IP fosters creativity and diversity! It will be called “socially useful investment.”

I think it best to avoid all such obfuscations and tax any and all private assets.

Piketty does, incidentally, discuss public wealth and lands as a proportion of total wealth, from the Capitol Building to the National Parks to unexploited mineral reserves. It is a full service work of political economy. I had hoped to not re-read it so soon.

112

Bruce Wilder 04.27.14 at 4:52 pm

P’s K21 has the virtue of its defects. The wealth tax proposal is one of those defects — just an extension, really, of his “definition” of “Capital”.

I don’t think K21 will revolutionize economics directly. It’s designed to appeal to folks like Krugman, political liberal-centrists who are also conservative economists. Those “serious” fools are our gatekeepers, and this book is like a Trojan Horse, designed to appeal to them above all, designed to motivate them to drag it to their temple, to admit its pages to their orthodoxy. Its seemingly careless concepts seem like their theories; its smooth facts seem like their safely empty stylized “facts”. It is designed to seem harmless. The wealth tax proposal is consonant with the book’s almost sculptural outline, smooth, undifferentiated, harmless. mcmanus shows why the proposed remedy seems harmless, the counter-arguments cliche’d and close to hand.

This book is the upper middle-class realizing they, too, may be eaten alive by r > g. It’s a dawning of class consciousness among those, who thought they were in on the con.

113

bob mcmanus 04.27.14 at 4:59 pm

If you want to know why I stress “taxing investment,” if it hasn’t been explained yet, I’ll just grab a quote DeLong’s Latest Post , DeLong quoting Suresh Naidu:

“For example, here is a passage where (a young) Marx talks about capital and labor as complements, and perhaps even thinks of wages at marginal products:

To say that “the worker has an interest in the rapid growth of capital”, means only this: that the more speedily the worker augments the wealth of the capitalist, the larger will be the crumbs which fall to him, the greater will be the number of workers than can be called into existence, the more can the mass of slaves dependent upon capital be increased… (Marx)

In fact, rhetoric aside, this passage is completely consistent with, say, vintage optimal tax theory, which says that the best way to increase workers’ crumbs wages in the long run is to not tax capital ever. And I think it is illuminating about the manifold criticisms Marx makes of capitalism. Perhaps Marx thought that even if workers’ standard of living increased under capitalism, it would not undo the exploitative/unfree/ undemocratic institutions inherent in the labor market. ” …SN

“vintage optimal tax theory…not tax capital ever”

Even Marxists…

(PS: Kojin Karatani’s (Duke U) latest book has just been translated and published. Very strongly recommended for someone interested in post-structuralism, post-Capitalism, post-Marxism. I don’t read Zizek, I do read Karatani.)

114

William Timberman 04.27.14 at 5:43 pm

Dear moderators: I’ve got one going stale back up at 105 or thereabouts. Although it’s not going to contribute all that much to the thread, and it’s Sunday and all, could you, pretty please, do your Moses thing and lead it to the Promised Land….

115

GiT 04.27.14 at 5:47 pm

” And I think it is illuminating about the manifold criticisms Marx makes of capitalism. Perhaps Marx thought that even if workers’ standard of living increased under capitalism, it would not undo the exploitative/unfree/ undemocratic institutions inherent in the labor market. ”

When I hear that sort of absolute immiseration thesis criticism of Marx to which this quote is responding, my mind always flies to this passage:

“A rise in the price of labour, as a consequence of accumulation of capital, only means, in fact, that the length and weight of the golden chain the wage-worker has already forged for himself, allow of a relaxation of the tension of it.”

116

William Timberman 04.27.14 at 6:06 pm

When critics on the right lambaste Piketty’s recommendations as soft Marxism, they’re not that far off the mark, I think — except, of course, that they put their emphasis on the Marxism part. With all due respect to BW @ 112, when I was reading K21, I kept asking myself: Is he as dispassionate as he claims, or is he hoping no one will notice such an ordinary looking fellow as he bends over to slip his bomb under the carriage seat? His irony, or fatalism, or whatever argues for the latter, but then again I was reading him in translation, so maybe there’s less signalling there than I think I found.

117

Bruce Wilder 04.27.14 at 6:23 pm

William Timberman @ 115: I kept asking myself: Is he as dispassionate as he claims, or is he hoping no one will notice such an ordinary looking fellow as he bends over to slip his bomb under the carriage seat?

Hoping. So far, so good, as far as I can see. (If he can fool Sam T, I’d say he’s made it in America. ;-)

118

Metatone 04.27.14 at 8:18 pm

For myself I think Sam Tenenhaus at the NYT is trying to distract us.

And the key to this is that he doesn’t mention the last time an economist with a book was the size of fad that could have been noticed in the NYT Style section… Milton Friedman.

But maybe that’s just the hope talking…

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Bruce Wilder 04.27.14 at 9:43 pm

Way up thread, there was some back and forth regarding the relevance of the Cambridge Capital Controversy (CCC), an episode in which Joan Robinson and Piero Sraffa proved to Samuelson and Solow, that their concept of capital couldn’t fly. (To no apparent effect on the subsequent thinking of Samuelson and Solow or the rest of American mainstream economics, down to Krugman today.)

The concept of capital under attack was the largely unexamined notion that capital is identical with the tools and organization, embedding an advancing technology, which accumulate and amplify the productivity of labor, resulting in greater total output (= income) from production processes. Output, by the economist’s “production function”, is a function of the physical quantities of factor inputs — capital and labor complementing one another — and efficiency is allocating inputs to production processes in the quantities indicated by the (market) prices of marginal output and marginal inputs. More accumulated capital raises the marginal productivity and, therefore, wages of labor. And, capital accumulates until the marginal efficiency of capital equals the price of capital, aka the rate of return (and in a tremendous illogical leap) aka the interest rate.

In this model, as dsquared @ 43 wrote:

. . . the return on capital has to fall as the stock of capital grows, more or less just because. That’s a statement which “neoclassical” (speaking loosely) economists make because they think about homogenous capital models in a Cobb Douglas framework, in which declining returns on capital fall naturally out of the model.

It is a critical support for a lovely vision. That production function, as some variation on the Solow-Swan model, remains at the core of mainstream macroeconomics, linking macro — spiritually if not exactly logically — to the microeconomic system of Samuelson (and Friedman and Hayek), in which the production function is at the core of the theory of the firm. And to the Walrasian system of markets, in which firms are coordinated in their allocation of factor inputs and output by market prices and marginal product, resulting in an efficient general equilibrium.

It is a vision that Voltaire’s Dr. Pangloss could love: this vision is a proof, in its way, that we live in the best of all possible worlds, all in balance: the efforts of the capitalists to accumulate capital redounding to the benefit of labor, as the investment in additional capital creates jobs and raises productivity, output and wages: everything in balance, like supply crossing demand at the optimal price and output.

It’s the vision behind the Garett Jones review at Reason.com, which Main Street Muse @ 66 found so disturbing. Jones denies r > g could obtain for long, and reiterates the conventional thesis that capital = t00ls = good for workers.

Since capital helps the average worker do her job, we should hope that the world’s billionaires will be frugal rather than reckless, lending their capital to fund innovation the world over . . .

and argues that the wastrel grandchildren of billionaires will fritter away their excessive wealth in foolish consumption, and yada yada.

Walt @ 37 complains that the CCC is “such a terrible argument, because it’s so easy for the mainstream to wiggle out of it.” It is so easy to wiggle out, he explained, because

“. . . every single other ingredient of the model — the fact that there’s a single representative agent, that there’s one kind of labor, that you can turn factories back into food if you need to, that everybody already knows the correct probability of every possible event in the future, that everybody gets paid their marginal product — are equally unrealistic.”

Walt adds,

A reliable measure of how useful it is to read a heterodox economist is one over how often they mention the controversy, rather than the one million other issues with mainstream economics.

I’m not going to defend or reiterate the UK-Italy side of the CCC; as Kevin Donoghue said, it’s a terrible bore. The only takeaway is that Samuelson and Solow got nailed, on a high theoretical level, and it did not matter. It did not stop them. This thing, this concept of capital, and its theoretical relation to production and income, the production function, on which a common or shared intuition about the nature — no, the basic, fundamental goodness — of investment and the capitalist industrial revolution and the market economy system rests, was proven wrong.

Krugman excuses his own conservative complacency:

There are a few economists on the left who seem to believe that:

1. You need to believe in the existence of a perfectly well-defined aggregate measure of capital to believe in the marginal productivity theory of income distribution;

2. If you believe in, or even use, marginal productivity theory, you are conceding that capitalists deserve their income.

Neither of these things are true. Nothing about marginal productivity theory depends on the exact truth of a simple aggregate production function with capital defined by a single number. And saying that capital gets its marginal product in no way says that the people who own that capital deserve what they get.

You see, as Krugman has it, nothing depends on the exact truth of a simple aggregate production function. Which is, I guess, a good(?) thing, because simple production functions [output is a function of factor input] — aggregate or otherwise — are false representations of the relation of factors in production. False. A false theory of capital in a false theory of production. As in untrue. Wrong. But, as Walt says, there are a million things wrong with neoclassical economics — pretty much every element of the vision is wrong, imho — and the wrongness doesn’t matter, because economists know about this wrongness, use good judgment in accounting for reality frictions and apply models appropriately. (“Also, Larry Summers, Tyler Cowen, [fill in the blank with the name of a clever corrupt little toad]. . . has written something interesting . . . “)

This complacent conservatism, this denialism, which Krugman amply demonstrates, is why economists like Thomas Palley fear that Piketty’s work, though a literary phenomenon, will change everything and change nothing. The fools that bad Jim @ 13 takes seriously are fools. Which wouldn’t be so bad, if they were isolated and ignored, which they are not. Their stubbornness on what might seem to be esoterica serves to legitimate fundamental intuitions underlying a lot of the common political discourse. False and misleading intuitions. It is as if academic geographers, selling mercator projections, repeatedly ridiculed rumors of a spherical earth, so that someone could pass off Greenland as larger than Australia.

If the economics profession could absorb the humiliation of completely missing the 2008 GFC, then, I think they may well be able to handle Piketty. Krugman fans, brace yourselves. Here’s the maestro, just days ago:

. . . the heterodox need to realize that they have, to an important extent, been working with the wrong story line. . . . Here’s the story they tell themselves: the failure of economists to predict the global economic crisis (and the poor policy response thereto), plus the surge in inequality, show the failure of conventional economic analysis. So it’s time to dethrone the whole thing — basically, the whole edifice dating back to Samuelson’s 1948 textbook . . .

Unfortunately . . . this gets the story of what actually happened almost completely wrong.

It is true that economists failed to predict the 2008 crisis (and so did almost everyone). But this wasn’t because economics lacked the tools to understand such things — we’ve long had a pretty good understanding of the logic of banking crises. What happened instead was a failure of real-world observation — failure to notice the rising importance of shadow banking. Economists looked at conventional banks, saw that they were protected by deposit insurance, and failed to realize that more than half the de facto banking system didn’t look like that anymore. This was a case of myopia — but it wasn’t a deep conceptual failure. And as soon as people did recognize the importance of shadow banking, the whole thing instantly fell into place: we were looking at a classic financial crisis.

What about the lousy policy response — austerity and all that? The key point here was that policymakers weren’t basing their decisions on conventional economics. On the contrary, they decided to blow off textbook macroeconomics and embrace exotic doctrines like expansionary austerity and a mysterious growth cliff at 90 percent debt relative to GDP. The disastrous policy responses that have perpetuated the slump are the result of mainstream economics having too little influence, not too much.

Yep. No deep conceptual failures need apply. If the CCC didn’t pinpoint a deep conceptual failure that mattered, there couldn’t be one. And, if Piketty’s r > g does not identify a deep conceptual failure, well . . . then, it can be greeted as a great achievement and safely buried next week.

Ultimately, though, the topic of the book may become too important to be left to the economists to determine its truth value. We live in hope.

PS A lot of blockquote in a very long comment, and if I goofed up, it will crack up like a house of cards in a summer breeze. I tried, I really tried. Here’s hoping |-(

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mattski 04.27.14 at 10:45 pm

What are you trying to achieve, Bruce? Economists are wrong. They can’t satisfactorily define capital. Do you know someone who can satisfactorily define capital?

I see an impressive tantrum. Not much content.

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William Timberman 04.27.14 at 10:47 pm

Models and deep conceptual failure. Who looked at the blueprints of a B-29 in 1943 and imagined Hiroshima at 8:17 a.m. local time on August 6, 1945? One would think that in the aftermath of that hour, we’d have demanded more of everyone’s imagination. Instead we got 70 years of pontification, not all of it from Air Force wonks, assuring us that such things had/have their justifications, and we shouldn’t ever, ever feel anything weird about them.

You’re asking a lot of us BW, and what you’re asking is for sure NOT what the Nobel Committees would demand of anyone.

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mattski 04.27.14 at 10:48 pm

***Dept. of Repetition:

There isn’t a dimes worth of difference between the worldviews of Piketty & Krugman.

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William Timberman 04.27.14 at 10:48 pm

Thanks to whoever freed my 105. Much appreciated.

124

Alex K. 04.27.14 at 11:22 pm

Sometimes I read Bruce Wilder’s sprawling narratives and I don’t want to comment because even if I don’t agree, I still like reading stories and I don’t want to be a nitpicker or a nagger spoiling people’s fun.

But the particular narrative that he’s spun here is completely off the mark and seriously misleading.

” That production function, as some variation on the Solow-Swan model, remains at the core of mainstream macroeconomics, linking macro — spiritually if not exactly logically — to the microeconomic system of Samuelson (and Friedman and Hayek), in which the production function is at the core of the theory of the firm. And to the Walrasian system of markets, in which firms are coordinated in their allocation of factor inputs and output by market prices and marginal product, resulting in an efficient general equilibrium. “

There is no link (“spiritual” link? really?) between aggregated production functions and the microeconomic production functions. It is actually provably impossible to get aggregated production functions, even as approximations, from microeconomic production functions, under weak assumptions. That, in fact, is the main reason the Cambridge, UK side won!

Furthermore, the CCC did not touch even a single hair of the Walrasian framework. You can criticize the Walrasian framework from a lot of perspectives –I know I do– but there is no inconsistency related to the production functions employed.

If you want to make an argument that you can’t have a theory of the firm in which you talk only about production functions, that’s perfectly fine (I certainly agree) but that’s not really the reason the CCC debate was lost.

So Krugman is absolutely correct when he points out that the failure of aggregated production functions has nothing to do with marginalism — only with thoughtless, aggregated versions of marginalism. ( I can’t defend Krugman if he wants to make further claims, like the CCC did not affect aggregated versions of marginalism either (that’s simply wrong) but Krugman seems weaselly on this part so I don’t know if he actually wants to make that claim.)

So when Bruce Wilder claims this:

“This thing, this concept of capital, and its theoretical relation to production and income, the production function, on which a common or shared intuition about the nature — no, the basic, fundamental goodness — of investment and the capitalist industrial revolution and the market economy system rests, was proven wrong.”

I can only stand back and admire his ability to construct convincing looking narratives on the basis of virtually nothing that is correct.

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john c. halasz 04.27.14 at 11:24 pm

Mattski @ 120:

Bruce W., despite his ranting tendencies, tends to know what he’s talking about, at least with respect to econ and especially the production system part of the “equation”, which standard econ tends to ignore or overlook. You, however, as has been repeatedly demonstrated by you comments, tend to not know a thing of what you’re talking about.

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J Thomas 04.28.14 at 12:14 am

# 122
What are you trying to achieve, Bruce? Economists are wrong. They can’t satisfactorily define capital. Do you know someone who can satisfactorily define capital?

mattski, it sounds like you have some sort of criticism of Bruce’s criticism, but I can’t make out just what it is.

If the foundations of economics are wrong, then economists are like 18th century horse doctors. They have a theory of humors which is basicly worthless, but they also have a lot of experience looking at sick horses and they know how to alleviate some symptoms. Liniment for muscle and joint problems. Decoction of alder bark to wash wounds. Decoction of willow bark for fever. Etc.

When a bunch of horse doctors disagree about remedies it means probably they don’t know anything that actually works.

So — if economic theory is basicly and fundamentally wrong, then we might as well discard it completely and start over from scratch. Do you disagree?

No, it sounds like you’re saying that until we get a correct theory we should stick with the one we know is wrong.

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Alex K. 04.28.14 at 12:25 am

” If economic theory is basicly and fundamentally wrong, then we might as well discard it completely and start over from scratch. “

Sure. You go first.

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Peter K. 04.28.14 at 12:36 am

I don’t understand Bruce W. criticisms of Krugman. He tosses around a lot of ad hominem.

at 112 he writes “The wealth tax proposal is consonant with the book’s almost sculptural outline, smooth, undifferentiated, harmless. mcmanus shows why the proposed remedy seems harmless, the counter-arguments cliche’d and close to hand.”

Have Bruce and McManus read the book? DeLong summarizes Piketty’s view as “And it is Piketty’s main thesis that all of this was upset by the triumph of economic reaction that happened around 1980, with the elections of Reagan and Thatcher, the exhaustion of the social democratic model, the end of the Soviet Empire and thus of any perceived need on the part of the powerful to moderate the expression of their economic power, etc.”

Sounds like what he’s really saying is that you need to reverse the Reagan revolution. I haven’t read the book yet but I doubt he views the wealth tax as a silver bullet. Taxes could be cut again if another Ronnie Raygun-type came around. You’d need deeper changes.

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john c. halasz 04.28.14 at 12:36 am

It’s my understanding that Joe Stiglitz already eviscerated the two famous “welfare theorems” attaching to GE theory from within, i.e. using the same formal “axiomatic” methods. Once the claim that economics serves eo ispo the “general welfare” is abandoned, then what special public authority do economists have? So then maybe it’s all just political-economy, rather than some specialized expertise in an entirely separate domain. Maybe economists should be accorded no more specialized public authority than priests, and in both cases a consumer warning label should be attached: “Caution: May Contain Snake-Oil”.

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Bruce Wilder 04.28.14 at 12:37 am

There are many differences in worldview, between Piketty and Krugman, and some of those differences may well prove hugely significant in time. Piketty, I think, shaped his rhetoric quite deliberately to gain acceptance from Krugman and Krugman’s generation in the American profession. I am in awe of how well he did it. However, that rhetorical strategy is no indication of a shared worldview.

Krugman is my age, an American, a product of a moment in time, when a child of the quite ordinary middle class could fairly effortlessly find his way to an education at ruling class schools. Like me, he is nostalgic for the New Deal and for what he remembers as the egalitarianism and fairness of the society into which he was born — his parents part of the ethnic working class that found itself white and middle class, after the trauma of depression and war — a trauma he has no memory of. (Probably, like me, Krugman doesn’t understand why younger people don’t believe such a world is possible. Piketty is part of a generation characterized by such strong doubts, and that comes through clearly in his book.)

Intellectually, Krugman is an analytic intuitionist. He highly values the insight he feels he gains from working through simple albeit sometimes abstruse analytical models. He learned economics, initially, from Samuelson’s textbook or one very much like it (I had Lipsey, Steiner — same thing), a textbook, which in his day, had an outline modeled on Euclid’s Geometry. The book proved a series of theorems by deductive method, that added together, somewhat loosely, into both a rough model of the market economy and a canon of economic ideas or arguments. All ornamented by apt observations and asides concerning the world outdoors, to give the abstract, context. The insights imparted emphasized the essential and the logical, in a medium is the message sort of way.

Krugman wrote a short piece once, called Serfs Up!,referencing the work of Evsey Domar, who proposed as an hypothesis to explain the advent and demise of serfdom, a simple model focused on the land/labor ratio. Basically, a lot of land and scarce labor “explained” why the Russian nobility felt it needed to impose serfdom in the 17th century, and a lot of labor relative to land would cause serfdom to die of its own accord. Krugman admires Domar’s paper, published around 1970 when Krugman was matriculating as an impressionable undergraduate, and he wrote (around 1973) that Domar’s hypothesis explained why serfdom died of its own accord in the 13th century in western Europe. The puzzle, according to Krugman, is why wasn’t serfdom re-imposed after the Black Death made labor scarce.

Without the confusion of contemporary political controversies, Krugman’s take on Domar reveals a lot about how Krugman thinks, and fails to think. First, of all, Domar’s model is a ridiculous, severely oversimplified toy. Second, Domar is wrong on the facts of medieval serfdom in Western Europe — both why and how it worked economically, and when it came and went as a set of institutions. The serfs were freed gradually, in a patchwork fashion over centuries, beginning very strongly after the Black Death broke the institution decisively in the 14th century. Krugman is not good on history or institutions, and he doesn’t care to be — he’s actively hostile to institutionalism in economics. In this, Krugman is typical of his generation (and his profession since 1948).

Piketty is, as you know, French and he identifies quite self-consciously with the European generation that came of age, after the fall of the Soviet Union. He begins a section of his book with exactly that self-observation, where he also claims that French academic economists are less arrogant and imperialistic (in the inter-academic-department wars) than their American counterparts. He is interested in history and data — facts before theory. Like Krugman, he uses toys, but his toys are simple identities, used as heuristics, to manage data, not theories of causality he’s imposing. He’s very critical of the methodological habits of American economists (like Krugman!), who operate in a theory, largely unconnected with history and connected to data in only stylized form.

You’d have to ask someone else for a fuller explication of what it means to a European to have come to adulthood as the Berlin Wall came down, socially and politically. The thing Piketty seems most conscious of, is the changed relationship with socialism as an ideology, compared to previous generations. (It sure isn’t like my generation’s New Deal nostalgia!)

Piketty isn’t an institutionalist, and I am convinced this is part of his recipe for success. I may have missed it, since I haven’t finished the book, but I don’t think I will ever catch him making much explicit use of the concept of economic rent (as opposed to ordinary property rent, which he refers to a lot since it is part of the data record). An institutionalist never leaves home without economic rent in her conceptual toolkit. Nevertheless, he leaves that door open, and that gives his work subversive potential.

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Bruce Wilder 04.28.14 at 12:50 am

Someday, I may have a comment numbered around 130 emerge from moderation, which contains this typo:

‘he wrote (around 1973) ‘ which should have read, ‘he wrote (around 2003) ‘

oops

132

bob mcmanus 04.28.14 at 1:38 am

128: I have read the book.

Piketty has the data, the analysis, a few prescriptions, but he doesn’t have a plan.

It is actually very funny that a decades long study of the roots and causes of 2000 years of oligarchic control and exploitation could in any way inspire optimism. Piketty is not optimistic.

There was the isolated, and according to Piketty very atypical, “good period” that followed 1914-1945.

History, studied honestly and with integrity fills one with a kind of horror doesn’t it? The menu of options is not at all comforting. If I thought this coming aristocracy could be only as bad as the Tokugawa shogunate…but I think it will be the worst yet.

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A H 04.28.14 at 1:39 am

@124 “There is no link (“spiritual” link? really?) between aggregated production functions and the microeconomic production functions. It is actually provably impossible to get aggregated production functions, even as approximations, from microeconomic production functions, under weak assumptions. That, in fact, is the main reason the Cambridge, UK side won!”

Then what are the production fundtions in DSGE models?

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Alex K. 04.28.14 at 2:08 am

“Then what are the production fundtions in DSGE models?”

Conceptual muddle.

My turn: why do Keynesian estimates of potential output still use Solow growth models as a theoretical foundation?

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A H 04.28.14 at 2:39 am

That wasn’t a rhetorical question. I was curious as to your answer.

The production functions in DSGEs are at the core of modern macro, so if they are based on the Solow-Swan model it would seem that BW is right. But maybe not, that’s why I asked the question.

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Alex K. 04.28.14 at 2:47 am

I’m not the right person to ask if you want me to defend modern macroeconomics — of all varieties. In fact, BW is actually less skeptical than I am about the wonders of macroeconomics, so his criticism of macro was not a point I was challenging.

137

A H 04.28.14 at 3:01 am

Fair enough.

Though, when you say,

“So Krugman is absolutely correct when he points out that the failure of aggregated production functions has nothing to do with marginalism — only with thoughtless, aggregated versions of marginalism.”

It seems you are implying that modern macro has “thoughtful, aggregated versions of marginalism.”

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Alex K. 04.28.14 at 3:10 am

“It seems you are implying that modern macro has “thoughtful, aggregated versions of marginalism.””

I’m not implying anything of the sort. If anything, I’m with Franklin Fisher’s “There’s no such thing as macroeconomics,” which even if it has the style of a truth told partly in jest, is a truth nevertheless: if one’s analysis is rigorous when told with aggregated variables then one should be able to provide a rigorous analysis with vectors of variables.

But I’m afraid I’ll not continue the discussion this Sunday night.

139

J Thomas 04.28.14 at 3:15 am

#127

” If economic theory is basicly and fundamentally wrong, then we might as well discard it completely and start over from scratch. “

Sure. You go first.

?? Do you argue that maybe it isn’t wrong?

If it’s wrong, then why would you hold onto it?

If it’s wrong, then you must find something else or do without.

This isn’t like philosophy where you can choose to be a Nietzscheian and have a good time arguing with Postmoderns and everybody goes home happy.

Economics matters. If too many people believe the wrong economic fables we could be stuck with generations of poverty.

Or maybe it doesn’t matter, maybe all that matters is that the powerful have some sort of priest with some sort of explanation why it’s all for the best. They do whatever they want and then the economists make up explanations why the market had to be that way.

It made no difference whether the theory of divine right of kings was correct. Maybe it will make no difference whether the theory of divine right of markets is correct either.

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William Timberman 04.28.14 at 4:36 am

Asides: God bless a) BW’s rants, b) bob mcmanus’s tireless turning over of acres of rarely visited rocks in the pursuit of our common enlightenment, c) john c. halasz’s intense and close reasoning, and d) J.W. Mason just because (mostly because of The Slack Wire, which is a treasure trove for those who of us can’t read — let alone understand — everything in the literature of economics.)

Thanks today, too, bob m, for the Karatani tip. I grabbed Transcritique this afternoon, and am already enjoying it immensely. Such riches out there. Too bad I’m so ignorant, and so damned old.

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William Timberman 04.28.14 at 4:41 am

Sigh…. How churlish of me to neglect mentioning our hosts in my benedictions, who, after all, provide the clean well-lighted place where all of these riches are on display.

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bad Jim 04.28.14 at 6:34 am

My mention by Bruce Wilder I found both disturbing and gratifying. I have scant expertise in economics. A roommate handed me her copy of Samuelson’s text just after I’d dropped some acid, and I spent the night giggling over it. I then found that Berkeley offered an upper-division class in economics for mathematically sophisticated non-majors. It seemed like a sign from God, like the notice in a bookstore window: “Slightly dented Mars Globes $8″. What I most remember of the class is an appreciation of Milton Friedman which turned out to be misplaced.

The main reason I place my trust in saltwater economists is that they’re not as certifiably loco as the Chicago school. I don’t follow Krugman and deLong when they start to build models, not, I hope, because I’m unable to understand their equations, but because I don’t accept their assumptions or their methodology. I’m inclined to trust them because when their predictions turn out to be wrong, they ask “Where did I mess up?” Too many others don’t.

Climate science is difficult. There are simple issues like incoming and outgoing radiation, orbital and atmospheric variations; then there are arbitrarily arranged landmasses interfering with the circulation of air and water, planet-wide biological interference, episodic astronomical and geological disturbances, and modern technology. Forecasting weather is far more difficult than forecasting the climate.

Economics is trying to characterize nascent tornados that read the business section.

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Robert 04.28.14 at 10:11 am

A common lie among (some) economists is that the Cambridge critics confined their criticism to attacking aggregate models.

Consider the so-called factor-price frontier in a long-period model. (This is NOT a model of Arrow-Debreu intertemporal equilibrium.) Every valid marginal productivity relationship holds at every point on the frontier. That is, marginal productivity fails to fix a point on the frontier. In other words, the marginal productivity theory of distribution is, in the jargon, all bosh. And talk about the “marginal productivity of capital” is just as meaningless.

Several closures of the model are possible, not all neoclassical. But why not retain an open model? This model provides a formalization of the idea that distribution is shaped by the interaction of politics with social norms (such as on acceptable rates of pay) and institutions (such as a monetary authority).

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Peter T 04.28.14 at 10:28 am

” If economic theory is basically and fundamentally wrong, then we might as well discard it completely and start over from scratch. “

I’m not sure “wrong” is the right word here. I’m starting to think that much formal economics is not even wrong – it’s on some other page than the actual economy. Can I offer an analogy? There was a brief enthusiasm in the late C19 and early C20 for trying to reduce war to “laws”, sometimes given mathematical form. But, since the stakes are so high, the penalties so drastic, and the forms of conflict so mutable, they were soon discarded as more or less useless (they still have the odd echo in the academy). What turned out to be more useful was various forms of accounting, very close professional attention to the details of each situation, plus a solid grounding in history as a way of giving people a feel for the range of options available and sparking their creativity.

I would not push the analogy too far, but economics often feels like they decided to stick with the formulas and ignore the fighting.

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J Thomas 04.28.14 at 11:27 am

“I’m not sure “wrong” is the right word here. I’m starting to think that much formal economics is not even wrong – it’s on some other page than the actual economy.”

I don’t see that this is a useful distinction. If they ask the wrong questions and get delusional answers, how is that not wrong?

As an aside, from William Timberman’s recommendation I looked at The Slack Wire which so far looks fascinating. I was surprised to see that the sysop there considers himself a Marxist. Why would somebody do that today?

If you say you are a Marxist hundreds of millions of people will ignore anything else you say because they think you are a Marxist. Wouldn’t it make more sense to be something else, and use whatever is useful from Marx after filing off the serial numbers?

Marx and Darwin were about the same time. No serious biologist is a Darwinist, we’ve advanced way beyond that now though with a certain Darwinist legacy.

Since Marx we’ve had the full flowering of the assembly line (replace skilled labor with extremely-reliable less-skilled labor, use precision parts rather than use skills to work around variation in parts). The invention of the research lab, which systematically attempts to innovate. We’ve had cybernetics and control theory. (Watt used self-regulating engines, Adam Smith suggested economies self-regulate for the common good, Marx said they self-regulate for exploiters with no good end-p0int, Darwin said the evolutionary process self-regulates adaptation without requiring consciousness on any level, Weiner said we could replace lots of employees with robots.) We’ve had neocolonialism. (Rather than subjugate and govern colonies, it’s cheaper to pay colonies to subjugate and govern themselves.) We’ve had multiple innovations in banking. (Banks can make fiat money so we can forbid government to do so, all money comes from bank loans and government borrows its funds and pays interest. Corporations that have too little debt become hostile takeover targets and are required to issue junk bonds. Citizens that get a bad credit rating become part of the underclass until they can repair it, they must borrow and repay consistently to be respectable.)

Any three of these would change the economy into something unrecognizable. Why would we pay so much attention to somebody who didn’t have any of them?

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Agog 04.28.14 at 12:34 pm

Piketty’s treatment of capital is not dissimilar to Veblen’s, right?

147

Agog 04.28.14 at 12:35 pm

(I haven’t read the book, just the reviews).

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mattski 04.28.14 at 12:35 pm

J Thomas,

So — if economic theory is basicly and fundamentally wrong, then we might as well discard it completely and start over from scratch. Do you disagree?

Economics is not monolithic. And because it is more of a social science than a hard science it necessarily deals in approximations. And as a social science it is subject to differences of opinion which are political in nature. It is even subject to ‘capture’ by interested parties. Right wing ‘think tanks’ etc.

But like Peter T–maybe for different reasons–I don’t think “wrong” is a helpful word here. Was Keynes “wrong” to suggest government spending as a remedy for a depressed economy? Is Picketty “wrong” to advocate a global tax on wealth? These guys are economists you know.

It’s fine to point out weaknesses or limitations in economic modeling. But the real question is do the prescriptions coming out of various models, or various interpretations of such models work as intended? We’re looking for real world solutions to real world problems. Treating economics as an undifferentiated block of theory is ridiculous, and imo denying that valuable ideas have come out of economics is especially ridiculous.

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Anarcissie 04.28.14 at 2:44 pm

J Thomas 04.28.14 at 11:27 am @ 145:
‘Why would we pay so much attention to somebody who didn’t have any of them?’

Because ‘God is dead.’ So some people are looking for a prophet who tells them what they want to hear and know intuitively is true (communism) but doesn’t bring the message from a spooky Other outside the world, but from Science — a big worldly social machine which seems to produce correct answers and useful techniques from time to time. Since other people do not want to hear the message or even acknowledge that it exists, they drive the prophet and his followers into the wilderness, off to the edges of the world, where, feeding on the longing of his people, he grows vast and haunts the world — rather like the spooky Other.

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J Thomas 04.28.14 at 2:48 pm

“Economics is not monolithic. And because it is more of a social science than a hard science it necessarily deals in approximations. And as a social science it is subject to differences of opinion which are political in nature. It is even subject to ‘capture’ by interested parties.”

So instead of one wrong theory we have many wrong theories?

“It’s fine to point out weaknesses or limitations in economic modeling. But the real question is do the prescriptions coming out of various models, or various interpretations of such models work as intended? We’re looking for real world solutions to real world problems.”

That’s a different sort of thing, isn’t it?

Like, I met a farmer who had a pond that was full of algae gloop. It wasn’t what he wanted. There are various theories about how that sort of thing happens, like if it gets too much phosphate in the runoff that can do it. But his idea was that when you put ducks on a pond like that, it will clear up. He didn’t need to test for phosphates or nitrates, he didn’t need a theory about why the gloop was there, all he needed was a solution. And it was his pond.

So whose opinions should we pay attention to? I have a preference for science because sometimes science works, and usually science can tell you whether it will work or not.

To do economics like a science we’d need to collect data. That’s hard. Like, in the USA the Fed and its member banks interact, and they aren’t really required to tell us how they interact. If they change it all around they don’t have to tell us, and to the extent they do have to tell us they can lie. It’s a big deal just to figure out what’s going on based on what they say is going on.

Well, but when an ecologist looks at an oak-hickory forest, the oaks and the hickories aren’t obligated to say how they interact. Scientists get results anyway.

If a lot of economists have macroeconomic models, and those models do not work, why should we pay attention to them? We could give economists the sort of respect we give to farmers who have experience with the weather and such. Their hunches and intuitions might be better than most because they’ve spent their lives developing those hunches. But….

“It’s fine to point out weaknesses or limitations in economic modeling. But the real question is do the prescriptions coming out of various models, or various interpretations of such models work as intended? We’re looking for real world solutions to real world problems.”

Thinking of it like a science, I prefer models that start with a clear understanding of subsystems, and then put those subsystems together. Ad hoc models that provide ad hoc assumed relationships have some practical use, but you never know when they’ll turn on you. When they do, you won’t have any idea why.

“Treating economics as an undifferentiated block of theory is ridiculous, and imo denying that valuable ideas have come out of economics is especially ridiculous.”

Tell me which economic theories you think are done well enough to pay attention to.

There’s no problem using whatever valuable ideas we find from any source.

It occurs to me that this is kind of similar to the situation in psychiatry. First we had Freudian theory, and then lots of other theories. A few studies came out saying that independent of the theories of the treatment givers, in some controlled settings patients recovered about as well whether they had treatment or not. Psychiatrists responded to this by saying that on average treatment did no good, but some did a lot of good while others did a lot of harm, and good psychiatric care was very much worth having. Then they turned into drug dealers. “This patient had severe anxiety. Treated with this drug which keeps her from remembering from moment to moment well enough to maintain her anxiety, her symptom is cured. Success!”

If there are multiple wrong theories, why should we pay attention to the wrong theories?

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Anarcissie 04.28.14 at 2:53 pm

mattski 04.28.14 at 12:35 pm @ 148:
‘… It’s fine to point out weaknesses or limitations in economic modeling. But the real question is do the prescriptions coming out of various models, or various interpretations of such models work as intended?’

In other words, it’s like the Ptolmaic system of celestial mechanics — it can produce a lot of correct results, even if the fundamental theory is ‘wrong’ and leads to many, many insuperable difficulties. One might want to replace such a system if possible.

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Walt 04.28.14 at 3:37 pm

I think Bruce Wilder’s comment (119) is a pretty good example of the peculiar role of the Cambridge Capital Controversy in these kinds of debates. Let’s say all economists understood that you can’t aggregate capital. Would economists still be as likely to picture “tools” when you said “capital”? Yes — they would just keep in mind that there are different kinds of tools. Could Bruce still make the same argument, that picturing capital as tools is a bad analogy? Yes. So whether or not you can aggregate capital has no function in either side of the argument.

If economists kept in mind that you can’t aggregate capital, would they been more like to predict the GFC? No, because the benchmark model would then just be (complete market) general equilibrium with disaggregated capital markets, a model that doesn’t have financial crises in them. The financial crisis was not caused by heterogeneous capital.

dsquared’s point about interest rates and the amount of capital, on the other hand, really does depend on there being a single capital good.

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david 04.28.14 at 5:05 pm

Consider the so-called factor-price frontier in a long-period model. (This is NOT a model of Arrow-Debreu intertemporal equilibrium.) Every valid marginal productivity relationship holds at every point on the frontier. That is, marginal productivity fails to fix a point on the frontier. In other words, the marginal productivity theory of distribution is, in the jargon, all bosh. And talk about the “marginal productivity of capital” is just as meaningless.

Wrong. What they proved was that MPK is dependent on the existing endowment distribution – i.e., it is a simultaneous property of general equilibrium, not an exogenous characteristic of the capital itself. Of course it “fails to fix a point” in a static (long-period) analysis.

Income distribution and marginal productivity have to be solved simultaneously; the old American Keynesians were wrong to ever have expected otherwise. But the resulting equilibrium really exists, and is really uniquely determined by the endowment, under weak assumptions.

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William Timberman 04.28.14 at 5:08 pm

JW Thomas @ 145

Why would anyone — anyone who wanted to persuade the public — call himself a Marxist? Intellectual stubbornness, for one thing, and for another, fear and loathing of the smug world wreckers who now rule pretty much everything economic, political and cultural, all without any significant opposition. The impulse toward the redemption of fallen warriors also plays a part, I suppose. A true disciple and foot soldier of the Enlightenment, Marx deserved a lot better than he got. Our fondness for him, those of us who’ve always admired his work even as we despised his callous and bloodthirsty bastard children, is at least partly ironic, but its seriousness should not be doubted on that account alone.

As a moral philosopher Marx still deserves attention, I think, and not only from historians. As an economic theorist, yes, he may well have been left floundering in the wake of our century and a half of spiffy innovations since he published Capital, from outsourcing to collateralized debt obligations and interest rate swaps, but I wouldn’t bet on that remaining the case forever, especially not after scouting the intellectual forces marshaling themselves behind folks like JW Mason, bob mcmanus, john c. halasz, et al,. their heralds here.

If human society is to have any value at all, collectively or individually, that value has to reside in human beings treated as ends, not as means. Marx was the first, I think, to realize fully just how great a threat the progressive forces unleashed by industrial capitalism posed to that principle. Certainly he was relentless in exposing it. To file off the serial numbers, as you put it, is to falsify history, which, as a general principle, is never a good idea. Never mind the fact that Marx’s name is anathema among those we wish to persuade. An essential part of the labor of persuading anyone is to to call things by their proper names, and keep doing it until, out of exhaustion, perhaps, they begin to take their fingers out of their ears. Marx is one of those proper names, and really, there’s just no way around crediting him that doesn’t involve lying to ourselves, and by extension, to everyone else.

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Robert 04.28.14 at 7:49 pm

“Wrong. What they proved was that MPK is dependent on the existing endowment distribution – i.e., it is a simultaneous property of general equilibrium, not an exogenous characteristic of the capital itself. Of course it ‘fails to fix a point’ in a static (long-period) analysis.”

This is simply incorrect. In both short-run intertemporal equilibrium models and a disaggregated long-period equilibrium model, the value of the marginal product of every input is equal to its price. It is correct that neither side of this equality is exogenous in either model.

In neither type of model is there necessarily an equality of the marginal product of capital (as opposed to a specific capital good) to the interest rate. Think about price-Wicksell effects in the long run model. I do not believe the concept of “the interest rate” or the “marginal product of capital” is even defined in intertemporal equilibrium.

The long run model can be a steady-state, dynamic model in the sense of Harrod. And endowments are endogenous, not given in such a model. So it does not make sense to talk about the “existing endowment distribution” of capital goods in such a model.

The most that can one say is that in a long run model, in special cases (no capital-reversing), one can define a chain index that abstracts from price Wicksell effects and maintains the equality to the interest rate. (See the post my name links to.) This equality plays no role in establishing equilibrium.

Given what we know now, why would one want to currently put up the Arrow-Debreu model as a general theory of prices, anyways? Joan Robinson use to say she could never get it to stand up long enough to knock it down.

(I also find several comments above about Marx to be poorly expressed, at best.)

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Ronan(rf) 04.28.14 at 8:15 pm

“Krugman is my age, an American, a product of a moment in time, when a child of the quite ordinary middle class could fairly effortlessly find his way to an education at ruling class schools. “

Afaict that was Bill O Reilly’s story as well.

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Bruce Wilder 04.28.14 at 9:00 pm

mattski: . . . do the prescriptions coming out of various models, or various interpretations of such models work as intended?

No. (For all values of “no”.)

There’s no pragmatic gambit available, here. The economy is not the weather, a chaos largely apart from us; nor is it a machine, waiting for us to pull the levers and push the right buttons. The economy is something we do, already. The economy is almost entirely artifactual, the emergent outcome of our strategic interactions. Nothing ever works as any one person intends, but everything “it” does is people doing the doing.

Economics fails, because economists have a false epistemology. They think that their a priori analyses, arrived at by logical deduction from axiomatic assumptions, can be descriptive. They keep trying to construct a logical system that will serve, itself, to map the actual economy in the world. To get the pieces of that logical system to work together, they bend the logic and make assumptions that make it easier to calculate a solution, and as they do that, they get further and further from the complexity and subtlety and particularity of the actual economy and its actual institutions.

Theoretical analysis has its uses, in finding the logical relationships that define concepts. The theory, though, is just a collection of map-making tools, not a map, not a model of the world entire or in parts. There’s just never going to be a correspondence that makes theory, itself, into a map. Analytic distinctions will not map to differences of kind, analytic concepts will not map to empirical generalizations.

In theory, to get to a solution, you have to assume there is a solution, and the actors in the imagined economy can get to that solution. Then, you can assume “profit-maximization” or whatever behavioral principle determines a solution. In the actual economy, there can never be the degree of certainty, theory needs to arrive at a solution. In the actual economy, the actors never entirely know what they don’t know, or what they are yet to learn. No one can be “maximizing profit”, because no one knows enough to calculate the absolute maximum. The theory is a collection of solved problems; the actual economy is a collection of unsolved problems, people in the process of discovering an imperfect solution and working it out, or in the process of discovering that a problem is insoluble, and not working it out.

Krugman thinks economists were surprised by the GFC of 2008, because very few of them were observing and understanding the emerging institutions of shadow banking, but economics has redeemed itself, because it could reach into its grab bag of toy models and offer ex post facto insight into a bank run, only mapped onto the particulars of shadow banks, this time. The theory, a priori as it is, is never going to know what is going on in the world. To know what is going on in the world, and how it works, or fails to work (which is often the more important bit of understanding, practically), one has to observe and model the world. Economists, to know something about the economy, will have to study . . . (wait for it!) . . . the economy. Having insight after the fact from toy models isn’t useful. What is needed are operational (not analytic) models of the actual, institutional economy, so that we can control the economy we are already operating, so that we can architect the economy even as we are changing its structure.

Economics uses the production function in the indefensible way that it does, because it fits neatly into the analytic structure and system. You need constant returns to scale to get firm cost structures that allow market price to clear markets, for example; that’s not the way it commonly is, in the actual world, where increasing returns to scale result in markets, where there’s no equilibrium, no market-clearing price — in fact result in administered prices and exchange without much in the way of actual markets. And, economics resists the myriad criticisms, because acceptance of any of those criticisms would break the system, and then there would be no system, no solution, no easy canon of related ideas. It’s a misunderstanding. The criticisms require moving beyond the analysis to synthesis, to operational models that can describe and to observation and measurement of the particular, as a separate intellectual endeavor.

If one were serious about understanding the dynamics of economic growth from the perspective of 2014, a Solow model with a Cobb-Douglas production function would be recognized by reasonable people as silly, and deeply unserious, not excused as convenient and justified by caution and caveats and hand-waving. Actual production involves elaborate bureaucratic hierarchies managing and controlling processes. You’d want to recognize that. Actual production processes consume energy resources and produce errors, waste and pollution. You’d want to track that. (I know: Second Law of Thermodynamics!) Actual capital investment is, to a large extent, a sunk cost investment, and actual labor isn’t being paid for its time as a metered labor service, but, rather, for operating a control node in the system — compensation is structured by labor contracts in a contingent way to get the proper behavior. If you don’t understand that, as many economists refuse to you, you are surprised by, as an example, efficiency wages and paradoxes like a higher minimum wage increasing employment. Production is a farmer driving a tractor (which sits idle much of the time), burning fuel. Marginal product is a managed outcome, and substitution between capital and labor? — there’s only one steering wheel and one gas pedal on that tractor.

As the constraints from peak oil and environmental carry capacity (e.g. climate change) loom on the horizon, and the technologies of communication and control advance by leaps and bounds, one would think there would be some interest in an analysis of production that acknowledged their roles, and an accounting of how much productivity trends owed to each over the course of the industrial revolution.

I rant, because I don’t think any of this should be news, and, yet, many economists do not seem willing to absorb it. It is not like no economists have thought about these issues. But, the profession appears to want to work it all out in a hermetically sealed analytic theory, and when that project fails, as it must, the profession just keeps going back to the analysis to try again, never to recognize the need to operationalize, to observe, to measure, to go out of doors.

Knowing how a particular institutional structure, in all its second-best particularity, works is never going to have the same apparent power and scope as an absolute, analytic theory in its first-best perfection. But, with an operational model of a particular institutional structure, you do have the option of a pragmatic gambit: you can ask if the model “works” and not be a fool for asking.

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roy belmont 04.28.14 at 9:00 pm

William Timberman :
“If human society is to have any value at all, collectively or individually, that value has to reside in human beings treated as ends, not as means”

All you need there is someone stepping outside your definition of “human”.
Or vice versa, defining the rest of us out.
The assumption is there isn’t any possibility of that, but that’s exactly how we are not proto-chimpanzee. Any altruism toward the original ancestor was jettisoned with new identity. So, not the same, so better, so therefore entitled to abuse and misuse.
A toxic mind-sickness that’s still prevalent as hell.
Post-human’s got a lot of google hits behind it.
And a bunch of what you and I would assume are fellow humans don’t see the commonality at all.
I doubt very much, if we could get through the raw sewage in Donald Sterling’s mind, that we’d find a core sense of Don-as-just-another-regular-guy, even though outwardly he’d probably insist on it.
Deep down he knows he’s special, so special as to be a member of a different species.
You can’t make arguments for shared well-being with sociopaths.

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TM 04.28.14 at 9:18 pm

Can we now have a dedicated Piketty forum, or can we only debate what the cultural industry is saying about him?

http://crookedtimber.org/2014/04/27/has-there-ever-been-a-better-patron-of-the-arts-than-the-cia/#comment-524540

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mattski 04.28.14 at 9:20 pm

@ 150

If there are multiple wrong theories, why should we pay attention to the wrong theories?

Because “wrong” is not the best way to characterize an approximation. Better to allow that some ideas are closer approximations to the way the world works than others.

(You ask about theories. Well, based upon my unprofessional but serious interest in economic thought Keynes’ work has been proven by history to be useful. I don’t think attachment to theory is the point though. The point is what happens when specific ideas are implemented. Do they help or do they hurt, and in whose opinion?)

What I really have a problem with here is the parochial nay-saying of the far left which crops up in threads like these. It is almost as if one were to argue that since language cannot map perfectly onto reality therefore we should give up speaking. People say, “the theory is wrong,” it “should be replaced with something else if possible.” Replaced with what?! Do you have a better idea? Are you ready to submit your brilliant ideas to the scrutiny of the world?

For better or worse the economics profession has submitted their ideas to the scrutiny of the world. To merely say “nay” is to add nothing of value. To deny that Keynes’ ideas have been enormously valuable to the world would be profoundly foolish. At least if you ask me.

Here is an excerpt from Piketty’s interview with Matt Yglesias:

Point number two is, whenever you have a capital market imperfection, or whenever you have some imperfect observability of income from really top wealth holders, you find that the very notion of consumption is not very well defined. What’s the consumption or income of Warren Buffett or Bill Gates when they are using their corporate jet? Are they consuming? Are they investing? Nobody knows.

Think about the word “wealth.” It is similar to capital in its ambiguities. It is very difficult to define in a clear and concise way. Does that mean it’s not meaningful? Not useful? Of course not. Don’t get sidetracked by the imperfection of ideas. And don’t assume that because all ideas have imperfection of some kind that therefore they are all equally valid or useful.

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William Timberman 04.28.14 at 9:21 pm

roy belmont @ 158

True dat. On the other hand, someone who isn’t a sociopath also tends to respect the rest of creation — and not merely that part of it nearest us on the evolutionary tree — as ends rather means, just as he does his fellows. (It’s not that other human beings may never be treated as means, or animals may never be eaten, but that the moral protocols for doing either are rather rigorous. You don’t bottom trawl, for example, or raise a million pigs in boxes just so you can feed an extra billion people, and you don’t drop atomic bombs on cities and attempt to justify it by claiming you’re saving soldiers’ lives.)

As BW explains about the failures of economic theorizing above, there is no sacred telos here, but there is a possible ethics of muddle-through, one that can be learned, I think, at one’s mother’s knee. Realists will no doubt abjure it, but in our present discourse realist seems to be just another word for sociopath. We must do better.

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mattski 04.28.14 at 9:32 pm

Bruce,

Economics fails, because economists have a false epistemology.

You are lapsing into gibberish. Questions for you:

1) What is your preferred alternative to “economics?” What is your brilliant idea?
2) Is Picketty an economist?
3) Did Keynes have any useful insights?
4) If so, were they related to his discipline as an economist?

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mattski 04.28.14 at 10:03 pm

164

TM 04.28.14 at 10:07 pm

“What’s the consumption or income of Warren Buffett or Bill Gates when they are using their corporate jet? Are they consuming? Are they investing? Nobody knows.”

Nobody knows? Really? And this is supposed to be profound?

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TM 04.28.14 at 10:10 pm

Ok I’m gonna repost this. Please tell me what I’m getting wrong here.

Piketty says that the capital rate of return has for centuries, nay millennia, been around 4-5% (http://www.nybooks.com/media/graphics/chart/image/krugman_3-050814.png). Apart from the absurdity of trying to quantify these rates back into the mist of history (I know, DeLong even “calculated” GDP growth rates for the last million years – http://en.wikipedia.org/wiki/Gross_world_product#Historical_and_prehistorical_estimates – deserving nomination for the most ludicrous econometric overreach ever) – am I the first to point out that if capital had indeed grown on the order of 4% p.a. for a period of 1,000 years, a “dollar” would have multiplied to about 200 million billion (I leave the other 1,000 years as an exercise)? What is it about the exponential that makes even mathematical sophisticates completely miss the obvious? Nothing in the universe can grow at sustained rates like that for centuries, let alone millennia (http://www.slideshare.net/amenning/growth-in-a-finite-world-sustainability-and-the-exponential-function)!

To be sure, the rate of return is not the same as the rate of reinvestment, but the whole (imho confused) premise of the r>g argument is that capital is growing *much* faster than income so r is taken as reasonable estimate of a growth rate. Which is simply numerically absurd.

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adam.smith 04.28.14 at 10:39 pm

@TM – it’s really quite simple. A lot of capital isn’t invested. Sometimes (as in wars, a point Piketty makes explicitly) a lot of capital is destroyed. Not all existing capital automatically grows by 5% p.a. But rich people do invest their capital and, for the most part, it’s not threatened by wars or the like. I don’t know if the 5% estimate makes sense or not, but exponential growth is not a problem here.

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Main Street Muse 04.28.14 at 10:57 pm

From the Krugman link in Mattski’s post @163:

“the reason we don’t have a new economic paradigm isn’t that economists are dumb, or even that all of them are rigid in their beliefs (obviously some are, or I wouldn’t have as many arguments as I do.) The reason, instead, is that it’s hard.

Specifically: we have a body of economic theory built around the assumptions of perfectly rational behavior and perfectly functioning markets. Any economist with a grain of sense — which is to say, maybe half the profession? — knows that this is very much an abstraction, to be modified whenever the evidence suggests that it’s going wrong. But nobody has come up with general rules for making such modifications.”

(trying to italicize but feel I will muck it up.)

A science based on theories that are erected on a foundation of a big behavioral impossibility is kind of a big problem. We are not rational. Sometimes we can be rational. But not always. And certainly not when we delve into markets and market making and market toppling of the kind we saw in 2008.

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TM 04.28.14 at 11:06 pm

a.s 166, if I’m not mistaken, return on investment by definition is net of depreciation.

“I don’t know if the 5% estimate makes sense or not, but exponential growth is not a problem here.”

You don’t understand the point do you? What is the claim being made, that capitalists accumulate wealth at a near 5% annual rate? If that is the claim then it’s wrong. It can’t work out numerically. It’s physically impossible. If the claim being made is something else, please somebody enlighten us.

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JW Mason 04.28.14 at 11:46 pm

am I the first to point out that if capital had indeed grown on the order of 4% p.a. for a period of 1,000 years, a “dollar” would have multiplied to about 200 million billion

No, you are not. John Maynard Keynes beat you to it about 70 years ago:

The value of Great Britain’s foreign investments today is estimated at about £4,000 million. This yields us an income at the rate of about 6 1/2 per cent. Half of this we bring home and enjoy; the other half, namely, 3 1/2 per cent, we leave to accumulate abroad at compound interest. Something of this sort has now been going on for about 250 years.

For I trace the beginnings of British foreign investment to the treasure which Drake stole from Spain in 1580. In that year he returned to England bringing with him the prodigious spoils of the Golden Hind. Queen Elizabeth was a considerable shareholder in the syndicate which had financed the expedition. Out of her share she paid off the whole of England’s foreign debt, balanced her budget, and found herself with about £40,000 in hand. This she invested in the Levant Company – which prospered. Out of the profits of the Levant Company, the East India Company was founded; and the profits of this great enterprise were the foundation of England’s subsequent foreign investment. Now it happens that £40,000 accumulating at 3 1/2 per cent compound interest approximately corresponds to the actual volume of England’s foreign investments at various dates, and would actually amount today to the total of £4,000 million which I have already quoted as being what our foreign investments now are. Thus, every £1 which Drake brought home in 1580 has now become £100,000. Such is the power of compound interest !

Keynes goes on to suggest that this compound growth of financial wealth is a distinctive feature of the modern era.

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Peter T 04.29.14 at 12:06 am

By not wrong I meant, essentially, irrelevant. There are quite a few domains of knowledge where complexity, variation, adaptation, strategic interactions and so on are such that abstract generalisations contribute very little to understanding or, where this is the aim, to our ability to manipulate outcomes. Ecology, cell biology, evolution, agriculture, the warfare example I cited, human history…

In these fields we succeed, when we do, by detailed understanding of particular situations, pathways and dependencies, keeping an open mind to the possibility that this time it may well be different, a loose framework of loose over-arching principles and a lot of cross-checking between local results. Sort of the opposite to the way most economics is practiced.

TM’s query is a case in point: elites have generally never taken less than a 4-5% return. Why does this endlessly accumulate? Because countervailing social pressures, intra-elite competition and the accidents of history all tend to break up large concentrations of wealth. To be a member of the Roman mega-rich was to own land in all the provinces of the empire (ie to be able to draw wealth into Italy from Britain to Syria). They had been built up to this enormous size over several centuries by the processes Piketty describes. None of fortunes survived the empire. Often, particular aggregations did not survive the attentions of the emperor in moments of need.

What we need is an economics that pays much more attention to all the forces involved, is more empirical.

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TM 04.29.14 at 12:44 am

JWM, what I pointed out and what Keynes pointed out, in a quote that I am well familiar with, are different things. Keynes believes in that narrative of growth as if it were just the natural order of things that 1 pound multiplies to 100,000 in 300 years – as if anybody had ever seen it happen. His example is nothing but a sleight of hand since he just takes two unrelated figures and uses them to calculate a growth rate without explaining where that growth is actually supposed to be coming from (hint: looting India is a good approximation).

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LFC 04.29.14 at 12:45 am

TM 168
What is the claim being made, that capitalists accumulate wealth at a near 5% annual rate? If that is the claim then it’s wrong. It can’t work out numerically. It’s physically impossible.

Why is it “physically impossible”?

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Bruce Wilder 04.29.14 at 1:57 am

@ mattski

You are lapsing into gibberish.

I would appreciate it, if in the future, when you fail to understand what I have written, you would assume that this reflects a failure of reading comprehension, which it mostly likely is.

Questions for you:

1) What is your preferred alternative to “economics?” What is your brilliant idea?

I think economics is too much theory, and too little factual and institutional investigation. More Piketty, Less Krugman, please.

I thought the Krugman piece you linked to at 163 expressed the problem quite well, reinforcing what I wrote earlier: economic theory is built around assumptions like perfectly rational behavior and perfectly functioning markets. They make those frankly “unrealistic” assumptions in order to make the theory work as a logical analysis — so they can calculate solutions, if you like. Contra Krugman, I really don’t think you can ever, ever make such a theory work as a model of the actual world, because the actual social world is not like that, it’s not logically perfect or complete. And, they shouldn’t expect it. They should expect to have to build operational models of the actual, institutional economy, to learn how the actual economy works. Physicists expect to build operational models, and to estimate parameters and measure variables of the actual universe, so this is not some exception to general rules of the philosophy of science. Economists, in theory, may conceive of perfectly efficient financial markets in order to analyze how they work in some idealist sense, but they shouldn’t be declaring actual financial markets “efficient” (especially not as a political proposition). (Some) economists should be investigating actual, institutional financial markets, estimating just how efficient they are, and what features of the institution serve to make them (in)efficient to whatever degree. It is not unlike an engineer applying physics to build an operational model with which to evaluate the heat efficiency of an actual engine.

Too few economists make their careers doing this kind of institutional analysis, and those who do, hazard heavy ideological criticism of their work, and the discipline is impoverished as a result. And, we all suffer. When there are not two dozen economists paying enough attention to banking and finance to spot a $5 trillion housing bubble, and the consequences include mass disemployment and global unrest, I daresay this is a problem for society.

I don’t like the orthodox v heterodox thing, because I do not think economics should be a religion. But, part of the pathology of too much theory is a religious devotion to ideology.

I think Krugman grossly underestimates the difficulty of establishing facts and figuring out what is the case. He wants insights and ad hoc handwaving and pointing out the window and vague references to “frictions” to be enough. Confronting theory with reality is a little more demanding than that.

2) Is Picketty an economist?

An excellent one, from my reading so far of his book.

3) Did Keynes have any useful insights?

Useful insights, yes. (Useful insights are not enough, not nearly enough.)

4) If so, were they related to his discipline as an economist?

Some of the most important insights were related to his attempted (re)invention of the discipline of economics.

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JW Mason 04.29.14 at 2:09 am

Keynes believes in that narrative of growth as if it were just the natural order of things that 1 pound multiplies to 100,000 in 300 years

Certainly not. What he believe is that the cumulative return on assets is very old, but tended to impede rather than contribute to the growth of production since wealth was overwhelmingly held in the form of money, land or other non produced goods. Only in the past few hundred years has a significant fraction if wealth taken the form of means of production, and so — exceptionally — the compounding of money claims has corresponded to a growth in real incomes. He is also quite clear that this period is at an end, as — for various reasons — wealth now again preferentially takes the form of money-claims. In this sense, Keynes’ story is more sophisticated than either Piketty’s or his critics, since it doesn’t depend on deciding what is the “true” social relation underlying capital but hinges on how that has shifted historically.

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Bruce Wilder 04.29.14 at 3:07 am

Does r > g imply that opportunities to invest in increased output have flagged, and the desire to save outruns those opportunities?

We can imagine that the accumulation of productive capital must be constrained by diminishing returns, but is saving also constrained?

If saving, and accretion of wealth is not limited by returns on, and accumulation of productive capital, what is happening, to channel income to wealth as r remains in excess of g?

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JW Mason 04.29.14 at 3:23 am

Bruce-

The reality is that there are a bunch of different ways to formalize the Piketty argument, and they have different implications for questions like that. In the orthodox sigma > 1 interpretation (what my co-blogger Suresh calls “bastard Pikettyism”, but which you can also find in that article by Piketty and Zucman) the combination of fixed r and reinvestment of all profits is possible because physical capital and labor are close substitutes so capital does not suffer marginal returns. A second possible interpretation is capital-as-debt — it’s financial claims rather than physical assets being piled up. A third possibility is the secular-stagnation (or Kaleckian) interpretation, where an increase in desired saving leads not to a rising capital-output ratio, but to a fall in output until savings drop to the level that can be absorbed by investment.

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JW Mason 04.29.14 at 3:24 am

does not suffer DECLINING marginal returns

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J Thomas 04.29.14 at 4:44 am

#160

“If there are multiple wrong theories, why should we pay attention to the wrong theories?”

Because “wrong” is not the best way to characterize an approximation. Better to allow that some ideas are closer approximations to the way the world works than others.

OK, that sounds reasonable!

(You ask about theories. Well, based upon my unprofessional but serious interest in economic thought Keynes’ work has been proven by history to be useful.

I am not well-versed in that history. As I understand it, before Keynes people tended to assume that Say’s Law was true? That supply creates its own demand, so there cannot be a demand shortage. My freshman year in college I read something by Schumpeter about the business cycle. It was a long time ago, but as I recollect it, he figured that the market is always right so therefore the busts in the boom/bust cycle must serve a valuable purpose. He proposed that they free up resources that would otherwise be wasted on marginal operations, and this was a good thing.

It looks to me like the big value Keynes provided was not what his theory did, but the stupid assumptions it DIDN’T make. By removing some of the a priori assumptions that were not created in response to observation or tested against observation, he released economists from the paralysis they were stuck with when they faced something that their useless theories told them was impossible.

I don’t think attachment to theory is the point though. The point is what happens when specific ideas are implemented. Do they help or do they hurt, and in whose opinion?)

That’s certainly important. Since economic ideas that affect government are inherently highly politicized, the spinsters will try to use them to support whatever they already want, or failing that will try to discredit them using whatever sounds good. We’re already seeing that with Picketty, right?

I figure the short-run political effects of your work mustn’t be the important thing. They will have a minor affect on which of two pre-existing policies will be used for a few years.

What I really have a problem with here is the parochial nay-saying of the far left which crops up in threads like these. It is almost as if one were to argue that since language cannot map perfectly onto reality therefore we should give up speaking. People say, “the theory is wrong,” it “should be replaced with something else if possible.” Replaced with what?! Do you have a better idea? Are you ready to submit your brilliant ideas to the scrutiny of the world?

I have some ideas, but I don’t know how well they’ll work.

“It ain’t what you don’t know that gets you in trouble, it’s what you know for sure that just ain’t so.”

If we can just get rid of some of our false assumptions, that will put us ahead of the game.

In another discussion here about Red Plenty which was closed before I found it, people made a big deal about the computing power that would be required to optimize a whole economy if you tried to do it on PCs. You’d plug in a whole lot of variables and find an optimum solution for the whole economy, and you couldn’t do it in any reasonable time. And this showed that planned economies couldn’t work, because it’s probably an NP-hard problem.

But nobody claims that free markets analyse every bit of data and come up with the optimum solution. Most of the time people find solutions that are good enough. We have lots of traveling salesmen, and probably none of them have optimal solutions for their Traveling Salesman Problem. They just do it, and spend their time thinking about ways to persuade customers.

Why should a planned economy have to come up with an optimal solution? Nobody else does. If you have a market where less than 1% of participants know what’s the optimal result for themselves, why would we expect the whole market or the whole economy to provide an optimal solution?

Get past the concept that somebody — anybody — optimises, and we’ll do better.

* The microeconomics texts I’ve looked at gave me good ideas how businessmen ought to make decisions. Good, workable ideas. Worth studying. How do businessmen actually make decisions? I propose that we should find out. The US government should pick a few hundred businesses at random, and have the NSA collect all their data. Everything that goes onto their computers, phones, and faxes. It’s pretty cheap to collect data and store it. Store it untouched for 5 years or so, and then farm it out to econ grad students etc to try to make sense of it. Old data won’t hurt a company’s competitive position. We can find out a lot about how companies actually behave, and how businessmen actually make decisions. Hint — they seldom optimize.

* Look for ways to get good estimates about the shadow economy. We have a lot of people who try to hide their dealings to avoid taxes etc. Without good estimates how much that is, we don’t know how much it affects the rest of the economy. How much drug money actually leaves the USA? That could make a big difference to our trade imbalance. Do we know?

* Try to create theory based on data about what actually happens, and not on a priori theories about what people ought to do if they know what’s good for them.

* Most of the intro macroeconomics texts I’ve seen probably ought to be burned. There’s the risk that somebody will pay attention to them and do something different based on them….

“Point number two is, whenever you have a capital market imperfection, or whenever you have some imperfect observability of income from really top wealth holders, you find that the very notion of consumption is not very well defined. What’s the consumption or income of Warren Buffett or Bill Gates when they are using their corporate jet? Are they consuming? Are they investing? Nobody knows.

Think about the word “wealth.” It is similar to capital in its ambiguities. It is very difficult to define in a clear and concise way. Does that mean it’s not meaningful? Not useful? Of course not. Don’t get sidetracked by the imperfection of ideas. And don’t assume that because all ideas have imperfection of some kind that therefore they are all equally valid or useful.”

Physicists often use operational definitions and I recommend them to you. The meaning of a term is what you do to measure it. If you measure something two different ways, there’s the chance that you are measuring two different things.

This is a very useful concept.

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JW Mason 04.29.14 at 4:49 am

The microeconomics texts I’ve looked at gave me good ideas how businessmen ought to make decisions.

Yeah, no.

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protoplasm 04.29.14 at 5:26 am

My (fairly recent) interest in economics grew from an engagement with philosophy and history, so while my attention on the subject has certainly been that of an amateur I hope this question, inspired by various CT threads and what little econ I’ve yet read, isn’t unserious or dilettantish:

Is there a story—nice and neat, or otherwise—for why the prevailing and hegemonic theories & methods in economics have been more in the genres of advanced mathematical formalisms, cheap/easy philosophy, and hallucinated moral psychologies than what seems intuitively called for: historical institutionalisms amenable to sociology and applied statistics?

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Peter T 04.29.14 at 5:50 am

“Most of the time people find solutions that are good enough.”

True. But how good does “good enough” have to be? Krushchev was famously told that no-one was in charge of the food supply to New York, and it’s true that the myriad of different suppliers and means does a good enough job. If one shop does not have bread, there will be another, or there will be bagels. But – electricity or water are another matter. A voltage fluctuation can put a factory out of business for a week; bad water can kill half the people in the street. So we don’t let the market run these things. Simply, the difference matters, and is not captured in a debate that takes the market as a start point and then analyses the differences in terms of “imperfections”.

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reason 04.29.14 at 8:49 am

” So we don’t let the market run these things.”

No – we don’t let the UNREGULATED market run these things. This is not just semantics. Think about why the Soviet system collapsed. A large part of the reason was the providers and the regulators were the same people. Seperating functions has great value, especially where there are inherent conflicts of interest.

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J Thomas 04.29.14 at 10:55 am

Electricity is special, if one power plant fails it can unbalance the load for others so they shut off too. It requires absolute reliability of cooperation, and so it really doesn’t make sense to have independent competitors fighting for market share.

Water is special a different way. As it gets harder to find unpolluted water, people stop trusting the public water to be good enough for them. So they increasingly buy bottled water that they do trust, and the bottled water is not regulated nearly as thoroughly.

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Peter T 04.29.14 at 11:11 am

My point is the same as the one Bruce Wilder often makes. Electricity, water etc are not “special”. Large-scale, highly-interdependent processes are the norm across a lot of production (chip fabrication, complex machinery production, mass production of key goods…..). Also in the delivery of many services. We have developed very sophisticated methods of organisation and control that make this routinely possible – methods that involve markets only tangentially. By most counts, “market” production is in fact much less than half of total production (government, households, not-for-profits, academia, large corporations and so on are not only larger in total, but often each dominate in certain sectors). An economics that analyses this in terms of deviation from a market model is simply bizarre.

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J Thomas 04.29.14 at 11:43 am

“Is there a story—nice and neat, or otherwise—for why the prevailing and hegemonic theories & methods in economics have been more in the genres of advanced mathematical formalisms, cheap/easy philosophy, and hallucinated moral psychologies than what seems intuitively called for: historical institutionalisms amenable to sociology and applied statistics?”

Here is one: “Economic theory” is a product that must be sold in the economy. The consumers of economic theory are the the ones who pay for it, not necessarily the ones who get taught it. Just like the consumers of advertising are the people who pay for it and not the people who are exposed to it.

Until recently, a whole lot of the demand for economic theory involved demand for explanations why communism could not work. Even today, there is a great deal of demand to explain why anything government does is bad, and why it is that unregulated free markets are the only way to create wealth and the best way to decide how to distribute wealth.

And so it should be no surprise that a great deal of economic theory taught to non-economists has been devoted to explaining why communism cannot work and why unregulated free enterprise is the only way to create wealth and the best way to decide how to distribute wealth.

It should not be surprising that what academic economists do for their bread and butter affects their thinking when they write for each other, too. If what you taught was incompatible with what you thought, that would induce cognitive dissonance, right?

Plus, even if your actual teaching of the material was superb, consumers might get very upset if they decided that you were a communist allowed to teach the nation’s young people. While academic freedom pretty much requires that we have a few communists teaching economics, that would not be good for your bottom line.

So economists who don’t want to be trapped in the low-price communist brand, must be careful not to say anything that might be interpreted as a challenge to the idea that unregulated free enterprise is the only workable way to get results.

There are a lot of economists who try to do something unique, who want to differentiate themselves from the mainstream so they can be something more than a replaceable part, a commodity item. If you look hard you might find an economist who has been working hard at whatever you are interested in. But people don’t usually pay them a lot of attention. While there is both risk and reward to differentiating your product from the crowd, there is not much reward to paying attention to others who have done that.

Of course there is room for a couple of major brands, plus some specialties. Just like in personal computing there were PCs and Apples.

https://en.wikipedia.org/wiki/Saltwater_and_freshwater_economics

Economists who are interested in fixing the problems with mainstream theory tend to do it as a sort of hobby.

All my opinion, and I am not an expert.

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JW Mason 04.29.14 at 12:30 pm

Is there a story—nice and neat, or otherwise—for why the prevailing and hegemonic theories & methods in economics have been more in the genres of advanced mathematical formalisms, cheap/easy philosophy, and hallucinated moral psychologies than what seems intuitively called for: historical institutionalisms amenable to sociology and applied statistics?

Philip Mirowski has written a lot about this. Here is a good place to start: http://www.bresserpereira.org.br/Terceiros/Cursos/2010/2010_Physics_and_the_marginalist_revolution.pdf

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reason 04.29.14 at 12:47 pm

J. Thomas @183
“As it gets harder to find unpolluted water, people stop trusting the public water to be good enough for them. “

Well the fact that people stop trusting the perfectly good public water (repeated shown in trials to be in fact safer than bottled water) has nothing to do with the difficulty of finding unpolluted water and everything to do with the manipulatability of public perception. Unfortunately people are not nearly as rational and critical as they should be (or as they would need to be for the neo-classical model to approximate reality for that matter).

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Main Street Muse 04.29.14 at 1:04 pm

Bruce @173 “I don’t like the orthodox v heterodox thing, because I do not think economics should be a religion. But, part of the pathology of too much theory is a religious devotion to ideology.”

Economists – the ones who seek to put reality into rational boxes – are like priests, faithfully devoted to an ideology that cannot be proved. God is more likely to exist than those rationally ordered markets, created by the whims of economists, that world where information is easily available and greed is something one finds only outside the model, and thus not relevant.

It is really very sad that Krugman thinks only half the economics profession “knows this is very much an abstraction, to be modified whenever the evidence suggests that it’s going wrong.” And even sadder that six years out from the devastating crash of the global economy, created in part by a denial of the reality that was happening in the mortgage market and financial sector, “nobody has come up with general rules for making such modifications.”

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reason 04.29.14 at 1:12 pm

P.S. The thing about water is particularly frustrating to me, because I am the only person in my household who generally drinks tap water, and not using bottled water is one of the absolute no-brainer things we could do to reduce our carbon footprint. Excuse me while I fume (and fume at J.Thomas for thinking there might be a good reason for people to drink bottled water).

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JW Mason 04.29.14 at 1:23 pm

So economists who don’t want to be trapped in the low-price communist brand, must be careful not to say anything that might be interpreted as a challenge to the idea that unregulated free enterprise is the only workable way to get results.

As it happens, this is completely false. It is true that the economics profession is strongly committed to. a particular kind of formalism, far out of proportion to its usefulness at addressing the sort of questions that were historically economics’ domain. It is also true that the economics profession provides an important ideological prop to the existing social order. But these facts are entirely unrelated, as far as I can tell.

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J Thomas 04.29.14 at 1:37 pm

#187

“Well the fact that people stop trusting the perfectly good public water (repeated shown in trials to be in fact safer than bottled water) has nothing to do with the difficulty of finding unpolluted water and everything to do with the manipulatability of public perception.”

Isn’t it true that the supply of potable water is in fact shrinking? Water works require more treatment to make the water safe?

Agreed about the manipulation. But notice that there is a big variety of bottled water available. A consumer who recognizes that bottled water varies in quality, can assume that the market has discounted the water that isn’t as good, so it’s safe to drink the more expensive brands.

“Biggest price is best price.”

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reason 04.29.14 at 1:51 pm

“A consumer who recognizes that bottled water varies in quality, can assume that the market has discounted the water that isn’t as good, so it’s safe to drink the more expensive brands.

“Biggest price is best price.””

Wrong and wronger.

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J Thomas 04.29.14 at 2:16 pm

“Wrong and wronger.”

Yes, but do you deny the mechanic is in place?

There are a lot of people who do believe this sort of thing, and it is implicitly a belief in markets.

When I was a kid, there was one kind of cheap ice cream we got a lot, and a pricier better kind we mostly got for special occasions. Then I visited friends in another state, and the ice creams were reversed. The better ice cream was cheaper, and they only got the worse ice cream on special occasions. I eventually reasoned that it was because back then it *cost* to ship ice cream long distances, so the ice cream that went a long way had to fit a different market niche.

Don’t people often assume the more expensive product is the better product? I’ve seen it happen many times.

I have several times seen the claim in print that if you go to an expensive french restaurant and you’re ready to get a good wine but you don’t know much about wines, you should get the second or third most expensive wine on the list. The most expensive wine is some crap they put there for rich idiots who don’t know what they’re doing, but the second most expensive wine will be superb. The beauty of this strategy is that if you don’t know enough about wine to tell by taste whether it’s good, this simple rule will convince you that you have a fine wine and you have not been shnookered.

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reason 04.29.14 at 2:21 pm

” is that if you don’t know enough about wine to tell by taste whether it’s good, “

logically you should get the cheapest wine or skip wine altogether.

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reason 04.29.14 at 2:24 pm

P.S. Maybe you meant by name not by taste in which case you might have a point.

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J Thomas 04.29.14 at 2:27 pm

What kind of person goes to an expensive French restaurant and gets the cheapest wine? At the very least, somebody who doesn’t care about the image he presents.

By a similar token you shouldn’t go to a casino at all unless you are good at counting cards or sharking other players at the poker games. But lots and lots of people do go to casinos. Some of them set aside so much money to lose and quit when it’s gone, and others don’t.

And what about people who invest in the stock market without being fanatical experts in the companies they buy stock in?

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J Thomas 04.29.14 at 2:31 pm

Reason, I wrote a reply that had a word which got it into moderation.

My fundamental point here is that a lot of the time a lot of people are not rational, and they appear to think they won’t get more enjoyment by being more rational.

I keep describing stupid things people do and you keep telling me they’re stupid. Yes, I agree.

This is one of the reasons we can expect poor results if we assume people are smart and rational.

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Ronan(rf) 04.29.14 at 2:39 pm

protoplasm – as a layman, I found some of Marion Fourcade’s stuff interesting on that question. (review here)

http://understandingsociety.blogspot.ie/2013/11/who-made-economics.html

Though there appears to be a lot written on that specific question, and I don’t have the interest (personally) to read any deeper into the topic. (so you can find a lot of semi competing theories out there, afaict)

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reason 04.29.14 at 2:48 pm

J. Thomas @196
OK, I get the point – we do not disagree here.

But this:
“An economics that analyses this in terms of deviation from a market model is simply bizarre.”

I think is actually missing something important. Economics has mislead itself by being guided by what is measured, rather than what is meant to be measured. In a very real sense GDP is a measure of market exchange, not of value (“utility”) produced or consumed. If you are trying to maximise it, then any deviation from unrestricted exchange will inevitably depress what you are trying to maximise. You often here people say that “so-and-so is bad FOR THE ECONOMY”. The economy is just a tool serving other purposes. This is often like saying doing something or other in building a house is “bad for the hammer”. We are mixing up means and ends.

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reason 04.29.14 at 2:52 pm

P.S. And bottled water is a perfect example of this.

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TM 04.29.14 at 3:09 pm

172 “Why is it physically impossible”?

165: “if capital had indeed grown on the order of 4% p.a. for a period of 1,000 years, a “dollar” would have multiplied to about 200 million billion (I leave the other 1,000 years as an exercise)”

Is there a real dispute about the observation that this is physically impossible? There simply are no capital amounts on that order in existence today. Do we really have to argue the basics of arithmetic?

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A H 04.29.14 at 3:17 pm

179 “The microeconomics texts I’ve looked at gave me good ideas how businessmen ought to make decisions.

Yeah, no.”

The most influential scholar of “Strategic management” is Micheal Porter, and his “5 forces” come almost diriectly from any intro micro chapter on monopolistic competition. This may not be what businesses ought to do, but in practice it is how they make decisions.

I have wondered if anyone has ever written a Marxist take on porter. He so unabashedly emodies capitalism.

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Random Lurker 04.29.14 at 3:34 pm

@TM 200
Suppose that capital accumulates at a rate of 5%/year, while growth is just 1% year.
This means that at some point capital (in the sense of general wealth, not just of productive capital) eats much more than it produces. Oh my! This means that people will have, sooner or later, falling real wages! But this will lead to a crisis of demand! Unless we can increase the size of the market. So:
1) first, we split new markets among capitalist nations, as each nations tries to get a bigger market;
2) whoops – we finished the possible new markets – now each capitalist nation will try to snatch some market from other capitalist nations;
3) unfortunately stage 2 caused WW1, but now, winning nations can shovel the excess debt on losing nations!
4) unfortunately losing nations became either soviet or fascist, and are not paying bask the debt! A lot of “wealth” disappears. General sufferings. Fascist nations also redistribute some wealth (e.g.: Mussolini expropriated and redistributed a lot of land from big landlords to poor farmers). soviet countries of course redistribute everything. Another lot of wealth disappears again.
5) But this is still not enough, so fascist nations still want to increase their markets, this time by forcefully conquering their neighborhoods and turning them into their “spheres of influence”. WW2 ensues, which I suppose burns out a lot of wealth again (included in the USA through inflation IMHO, for very big wealth owners);
6) Now, there is no more too much wealth! Rinse and repeat.

Do you agree/disagree with this interpretation? Do you think this is physically impossible? Or you mean that just the continuous accumulation, without the crises (this of course would be much less possible)?

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Lee A. Arnold 04.29.14 at 4:30 pm

Protoplasm #180, The root problem there, is probably that any definition of “institution” that could be intellectually coherent and endlessly useful, would not be what sociologists nor economists think it is. An institution is a collected intentionality that rules over a set of similar distinctions, tranformations or transactions. It is like a Wittgensteinian language-game.

Thus, mathematics is also an institution, language is an institution. Mathematics and language even have an economic function: they reduce costs of communication, and sometimes reduce costs of organizing the world by other, overlapping institutions. That is why we use language and math!

This idea goes beyond the way people normally think, although it is the base of the definition. Indeed it goes much further. There are thought categories which are virtually identical to institutions: A piece of technology is an institution (it controls a set of transformations), and all institutions are kinds of technologies. Capital is an institution, or conversely, all institutions are capitals.

Consequently the definition of “institution”, within a specific discussion, valves-down the total possible definition, simply in order to make the discussion more tractable. But this creates problems in extending the discussion outward. Thus: Piketty defines “capital” and “wealth” for his book’s purposes, then lots of other people start having objections because it runs into problems for other discussions, as we have seen in comments above.

But to get back to reformulating economics, using math to describe “math as an institution” introduces a logical circularity — and indeed, in today’s economics, institutionalism is not only tough to define, but notoriously unmathable, and the “institutionalists” (such as they are, within economics) are relying upon things like game theory to examine branching scenarios in business contracts, and where N-player results are mostly intractable.

I think that N-compartments may be an insurmountable barrier to the success of economics science. Of course the quantification of money suggests that numbers may be useful though it may be misleading, while mathematics is all that science in general has for extended predictions, even though in this case the foundational problems in applying math to complex systems (e.g. N-compartment models; inability to predict emergence; incompleteness) keep preventing extended application. Over and over again.

Thus economists have divided into micro (including the atomized, hallucinated moral psychologies) and macro, where overall accounting identities can be played with, and their own personal politics intervenes (as some of the Chicago school demonstrated in reactions to the financial crisis, and some pomposity in comments above demonstrates).

I drew a picture of what an institution is, here. Please ignore the ponderous scrolling Star Wars intro. Note that I show intentionality making mathematics, as Brouwer required:

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J Thomas 04.29.14 at 5:23 pm

“if capital had indeed grown on the order of 4% p.a. for a period of 1,000 years, a “dollar” would have multiplied to about 200 million billion (I leave the other 1,000 years as an exercise)”

Is there a real dispute about the observation that this is physically impossible?

I don’t see why people would argue about this. If the wealth increases slower than the growth in ownership of wealth by some party, then it’s far more likely to fit a logistic curve.

For awhile it looks exponential. Then as the amount of capital already collected grows enough that there isn’t enough left to collect, it slows down. When you already own 99% of stuff, of course you can’t grow like you did when you only owned 1%.

Besides that, things happen. The more you own the more of a target you are. Say you’re a banker and you earn 4% per year by your careful efforts. When you get big enough you’ll be unable to avoid loans to government. Then at some point there will be a war and you will be required to make very big loans. Win or lose, the bulk of them won’t be paid back. You may find yourself running for your life.

And a lot of wealth is lost to barbarian invaders. The Mongols, the Huns, etc.

No, of course 4% exponential growth doesn’t happen with any consistency.

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r. clayton 04.29.14 at 6:24 pm

Piketty is pronounced pick-a-TEE or thereabouts.

Maybe, maybe not.
But I noticed when he was in Washington they called him Toe-mah when they risked going beyond “Thomas.”

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TM 04.29.14 at 6:32 pm

“If the wealth increases slower than the growth in ownership of wealth by some party, then it’s far more likely to fit a logistic curve.”

What you have in mind is a situation where a subsystem is growing at a faster rate than the overall system. In that case, if growth rates are constant, the subsystem will just swallow the whole system. In practice, you are right, the growth of the subsystem relative to the overall system has to approach a logistic shape and both growth rates have to equalize.

This is kind of how several people seem to have understood the r > g argument. But it’s not how it is phrased. g is NOT the increase in total wealth, it’s the increase in economic output. r is not the “growth in ownership of wealth by some party”; it is the return on investment which by some accounts is approximately the rate of capital accumulation but that assumes 100% reinvestment which is patently not consistent with empirical reality. But even if it were, r would not be the growth rate of something that is a subset of GDP. It would be the growth rate of something that is much bigger than GDP! And if r were in fact 4-5% consistently over centuries, such growth would have been beyond anything imaginable.

To summarize, the inequality r>g doesn’t make sense unless one assumes r is a growth rate, which is not what it’s defined as. And if one assumes r as a growth rate, the arithmetic turns out completely nonsensical.

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TM 04.29.14 at 6:33 pm

And here again is Piketty’s chart of r and g:
http://www.nybooks.com/media/graphics/chart/image/krugman_3-050814.png

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mds 04.29.14 at 8:40 pm

Because “wrong” is not the best way to characterize an approximation.

“The earth is approximately flat. Now let’s launch satellites!”

“To a first approximation, hydrogen and helium are the only elements in the universe. Now let’s do chemistry!”

If an approximation is sufficiently poor in light of the declared purpose of employing it, I would say it is all right to call it wrong. Whether, e.g., DSGE falls into this category I leave to the economists present, though I will say that my intuition is that anything built around empirically false axioms would require a whole lot of epicycles, at the very least.

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mattski 04.29.14 at 9:17 pm

I apologize for being a lazy, hit-and-run asshole, but here’s more good stuff.

Bruce, thanks for your response. I’ll get back to you. Peace!

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mattski 04.29.14 at 9:31 pm

This is preliminary to a longer response to Bruce W.

I remain convinced that your issues with Krugman are spurious, and were you to be consistent about it, would apply equally to Picketty. Krugman:

You fairly often find heterodox economists insisting that to accept the idea that capital and labor are paid their marginal products, even as a working hypothesis to be modified when you address things like executive pay, is to accept that high inequality is morally justified. But that’s obviously not the case: there are plenty of economists who are willing to use marginal-product models (as gadgets, not as fundamental truth) who don’t at all accept the sanctity of the market distribution of income. So this complaint is, in its own way, as much of a distortion as the right-wing claim that anyone who so much as mentions inequality is a Marxist.

http://krugman.blogs.nytimes.com/2014/04/25/frustrations-of-the-heterodox/

**Interested in JW Mason’s take on this.

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Bruce Wilder 04.29.14 at 9:50 pm

JW Mason @ 176: . . . physical capital and labor are close substitutes so capital does not suffer [declining] marginal returns.

The capitalists can hire robots in place of minimum-wage workers, so we cannot raise the minimum wage? Intellectually incoherent and mean, too. Krugman will probably feature it in all his talks.

reason @ 182: A large part of the reason [for the failure of the Soviet Union] was the providers and the regulators were the same people. Separating functions has great value . . .

Indeed. The ability of a hierarchy to break the incentive bound is a key to why it works so well as a means of organizing closely coordinated groups, in general. This is more a statement about hierarchy than about “markets”. Economists typically want to make it a story of faulty allocation, which also occurred.

reason @ 187: the fact that people stop trusting the perfectly good public water . . .has . . . everything to do with the manipulability of public perception. Unfortunately people are not nearly as rational and critical as they should be . . .

Most people do not understand what’s at stake in struggles over public policy or how it affects them, and they don’t pay much attention.

In relation to Piketty, one reasonable implication of r > g is that the ability of the very rich to realize super-returns (greater than those available to small savers) is mirrored by the ability of collective action to secure income from the commons, and economies from public provision or regulation of natural monopolies, and public provision of social insurance. To make money on underregulated bottled water, the rich have an incentive to undermine the technical capacity of and public confidence in, public water administration.

Main Street Muse @ 188

I hope you catch Dean Baker giving Paul Gattopardo Krugman an economics lesson.
http://www.cepr.net/index.php/blogs/beat-the-press/paul-krugman-and-the-economics-fringe

JW Mason @ 190:

. . . the economics profession is strongly committed to a particular kind of formalism, far out of proportion to its usefulness at addressing the sort of questions that were historically economics’ domain. It is also true that the economics profession provides an important ideological prop to the existing social order. But these facts are entirely unrelated, as far as I can tell.

I have to strongly disagree on that. The fetish for “hard math” that overwhelmed macroeconomics after the Lucas Critique had a lot to do with the sources of academic funding, and the kind of reactionary noises the leading proponents made, which helped to obtain that funding. The doctrine was to deny that government could be responsible for the performance of the economy, regardless of logic or evidence. And, that doctrine was complemented by a program of Ph.D. training and socialization, which ensured that a generation of economists would have none of the knowledge or skills or interests of a competent technocrat. The esoteric formalism — derive microfoundations always! — reduced the accessibility by outsiders of advanced economic research markedly (while also handicapping the practitioner’s capacity to appreciate reality) — compare anything written by James Tobin with anything by Michael Woodford. It’s looks to me like design to purpose, and entirely related.

AH @ 201: Michael Porter, and his “5 forces” come almost directly from any intro micro chapter on monopolistic competition.

Porter’s work came out of the simple story-telling of the industrial organization sub-specialty of the 1950s and 1960s, concerning rivalrous competition and the bargaining over terms of trade among closely cooperating parties. Some of the explanation for why competition is rivalrous and involves price discrimination could have come out of the analysis of monopolistic competition, but Porter was usually not all that subtle. Mostly, Econ 101, even today, is silent on what managers do inside the corporate hierarchy, or why there is a hierarchy, let alone how managers should behave (other than the subliminal encouragement to be greedy and unethical, of course, encased in terms, like “profit-maximizing”).

213

Bruce Wilder 04.29.14 at 10:11 pm

mattski, check out my link to Dean Baker above.

Krugman is burning strawmen down with the marginal product crap.

Every competent economist, regardless of political druthers, knows that there are serious, usually fatal problems with the production function as a concept, and marginal product analysis rests on the production function. Moreover, Stiglitz proved that under uncertainty, while factors do still earn their marginal product, that marginal product is a managed outcome. The marginal product of labor, for example, doesn’t determine the wage; the wage determines the marginal product, because the firm has an incentive to make it so. Given the wage, the firm will manage the use of labor in the production process in such a way as to make the marginal product of labor equal the wage.

The general critique of irresponsible reference to marginal product as the determinant of factor income is the attempt to overlook the role of deliberate management. In a context in which top management is manipulating both the marginal product of capital and the marginal product of labor, as part of a scheme to pay itself fantastic sums . . .

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JW Mason 04.29.14 at 10:29 pm

The capitalists can hire robots in place of minimum-wage workers, so we cannot raise the minimum wage?

Wrong. Not cannot, do not need to. (I hope it is clear that I’m not endorsing this view.)

I have to strongly disagree on that.

I know you disagree. But you’re wrong. It’s just as possible to make abstract, deductive, mathematical arguments for socialism as for laissez-faire capitalism, and it’s just as possible to make concrete, historical, psychologically rich arguments for laissez-faire capitalism as for socialism.

215

Main Street Muse 04.29.14 at 10:33 pm

Bruce Wilder @211 – From the Dean Wilder link: “However entertaining it might have been, the financial crisis was secondary.”

I don’t know how you can separate the housing bubble from the financial crisis. As Baker noted: “hey, who knew AIG had issued $600 billion in credit default swaps on mortgage backed securities?”

Hey – who knew? AIG knew! And Goldman Sachs knew! And Goldman Sachs bet both sides of the deal. But for whatever reason, Henry Paulson, former head of Goldman Sachs who moved into Treasury, was oblivious? (There is an element of fraud, deception, illicit deals – you call it what you want – in this crash that really has not been addressed by the econo-sphere. And let’s ignore the massive federal bailout of a failed financial sector, unprecedented in American history.)

The financial crisis was not possible without the housing bubble – one fueled the other in a chicken and egg kind of way. (Obviously, I am not a master economist at all – just my humble observations from Ground Zero of the crash. So please, feel free to explain why the housing bubble is distinct and separate from a massive crash resulting from crazy CDO deals on mortgage-backed securities.)

For me, not an economist, not versed in economic theory, I’ve spent the past few years since the crash trying to understand how it happened. When I lived in Chicago, we saw the housing market heat up in ways that were inexplicable – we would go for walks in our once-working class neighborhood and wonder who had the income for the $800K homes that were going up on teeny tiny city lots.

To hear economists talk about it, the fact that housing prices never fell meant that they would never fall. So buying and selling and creating collateral debt obligations on mortgages with rickety financial backing was an appropriate plan of action – and the risk was spread out throughout the economy. Boy, was it ever.

One of the things I cannot understand – and please explain it if you can – how did debt become the most solid and enduring pillar of our economy?

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JW Mason 04.29.14 at 10:37 pm

More to the point, the more you learn about economics, the more you see how weak is the link between the esoteric and exoteric content. To take an obvious but important example, the orthodox trade theory is a theory of *conflicting interests* in trade. one of the strongest conclusions of the Ricardian model — every bit as strong as the proof of mutual gains from trade — is that in any situation where there is a choice over the development of production technology, a country will benefit most if it differentially raises its productivity in the goods it currently imports, while its trade partners will benefit most if it raises its productivity in the goods it currently exports. (Paul Samuelson famously pointed this out in one of his last published papers.) Yet this core result of the model is never pointed out in public discussions of trade. Or more obviously, think about optimal tariffs. It is true that professional economists are fanatically attached to free trade, and it is also true that trade theory is fanatically attached to a particular formalism that abstracts form most of the issues involved in real-world trade policy. Surprisingly these two facts turn out to have nothing to do with each other. Because orthodox trade theory does NOT support orthodox trade policy. But you have to make a certain investment in studying economics to see this.

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bob mcmanus 04.29.14 at 10:48 pm

Okay, been thinking since somewhere around JW Mason’s 177, and because “fictitious capital” and the “Tendency of profits to decline” are difficult for me to completely understand, but inspired by reading a longer version of a Marxian critique of fundamentalist Marxist economists especially Michael Robertas and Carchedi…

…so what will sustain, or has sustained, “r” the returns to capital/surplus in an age of robots and overproduction or maxed capitalization, in other words why won’t ‘r’ decline? And that takes me back to one of the first economic books I read, Toporowski’s “Financial Turbulence”…

…why not financialization divorced from production or consumption or demand, but an ever stream of fictitious capital/fiat money/bubbles directed at the 1% by central banks? To be gambled in a way that attracts labour/consumption/production by the 99%? Like a tech bubble/ housing bubble/student loan bubble/next bubble? Why can’t they play this game forever?

Recommend very strongly Christian Marazzi Capital as Language and other works, (he does use a lot of Keynes)

The social structure which permits the attainment of such a result is the
market: the financial market organizes the confrontation between the
personal opinions of investors in such a way as to produce a collective
judgment that has the status of a reference value.

On the financial markets speculative behavior is rational
because the markets are self-referential. Prices are the expression
of the action of collective opinion, the individual investor does
not react to information but to what he believes will be the reaction
of the other investors in the face of that information. It follows
that the values of securities listed on the stock exchange make
reference to themselves and not to their underlying economic
value. This is the self -referential nature of the markets , in which
the disassociation between economic value and exchange value is
symmetrical to the disassociation between individual belief and
collective belief .

And Kojin Karatani, Architecture as Metaphor which is really about money

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bob mcmanus 04.29.14 at 10:54 pm

I guess I didn’t explain the ref to Toporowski

He convinced me that finance is in no way shape or form reflective of the production/consumption economy.

I no longer think that is accurate, but finance is in a way reflective of our service/information economy, but probably not dependent on it.

New Soviet America: You pretend to work, and I take the surplus from your imagination.

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engels 04.29.14 at 10:56 pm

It’s just as possible to make abstract, deductive, mathematical arguments for socialism as for laissez-faire capitalism, and it’s just as possible to make concrete, historical, psychologically rich arguments for laissez-faire capitalism as for socialism.</i?

Possibly but iirc that doesn't have traction on the original claim, which was that the abtract, mathiness of contemporary economics is connected to its nature as ideology. The fact that one may be able to propound abstract, mathy ideological arguments for socialism (perhaps in the manner John Roemer?) wouldn’t contradict that…

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bob mcmanus 04.29.14 at 11:36 pm

You know I get so bored with, especially arguing against them, the useless bourgeois economists, who might just be reflecting their class positions…hoocudanode? Dismiss them with contempt and move on to what’s really fun:What the frack is going on?

Anaway, yeah, I am a Marxist, and that mostly means an abhorrence of reformism, which isn’t gonna work and is exactly what they want you to do, endless arguments over the right and just level of inheritance taxes…blah blah.

How about interesting questions like if financial values are determined by Keynes “beauty contest” and finance = capital/wealth and galloping financialization is turning everything into exploitable capital does that mean that labour no longer creates value (which is why fundy Marxists feel so lonely) or has the nature of labour/production changed? Is all value nor determined in a “beauty contest” with ourselves being the judges and contestants?

You know, they used to imagine that the socialist paradise would eliminate exchange value. What if in a post -scarcity (at least as concerns bare sustenance) society it is not x-value but use-value that is being eliminated so that nothing remains but exchange value? What does a Post-Marxian* analysis of that look like? The end of jouissance?

*It is called “post-Marxism” and “Post-Capitalism” precisely because it damn sure ain’t socialism.

221

William Timberman 04.30.14 at 12:03 am

…use-value is being eliminated… But we can still eat cake, right?

222

Bruce Wilder 04.30.14 at 12:09 am

Main Street Muse: . . . how did debt become the most solid and enduring pillar of our economy?

r > g ?

Or, as the wolf put it to little red riding hood, “. . . the better to eat you with . . .”

223

JW Mason 04.30.14 at 12:32 am

that doesn’t have traction on the original claim, which was that the abtract, mathiness of contemporary economics is connected to its nature as ideology.

Right. But I am arguing that, if you look at the economics profession in its concrete reality, that claim does not hold up. (1) The formalisms employed do not in fact support the political positions on whose behalf they are invoked. (2) The most ideological economics is not the mathiest, in fact it’s often the economics that is methodologically closest to what the critics are calling for. I’ve offered trade theory as an example of (1). For (2), consider Reinhart and Rogoff, who are both very aggressive ideologists and also among the most eclectically empirical, historically and institutionally sensitive economists in their milieu. Or someone like Michael Woodford, who explicitly describes the purpose of his work as bringing mainstream macroeconomics closer to the concrete realities of central banking, precisely in order to make it a stronger prop for orthodoxy.

I understand the appeal of a morality tale in which bad ends can only be served by bad means. But with respect to academic economics, it just isn’t true.

224

Corey Robin 04.30.14 at 12:37 am

Just to piggy-back a bit on Josh’s comments. The right-wing Austrian School theories of Hayek and Mises — and Hayek, according to Mirowski, deserves far more a place at the table than we realized in terms of successfully propounding the more reactionary economic moves of the last half-century — are very hostile to mathematical and scientific models of economics. Mises is especially scathing on the topic. As was Menger, who was one of the three of the original marginalist triumvirate.

225

JW Mason 04.30.14 at 12:46 am

Corey-

Right. Or think about Milton Friedman, whose Monetary History of the United States is about as far from the ahistorical, mathematical abstraction of contemporary economics as you can get. Bob Pollin once told me that that book is the model we radical economists should be trying to emulate. I think he was right.

226

J Thomas 04.30.14 at 12:48 am

“The formalisms employed do not in fact support the political positions on whose behalf they are invoked.”

“I understand the appeal of a morality tale in which bad ends can only be served by bad means. But with respect to academic economics, it just isn’t true.”

When it doesn’t matter whether the means support the ends or not, what does it matter whether the means are bad?

227

LFC 04.30.14 at 12:50 am

@JWMason
Because orthodox trade theory does NOT support orthodox trade policy.

So how do economists deal w the cognitive dissonance of being attached to a policy — free trade — that (at least acc. to JW Mason) the theory doesn’t support (or at least doesn’t support in an unambiguous way)? They just pretend there’s no problem? Or they claim that policy is all a matter of ‘the good not the perfect’ in a messy world? Or what?

228

JW Mason 04.30.14 at 12:52 am

how do economists deal w the cognitive dissonance of being attached to a policy — free trade — that (at least acc. to JW Mason) the theory doesn’t support (or at least doesn’t support in an unambiguous way)?

Good question! I don’t have a good answer. At this point, I just want people to see that it IS a question.

229

William Timberman 04.30.14 at 12:57 am

A bob mcmanus nightmare: Is the metastasis of the liquidity preference what’s transforming fixed capital assets into tradable fictions, which then continue to be traded even after they’ve ceased to exist? Or is it the other way around?

Can I go home now?

230

JW Mason 04.30.14 at 1:02 am

OK — for a start to your answer take a look at this paper by Krugman on the development of the new trade theory. You will see that he explicitly describes the impetus behind the development of the theory as finding a better justification for free trade, one that — unlike the orthodox theory — can produce large gains from trade without the need for large redistributions of income. Krugman:

What was really needed to get peoples’ attention, however, was a “killer ap”: a demonstration that the new view offered a fundamentally different insight into something that mattered. I found that killer ap in an empirical insight by Balassa (1966), who pointed out that trade liberalization among industrial countries had proved surprisingly nondisruptive, belying fears that, for example, there would be a major rearrangement of Europe’s industrial landscape after the formation of the Common Market, and possibly large effects on income distribution…. In Krugman (1981) I built a special version of the emerging style of model to encapsulate this phenomenon. What the model showed was that the classic Stolper-Samuelson result, in which trade liberalization hurts scarce factors, can emerge—but only if comparative advantage is strong and/or economies of scale weak. In the reverse case, which seemed to describe the growth of trade among industrial countries, trade was win-win.

The work Krugman got his Nobel for was specifically undertaken to show that trade is “win-win”, something that is NOT true in the old orthodox theory.

The new trade theory also, however, implies much more scope for strategic trade and industrial policy, and historically contingent patterns of specialization that may produce winners and losers without any basis in efficiency. These results are ignored — it’s the ideological killer app that counts.

231

A H 04.30.14 at 1:10 am

But then we have Real Business Cycle. Which is basically used beacuse its mathematical form is aesthetically pleasing. Oh. coincedentally it says goverments can never influence the economy.

For some reason it has been the only acceptle modeling tool in mainstream economics for the past 30 years.

232

JW Mason 04.30.14 at 1:14 am

For some reason it has been the only acceptle modeling tool in mainstream economics for the past 30 years.

Wrong. I really wish people criticizing academic economics would learn enough to identify the real problems with it. God knows there are enough of them.

233

A H 04.30.14 at 1:21 am

Mainstream macro I should have said.

234

A H 04.30.14 at 1:38 am

I don’t think JW Mason is wrong in general about math and politics in economics.

However it is the case that for the past 30 years acheivement in mainstream theortical macro has been measured by mathematical ability in the vary narrow field of RBC style models. At the same time the dominant political stance among acedemic macroeconomists became no-nothing lasizez-faire. It’s not hard to see how these two trends are connected.

235

LFC 04.30.14 at 1:40 am

JWM @229
thks

236

engels 04.30.14 at 2:21 am

Sorry, this may be getting a bit pedantic but I thought the claim was the reason for economics’ mathiness is its ideological function. That doesn’t imply a statistical correlation between how mathy and how ideological various branches of economics are. (In fact, in general, I think you’d expect the most straightforwardly propagandistic work to be written for a general audience and devoid of formalism.) It may imply that where the mathiness exists, it tends to serve an ideological function. I think the latter may be true, some obvious ends being, ‘blinding with science’, narrowing the field, creating a false veneer of objectivity, etc. But I don’t know a lot about academic economics so I’ll shut up now.

237

Lee A. Arnold 04.30.14 at 3:33 am

Main Street Muse #214: “…how did debt become the most solid and enduring pillar of our economy?”

The short answer is the development and marketing of credit cards. They still use promotions with frequent flyer miles and the like.

Most people didn’t used to like to go into debt. The appearance of the personal credit rating changed all that. Most people still don’t think the government should run a debt. That is completely wrong, but check any opinion poll. About 70% of the population doesn’t think the gov’t should run a large debt. This is one of the big reasons why politicians didn’t want a bigger stimulus package after the crash, although a small minority of them may have known better.

238

Lee A. Arnold 04.30.14 at 4:06 am

JW 222, Corey 223 — I do not usually defend Hayek, I think he is ultimately boring, but I think this gets it wrong. Hayek was a proto-systems theorist, and like a few of them, he was skeptical of mathematical applications in economics for the reasons I outlined in #203 above, more or less. I write “more or less” because he didn’t put it in terms of “N-compartment computation” problems, although that was the underlying idea. (And it is not original to him, although that is another discussion.) Then he surmised that the market economy can solve those “knowledge problems” — which of course it does, although only in a very local and imperfect way. But after that, Hayek’s next step is indeed ideological: he decided that the resulting “spontaneous order” was some type of absolute and emergent good that could ONLY be provided by the market system and that social intervention must harm it. His aim was to explain the difference between the western market system and the Soviet-style communists. But the idea is intellectually adrift, and he spent the rest of his life splitting all the hairs. That is why I think he is an “also-ran”: most of the early systems theorists, before it was even called systems theory, made these kinds of categorical mistakes. It is a rather boring episode in the history of ideas. Of course, it hasn’t stopped today’s conservatives from fooling themselves and others with this nonsense.

239

Bruce Wilder 04.30.14 at 5:53 am

@ JW Mason Re: Krugman, Trade, and the Difficult Idea

What I notice about Krugman is that he pushes very, very hard on the notion that “comparative advantage” — which he dubs Ricardo’s Difficult Idea — is extremely difficult to grasp. And, he deploys this insistence in an accusation against anyone, who might have a kind word, say, for industrial policy or protective tariffs as a national economic strategy, asserting they simply do not understand this difficult idea.

“Comparative advantage” is a particularly robust argument for specialization and trade. It is robust in the sense that it provides a reason to specialize and trade, even when there are no more obvious, powerful and compelling reasons to specialize and trade. But it doesn’t really say very much, by itself, about anything anyone is much interested in. That doesn’t make the argument, itself, difficult; it makes it boring.

I’ve seen people wrestle with economists arguing comparative advantage, and what ordinary mortals want to know is how to gain a strategic advantage, who wins and who loses, and what the implications might be for what economists might call the terms of trade. Part of the fun for the economist — the kind of fun associated with pulling the wings off a fly — is to keep insisting that the comparative advantage principle stands for the proposition that everyone wins from trade, while refusing to explore the questions people are really interested in.

The Stolper–Samuelson theorem was an attempt to answer the question of who wins and who loses in a rigorous analytical way, from trade motivated solely by comparative advantage, in a world where only factor endowments and allocative efficiency matters, and that argument is fairly difficult to grasp. It is difficult, in large part, because of the stylized setup, typical of such formal arguments in economics, which makes it hard to establish a correspondence with any actual circumstance. And, though it tries to say something about the terms of trade, it really doesn’t give clear hints regarding the strategic competition question, which is what people seem most naturally interested in.

Krugman’s Nobel-winning achievement was to invent some analytic models, which could admit cases where production demonstrates significant increasing returns to scale. Increasing returns posed some significant challenges for economic modeling of the conventional sort. A large part of international trade is motivated by production of goods with big, big increasing returns to scale or similar effects (external economies, network effects), sometimes combined with unique resources. Manchester textile mills back in the day. Steel mills. Automobiles. Aerospace. Petroleum products. Hollywood. Oranges from Florida . . . or Brazil. Etc. You really don’t need to get into the weeds of comparative advantage to explain why Saudi Arabia exports oil, or Hollywood makes movies. And, the story of, say, Silicon Valley is not that boring.

Free trade became the policy of Great Britain, when it was the dominant and most advanced industrial power of the world. Free trade is quite advantageous for the most advanced industrial power, for reasons, which are, at best, only very tangentially related to the concept of comparative advantage. The U.S. in the late 19th century successfully adopted a protective tariff, and Japan and other developing countries have followed its lead. These kind of strategies are interesting, but Krugman, though eminently qualified, talks about a very boring idea. It seems curious to me.

240

engels 04.30.14 at 6:24 am

Unrelated to anything, but I learned the other day that Tyler Cowen thinks that We need to accept the principle that sometimes poor people will die just because they are poor.

241

Ronan(rf) 04.30.14 at 8:00 am

“So how do economists deal w the cognitive dissonance of being attached to a policy”

I would have thought in the same way as with any policy, it has costs and benefits but those pushing it want to concentrate on the benefits and so highlight those aspects. I’d be surprised if most (all?) graduate classes didn’t deal in the whole story, and if pretty much all academic economists weren’t aware of it. See Dani Rodrik here:

http://issuu.com/instituteforadvancedstudy/docs/il_fall2013_final

but especially relevant to trade page 14 second paragraph.

‘Free traders’ want to err on the side of an open trading system so they are going to use their best arguments to push it,(and those arguments are going to become even more simplified as they enter political rhetoric – it’s like Krugman’s arguments against austerity which – afaik – wouldn’t hold up in an advanced class on the subject ie the principle is right but it’s still a simple retelling)
I’d be surprised if most ecomomists didnt *know* that the argument for trade is more complicated political rhetoric would have you believe,and that in practice it doesnt look like it’s supposed to in the textbooks.

242

Ronan(rf) 04.30.14 at 8:16 am

sorry, not second para but the bit under economists and the public.

243

J Thomas 04.30.14 at 10:45 am

“Tyler Cowen thinks that We need to accept the principle that sometimes poor people will die just because they are poor.”

If religion were a thing that money could buuuuyyyyy,
The rich would live and the poor would diiiieeee.

https://www.youtube.com/watch?v=Ulm8F15tTyg

Substitute “health care”.

244

mattski 04.30.14 at 11:54 am

One of the things I cannot understand – and please explain it if you can – how did debt become the most solid and enduring pillar of our economy?

http://www.motherjones.com/kevin-drum/2010/12/inequality-and-economic-collapses

245

J Thomas 04.30.14 at 12:33 pm

“When asked by mathematician Stanislaw Ulam whether he could name an idea in economics that was both universally true and not obvious, economist Paul Samuelson ‘s example was the principle of comparative advantage.”

Since most ideas in economics that are always true are obvious, it makes sense when talking to the public to concentrate on comparative advantage.

It isn’t immediately obvious for the public to understand that imports never cause unemployment. But comparative advantage proves that if you can’t compete at one job, there’s always another job waiting for you. Foreign nations must always import as much as they export, there can never be a trade imbalance without government interference.

What causes unemployment is never cheap imports, but instead minimum wage. If there wasn’t a minimum wage then there would be an unlimited number of jobs. You can always find work at the price your work deserves, and it’s your lookout to find the best-paying work you can.

All of the above follows directly from comparative advantage.

We must not impose tariffs or otherwise regulate trade, because the result is always that there is less wealth produced and we get less of it. Also, if we do then other governments will retaliate and we will be poorer still.

We must not retaliate if other governments impose tariffs because they will hurt themselves more than they hurt us, and if we retaliate we will hurt ourselves more than we hurt them. I don’t think this last follows directly from comparative advantage but a lot of people appear to think it does.

The theory of comparative advantage is “robust”, meaning that even though it can be proven only for very restrictive unrealistic circumstances, still it is mostly true almost all the time even though we have no evidence. So we might as well just say it’s completely true all the time.

The theory has such important far-reaching counterintuitive real-world consequences that of course it’s important to persuade the public about it.

And if what the public thinks it says (like the above) is not what it really means, then it’s vitally important to show them that.

246

mattski 04.30.14 at 1:16 pm

Bruce,

I read the Dean Baker piece. It doesn’t make too much sense to me. For example, Baker writes,

The saving us from (SGD) myth is especially pernicious because it implies that we should somehow be thankful for an economy that continues to inflict massive amounts of needless pain.

Krugman does NOT go around admonishing the public to be thankful for our current economic situation. For Pete’s sake. Krugman is a MAJOR critic of our current, needless depressed state of affairs. Krugman & Baker prescribe pretty much exactly the same antidote. Let the government spend money!

Krugman may have allowed that had we not bailed out the financial sector, things could have been worse. To me, this is really just acknowledging reality. Things, indeed, could have been worse! That is not an endorsement of secular stagnation. Really.

247

JW Mason 04.30.14 at 1:38 pm

“Comparative advantage” is a particularly robust argument for specialization and trade.

The interesting this is that this isn’t true. The Ricardian theory establishes clearly that when the price-elasticity of demand is less than one, a country will get poorer when its export industries become more productive. On the other hand, a country will always grow richer when its import-competing industries become more productive, but in that case, its trade partners will normally be made worse off. This is a very familiar point – Bhagwati was writing about immiserizing growth in the 1950s.

The Ricardian theory also shows that price-ineleasticity is a necessary condition for there to be large gains from trade. So if you are a country in a Ricardian world, you are best off when your trade partners specialize, but you are a generalist. This is true even before we bring in increasing returns, learning by doing, linkages, varying income elasticities, and other arguments against following comparative advantage.

A large part of international trade is motivated by production of goods with big, big increasing returns to scale or similar effects (external economies, network effects), sometimes combined with unique resources. Manchester textile mills back in the day. Steel mills. Automobiles. Aerospace. Petroleum products. Hollywood. Oranges from Florida . . . or Brazil. Etc. You really don’t need to get into the weeds of comparative advantage to explain why Saudi Arabia exports oil, or Hollywood makes movies.

This is very confused. You are mixing up cases where trade clearly is based on comparative advantage, like oranges and oil, with cases where it clearly isn’t, like planes or movies. I’m not sure what your point is.

248

Main Street Muse 04.30.14 at 2:20 pm

Bruce Wilder @221

“‘Main Street Muse: . . . how did debt become the most solid and enduring pillar of our economy?’

“r > g ?

“Or, as the wolf put it to little red riding hood, “. . . the better to eat you with . . .”

Yes. What economic models address the voracity and endless appetite of the wolves on Wall Street?

249

Main Street Muse 04.30.14 at 2:24 pm

Until certain predatory financial practices are deemed so harmful as to become illegal (that they are not illegal is astonishing to me), the financial sector will continue to eat what it kills – and in 2008, that was the US economy, filled up as it was with the “toxic assets” (the name itself is a brilliant blend of reality and obfuscation!) of mortgage debt and the “innovative” financial instruments clogged to the gills with that debt.

250

Peter K. 04.30.14 at 2:31 pm

@ 224 JW Mason:

I’ve been going through the dozens and dozens of reviews of K21 and as far as I can recall only The Nation review brought up the comparison with Monetary History of the United States . Others might mention Friedman.

“But if that occurs, it will owe much to Piketty’s affinities with two startling predecessors. More than fifty years have passed since the appearance of Milton Friedman and Anna Schwartz’s A Monetary History of the United States, but it remains the most influential work of economics in the last century not written by John Maynard Keynes. Like Piketty, Friedman and Schwartz grounded their theorizing on a command of vast stores of data. It was a ruthlessly academic text, yet it entranced a rising generation of economists, including the young Ben Bernanke, who credited it with inspiring his specialization in monetary theory. When stagflation seemed to undermine the pillars of Keynesian economics in the 1970s, desperate policy-makers clutched at policies legitimized by Friedman and Schwartz (the former, as it happens, a protégé of Simon Kuznets). Political debate can swerve in unexpected directions, and though it helps to have the powerful on your side, the opposition of weighty interests is not always decisive. Economists were at the vanguard of the turn against the postwar order decades ago, predictably enough, because no other social science wields comparable influence over governance. Piketty’s career shows that at least some economists are ready to help repair the damage their colleagues have inflicted.”

Maybe like A Monetary History, K21 is a sign of the times. Did the New York Times do style section pieces on it fifty years ago? One of my favorite reviews was published in Esquire titled THE MOST IMPORTANT BOOK OF THE TWENTY-FIRST CENTURY. “If I were a Republican policy-maker, if I were the Koch brothers, if I worked for Goldman Sachs, Capital in the Twenty-First Century would frighten me more than anything that happened at Occupy Wall Street. ” Whoa! Hyperbole much?

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LFC 04.30.14 at 2:35 pm

Ronan @240
fair enough.
though JWM presented a somewhat starker disconnect, istm, betw theory and policy than you are suggesting here.
Of course, in Intl Relations there are fairly blatant cases of someone’s being attached to a theory (I am thinking of Mearsheimer and ‘offensive realism’) and then taking policy stands which seem to be in some tension w the theory (as R. Payne and I. Oren, e.g., have pointed out in articles). But in IR arguably everything is somewhat, um, looser (for lack of a better word) than in economics…

252

Peter K. 04.30.14 at 2:41 pm

Suresh Naidu mentions Friedman too at his The Slack Wire post. My bad.

253

Ronan(rf) 04.30.14 at 2:59 pm

LFC – perhaps the disconnect on the point is starker than I realised.

I was thinking of a comparison with IR aswell, but even away from the kind of arguments Mearsheimer tends to push, if you asked Ikenberry (or someone from the liberal internationalist school) why they supported international institutions, norms, laws etc I’d guess their answer would be something like, it’s a useful way of managing relations between major powers, of integrating states into the international system etc (more specifically on something like international law I’d guess they’d say it extends certain standards and protections etc)
Of course *a lot* has been written on both subjects showing how it doesnt actually work like that, but I don’t think holding either position in simple and general terms is neccesarily indefensible (if you think that despite the faults with international governance or humanitarian law it is still better than the alternatives and can be improved upon, then you could support both in principle despite their faults..Obviously there are also numerous valid objections on principle or empirical grounds to the ‘liberal internationalist'(to shorthand it) position, but at that stage you’re involved in an academic/ideological argument which doesnt really have any end point )
Does that make sense or am I missing the point ?

254

LFC 04.30.14 at 3:01 pm

Peter K @249
I haven’t read K21 and have read only a couple of the reviews. However, re your quoting the Nation’s review’s line about “repairing the damage their colleagues have inflicted”: it’s worth noting, perhaps, that apparently at least some historians, not necessarily *overtly* right-wing, who write about the 70s and 80s have bought the narrative that neoliberalism/Thatcherism/Reaganism sparked a “recovery of capitalism” from the stagnation of the late 70s/early 80s (helped by, e.g., the mid-80s drop in oil prices). What we see as ‘damage’ they see as, at least for that time frame, positive.

I noted this recently in listening to a young historian talk about his new bk on Gorbachev, Reagan, and the end of the Cold War. In subsequently browsing through bits of the bk and looking at the notes I was struck by the degree to which the neoliberalism-saved-capitalism line seems to have been accepted in some of the historical lit. — which I guess I hadn’t been fully aware of.

255

LFC 04.30.14 at 3:10 pm

Ronan @252
if you asked Ikenberry (or someone from the liberal internationalist school) why they supported international institutions, norms, laws etc I’d guess their answer would be something like, it’s a useful way of managing relations between major powers, of integrating states into the international system etc (more specifically on something like international law I’d guess they’d say it extends certain standards and protections etc)

Yeah, in Ikenberry’s case I guess I’d say there’s more of a fit between his ‘theory’ about the virtues of a “rule-based” international order and his policy preferences. (though my quotes around ‘theory’ are fairly intentional)

256

Ronan(rf) 04.30.14 at 4:07 pm

The point as well though is that you can support something like international governance or humanitarian law as a generality, while being aware of it’s limitations and being aware that a lot of the arguments in its favour are caveated and contested, in much the same way that you can support an open trade regime (in principal) for what *person X specifically* sees as positive reasons (integrating the global economy, enabling (export led) growth in developing countries etc)
The fact that a concept like comparative advantage doesnt work exactely as imagined doesnt really undermine it (afaics) At most it’s an interesting and useful way of looking at the phenomenon that explains one aspect (in part) of a complex reality.* And the fact that trade deals *don’t work* as the economists models predict doesn’t (entirely) negate their usefulness either (perhaps it just shows that political economists have the most interesting things to say about how trade deals actually work in reality)
Afaict all research agenda’s trade in simplisities and questionable assumptions, and one such as ‘neo classical economics’ is especially going to be accussed of that (as they have manged quite succesfully (afaict) to create a somewhat coherent set of theories, assumptions and models to unify a research agenda around)

*The question of why a specific theory, argument, idea (in this case comparative advantage) becomes popular and ‘the face’ of a specific policy is an interesting question as well, I guess, but I think it’sa different question (if you see what I mean)

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William Timberman 04.30.14 at 5:17 pm

Paul Krugman today: …shocking the liberal bourgeoisie is not how I see my job.

Noted.

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LFC 04.30.14 at 5:25 pm

@Ronan 255:
Of course you can support e.g. ‘int’l governance’ or an ‘open trade regime’ while “being aware of its limits,” but in the case of ‘free trade agreements’ a lot has to do eg w protection of intellectual property, as is well known, and that ‘regime’ can have real costs to some (often poor) people (in addition to whatever benefits it might have).

As to whether “all research agendas trade in simplicities and questionable assumptions,” there’s a range in terms of how useful and justifiable a given set of assumptions is, and I certainly do *not* agree that ‘all research agendas are created equal.’ Some research agendas for one thing are more designed to hide their politics, as is prob the case w neoclassical economics.

As to ‘comparative advantage,’ we all know the intro txtbk’s wine-and-cloth example, or whatever it’s been updated to now, but I think one of JWM’s pts is that if that’s *all* you know about comparative advantage, you have a quite misleading picture. Istm perfectly valid to pt out the disjunction, in some cases, betw standard policy prescriptions and theory-beyond-the-intro-txtbk.

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LFC 04.30.14 at 5:27 pm

For reasons of time etc, I will henceforth let JWM himself defend what he has said. He’s the economist; I’m not even an IPE scholar (let alone an economist).

260

Lee A. Arnold 04.30.14 at 5:55 pm

At least Krugman tries to avoid mixing up economic analysis with ideological interpretation. The supposition that this cannot be done, i.e. that carrying on with some analyses is to betray an ideological position, is pretty childish, although this is the tenor of some comments above: “Krugman should have changed the foundations of economics by now, or else he is part of the problem!” No, I am not buying it. What is most boring is that no one here has done it either. As to whether this is news, consider:

“We have by now collected an extensive list of the shortcomings of marginal productivity theory: it is static, it is of little use in production problems, it neglects the supply side in factor markets, it cannot be applied to factor markets as a whole because of the independence of demand and supply, it sheds no direct light on the problem of relative shares because the conditions for valid aggregation of micro-production functions are rarely encountered, and it fails to integrate the phenomenon of technical change. Nevertheless, in the eyes of most economists, contemporary distribution theory is marginal productivity theory properly qualified to make allowances for these objections. And of course, so long as no satisfactory alternative theory is in sight, it will remain secret from attack.”*

Which all of us know, which Krugman knows, which Piketty knows. Already. So if the left wants to stop wasting everybody’s time, tell us something we DON’T know already.

*Mark Blaug, Economic Theory in Retrospect, 5th edition, 1997, p. 467. Near the very end of a 70-page chapter that exhaustively discusses all the stuff in that conclusion.

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William Timberman 04.30.14 at 6:11 pm

Lee A. Arnold @ 259

What you’re worth is what we deign to pay you. Marginal productivity theory is as serviceable a justification for that reality as any. Is that something you don’t know already, something you’d rather not admit, or something altogether false? Whether or not this thread has resolved the question is open to debate, but it’s hard to deny that its limits have been well established here.

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Lee A. Arnold 04.30.14 at 6:15 pm

As for the use of “comparative advantage” as a bludgeon to prevent talk of strategic development, once again, the era has passed. Krugman knows better by now (indeed his theory points to strategic development of industry clusters), and even Paul Samuelson insisted upon something which has been known since J.S. Mill: that the proper distribution of the gains from international trade depends upon rebalance of the employment and incomes disequilibrium that occurs within each country. Whether that occurs by new jobs, or redistribution, or not at all, is an empirical question. And whether the incomes will be nominally as high as before, is about prices and wages, and the fact that increase in real incomes may not be matched by an increase in nominal, is one way for conservatives to argue that poor people don’t require help.

People trade because specialization allows the increase of efficiency, so two people may be able to have more together, than if they each stayed separate and did both tasks by themselves. Krugman got the award for formalizing the thought (original to Marshall, I think) that industrial agglomeration (Marshall called it “external economies to scale” or somesuch) produces the same effect as a comparative advantage in skills, capital, resources, etc. Formalization is what they give Bank of Sweden prizes for, sometimes.

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Peter K. 04.30.14 at 6:17 pm

@LFC 253,

That is a very good point. The neoliberal narrative as I understood it was something like Keynesianism ruled the postwar years until the 1970s and inflation. Then Friedman and Reagan appeared on the scene and all was great through the Clinton and Bush years – the end of the Cold War and Great Moderation – until (sad trombone) the epic housing bubble and financial crisis. The rightwing narrative is even more ludicrous.

Piketty’s history makes more sense and he provides the data. Of cousre he doesn’t answer all of the questions.

@ 259 Lee Arnold. I agree with you although moderating this debate is tricking since I’m not that knowledgable about the history. Thomas Palley is one of those critics on the left. He writes:

“The “no conceptual failure” claim also stretches the truth. The list of failures includes failure to anticipate the crisis; underestimating the effectiveness of fiscal policy in recessions; failure to incorporate the demand effects of debt and the dangers of debt-deflation; failure to incorporate the demand effects of income distribution; and failure to anticipate secular stagnation. In contrast, heterodox economists did well on all these counts.”

I would like him and others to provide links about this list. Krugman did not underestimate the effectiveness of fiscal policy for one thing. It seems like a lot of this in textbook macro.

264

Bruce Wilder 04.30.14 at 6:26 pm

JW Mason @ 246: This is very confused. You are mixing up cases where trade clearly is based on comparative advantage, like oranges and oil, with cases where it clearly isn’t, like planes or movies. I’m not sure what your point is.

My point is that the world — the actual world — is “confused”, or rather, compound and coincidental. Things that can be isolated in theory, sometimes happen together in reality, and that can matter a lot.

There are no cases in the world, where comparative advantage operates in isolation, or where only constant returns to scale, factor endowments and allocative efficiency matters. I can assure you that growing oranges in Florida or Brazil, or extracting oil in Saudi Arabia, is an industrial activity, where major investments have been made, to realize economies of learning and scale, etc. And, comparative advantage never stops operating in any case; it just gets dominated.

In analysis, the point of the intellectual activity is to isolate, to make fine distinctions, and painstakingly figure out what exactly matters, what is necessary and what is sufficient. So, in analysis, we may, for our edification, imagine a world where only allocative efficiency matters, and where the principle of comparative advantage operates in isolation upon the allocation of factors to employment, and the terms of trade follow. We can imagine it. We shouldn’t expect to find Platonic Ideals washed up on the beach. Just because we can make an analytic distinction, doesn’t mean there will be a corresponding difference manifest in the world.

This is why, to know something about how the world works requires building operational models and studying actual institutionalized economies.

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Lee A. Arnold 04.30.14 at 6:30 pm

William Timberman #260: “What you’re worth is what we deign to pay you. Marginal productivity theory is as serviceable a justification for that reality as any. Is that something you don’t know already, something you’d rather not admit, or something altogether false? Whether or not this thread has resolved the question is open to debate, but it’s hard to deny that its limits have been well established here.”

Since you will not be bothered to read a book that said it all before, and said it much much better, perhaps I should quote from Blaug’s VERY NEXT paragraph:

“A simplistic marginal productivity of distribution explains the rate of wages and the rate of interest or profit simply by technology and consumer preferences, factor supplies being taken as given. Hence, the theory has few practical implications. Radical critics are quite right to argue that it relegates to ‘sociology’ such forces as unions, the corporate power structure, the monetary system, the state of aggregate demand and government policies towards incomes and prices, all of which seem to be very relevant to problems of income distribution. Even here there is a confusion of language because by a “theory of distribution” the critics mean a theory of distributive shares, whereas in the neo-classical tradition, the theory of income distribution is a theory of factor pricing. Even so, there is nothing in the so-called ‘marginal productivity theory of distribution’ that would deny that the ‘class struggle’ has a lot to do with the determination of distributive shares, or even with the rate of wages or profit.”

– Mark Blaug, Economic Theory in Retrospect, 5th ed. 1197, p. 467. The first edition of this book was in 1962.

As I wrote in comment #6 above, “Jesus look at the comment threads on Crooked Timber. There is very little reading and thinking. Mostly attitude, sermonizing, self-regard.”

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Bruce Wilder 04.30.14 at 6:42 pm

Lee A. Arnold @ 259

And, you honestly do not see the utter ridiculousness of the sentiment expressed in that Mark Blaug quotation?

paraphrase: Everything is wrong with our theory, but until a better theory comes along, we’re not giving it up. We’re not going to admit to simple, naked not-knowing.

If you have such low standards that you would cling to marginal productivity analysis, as you would a buoy of lead, how can you even expect to recognize something better?

What Blaug is confessing is that economics compounds the clinging to utter ignorance with bad taste.

267

Lee A. Arnold 04.30.14 at 6:49 pm

@ Peter K. #262 — I agree with Thomas Pally on the financial crisis. I was addressing the long discussion above that Krugman and Piketty are believers in marginal productivity theory, as oppposesd to acknowedging it as a main tool in use.

I would disagree with Pally on whether it was a “conceptual” failure, by definition, since all the concepts in use now, including the ones he lists, are ones that existed before. Indeed many of Krugman’s (and DeLong’s) comments often depend upon the insistence to use simple definitions properly, thus enraging their critics right AND left. It was an empirical failure. Economists didn’t recognize that there were two bubbles, one in housing, one in shadowbank paper. But they knew what a “bubble” is.

This distinction hardly matters though, since the discussion even above shows that definitions can be what you like.

268

William Timberman 04.30.14 at 6:53 pm

Lee, no one has read everything — not even you, I suspect. When you accuse others of very little reading, I’d say you’re guilty of making unproven assertions, at least when applying that judgment to the majority of CT commenters. As far as the substance of the paragraph of Blaug that you’ve supplied goes, I’d say that it represents a form of question begging that’s all too familiar from the economics texts I have read, and no more helpful than much of what has appeared in this comments thread despite being 50-some years prior.

In any event, what’s in books is useful only to the extent that it can be applied to the living conversations all of us get up to when we’re really at odds with much of what we see. In that sense, it matters little how long ago, or how recently someone has said something, and it matters only slightly more how well he’s said it. What matters is that someone has remembered it, and can apply it effectively to matters at hand. You’re not the only one who’s mastered that skill here, not from my point of view at any rate.

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Lee A. Arnold 04.30.14 at 6:59 pm

Bruce, you appear to think that everything that is said and done, is by material determinism, and out of ideological pretense. But Blaug wrote, “so long as no satisfactory alternative theory is in sight, it will remain secure from attack” (sorry about the typo “secret” for “secure”). What you have to do, is to meet his demand for a “satisfactory alternative theory”; in other words to meet your own demand for “something better” — then, even Blaug in heaven will agree to another silly buoy. If you want to change things from even further below, such as in the epistemology of science, then you arestill free to try to construct something. Otherwise it’s boring.

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Bruce Wilder 04.30.14 at 7:01 pm

mattski @ 245

Krugman may have allowed that had we not bailed out the financial sector, things could have been worse. To me, this is really just acknowledging reality. Things, indeed, could have been worse! That is not an endorsement of secular stagnation. Really.

Bailing out the financial sector is how we got to secular stagnation. One follows from the other. That’s just acknowledging reality.

271

Lee A. Arnold 04.30.14 at 7:03 pm

William, you are begging the question too, which was the main point. Come up with something new.

Actually it does matter how long ago something was already said, because that is a pretty good yardstick as to contemporary intellectual comprehension and training.

272

Bruce Wilder 04.30.14 at 7:12 pm

Lee A. Arnold @ 268: What you have to do, is to meet his demand . . .

No. I don’t. His demand has no legitimacy. He has to meet my demand. His theory has been disproven nine ways from Sunday, by his own friggin’ admission. He has to give it up. Even if there is no alternative . . . Because his theory is no alternative. That’s what disproven and discredited means.

Because he doesn’t give up a disproven and discredited proposition, he’s showing me that he does not and will not care about the truth-value of any proposition. His “better” can have no meaning.

273

William Timberman 04.30.14 at 7:12 pm

Lee A. Arnold @ 270

Come up with something new.

As you have done? Modesty forbids.

274

Lee A. Arnold 04.30.14 at 7:16 pm

Bruce Wilder #271: “His demand has no legitimacy. He has to meet my demand.”

Good luck with that! But why don’t YOU meet your own demand?

275

Bruce Wilder 04.30.14 at 7:17 pm

Lee A Arnold @ 268

I do not propose to reinvent the epistemology of science. I merely suggest that economics strive to satisfy it. Moving halfway to Karl Popper’s standards would be a big step forward.

276

mattski 04.30.14 at 7:18 pm

Bruce,

Bailing out the financial sector is how we got to secular stagnation.

Yes? And mainstream economists like Krugman warned at the time that the stimulus package was completely inadequate in size.

There was and is a battle between ‘conventional wisdom,’ which is essentially a proxy for the preferences of the .01 percent, and a progressive, Keynes-based policy, which Krugman aggressively advocates.

And as I already said, Krugman’s policy prescriptions are essentially identical to those of people like Dean Baker, Picketty, etc.

277

Bruce Wilder 04.30.14 at 7:22 pm

Lee A. Arnold @ 273

Which demand would that be?

278

Lee A. Arnold 04.30.14 at 7:23 pm

William Timberman #272: “Modesty forbids.”

Self-regard.

279

Lee A. Arnold 04.30.14 at 7:26 pm

Bruce Wilder #276: “Which demand would that be?”

Sorry, I thought you were arguing that people should come up with a better theory for economics.

280

Bruce Wilder 04.30.14 at 7:27 pm

mattski @ 275

Partisan policy advocacy always tends to resolve to a simple dichotomy of for or against, yes or no. That doesn’t make Krugman’s views identical with any of his customary political allies or fellow travellers, including me.

281

J Thomas 04.30.14 at 7:33 pm

#260

Everybody knows the theory is useless, incorrect, and even self-contradictory.

And yet the theory is being used to influence national policy.

You say that people should just shut up about it being wrong, because everybody knows already that it’s wrong. We should just shut up and go away while your friends continue to use it to influence national policy.

Something about this bothers me. I can’t quite put my finger on just what it is, but your stand leaves me with a nameless doubt.

“We have by now collected an extensive list of the shortcomings of marginal productivity theory: it is static, it is of little use in production problems, it neglects the supply side in factor markets, it cannot be applied to factor markets as a whole because of the independence of demand and supply, it sheds no direct light on the problem of relative shares because the conditions for valid aggregation of micro-production functions are rarely encountered, and it fails to integrate the phenomenon of technical change. Nevertheless, in the eyes of most economists, contemporary distribution theory is marginal productivity theory properly qualified to make allowances for these objections. And of course, so long as no satisfactory alternative theory is in sight, it will remain secret from attack.”*

“Which all of us know, which Krugman knows, which Piketty knows. Already. So if the left wants to stop wasting everybody’s time, tell us something we DON’T know already.”

282

mattski 04.30.14 at 7:33 pm

From my Krugman quote @ 210

…there are plenty of economists who are willing to use marginal-product models (as gadgets, not as fundamental truth) who don’t at all accept the sanctity of the market distribution of income.

Bruce, Krugman is in the ring, duking it out with the plutocrats. You’re in the cheap seats screaming that he’s a bum. You offer nothing better because you have nothing better.

283

A H 04.30.14 at 7:39 pm

“William, you are begging the question too, which was the main point. Come up with something new.”

Why don’t you actually try looking at the work of the hetrodox economists criticising Krugman instead of qouting Blaug like it is scripture. There is a massive amount of litrature out there about alternatives to orthodox macro. To claim there is none is to show your ignorance.

284

William Timberman 04.30.14 at 7:40 pm

Lee A. Arnold @ 277

Self-regard.

No, irony. It’s difficult to meet the demands of someone determined to lay about him with an entire arsenal of self-righteousness without resorting to it. It’s not an attempt at defending myself, as I don’t actually believe I need a defense. Coming up with something new is a collective enterprise, after all, isn’t it? How much guilt should I feel if today I’m having a bit of a lie-in while, armed as usual with your blueprints and your bullhorn, you’re already busily assigning tasks in the lab.?

285

mattski 04.30.14 at 7:47 pm

@ 282

Accusing Lee Arnold of ignorance is what I would call a low percentage strategy.

Yikes.

286

Anarcissie 04.30.14 at 7:47 pm

Bruce Wilder 04.30.14 at 6:42 pm @ 265 — Again, it’s like the Ptolmaic system. The theories, the practices, are fundamentally ‘wrong’, but they do give some correct answers, which could be useful at times, and many of them are ‘mathy’, which gives them heft in the ruling class’s ideological and cultural wars — sort of the way the mathiness of the higher astrology gives it repute with some people although it has no factual base whatever. It’s said that you can’t replace something with nothing, so it looks like we’re stuck.

287

J Thomas 04.30.14 at 7:51 pm

# 269

But Blaug wrote, “so long as no satisfactory alternative theory is in sight, it will remain secure from attack” (sorry about the typo “secret” for “secure”). What you have to do, is to meet his demand for a “satisfactory alternative theory”; in other words to meet your own demand for “something better” — then, even Blaug in heaven will agree to another silly buoy. If you want to change things from even further below, such as in the epistemology of science, then you are still free to try to construct something.

Of course economics is observably not a science, as you demonstrate, but I want to point out that this is not the way that science works.

Like, when physicists found things happening which made their theories unworkable, they acknowledged that and they thrashed around looking for better theories.

Relativity came along and it made no sense, but they accepted it anyway because it giave them workable results and no sensible theory could do that.

Quantum mechanics likewise. It did not make sense, but it got accepted because after adjusting various fudge factors and incorrectly summing some series etc, it fit the observations and no sensible theory could do that.

Physicists looked for new theories after they noticed that the theories they already had did not work.

But economists have theories that don’t work, and they say they will wait for somebody else to make theories they think are better before they will give up the ones that don’t work.

Ideally we should have multiple theories that fit the known reality, and economists could reason out what sort of data might disprove one or more of them, and look for that data plus whatever other new data might be worth finding. But that would be scientific, not like what economists do….

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Bruce Wilder 04.30.14 at 8:08 pm

Lee A. Arnold @ 278: I thought you were arguing that people should come up with a better theory for economics.

What I have argued is that economists should not confuse their theory with a map or model of the actual world. Propositions, which have been proven logically valid in theory should not be regarded as statements about what is the case in the world. To make statements about what is, in fact, the case in the actual economy, it is necessary to build operational models and study institutions.

None of this would be worth my arguing, except that many economists regularly do mistake their analytical theories for models of the world as it is, and declare the case on little more basis than that, and maybe some boilerplate caveats and handwaving about frictions. Much of the ideology of conservative libertarianism derives from mistaking the ideal of Chicago’s model of a competitive market economy for the real thing. And, much of the ideology of neoliberalism follows a similar path.

Analyzing the efficiency of a financial market in theory, though, doesn’t make an actual financial market efficient. Declaring financial markets, efficient, on the basis of theory is just launching zombies to wander.

We hear so much about the “market economy” that we forget to notice that we do not actually live in an economy of markets. We, gentiles and laity both, should ask for arguments with referents to the actual, institutionalized economy we live in, in the homilies of economists. Piketty is a welcome alternative to the Friedmanite market economy of delusional fantasy freedom to choose.

I do think, if more economists assiduously studied the institutional economy instead of focusing on the theory, we would get better theory, as a better appreciation of the world fed back into theory. It would be practically useful for economists to study actual financial markets, to determine what about their institutional architecture made them efficient, and how efficient. That requires operational models, not analytical models; it is a different kind of inquiry and study.

It might seem odd to you, but I would not expect economic theory to give up its affection for rational homo economicus, and unrealistic assumptions about information, rationality and the like. The actual economy must cope with radical uncertainty, and analytic theory will never be able to build a tractable model where unqualified uncertainty is assumed. Economists must get used to the idea that their theory seems to describe an imaginary ideal world, which the actual world cannot be like. Arrow-Debreu is a hugely important achievement, showing what an efficient market economy, under assumptions of a limited sort of uncertainty, would look like, and the takeaway ought to be that the real economy cannot possibly look anything like that. I’m not saying anything new. The doctrine of the second-best — that trying to make the actual economy like an ideal economy, piece by piece — will back-fire is more than 50 years old, I think. The lesson just doesn’t seem to stick.

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Lee A. Arnold 04.30.14 at 8:11 pm

William Timberman #283 — That sounds like opening a big fat tin can labeled, “I know you are, but what am I?” Irony is the correct word.

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john c. halasz 04.30.14 at 8:15 pm

@284:

Because L.A. is a surfer dude who floats serenely above the world, because general systems theory, which is self-evidently an omnium-gatherum. It’s important to take account of differing perspectives, including opposing ones, but that doesn’t underwrite ad hoc eclecticism. And often enough, admitting to ignorance (or just acknowledging the limits of knowledge) is the crucial first step. One shouldn’t be defending phlogiston theory well past its sell-by date.

Neo-liberalism, on the other hand, exalts universal ignorance into outright agnotology.

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Lee A. Arnold 04.30.14 at 8:25 pm

Bruce Wilder #287 — Krugman already fits your bill. It also appears to be why the rest of the profession is edging away from him.

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William Timberman 04.30.14 at 8:26 pm

To add a little fuel to the fire: At first glance — not mine, but that of a significant number of poo-bahs in the field — Piketty seems to have come up with the demanded something new. No, say others after deep reflection, this is all stuff that at least some of us knew already. Maybe we didn’t put it all together the way he has, but some of us knew this part, and some of us were pretty sure about that part. Oh, yes, he has all this data — that’s new — but we doubt it’s really enough to justify such sweeping conclusions, and even if it were, his recommendations are arguably naive, if not derivative, and won’t they just be subsumed in due course into what everybody already knows and loves, and nothing will change…?

Well…. From my perspective, what’s attractive in Piketty’s thesis is not so much what’s new in it, as what it confirms in the context of some pretty poignant personal experiences, and I don’t mean those — at least not exclusively those — of reading Marx as an impressionable young man. The details are too lengthy to cram into a CT comments thread, especially one in which they’re arguably off-topic anyway, but details there are, I assure you. (I’d like to say that they’re available on request, but that would commit me to writing a book which I’d be unlikely to live long enough to finish.)

The bottom line is this: analyzed in detail, our present predicament — that of late capitalism and the post-Reagan right-triumphalists’ neue Weltordnung — turns out to be somewhat less than was advertised. Which, of course, doesn’t stop the advertising, as advertisers have no idea how to do anything else. The neo-liberal hegemony, while disdainful of triumphalism, and even more disdainful of the yahoos to the right of them, have nothing to offer but more-of-the-same-with-tweaks, largely, I suspect, because they’re safe within an edifice already built, and have no clue how to forage in the rubble left after the birth of something truly new and different. As Suresh Naidu has already said, Piketty suits them right down to the ground. Whether it suits Lee A. Arnold, or the rest of us, remains to be seen.

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A H 04.30.14 at 8:36 pm

@ 284

He certainly doesn’t show much sign of any knowledge of hetrodox econ.

Krugman linked to Thomas Palley’s site. It contains a whole section of books offering alternatives to mainstream econ.

http://www.thomaspalley.com/?page_id=245

Why does Lee Arnold keep pretending like this doesn’t exist?

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Lee A. Arnold 04.30.14 at 8:39 pm

John #289 — I would have to get a medical marijuana license to understand what you just wrote.

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Bruce Wilder 04.30.14 at 8:45 pm

Lee A Arnold @ 264

Mark Blaug: “A simplistic marginal productivity of distribution explains the rate of wages and the rate of interest or profit simply by technology and consumer preferences, . . . there is nothing in the so-called ‘marginal productivity theory of distribution’ that would deny that the ‘class struggle’ has a lot to do with the determination of distributive shares, or even with the rate of wages or profit.”

Blaug is making himself sound like an idiot standing in the middle of the road, waiting to get run over, with this passage. It’s either technology or class struggle. You have to choose. That’s why it’s controversial. He wants to have it both ways. And, as I mentioned in another comment, well after Blaug wrote this equivocating nonsense, Stiglitz showed that, under uncertainty, marginal product is a managed outcome, not an exogenous gift from the technology god or the deity of consumer preferences. So, controversy over.

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Lee A. Arnold 04.30.14 at 9:07 pm

Bruce Wilder #294: “It’s either technology or class struggle. You have to choose. That’s why it’s controversial. He wants to have it both ways.”

Nonsense, it could be for both reasons, and even more. But you have veered into Selective Citation: After writing, “A simplistic marginal productivity of distribution explains the rate of wages and the rate of interest or profit simply by technology and consumer preferences,…” Blaug then writes, “Hence, the theory has FEW PRACTICAL IMPLICATIONS [my caps]. Radical critics are quite right to argue…”

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Bruce Wilder 04.30.14 at 9:09 pm

You quote the guy, Lee. Don’t blame me, because he’s incoherent.

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Lee A. Arnold 04.30.14 at 9:11 pm

AH #293: “He certainly doesn’t show much sign of any knowledge of hetrodox econ.”

Just for the record, although it hardly matters: I have been reading “heterodox” economists since the late 1970’s, and even studying some of them.

As predicted, the Crooked Timber commentariat has devolved into a left-wing echo chamber. I am not surprised. Just as happens on the right, people here seem to think that one must argue from one’s own beliefs, or else apostasy is imminent. Well I rarely argue from my own beliefs. No one here who has speculated on my beliefs is even close, and actually I don’t care what anybody else’s beliefs are. You should have given this up on the 3rd-grade school playground.

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Lee A. Arnold 04.30.14 at 9:17 pm

Bruce Wilder #297: “he’s incoherent.”

The word “simplistic”, as in, “A simplistic marginal productivity of distribution”, MEANS “overly simple or naive; treating complex issues and problems as if they were much simpler than they really are”. Blaug sticks precisely to the dictionary. Especially by the 5th edition.

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Lee A. Arnold 04.30.14 at 9:19 pm

In fact Blaug is a very good writer, one of the better ones in economics.

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Bruce Wilder 04.30.14 at 9:26 pm

On this subject, you, not I, have made him out to be an idiot.

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Bruce Wilder 04.30.14 at 9:28 pm

Lee A. Arnold: “I rarely argue from my own beliefs. . . . and actually I don’t care what anybody else’s beliefs are.”

Good to know.

I’m done.

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Lee A. Arnold 04.30.14 at 9:32 pm

Now you are going to run away, because in an intellectual argument, I don’t care what anybody’s beliefs are? How very convenient.

If the left loses, this will be why.

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J Thomas 05.01.14 at 12:01 am

“Now you are going to run away, because in an intellectual argument, I don’t care what anybody’s beliefs are? How very convenient.

If the left loses, this will be why.”

I don’t understand why this would be left or right.

The dispute I’m seeing is between people who all agree that the existing tools are inadequate. Some of them say that we should admit our existing tools are inadequate and look for better ones. Others say that we should go on creating government policy with the inadequate tools until somebody creates something better.

OK, say we get some new diagnostic tools to show us what can be done. What decides whether those are right tools or left tools?

It seems to me that the tools we use to understand things aren’t left tools or right tools. What makes a policy left or right is what you try to accomplish. If you try to reduce inequality that’s a left goal only. It’s incompatible with right goals. But if you try to reduce wages that’s a right goal only, which is incompatible with left goals. But the methods you use to predict the consequences of your choices are themselves neutral.

Tools to achieve goals can be left or right. If you try to accomplish a goal by getting the government to do something, that’s a left tool. But if you try to let free markets accomplish your goals by paralyzing government, on the assumption that anything which isn’t government is a free market, then you’re using a right tool.

But I’m tired of this creaky old dichotomy. It’s like we have a layer cake and we try to slice it sideways so we get the amount of the government layer we want. And when we do it that way somebody gets the whole top layer of icing. Let’s slice it other directions and see which ways we actually like it.

Left/right is old and stale. Let’s try out some other goals.

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LFC 05.01.14 at 12:21 am

Lee Arnold:
As predicted, the Crooked Timber commentariat has devolved into a left-wing echo chamber.

No. If you just look at this thread and some of the commenters who have written here — e.g., b. mcmanus, anarcissie, W. Timberman, j c halasz, B. Wilder, JW Mason, Peter K., Ronan (to whom I replied a bit grumpily upthread, but it was one of those days), and others — you don’t see anything close to a unanimity of opinions (or modes of expression for that matter). Perhaps on occasion a Tower of Babel, but not an echo chamber.

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LFC 05.01.14 at 12:24 am

Oh yeah, mattski, and a bunch of others too. Not that much echoing going on.

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Lee A. Arnold 05.01.14 at 12:28 am

J Thomas #304: “I don’t understand why this would be left or right… say we get some new diagnostic tools to show us what can be done. What decides whether those are right tools or left tools?”

I wasn’t writing about the new tools you hypothesize. In fact I was writing quite the opposite, in effect: that people’s beliefs should not be a precondition of an intellectual argument — and if the left does that even more than now, they will follow the right into deserved oblivion.

You wrote above,

“economists have theories that don’t work, and they say they will wait for somebody else to make theories they think are better before they will give up the ones that don’t work. Ideally we should have multiple theories that fit the known reality, and economists could reason out what sort of data might disprove one or more of them, and look for that data plus whatever other new data might be worth finding. But that would be scientific, not like what economists do….”

But that is what some economists already do, and many more are beginning to do. Secondly, they aren’t waiting for someone else to make a better theory, because there is prestige (and maybe even the Bank of Sweden prize) in finding the better theory.

Yes, there are other economists who argue from personal politics and who shill for the status quo. But that is the right-wing (or left-wing) tribalism: it does not logically follow from the incompleteness and weakness in current economic theory, although the weakness enables it more easily.

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J Thomas 05.01.14 at 12:52 am

“I was writing quite the opposite, in effect: that people’s beliefs should not be a precondition of an intellectual argument — and if the left does that even more than now, they will follow the right into deserved oblivion.”

Good! I apologize for misunderstanding your point. I agree in full.

“Yes, there are other economists who argue from personal politics and who shill for the status quo. But that is the right-wing (or left-wing) tribalism: it does not logically follow from the incompleteness and weakness in current economic theory, although the weakness enables it more easily.”

I noticed that in my limited contact with astrologers. They had what looked like a rigid system, but it had so much room for interpretation that the result appeared to be all interpretation.

I”m glad economists are trying out new ideas. Of course, it takes considerable time for something new to become the mainstream. I guess in the short run there’s nothing available to be the mainstream except the old ideas that were accepted when they once seemed to work in a simpler age.

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Lee A. Arnold 05.01.14 at 3:37 am

LFC #305: “If you just look at this thread and some of the commenters who have written here…you don’t see anything close to a unanimity of opinions.”

Point taken.

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Ronan(rf) 05.01.14 at 7:53 am

LFC – I didn’t read you as grumpy. Perhaps a little exasperated, which sometimes people feel after extended conversations with me ; )

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engels 05.01.14 at 7:57 am

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mattski 05.01.14 at 3:37 pm

Meta:

As much as we annoy the shit out of each other here sometimes (significant data point on human nature, imo) I comment here because I feel like “these are my people” and because I often feel like my people fall into dogmatic traps which undermine the Left as a force. I want an open-minded, reality-based Left willing to work with the world as it is.

I think Krugman, as Lee said @ 291, amply fulfills Bruce Wilder’s stated criteria for a sound approach to economics. And I think it boils down to (stubborn human nature) issues of ego and self-regard that many here cannot see this.

So, if we take a short list of prominent left-liberalish economists like Stiglitz, DeLong, Picketty, Thoma, Woodford, Saez, etc., we have every reason feel comfortable in the belief that there is a good supply of brilliant minds doing good work in the profession.

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Random Lurker 05.01.14 at 4:35 pm

@Lee A. Arnold

At 265 you quote Blaug:
“[…] Even here there is a confusion of language because by a “theory of distribution” the critics mean a theory of distributive shares, whereas in the neo-classical tradition, the theory of income distribution is a theory of factor pricing. Even so, there is nothing in the so-called ‘marginal productivity theory of distribution’ that would deny that the ‘class struggle’ has a lot to do with the determination of distributive shares, or even with the rate of wages or profit.”

It seems to me that here the confusion is in Blaug’s mind, because a “theory of factor pricing” is, actually a theory of distributive shares. Pratical example:

Capitalist A, a shoemaker, buys fixed capital for 10, variable capital (labor) for 80, and sells the final product, shoes, for 100, thus making a profit of 100- (10+80) = 10.
Acording to the theory, 80 % of the value was produced by labor, while 20% of the value was produced by capital (the 10 advanced + the 10 of profits).

1) How do we know that the value produced by the workers is proportional to the cost of their work? It’s not that we can say, 80% of the shoe was produced by workers, the other 20% by capital. However since we determine profits by subtracting the cost of wages, the theory doesn’t hold unless we suppose that 80% of the value of the shoe, not more nor less, was produced by the workers.

2) How is this that the workers put in 80 and are paid 80, while the capitalist puts in 10 and gets back 20? According to the orthodox theory, the bonus 10 of value are the marginal productivity of capital, not of workers. But if it is so, why doesn’t the other capitalst B, who produced the fixed capital, get 20 instead of 10? This isn’t answered because in the orthodox theory there is an allotment of capital at the beginning, so capital is never produced (otherwise one would have to see capital as “congealed labor”), it just exists.

On the whole, it seems to me that the “so-called ‘marginal productivity theory of distribution’ ” starts from distributive shares, and then rationalizes them as natural consequence of “factors of production”, whose quantity is then covieniently calculated through market prices, so that the wage share is 80% because it is 80%, and this we call technology.

I’ll give you a second example based just on agriculture, where the capital factor, land, actually just exists.
In the land of Nowheria there are 100 people. Then of them, the landlords, own all the land, and each landlord employs 9 peasants. Each peasant produces 10 apples a day. What is the share of profits here? Everyone with a brain understand that it depends on what can the peasants take home. If a peasants takes produces 10 apples, but takes home 7 apples, the share of profits will be 30% (the remaining 3 apples). If the peasant can take home 8, the share of profits is just 20%. According to the othodox theory, however, the share of profits depends on the marginal productivity of lands, so if the share of profits is 30%, it is because the peasant only produces 70% of each apple, whereas the remaining 30% is produced by “land”. Not only this, but the rate of profits depend on total profits/capital, which in this case is land, so the rate of profits depends on the cost of land, that in turn depends on the rate of profit (because the value of capital is the discounted value of future profits). Nice catch.
Note in this example that, if we assume that there is a minimum “wage of subsistence” of 5 apples per peasant, and that the landlord only pay this subsistence wage, the quality of land changes the share of profit because the workers take home a fixed pay, while total productivity may vary depending on the quality of land. However this works only as long as we assume that workers are only paid subsistence wages, an assumption that was common in the 19th century but that modern economics refuse explicitly.

You ask for a different theory, I propose this:
“Factors of production” produce a total income, that is then divided between “wages” and “profits” exclusively because of market power, with wages that vary between a minimum of “subsistence wage” and a maximum of “total income”, and profits vary accordingly.
It seems to me that this theory is very simple and intuitive, and that the whole “marginal” stuff has the sole purpose of obfuscating this.

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Random Lurker 05.01.14 at 4:37 pm

The whole point is that when we distinguish between “wages” and “profits” we are already speaking of “distributive shares”, not of productive forces, which only produce total undifferentiated income.

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JW Mason 05.01.14 at 4:39 pm

in the orthodox theory there is an allotment of capital at the beginning

This is an important point. RL’s whole comment is very good.

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Random Lurker 05.01.14 at 5:21 pm

[blushes]

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Lee A. Arnold 05.01.14 at 6:05 pm

Random Lurker #313: “It seems to me that here the confusion is in Blaug’s mind, because a “theory of factor pricing” is, actually a theory of distributive shares.”

I don’t think Blaug was confused and he might even have agreed with you. He writes a little later, in the same section, “The fact of the matter is that distributive shares are the outcome of a wide variety of forces and any theory which attempts to tackle the problem finds itself making so many heroic, simplifying assumptions that the results are simply ‘curiosa’.” (Blaug p. 468) He is NOT arguing in favor of a theory. The book is called Economic Theory in Retrospect, and it is a history.

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Bruce Wilder 05.01.14 at 7:55 pm

I feel like someone should play the devil’s advocate on behalf of the beleaguered marginal product analysis, and in the LAA spirit of never propounding what one believes, I volunteer myself for a brief demurral, reserving the right to betray my client at the end (as every devil’s advocate should).

The production function posits that (maximum) output is a function of factor inputs. As inputs vary quantitatively, then (maximum) output, being a function of inputs, should vary. In a system of competitive markets allocating factors to production processes by price, how much of an input is allocated to a production process is a matter of price, and how much output is optimally desired is also to be determined by competitive market price. “Competitive market price” means that no actor is behaving strategically; every one, worker and landlord alike, take what they can get, with no awareness of the potential, say, of guile in clever bargaining or the exercise of political power. The purpose of such a patently unrealistic assumption is not to describe any actual situation; it is to understand and define in ideal terms, an efficient allocation of factor resources. That ideally efficient allocation is achieved when maximum output value (and, therefore, maximum income) is achieved by allocating inputs right up to the point at which the cost of an additional unit of input is exactly equal to the value of the additional unit of output resulting from adding that unit of input to the production process.

In this highly simplified ideal, the firm acts as if there is one fixed price for each category of input, so the wage of labor is equated with its marginal product, the rental rate of land is equated with its marginal product, the rate of return on capital is equated with its marginal product, and when each of those rates are applied to the total labor, land and capital used, the incomes of all of the factors together add up to exactly the revenue generated from the total output. For this ideal scenario to work out neatly, it helps a lot if the production process exhibits constant returns to scale, so that marginal cost of output is above average cost and rising in the relevant range of output.

There’s no use in denying that this speculative thought exercise describes a moral ideal. That’s exactly what it does, and exactly what its earliest advocates claimed that it did.

This is the orthodox theory, and contra Josh, it most certainly does not “begin” with an “allotment” of capital. The presupposition is that all factors are being metered into the production process by markets in output and markets for inputs, all clearing in price. The amount of capital input used is as much metered by expected returns as the amount of labor used is metered by the wage. Everything can vary, and varies in nice “convex” ways with respect to output. And, by implication, the “technology” that determines the functional relationship between (maximum) output and inputs, allows, considerable scope for substitution between factors. There can be more capital and less labor, or more labor and less capital.

We can immediately object, and are expected to object I think, that the assumption that all markets are competitive (no one acts strategically or exercises political power) is absurdly unrealistically. The conventional riposte has two parts. First, that even if the wage, say, were to be fixed arbitrarily, by a boss’s fiat or a negotiation between the boss and a (monopolistic!) union, the firm would still, within that constraint, attempt to use labor right up to the point at which labor’s marginal product equalled the wage. So, it is reasonable to suppose that such market imperfections or rigidities introduce only deviations from the ideal, and the inefficiency is some magnitude proportional to the deviation, but otherwise the behavior — varying inputs to control output — in a broad sense, remains descriptively accurate. This is, I think, the kind of woolly thinking behind the uncritical use of Solow’s growth model in macroeconomics, and the general notion that rigidities in wages are responsible for involuntary unemployment over the course of the business cycle. Part of this woolly thinking was a general conviction that capital could vary continuously across the relevant range of inputs and outputs, so that a lower market interest rate metering the supply of capital inputs would motivate a greater accumulation of capital stock as a kind of general proposition, intuitively true as well for the aggregate. (This smooth variance of the appropriate capital stock with the interest rate was one of the points — by no means the only or most important — attacked by the UK side in the Cambridge Capital Controversy.)

So, what Krugman is saying, and what Blaug said, and the excuse Piketty might put up for some of his more reactionary conventional narratives, is this woolly thinking, which says, yes, market power is real enough, but that just means (mostly relatively minor) deviations that make the actual market economy messy and less than ideally efficient, but the general behavior of adapting factor allocation to prices, goes on.

And, look at the actual economy: people in the economy do allocate and re-allocate factors in response to changing relative prices, and that’s the economy’s remarkable adaptiveness to changing “real” economy circumstances. Rich economies have accumulated much larger capital stocks. Economies do come out of recessions, even when policy doesn’t help as much as it should to speed things along, a New Keynesian might say, (even while his fresh water colleague claims this slow recovery amid prolonged unemployment and falling wages is close to an optimal response by a unified representative agent optimizing inter-temporally).

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mattski 05.01.14 at 8:29 pm

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Bruce Wilder 05.01.14 at 8:36 pm

What I referred to above as woolly thinking is the introduction of auxiliary hypothesis to make a theoretical, analytical model into a descriptive, operational model. Economics, like any discipline of inquiry assuming the form of a science, has to follow this path, that Popper tried to describe. And, some of its favorite auxiliary hypothesis — like the Law of Diminishing Returns — are well known to students of economics, even if they are not always clearly labelled as auxiliary.

Without auxiliary hypotheses, you couldn’t get pure economic theory to say anything definite about the world. You couldn’t say whether an increase in price will result in more output demanded or less output demanded.

The problem in economics is that there’s not much methodological care taken with auxiliary hypotheses, and, not incidentally, not much feedback from careful observation of the world back to analytic theory. (Auxiliary hypotheses form a two-way bridge.)

Careful and attentive observation of the world (no electron microscope needed!), would lead any reasonable economist to question the production function as a theory of production. It doesn’t fit what firms actually do. It doesn’t make sense of administrative management of production and distribution processes.

Neither capital nor labor is metered into a production process, nor do quantitative inputs of either vary neatly and reliably with the quantity or quality of output. The actual transactions, which assign an income to factors, are governed by contingent contracts. Capital return isn’t metered by a simple rate of interest; it’s leveraged in a complex capital structure, and financial markets feature a great range of interest rates. Labor is hired and fired under contingent contracts, in which the wage paid is structured, not to vary the quantity of labor service fed into a production process, but, rather, the behaviors of workers, controlling a stochastic production process.

Economists know all this, of course. I am not egotistically making it up out of my own head. But, they don’t feel obligated to apply it, in making sense of how the economy works in a general sense, for micro or macro policy purposes.

Does it matter? Damn right it matters. Piketty is earning points with conservative economists like Krugman, by fitting parts of his narrative (maybe not crucial parts, let’s not get too grumpy with Piketty in his moment of glory) with the armor of the old marginal product analysis, but he’s also just prolonging the degenerative state of conventional policy economics. This is not how the world works, and economists should not be telling themselves, their students, or the public that it does. Economics after 50 or 70 or however many years should be making progress, and should reject foundational concepts that are clearly wrong.

The production function is clearly wrong. Output is not a function of inputs. It’s just not. Which becomes perfectly clear as soon as anyone tries to find and describe any particular firm’s production function. It is just not a productive frame for analysis on a micro level. Blithely assuming that a firm has solved all its continuing technical and managerial problems, in order to realize “maximum” output from given inputs, is how theorists since Wicksteed or Carlson have tried to sidestep the problem, but engineering and management are most of the economy, and are clearly not “solved” problems. It’s stupid.

In the real world, business firms are not “profit-maximizers”. You cannot define maximization of profit in an uncertain world — no one knows enough. So, in a descriptive, operational model, firms must be rent-seekers. Firms are organized around whatever sources of economic rents they can secure. (You can send my Nobel to my PO box. Thanks so much.) Firms use economic rents to manage the distribution of risk against the control of stochastic production processes, because, in an uncertain world, the distribution of risk is the distribution of income and incentives. So, yes, if you are interested in analyzing the distribution of wealth and income, and its relation to economic performance, it matters very, very much.

All of this is just lying on the ground, waiting for competent economists to pick up. And, except for Stiglitz on exceptional occasions, either they do not do it, or if they do do it, they are ignored in favor of centrist or reactionary ignoramuses.

It pisses me off. It is why I rant! And, it should piss all of you off, too.

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Bruce Wilder 05.01.14 at 9:08 pm

Hopefully, even literalist readers get that my rants are conducted in a spirit of moderate self-ridicule.

Regarding that Krugman post mattski links to, I do wish that someone with sufficient weight, like Stiglitz, would step in, just once, and take Krugman to the woodshed in a way he wouldn’t forget.

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Metatone 05.01.14 at 9:19 pm

@Bruce Wilder

Good reminder about the prominence in reality of “rent-seeking” as opposed to theories of “profit-maximisation.”

I just had the fortune to attend a talk by Ha-joon Chang today, so I’ll add a couple of his observations (his in terms of his talk, not that he is the first to note them.)

1) Open Market transactions even now probably account for less than 20% of economic activity – most activity occurs inside institutions of various kinds.

2) Economics as a discipline is obsessed with “exchange” while what has actually improved quality of life is largely improvements in production and technology.

(I note that I’ve often complained that economic histories give credit to trade for a lot of growth that properly relates to advances in energy resource exploitation – trade enables some of that, but it’s nothing like the factor that the Zombie “trade is what makes us rich” meme suggest…)

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Main Street Muse 05.01.14 at 9:20 pm

Random Lurker @313

“Capitalist A, a shoemaker, buys fixed capital for 10, variable capital (labor) for 80, and sells the final product, shoes, for 100, thus making a profit of 100- (10+80) = 10.

According to the theory, 80 % of the value was produced by labor, while 20% of the value was produced by capital (the 10 advanced + the 10 of profits).”

Do managers use these equations to determine wages? I really don’t think so. I’d love to see the equation for a CEO’s salary.

Again, from Random Lurker @313

“Note in this example that, if we assume that there is a minimum “wage of subsistence” of 5 apples per peasant, and that the landlord only pay this subsistence wage, the quality of land changes the share of profit because the workers take home a fixed pay, while total productivity may vary depending on the quality of land. However this works only as long as we assume that workers are only paid subsistence wages, an assumption that was common in the 19th century but that modern economics refuse explicitly.”

I guess modern economists are turning a blind eye to wages paid by Walmart, McDonalds, etc. – wages so low that many rely on federal relief programs for things like food, medicine, etc.

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Bruce Wilder 05.01.14 at 9:31 pm

Smith identified the source of the wealth of nations with specialization, by which, I think we can fairly say with overstretching too much, he included economies of learning, scale and the ability to use capital embedding an advancing technology. What Smith clearly did not quite grasp is how much management in that pin factory mattered.

Technology, embedded in sunk cost capital investment, the return on which depends on the exercise of political power, however disguised, combined with the profligate externalization of costs and appropriation of resources, combined with the use of fossil fuels and productive domination by hierarchies — it’s a complicated story and not one for Pollyannas.

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mattski 05.01.14 at 9:37 pm

Bruce,

Rest assured that I wouldn’t be contributing in this thread if I wasn’t ‘pissed off’ by, well, the things about the Left that piss me off!

FYI, I just sent Professor Stiglitz an email apprising him of your request.

You friend & controversialist,

Matt Stern

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Bruce Wilder 05.01.14 at 9:45 pm

Now, I wish I had taken more time to edit my comments. ;-)

Hopefully, mattski, you do see a gap opening up between Krugman on the one hand, and Palley or Jamie Galbraith on the other. Krugman, qua economist, is a conservative. Beware.

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mattski 05.01.14 at 10:10 pm

:^)

Well, Bruce, you are fond of calling Krugman a ‘conservative’ economist. I don’t happen to share that view. ‘Conventional’ perhaps, but I agree with Professor K when he writes,

Palley goes on in both posts about the evils of the marginal productivity theory of distribution; like Wren-Lewis, I don’t see what this has to do with analyzing the crisis, one way or another.

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Lee A. Arnold 05.01.14 at 10:47 pm

The thing I don’t get is why labeling someone conservative or liberal or progressive or heterodox somehow makes them more or less useful, or more or less dangerous, to listen to. Some conservatives are worth listening to; some progressives and heterodox economists are out of their freaking minds… That is like right-wing talk: “Beware listening to him, you will be led astray!” or “What do you believe? so I know how to judge you!” It is like the die is already cast: if he doesn’t repent (according to MY specifications) he is anathema. What is the point of that stuff?

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bob mcmanus 05.01.14 at 11:21 pm

Palley goes on in both posts about the evils of the marginal productivity theory of distribution; like Wren-Lewis, I don’t see what this has to do with analyzing the crisis, one way or another.

Ryan Avent, Economist, today, on Piketty, Krugman, and inequality in America

One of the main ways America addresses inequality is through geographical filtering of its population into high and low cost areas, which compresses the real income distribution.

An important question is whether or not we should applaud this outcome. On the one hand, it seems like a grand thing. Workers can boost their real incomes simply by moving to cheap cities. Surely that’s preferable to taxing the rich and redistributing the proceeds!

Maybe, but maybe not. There is still a tax here; people living in cheaper cities earn lower nominal incomes, which suggests they are less productive

Mainstream economist breathe marginal factor productivity like the air. SF yuppies must be more productive than El Paso maquiladora workers. They make more money!
And Avent in the article is discussing differences in housing markets due to productivity differences; might be connected to the crisis.

He gets pushback on that last sentence in comments immediately.

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J Thomas 05.01.14 at 11:22 pm

The production function posits that (maximum) output is a function of factor inputs. As inputs vary quantitatively, then (maximum) output, being a function of inputs, should vary. In a system of competitive markets allocating factors to production processes by price, how much of an input is allocated to a production process is a matter of price, and how much output is optimally desired is also to be determined by competitive market price. “Competitive market price” means that no actor is behaving strategically; every one, worker and landlord alike, take what they can get, with no awareness of the potential, say, of guile in clever bargaining or the exercise of political power.

If you have a competitive market price, what room is there for clever bargaining? Each individual bargainer is competing against many others who might offer a lower price. You spend as much effort as the situation deserves hunting for the best price you can get, while each of your counterparts on the other end of the deal does the same.

In OR they call it the “secretary problem”. Or if you’re buying an interchangeable commodity, then you could just go to the biggest market and pay the going rate.

The purpose of such a patently unrealistic assumption is not to describe any actual situation; it is to understand and define in ideal terms, an efficient allocation of factor resources. That ideally efficient allocation is achieved when maximum output value (and, therefore, maximum income) is achieved by allocating inputs right up to the point at which the cost of an additional unit of input is exactly equal to the value of the additional unit of output resulting from adding that unit of input to the production process.

There’s a cost to allocation, so you don’t want to pay whatever it takes to get it ideally efficient. You allocate inputs as best you can, and you guess what you’ll be able to sell outputs for. If you’re a going concern then you know how it worked out this time last year, so you can guess it will be kind of similar this year.

In this highly simplified ideal, the firm acts as if there is one fixed price for each category of input, so the wage of labor is equated with its marginal product, the rental rate of land is equated with its marginal product, the rate of return on capital is equated with its marginal product, and when each of those rates are applied to the total labor, land and capital used, the incomes of all of the factors together add up to exactly the revenue generated from the total output. For this ideal scenario to work out neatly, it helps a lot if the production process exhibits constant returns to scale, so that marginal cost of output is above average cost and rising in the relevant range of output.

But that makes no sense. What about marginal costs? If you’re big enough to matter in one of the markets you participate in (hiring workers with each special skill, buying each other input, selling your outputs, etc) then if you expand production you will probably have to pay more, and likely get lower quality. Supply and demand and all that.

So, what Krugman is saying, and what Blaug said, and the excuse Piketty might put up for some of his more reactionary conventional narratives, is this woolly thinking, which says, yes, market power is real enough, but that just means (mostly relatively minor) deviations that make the actual market economy messy and less than ideally efficient, but the general behavior of adapting factor allocation to prices, goes on.

Could we make it more true? If each company had a low maximum size, then you would build a lot of product by assembling companies like tinker-toys. You might hire one company to do the janitorial work, another company to do the accounting, a third to own and operate machinery, a fourth to buy and ship raw materials, etc. Better yet, you could hire two companies to do different parts of the accounting, and if one of them seems to do it better then you give them more work and give a fraction of the work to some new company. The more of the internal functions could be handled by things you buy in markets, the better. Right?

Well, maybe not. People who think they’re a permanent part of things have an incentive not to sweep problems under the rug. If they know they’re going to be around to deal with overlooked problems after they blow up, it provokes a degree of responsibility.

If you treat people as temporary, then you need to arrange it so they don’t get the chance to make mistakes that hurt you after they’re gone.

The production function is clearly wrong. Output is not a function of inputs. It’s just not. Which becomes perfectly clear as soon as anyone tries to find and describe any particular firm’s production function. It is just not a productive frame for analysis on a micro level. Blithely assuming that a firm has solved all its continuing technical and managerial problems, in order to realize “maximum” output from given inputs, is how theorists since Wicksteed or Carlson have tried to sidestep the problem, but engineering and management are most of the economy, and are clearly not “solved” problems. It’s stupid.

Well, but does it get in the way?

Consider the gas laws in physical chemistry. They consider gas molecules like they’re little hard balls that do elastic collisions. That’s a big oversimplification. They’re usually not round, they’re often dipoles, they have various vibrational modes and some of the energy turns into rotational energy etc. But treating them as little round balls reveals a whole collection of mass behaviors. The gas laws mostly work.

If you simplify the treatment of individual firms, you still might reveal important macroeconomic principles. Would adding the micro complications to the model really help?

I suspect it might. But maybe not. Maybe the big problems are macro effects. Maybe individual companies behave enough like the model that they don’t get in the way, but we’re thinking wrong about how innovation happens, or how the Fed works, or something else.

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bob mcmanus 05.01.14 at 11:33 pm

The story I might write against Krugman and Avent on the housing crisis would not only be about the decline in median wages and the liquidity from financialization but also would include a distortion in wage distribution with the top twenty percent of elitist wage earners sharing outsized gains from de-industrialization privatization etc and bidding the attractive geographical areas up beyond their sustainable market values. Las Vegas?

Washington DC is the most productive area in the US over the last decade?

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mattski 05.02.14 at 12:14 am

Lee,

What is the point of that stuff?

To divert attention from the substance. Seems to me.

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christian_h 05.02.14 at 12:45 am

Huh? How can it not be substantial point of argument that the marginal productivity theory is just, well, nonsense. As explained brilliantly by Random Lurker. Like all models based on nonsense, neoclassical models with adjustments (.a.k.a., epicycles) can be useful in many circumstances. The problem starts when those who employ those models actually recognize a reality that contradicts them (e.g., that “r > g” even though this should be impossible in the long run, according to their underlying theoretical assumptions); because in this situation their theoretical assumptions will make it hard for them really see how fundamental the issue is (say, that the reason r > g is because the rate of return on capital is in fact determined by class struggle, so a “solution” to the problem they correctly identified cannot ignore… class struggle).

That, it seems to me, is as substantial as it gets. And yeah, I for one am extremely disappointed with Krugman on this not because he disagrees – fair enough – but because he either misunderstands or misrepresents his critics’ point in a very serious way.

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mattski 05.02.14 at 1:36 am

From Joseph Stiglitz’s review of Geoffrey Harcourt’s, Some Cambridge Controversies in the Theory of Capital:

The problems I find with the book are basically the problems I find with the Cambridge (U.K.) theory of which he is a partisan on one side–as I suppose I am on the other–and so rather than focus on any errors and confusions which are peculiar to Harcourt, I prefer to focus on three of the major issues involved in the dispute and to suggest, in doing so, where Harcourt (and the Cambridge U.K. theorists) have gone astray.

There is a well known propensity of individuals to dislike what they don’t or can’t understand. This book, as well as the writings of the other Cambridge economists, makes perfectly clear that they do not understand neoclassical capital theory.

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Wallace Stevens 05.02.14 at 3:03 am

My question is this: Where are the heterodox (or Marxist, for that matter) hedge funds? The limitations of orthodox economics have been well rehearsed on this thread. But if there were an alternative to orthodox economics that offered unambiguously superior predictive power, then I would have thought that there would be a lot of money to be made–enough to cause most bourgeois money managers to very quickly lose their ideological inhibitions. What? Not one of those “greedy bastards”? No problem! Simply donate the money to the cause of your choice. This is your chance to out Koch the Koch’s!

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J Thomas 05.02.14 at 3:16 am

“Where are the heterodox (or Marxist, for that matter) hedge funds?”

Do you think that hedge funds use orthodox economic theory to predict the market or the economy?

If you think that, why would you think that?

Has economic theory provided much success at predicting the market or the economy?

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Michael Harris 05.02.14 at 4:22 am

As a mostly mild-mannered workaday jobbing economist, can I just say, Bruce Wilder, write whatever damn book you have to write about all this stuff, and I promise to buy it. And read it. Seriously.

I might even buy copies for a few colleagues, to give us something to argue about over lunch or at the pub.

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Peter T 05.02.14 at 4:33 am

One example of what an alternative economics might look like is Merijn Knibbe’s work:

http://rwer.wordpress.com/2014/05/01/the-definition-of-capital-and-the-difference-between-the-productivity-and-the-profitability-of-capital/

Attentive to history, careful in its categories. More, if you like, scholarly.

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Bruce Wilder 05.02.14 at 4:56 am

J Thomas @ 330: . . . but does it get in the way?

Yes. Organization and management isn’t some occasional oddity in the economy — it is the economy. Half the U.S. workforce is in bureaucracies with over 100 employees. The achievement of technical and managerial efficiency completely dominates consideration of allocational efficiency in most of the economy.

Very few businesses vary their prices frequently in response to supply and demand — gas stations are one of the few examples. Most firms would like to sell more stuff at current prices, because their marginal cost of production is significantly less than average unit cost. That’s one reason for pervasive advertising and promotion — the last few units sold are very profitable. Every where you see administered pricing — prices are fixed, or vary according to an administered schedule (coupons, advertised specials, etc.)

Increasing returns to scale — marginal cost less than average cost and declining — means there may not be a market-clearing equilibrium price. And, this is not unusual — survey research indicates a marginal unit cost less than average cost and declining in the range of current output may actually be the most common case.

Nothing about the economy you observe every day accords with the requirements for marginal product analysis to work as a theory of income distribution: the firm is making huge profits on the last few units sold, in large part because capital and most of labor are either sunk costs or part of a fixed overhead.

This microeconomic reality — that most businesses would like to sell more stuff at current prices — is why increasing aggregate demand can increase business activity on a macro level. Most businesses, most of the time, are dreaming of the day more money walks in the door. This is just of the opposite of the model used to define an efficient allocation of factors, where the last unit produced yields almost no profit.

In New Keynesian models, the behavior of the macro economy is commonly explained by reference to “menu costs” (a modeling gimmick) of changing prices. The costs and time-consuming nature of price changes for firms creates a stickiness, that gives demand management policy traction, which it wouldn’t have in an imaginary market economy, with flexible prices.

So, the most prominent aspects of macro behavior are related to very common firm cost structures, which basically preclude a nice neat marginal product analysis of income distribution or overlooking the prominence of administrative structures in the economy. The micro complications are already implicitly there in the most conventional understanding of how the macro economy responds to changes in effective demand. It practically requires schizophrenia to think marginal product analysis of income distribution is a viable “first cut” in the circumstances.

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Bruce Wilder 05.02.14 at 8:28 am

Previous not one of my better comments, sorry. Long day.

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reason 05.02.14 at 9:26 am

Bruce,
I personally don’t think that @339 was in any way bad – what is wrong with it?

On the other hand, I have never been convinced by “menu-costs” as an important argument for price stickiness. You don’t even need it. All you need is transaction costs , costs of adjustment (of production, location or time schedule for employees) and uncertainty resulting in hedging via long term contracts.

But my bigger argument with neo-classical economics is the insistance on the equilibrium concept, it is both unnecessarily and leads to massive errors. You don’t need “class conflict” directly to explain why factor returns might diverge from marginal productivity, you just need disequilibrium (and monetary policy actually designed to maintain disequilibrium which might be a consequence of “class conflict”).

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Random Lurker 05.02.14 at 10:27 am

My two cents on why the capital controversy matters.
First, the orthodox view holds if we speak of one single business, because the price of both capital and labor are determined by ‘the market’ and are exogenous.
So for a single firm, we can say that it goes on hiring people at a market determined wage, as long as the additional profits due to the additional worker are higer than the worker’s wage (more realistically, the profits also have to be higer than the average rate of profit, also an exogenous variable determined by the market, or else the firm would use its money differently).
The orthodox theory pretends that this also happen in the market in the aggregate, but in the aggregate both the wage rate and the average rate of profit cannot be taken as exogenous.
This means that the marginal productivity theory should be flipped on its head, and seen as a theory that says in what fields will capitalists invest at a given wage and profit rate, but not a determinant of the wage and profit rates themselves.
This means basically that there is an equilibrium between fields and trades (at given wage and profit rates), but that there isn’t necessariously an equilibrium between wages, profits, and savings/capital/wealth.
This means that things like bubbles cannot be seen as market failures, rather we should see market as very efficient at allocating resources between different trades but completely inefficient at allocating wealth and at sharing income between capital and labor (duh).
Instead the prevailing point of view of Keynesians like Krugman is that the equilibrium among trades and the equilibrium between capital, labor and savings are one and the same thing (even if they don’t realize this, this is the consequence of the orthodox view), and then use weird theories (which they don’t really 100% believe) like rational expectetion to treat savings as it was stuff (deferred consumption).
This way they imply Say’s law that can only be broken by some market failure, and they threat crises or depressions as market failures which they aren’t (they are a big problem but not a market failure), and then are pissed off when rightwingers believe in Say’s law.

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J Thomas 05.02.14 at 11:25 am

“Half the U.S. workforce is in bureaucracies with over 100 employees. The achievement of technical and managerial efficiency completely dominates consideration of allocational efficiency in most of the economy.”

My first thought is to ask whether that’s OK. Do we need better allocational efficiency? If so, maybe we should work toward reducing the size of corporations.

My second thought is to wonder how this would affect macroeconomic models. The ideal gas laws work pretty well even though they make the wrong assumptions about individual molecules, but they get tested with 10^20 molecules or more. And of course you won’t know how this affects macroeconomic models until you actually make the alternate models and see what they do.

“Very few businesses vary their prices frequently in response to supply and demand — gas stations are one of the few examples.”

That’s certainly true for consumer products in the USA. Consumers have learned to just buy at the price offered and not think about it too much. If they want a better deal then they get one by fussing with coupons or something like that. People tell me that in Mexico it isn’t like that, you’re supposed to bargain. But I went to a restaurant in Tijuana and they didn’t look like they wanted to bargain, they had posted prices and they presented the bill just like back home. The department store didn’t want to bargain. People selling rosaries on the street did, though, and so did the guy with the shop selling cheap blankets.

I watched an a guy with a reefer full of organic ice cream negotiate with a food coop manager. “How about four more cases?” “I’d like to, but I just can’t push that much. I’d better go down two on the carob, too.” “Try it, I bet you can do it.” “No, not this time.” He didn’t offer to cut the price. But then, he was offering 90 days same as cash. If they could sell it at all it didn’t cost them anything except display space.

“Most firms would like to sell more stuff at current prices, because their marginal cost of production is significantly less than average unit cost. That’s one reason for pervasive advertising and promotion — the last few units sold are very profitable.”

That makes sense, and also they have to be careful about cutting price on the last few, to make sure they aren’t selling cheap to people who’d otherwise pay full price. So books get remaindered after they’re stale and new books are on the shelves. Ditto donuts. Old donuts get thrown out or given to charity because if they sold cheaper people might buy them instead of fresh donuts. Every 3 years you might get a deal on the last cars from the old model because people want the new cars, somebody who’d buy the old model cheap would probably buy used instead of an expensive new car.

People do bargain over used cars and mattresses, so used car and mattress salesmen get a reputation.

“Increasing returns to scale — marginal cost less than average cost and declining — means there may not be a market-clearing equilibrium price.”

There isn’t going to be a market-clearing equilibrium price unless there’s a market. Usually there isn’t. I was surprised the first time I visited NYC and saw whole rows of jewelry shops side by side. A New Yorker explained that they got more business that way because people would go to the place they could shop around easily. You don’t see that in Atlanta. You drive to a store and then either you buy or you don’t buy. Maybe the salesman will tell you he’s giving you a discount out of his commission. What do you know about jewelry? You could have it appraised, but you don’t let it out of your sight or the appraiser might switch the stones for worse ones and you wouldn’t know. It’s a mug’s game.

If it was a million diamond rings all the same, you could have an online market and you just choose the best price. If the ring isn’t standard then it’s fraud.

But it’s only for commodities that you can really have a market. If you want a loaf of bread, at Safeway the cheap bread is $1.40 and at WalMart it’s $1.10. They aren’t the same bread. Do you really compare prices? The difference in driving cost matters too. And some people get depressed when they go to WalMart.

It’s a whole bunch of different deals. The products aren’t the same. The prices aren’t the same. The externalities aren’t the same. When they won’t bargain on prices that’s just the icing. My Home Depot says they’ll match any lower price, but there are so many brands that the lower price is probably not what they are selling.

You can only get a single market price when the products are all the same. Stocks — one share of stock is the same as any other. Money — any dollar spends like any other. Wheat — if a railroad-car of wheat tests above-standard, they mix in enough bad wheat to bring it down to standard. Most things — no.

So, can you make reasonable economic models without a market-clearing equilibrium price?

“Nothing about the economy you observe every day accords with the requirements for marginal product analysis to work as a theory of income distribution: the firm is making huge profits on the last few units sold, in large part because capital and most of labor are either sunk costs or part of a fixed overhead.”

And with automation even more. More of the cost is sunk, less labor per unit, fewer people to lay off, etc. I notice with computer chips customers demand a second source. If there’s only one source they won’t accept it. But multiple sources need to agree on prices because free competition might bring prices down to variable cost which would be bad. So they compete in other arenas.

So OK, at a fixed price there’s still the marginal customer who is undecided whether to buy or not. Does that provide enough of the same effect?

Oh, wait. If production has already reached the point of diminishing returns, and then you try to subsidize poor people, what you buy for them is the most expensive. So you need to cut costs as much as you can and give them substandard stuff.

But if it’s extra cheap to provide extra for them, they aren’t much of a burden. They could get standard stuff and it minimally impinges on the rest of the economy. The only concern is that they might sell the stuff you give them and buy what they really want, and then they compete with the suppliers for real sales.

“The micro complications are already implicitly there in the most conventional understanding of how the macro economy responds to changes in effective demand. It practically requires schizophrenia to think marginal product analysis of income distribution is a viable “first cut” in the circumstances.”

OK. So at some point a respectable economist will get a “Nobel” prize for fixing this. Then what? We’d need textbooks written that describe it the new way, otherwise everybody will go on using the old textbooks.

What else would help? If a plague hit university economics departments so there were lots of vacancies for younger economists to fill? Or the kind of deep recession that got a lot of older economists put on early retirement, and then we came out of it and younger economists advance quickly?

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reason 05.02.14 at 1:30 pm

“Or the kind of deep recession that got a lot of older economists put on early retirement, and then we came out of it and younger economists advance quickly?”

What makes you think that the age of the economists makes any difference. The problem is who trains them, and who appoints them.

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J Thomas 05.02.14 at 1:44 pm

“What makes you think that the age of the economists makes any difference. The problem is who trains them, and who appoints them.”

People who aren’t as depreciated have more incentive to learn new stuff that works.

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reason 05.02.14 at 1:49 pm

On the other hand with tenure, isn’t it also true that people who are depreciated have less to lose by being innovative.

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J Thomas 05.02.14 at 2:05 pm

And less to gain.

Although I’m unclear about all that. Is innovation frowned on for candidates hoping for tenure? I can imagine if there are 5 possibilities and 1 of them makes it, it might be better of that 1 has nothing controversial about him.

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William Timberman 05.02.14 at 2:07 pm

Since what main stream economists are saying does not seem a satisfactory explanation for what we’re seeing, not even after the fact, I’d say that what’s been offered here beginning @339 goes some way toward clarifying at least some of what seems intuitively wrong to me. Tyler Cowan is easy to debunk — you hardly need to be an economist to do it — but Paul Krugman, et al. are a tougher nut to crack. I haven’t the wherewithal to debate Krugman’s economics, but his optimism has always seemed suspect to me for other reasons. He doesn’t appear to understand the workings of political power at all, for instance, and I don’t see how anyone can come to conclusions about aggregate anything without a fairly sophisticated grasp of how power is at work in the processes being aggregated. BW’s picture of managed outcomes in states of greater or lesser uncertainty, and the riffs on it by others are equally the product of an expertise I lack, but they do come closer to explaining what I actually can understand, and for that I’m grateful.

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Lee A. Arnold 05.02.14 at 3:49 pm

The only real problem I see with Krugman’s critique is Dean Baker’s criticism — not only of Krugman, but of many others in the same camp: they don’t bring the housing crash forward as the proximate cause of the drop in demand, and so they deaccentuate (I won’t write “dismiss”; they do not do that) the simplest policy explanation for the output gap: the simple fact that there is no other sector that is like housing, and no other sector can replace it in the same way. Housing has certain characteristics, indeed it is a remarkable form of capital. So the question is how to make it reconstitute faster, without blowing another bubble, and Krugman has written about that anyway, and that is among DeLong’s earliest observations on the whole disaster too. Standard economists of almost any camp tend to put the two bubbles together (i.e. the bubble in house prices, and the bubble in mortgage derivatives’ value as repo collateral) — no one ever says, “There were two bubbles” — because of course they fed each other, and so they tend to say, “Okay, the problem is we didn’t recognize that a bubble could blow up in the shadow-banking internal markets (i.e., repo), and so now we do.” …On top of this (and quite different, in a way) comes Piketty’s book, which is talking about a much more widespread and long-lasting phenomenon. Yes r>g no doubt fed the derivatives bubble, but in a very peculiar way, because a lot of the “savings glut” is coming from profits made abroad by exporters to the U.S. (and the other developed countries), thereby not only 1. dislocating and impoverishing U.S. labor because the various forms of recompense and job relocation that would satisfy international trade theory do not come fast enough, or do not exist, BUT ALSO at the same time, 2. impoverishing the developing exporting countries because their exporters to the U.S. choose not to reinvest in their own countries, but to chase quicker returns in the international capital markets, particularly from mortgage derivatives. Thus the savings glut comes partly from underinvestment in UNDERDEVELOPED countries. No doubt there are huge governmental and regulatory obstacles, but it is also much easier to masturbate with the money on Wall Street. …What I find surprising here is the contention that marginal productivity theory is somehow in the way of understanding all of this. Yes, marginal theory explains little or nothing. (“…the theory has few practical implications.”–Blaug) But who cares? The frustration at the fact that people won’t acknowledge that the “marginal theory” explains little or nothing, seems to be transformed into fears, either that non-acknowledgement will diminish efforts to find a valid alternative theory, or that the failure to disarm it will lead to weaponization by right-wing tribalism to justify inequality. I doubt either one, and I am not worried about it. I think it has some intellectual inertia, but not very far in. And the crowd around the paradigm isn’t the reason people haven’t come up with a new theory; though that gets us intellectually off the hook. I would totally agree with Krugman if he said: that the use of the theory to justify the the “makers/takers” corollary that the billionaires are worth their marginal product is ridiculous, and also probably not really a big danger in political rhetoric (largely because when it comes to the voters, “marginal product” won’t cause a dent in their denseness anyway. I don’t remember that even Romney — who would try any goofy thing –wasted his breath bringing up his marginal product). And then I would agree with Krugman if he went on politely from there, avoided jumping into a paying academic subdiscipline, and said that everybody who studies it knows it’s got problems, while correctly adding that anyway isn’t terribly germane to what we are seeing with r>g. Which is sort of what Krugman has written at various times.

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Lee A. Arnold 05.02.14 at 3:54 pm

That is not to say that political power is not involved, by the way. Which Krugman has also written, and everybody else who’s thought two minutes about it.

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Lee A. Arnold 05.02.14 at 4:25 pm

Since so many people need to judge, by knowing what you believe, I will help to cubbyhole my comments by stating what I believe, even though to me it is useless and boring. I have written this many times at Crooked Timber, so it may also be even MORE boring:

1) The world will be socialist within 100 years, maybe with some small capitalist institutional rule-sets.

2) Materialism is false. (And therefore the world will be socialist, but not due to materialism.) I deny the total rule of deterministic materialism in favor of a dualist approach to an unspecified neutral monism (rather like Nagel’s position I imagine). Perhaps it must remain unspecifiable.

This happens to be a very seviceable counterposition to some problems in the foundations of mathematics and science.

It is also fun, because so many thinkers get lost at sea, get emotional, start clutching their priors. I am delighted to cause anti-religious queasiness and anger on Crooked Timber by referring to “sin” as a valid causation, thus applying Wittgenstein’s license to take people’s own reports as the best language about condensed emotional complexes, and how they think about them and overcome them. “Oh, he’s going against science!” No. That is a part of science. Scaling up a different and even more verbose mountain of hairsplitting gibberish does not necessarily get you any closer to what is going on.

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mattski 05.02.14 at 5:57 pm

It is also fun…

I agree, Lee!

One of the most fun things for me–aside from the necessary exasperation of course–is learning more about what and how people think. Especially people we think we know on the basis of their comments here. People almost always surprise us, the more we get to know them.

For example, you have surprised me here. I am kind of fascinated with your use of the words ‘socialist’ and ‘materialism.’ When you say you think the world will be socialist in 100 years or so, do you mean socialist like Sweden, or in a more dramatic way?

And as for materialism, I’m not clear how you intend this. How does materialism fit into the political/economic organization of human affairs? Why is it important one way or another? Genuinely curious here.

I am basically of the mind that ‘socialism’ (for lack of a better term) is inevitable from an evolutionary perspective. Getting there of course will be an adventure filled with all kinds of difficulty and suffering. But one of the keys, imo, is that it will come about as a result of consensus and ever-increasing transparency through most all levels of society.

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J Thomas 05.02.14 at 6:08 pm

“1) The world will be socialist within 100 years, maybe with some small capitalist institutional rule-sets.”

I don’t know how to predict. I think it’s possible that within 100 years surviving humans will be hunter-gatherers and the concepts of socialism and capitalism will seem like distant memories.

“2) Materialism is false. (And therefore the world will be socialist, but not due to materialism.)”

I don’t see how it matters whether materialism is true or false. It might matter a whole lot whether people believe in it.

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Lee A. Arnold 05.02.14 at 6:13 pm

I don’t want to take the conversation in this direction, but to answer: Socialist in a more dramatic way, along an “evolutionary” path, but whether all to the better, remains to be seen. Materialism = the view that everything is made of matter and energy. Materialism determines human affairs if people think that material condition is the underlying cause, or should be the underlying cause, of social events — of even the explanation of consciousness. Both simple Marxism and the capitalist plutocracy espouse their own variants of this.

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Lee A. Arnold 05.02.14 at 6:14 pm

J Thomas #353: “I don’t see how it matters”

Exactly. As I wrote, “it is useless and boring”

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Bruce Wilder 05.02.14 at 6:38 pm

“everybody who studies it knows it’s got problems” — Yes, Krugman would say that. Just leave the theology to the priesthood, it’s all irrelevant anyway.

Except it’s not. Despite the vague acknowledgment of unspecified problems, he’s stubbornly refusing to give it up, and he’s attributing motives to his “heterodox” opponents, rather than engaging with them openly and respectfully, to understand the criticism. What is its merit for Krugman as a “first cut”? What’s he hanging on to? What’s he resisting? He scarcely gives us a clue in his writing to date. These things would be exposed in a respectful exchange, and the nature of the disagreement between, say, Galbraith or Baker and Krugman, if one remains after, would be clearer to the rest of us.

Part of the problem, abstracting from the sociological issue of the in-group establishment v the scorned outsiders (keeping in mind that Krugman straddles that divide most of the time, combining establishment credentials with a prophetic-voice-in-the-wilderness pose, and jealously guards the reputation for integrity that straddling gives him, convinced that he has special responsibility to man a lonely outpost for a half-forgotten liberalism) — anyway, putting aside the political and sociological theatrics — is that neither the establishment nor the heterodox have a complete, closed account of what principles govern the emergence in the economy of systematic behavior by households and firms. Well, the establishment has a closed account, but it doesn’t fit the data, so only the crazy fundamentalists on the Right tout it; the reasonable-man centrists have the-closed-system-that-does-not-work, plus ad hoc frictions, that bring it closer to some kind of conformance with undeniable facts. And, the heterodox seem to the establishment to be offering nothing more than unanchored “norms” and such: essentially frictions without the closed-system.

The marginal product analysis of income distribution belongs to that closed-system-that-does-not-work-but-we-love-it-anyway-and-we-can-live-with-the-epicycles, and you bums got nothing but epicycles, so what’s your point (we already know our epicycles, why learn yours?)!

Underneath this unproductive exchange is a simple lack of confidence among the establishment centrists that they could reject the closed-system-that-doesn’t-work and keep their keys to the faculty club lavatory. New Keynesian economics is literally cantilevered off the RBC modeling strategy (a formalization of the closed system that does not work), and that reflects their essential dependence on the true believers for establishment credentials. They cannot walk away, without falling off the cliff. That’s why, when Chris House lectures Krugman on Krugman’s deviations from the Thomas J Sargent True Believers principles list, Krugman says, “look how reasonable I am being” and its not my job to shock my flock. He doesn’t say, Thomas Sargent is an idiot and his principles are crap, and you, Chris House, are nothing but a tool for subscribing to them. And, even more pointedly, he doesn’t say, Sargent’s doctrines were contributing causes to the 2008 GFC, and to our political inability to recover and to repair our damaged institutions.

Quite a ways back, Krugman was very clear about connecting deregulation with the twin housing and securities bubbles. But, he’s forgotten, I guess. He’s going to defend the legitimacy of the establishment that endorsed and facilitated the deregulation that caused the fundamental problems. Larry Summers may have had some shortcomings as a policymaker, but as a Prophet of the Secular Stagnation (that the corrupt Summers did so much to create with his obstruction of good public policy), Larry Summers is now Krugman’s hero for articulating abstract insights that obscure more than they reveal.

These are the kinds of behavior that make me uncomfortable with Krugman, and lead me to warn that he remains, at base, a conservative economist, even if he is a sincere voice for political liberalism. A left-liberal-social-democrat follows his economic judgments at some peril of being misled.

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Bruce Wilder 05.02.14 at 6:44 pm

J Thomas @ 343

So at some point a respectable economist will get a “Nobel” prize for fixing this.

I don’t think the folks at the Bank of Sweden, or their mega-rich patrons, would be much interested in legitimating such insights. Sorry to be cynical, but, in some important respects, the fix is very much in, and the Nobel has been used to legitimate a reactionary-friendly economics. Krugman is not an exception, though he might be a bit of twofer, in that his Nobel is one that also serves as packing peanuts for the rest.

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Lee A. Arnold 05.02.14 at 6:45 pm

Mattski #352: “How does materialism fit into the political/economic organization of human affairs? Why is it important one way or another?”

Because I think that people who look to mathematical theories for overarching explanations (e.g., some of the people in economics, and some of the people who criticize them) — and also define “science” this way — are doing the same thing as supposing that an algorithm on a Turing machine will provide that overarching explanation. That is “mechanism”, and closely identified with materialism. To put it the other way, if there is materialism without the insistence on mechanical explanation, or without an insistence on the principle of sufficient reason, what does it sound like?

Because I think materialism is the unspoken premise of the search for algorithmic theories, such as would allow for mathematical models in economics.

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roy belmont 05.02.14 at 9:01 pm

Timberman, Wilder:

Cheers for your efforts.
Fun to watch, but the agendae are too nested.
There’s at least three motives operating to your, respective, one.
There’s theory, there’s practice, and there’s lying sacks of shit.
Not to cast any aspersions or anything.

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Bruce Wilder 05.02.14 at 9:07 pm

reason: what is wrong [with BW’s comment at 339]

In my mind, I had a glimmer of a thought about how capital, management and marginal product mattered in a macro vision (a glimmer that said something about why the heterodox keep harping on the CCC and on misuse of marginal product), but all that seemed to come out on the page was a string of consciousness, repeating some of my standard points. (and, I’m about to do it again in this comment, so apologies in advance)

Basically, I think it is very easy, even for those with leftish sentiments, to lapse into talking about the economy as a moral system, where virtue is rewarded. You can deny that using marginal product analysis as a first-cut entails any such conviction. (You can deny that marginal product entails much of anything, as Blaug seemed to try to do, but if that’s really your belief, why bother to defend it at all?)

In the economy as a moral system, capital earns a return because capital is productive. That’s moral quality as mechanism. Productivity is a virtue. The innovator gets rich. Higher labor incomes are attributable to “skills”. An industry with rising productivity is characterized by rising wages. It’s a familiar shorthand, with which the capitalist market economy is routinely legitimized. And, treated uncritically by many writers and readers, who accept and repeat these often formulaic explanations, without noticing that moral qualities cannot substitute for institutional mechanisms.

The actual economy doesn’t work that way. Capital as investment in synthetic factors of production (tools, organization) is mostly sunk-cost investment, which shouldn’t (in a normative economics sense) and won’t (in a practical sense) earn any return at all without political power of some kind, to generate an “economic rent” (scare quotes to alert mattski that this is a term of art in economics, not a reference to lease payments). To talk about return on capital as a marginal product, as if capital services are being metered into each unit of production, is to completely misconstrue what microeconomics (and academic business strategy, too, which teaches almost nothing but the search for “viable business models” which are the political strategies for structuring the organization of production and distribution in ways that allow collecting a return on sunk-cost investments) say about actually existing business.

There’s no correspondence or correlation between the political power that enables a return on investment and social return on investment — if anything, the two are opposed. The benefits of innovation diffuse through the political economy as the business models break down and erode due to strategic competition from government, non-profits, other businesses, or even household production. If that strategic competition occurs. It doesn’t have to. The government may not constrain business with regulation or otherwise. Business may effectively evade even the constraint of business competition — that occurs in media and banking and other industries in which conglomerates and networks form, and regulators are “captured”. It may not be judged worthwhile to accept the inefficiency of whatever device private enterprise must have to capture a return, and public provision may be adopted, to deliver goods with a high social return on investment, as public goods.

I don’t see how marginal product analysis, as if the economy has a completely different structure from the one we observe, can be anything but a distraction from recognizing the reality on the ground for what it is. So, when Krugman says, yes, but, of course, we know marginal product is not a moral justification, I am still left wondering why he wants to do it at all. It has no descriptive usefulness, so there’s no excuse except as a moral justification. And, pompously asserting that he is above the moral judgments still doesn’t answer, why do it at all? It does not describe the way things are.

And, how are things? Well, there are very few markets. And, a lot of administrative hierarchy. (Marginal product analysis is premised on market exchange, and the dominating importance of factor allocation efficiency.) In fact, technical and managerial efficiency dominate, which is why hierarchy dominates. Marginal product of labor or capital is a managed outcome, in a hierarchy, not a market.

Think about Apple and its iPhone. Roughly, the iPhone costs about $200 to manufacture. And, Apple sells most of them through complex financial agreements with cellphone service providers for around $600. This is administrative pricing and political power, creating a return on capital. If we could model the cost structure, I suppose we would find major increasing returns to scale and learning, such that marginal costs decline through most of the life of a particular model in production, and are below average cost at least until very near the end of the production run, and way below price. Once in a while, when the new phone comes out, at basically the same, or close to the same, posted price (I got an iPhone 5 for $129 plus contract, because I’m a careful shopper), lines will form at Apple stores, where they will be videotaped for the 11 o’clock news, and some conservative econblogger will wonder aloud, why Apple doesn’t vary the price, when there’s clearly a shortage. And, then offer some ad hoc rationalization, which will confirm in his mind that Apple is a profit-maximizing vendor selling into a “market” for phones.

Aside from the idiocy of insisting that there’s a metaphoric “market” there somewhere, it seems to me we could think about the macro implications. It’s really, really important that the price is held administratively fixed in nominal terms. Apple clearly needs to do that, to do all its (financial) contracting over longish periods. Price is just a nominal value attached to a complex, contingent contracted net of relationships. The effectiveness of advertising (which is a big part of the sunk cost capital investment in the phone, so to speak — and if Krugman can enlighten us on how the capital investment in advertising is expressed in marginal capital product contribution to the phone, more power to him) depends on stable expectations regarding the price. (Remember way back, when Apple got the initial price “wrong”, corrected it, and got a huge storm of consumer resentment — helpfully scorned by conservative econbloggers, of course, who never tire of explaining why the little people should enjoy being screwed).

If price is held fixed over a long time, many models and many years, factor allocation by price cannot be the dominant consideration. Factor allocation is no doubt taking place. But, it is subordinate to something else. I’m inclined to identify that something else as the management for technical and managerial efficiency — the routine stuff of business, like dominating your suppliers and workers, pressuring them to produce more with greater technical efficiency, quality control, technical process innovations, etc. — and the strategic management to manipulate the distribution of income and wealth and power.

There’s a lot of yada yada in conventional macro about the role of sticky prices or wages in making macro policy necessary or effective. If you look around, and see the pervasiveness of administered prices, I’m not sure why the observation of administered prices seems to have so little influence over the way economists think about it. Reactionary economists, of course, hammer relentlessly on the thesis that all macro problems can be solved by forcing wages to be “flexible”, especially in a downward direction.

The heterodox are after different intellectual prey, I think. They want to go after the neoclassical synthesis, which ties conventional macroeconomics to the closed-system-of-classical-market-general-equilibrium which doesn’t work. It’s that neoclassical synthesis, authored by Samuelson, that makes “sticky prices” the explanation for why the “natural” economy needs policy interventions. And, results in the neat division of labor between New Classicals plus RBC and New Keynesians, in the the economics establishment.

To complete my argument, I would need to be able to articulate better than I can, how marginal product analysis of the distribution of income relates to this orthodox doctrine that there is a “natural” economy, which wants to be self-equilibrating, but is just . . . I don’t what? slow.

I have some, maybe many, of the threads, but I don’t know exactly how to weave them into a fabric to my own satisfaction.

In relationship to Piketty, I think the gravitational pull of the moral economy is more than a bit of a problem. Not because Piketty doesn’t see the problem, but because he doesn’t always keep his perspective. He goes simple-minded a lot, I guess, in the interests of letting the data speak, but, also, I suspect, in letting conventional economists read and praise his work. The conventional frameworks and language distract and mislead us into a default understanding that is faulty about the role of capital and Capital in the political struggle over the distribution of income and the legitimacy of our political policies. In this, my sympathies are entirely with acute observers of the predatory political economy, like Jamie Galbraith and Dean Baker, and with many of the left heterodox.

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Lee A. Arnold 05.02.14 at 9:08 pm

Bruce Wilder #356: “Underneath this unproductive exchange is a simple lack of confidence among the establishment centrists that they could reject the closed-system-that-doesn’t-work and keep their keys to the faculty club lavatory.”

This presupposes: 1. that the alternative open-system approach is well-formulated and ready for acceptance; 2. that they are all open, functioning intellects, and therefore they actually must be consciously or subconsciously shirking their duties to seek the Truth; and last, 3. that tenure doesn’t include the lavatory keys.

NONE of these is in evidence.

“A left-liberal-social-democrat [who] follows his [i.e. Krugman’s] economic judgments” is already a failure: he or she is not thinking for themselves.

362

William Timberman 05.02.14 at 9:28 pm

roy belmont @ 359

I would say in response that any realism worthy of the name has to have some magic in it, and in your contributions I recognize a certain respect for that necessity. On the other hand, any form of sorcery in the arena of the real world has its dangers. The liars we can discount, I think — they have no magic in them at all — it’s the apprentice sorcerers who are really dangerous.

363

john c. halasz 05.02.14 at 9:35 pm

@249:

” Yes r>g no doubt fed the derivatives bubble, but in a very peculiar way, because a lot of the “savings glut” is coming from profits made abroad by exporters to the U.S. (and the other developed countries), thereby not only 1. dislocating and impoverishing U.S. labor because the various forms of recompense and job relocation that would satisfy international trade theory do not come fast enough, or do not exist, BUT ALSO at the same time, 2. impoverishing the developing exporting countries because their exporters to the U.S. choose not to reinvest in their own countries, but to chase quicker returns in the international capital markets, particularly from mortgage derivatives. Thus the savings glut comes partly from underinvestment in UNDERDEVELOPED countries.”

But, of course, this is wrong is so many ways, and just reflects “orthodox” theoretical analysis.

There wasn’t a housing bubble and a financial bubble. There was a generalized credit bubble and a financialization of a large part of the general economy. (RE played a large role because it is a main source of collateral, and lenders much prefer that loans be secured with collateral, despite the fact that, if there’s a bubble, the value of collateral will be “corrupted”. And because housing is in the non-tradeables sector, like health care, and as a rule of thumb, if one’s tradeables aren’t competitive, domestic investment will flow into non-tradeables, with a large trade deficit offering prima facie evidence of non-competitiveness. And because housing forms much of the net worth of the broad middle class, which was being looted, in the face of stagnant incomes, even as the housing bubble was being used to prop up otherwise stagnant AD, due to collapsed domestic productive investment and stagnant “middle class” incomes).

But “exporters from abroad” weren’t accumulating large profits. Rather immense rents were accruing to MNCs and their mega-bank partners via controlling and intermediating international “markets” on each end. (If the RMB was undervalued, that just means that Chinese producers aren’t receiving their full share of profit, and if they then invested their FX reserves, which were accumulated to maintain the RMB “value”, in “safe” low return financial assets, that just means that they recycled their profit shares back to Wall St., which indulged in much higher return, leveraged speculative activity).

And, of course, there was no “global savings glut”. S=I is a short-run accounting identity, and they will always vary together, no matter what the underlying “causes”, and, in fact, both were declining marginally during the naughties, in global terms. The theoretical claim was invented by Bernanke and latched onto by the Fed, to rationalize Fed policy and to justify a lack of concern with large global CA imbalances.

So, ya see, maybe one’s theoretical methods of analysis do have real consequences, in terms of what can be seen and what can be ignored. And maybe they might just serve to give an illusion of technocratic control, to rationalize the policies supporting dominant interests, no matter how out-of-control the processes they unleash really are.

364

Bruce Wilder 05.02.14 at 9:46 pm

Lee A. Arnold @ 361

The sociological and historical and institutional details of just how the vast and amorphous collectivity, which is academic economics, came to embrace a macro research agenda centered on absurdly abstract DSGE models and intertemporal optimization is not something I could document. The simple fact that this group could make such a colossal intellectual error does not add to my confidence that they will self-correct easily or in response to better angels. But, whether any of your suggested presuppositions obtain or not, I really couldn’t say with confidence.

Very few of us have any great interest, let alone expertise, in economics or politics. Or, any other field. We specialize and trade. I don’t begrudge anyone getting their political opinions at retail, if they are a reasonably careful and tasteful shopper.

Anyone interested in contemporary politics, left or otherwise, who did not seek out Krugman’s judgments, and did not put at least some measure of trust in someone of such obvious intellectual capability and personal commitment to integrity, would be missing out on an important and scarce resource.

Not everyone is going to read Krugman the way I do. I’d like to think that I have a comparative advantage ;-) So, I try to alert people to what I see as subtle, but important points, which might otherwise escape their attention and understanding, and which help to form a more accurate and critical assessment of where Krugman is coming from and where he might be headed, and, in that context, what he means.

365

mattski 05.02.14 at 9:54 pm

@ 358

Because I think materialism is the unspoken premise of the search for algorithmic theories, such as would allow for mathematical models in economics.

I guess I don’t see this. I think plenty of good minds–think Krugman’s “gadget”–are able to use mathematics without a) overly identifying with it or b) making a metaphysical imputation with the modeling process. Certainly many lesser minds might do these things.

Are you familiar with this guy?

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Bruce Wilder 05.02.14 at 9:55 pm

john c. halasz @ 363

Well done.

367

john c. halasz 05.02.14 at 10:02 pm

I think you can see something of what is wrong with Krugman’s approach in his dispute and his confusions with Steve Keen, (who himself is a rather ornery fellow and not always clear in his terms). Krugman seemed to be assuming that banking and finance are just an ordinary market good, like socks or chewing gum, such that price and quantity mutually control and balance each other at an achieved equilibrium. And thus the price of loans, the interest rate, would automatically determine the quantity supplied, (with the money-multiplier model, etc.). But there are plenty of reasons, both on the production supply, i.e. lending, and consumption demand, i.e. borrowing, sides, why, both in the boom and the bust, such an automatic equilibrium mechanism doesn’t apply. So attention needs to be payed to the overall levels and distributions of debt, not just to interest rate policy.

368

Lee A. Arnold 05.03.14 at 12:22 am

Mattski #365 — Sorry, I think Sheldrake goes too far.

369

Ronan(rf) 05.03.14 at 12:30 am

The one good thing.
BW has ever done.
Was convince me to look at Sam Bowles big book.
The one good thing.
Ever.
Thanks BW.

370

Lee A. Arnold 05.03.14 at 12:56 am

John C. Halasz #363: “There wasn’t a housing bubble and a financial bubble. There was a generalized credit bubble and a financialization of a large part of the general economy… So, ya see..”

No. The “generalized credit bubble and a financialization of a large part of the general economy” has been going on since before 1980 and some people would date it back to the rise in bank assets vs. GDP, starting I think around the early 1950s. The recent crash is merely the most recent manifestation of it. I agree with you that the so-called “savings glut” was in fact a malinvestment phenomenon and I am a little surprised you missed my point. And I continue to be surprised that people omit to mention the point that not only people in the developed countries were taken to the cleaners, but it was even worse for developing countries. But see, it doesn’t matter what you leave out, it only matters what I leave out.

371

Ronan(rf) 05.03.14 at 1:05 am

The ’14 Bonnie and Clyde, Ro’ and B

372

Bruce Wilder 05.03.14 at 1:13 am

Ronan(rf) @ 369 one

!

373

Lee A. Arnold 05.03.14 at 1:21 am

Bruce Wilder #360: “To complete my argument, I would need to be able to articulate better than I can, how marginal product analysis of the distribution of income relates to this orthodox doctrine that there is a “natural” economy, which wants to be self-equilibrating, but is just . . . I don’t what? slow.”

It is already laid out pretty nicely in Schumpeter’s History of Economic Analysis. In essence, marginal analysis was used to justify the Walrasian idea that the many trains of inputs to outputs in the whole economy will be properly modulated ACROSS their flows, by competing uses of the factors at each step, –to make things most efficient overall, blah blah blah. Marginalism was/is essential to the Walrasian conception.

Schumpeter also points out by the way that marginal analysis makes a good first cut for land rents and wages, but it will NOT work well for interest, the return to capital. See pp. 924-944. That section starts with Böhm-Bawerk and is another amazing reason why all contemporary economists should be slammed upside the head with Schumpeter’s weighty volume until they see stars in their eyes.

A rather more concise, prior passage relates how the intellectual inertia on this point was a continuation from the earlier classical period:

“”… it [i.e., the example of error in Mill’s Book III] points to a fundamental weakness in the ‘classic’ construction. I do not accuse the ‘classics’ of having failed to acknowledge the pivotal importance of the analysis of value (choice) which is, if I may say so, the specifically economic element of the economic process. But there is some truth in Professor Knight’s indictment that the ‘classics’ had ‘no clear or definite conception of the meaning of economy as a process of maximizing a value return’ and that ‘the problem of distribution was not approached as a problem of valuation at all.” To this extent, we must qualify our recognition of Ricardo’s chief merit. He and all the ‘classics’, including Mill, did indeed make progress toward the acquisition of an analytic apparatus that would unify all purely economic problems; but, partly owing to the shortcomings of their groundwork, they never realized its possibilities to the full. They still divorced production from distribution — J.S. Mill even took credit for doing so — as if they were governed by different ‘laws’. The first to point this out was Ferrera. But Say’s and Mill’s combined authorities kept this plan of exposition alive for many decades to come. It is not worth our while to discuss its variants…” Schumpeter, History of Economic Analysis, p. 543.

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Lee A. Arnold 05.03.14 at 1:28 am

Oh, and the reason it would be a “slow” equilibration was to be “explained” later by the concepts of “market failures” and rent-seeking, getting in the way of proper marginal pricing, thus preventing true equilibration.

I think the market libertarians have the idea of the Walrasian system in their brains, if they have much in the way of ideas or brains at all, and this is why they always so adamantly argue that market failure does not exist, or that it is caused by government intervention: the pure market system must work by itself!

375

Lee A. Arnold 05.03.14 at 1:57 am

To explain easily, I think I can make almost anybody see the standard economic concepts of how marginal analysis fits into the Walrasian system in less than 5 minutes. First, everything almost anybody needs to know about the concept of Marginal Analysis, in under 2 minutes:

376

Lee A. Arnold 05.03.14 at 1:58 am

Second, it is combined into the basic conceptual module of Perfect Competition in 1 and a half minute:

377

Lee A. Arnold 05.03.14 at 2:00 am

Third and finally, here is how it fits together into a rectilinear grid for the Walrasian Market System, at about 30 seconds in.

I’m sorry about the ads but now I can’t disable them because I lost access to my Google account, will someone at Google please help me!

Conceptually though: Mission accomplished!:

378

Ronan(rf) 05.03.14 at 2:05 am

Mr Lee Arnold. When I’m sober I want to talk to you about my theories surrounding complex adaptive systems and their conceptual applicability to maket economies.
Remind me at a later date, if you will.

379

mattski 05.03.14 at 2:19 am

Remind me at a later date, if you will.

When you’re sober you might want to apologize for asking LAA to remember your stuff for you.

;^)

380

john c. halasz 05.03.14 at 2:32 am

L.A. @370:

Umm… what makes you think that I missed the point about a “credit super-cycle” (Soros), and that the GFC was the culmination of longer-running trends, not just of the immediate U.S. environment in the naughties? In fact, I trying to explain things to the local yokels, I’ve used the chart of total U.S. debt-to-GDP ratios going back to the mid 1920’s, which I copied of the tubz. (It’s the “Ned Davis Research Inc. version, which differs from the Fed flow-of-funds reports recently, with the former peaking at 386% and the latter at 369%, but the absolute amounts don’t matter, since no one knows the “absolute” breaking point, which is likely a contingent event, like Credit Anstalt or Lehman Bros., but it’s the slopes, i.e. the rates of change, that matter. But either way, compositions can be explained from the totals, and it allows one to explain the debt-deflation of the GD and WW2 quite clearly). That, plus Wynn Godley’s stock-flow consistent account of GDP, which allows one to explain the folly of “fiscal austerity” quite quickly, as well as the role of CA imbalances in the whole mess. The rising in U.S. debt-to-GDP began quite clearly after 1980, with the rise of the global neo-liberal regime-of-accumulation, which itself was a response, (whatever its prior ideological formation), to the global stagflationary crisis of the 1970’s, (which itself was precipitated by the collapse of Bretton Woods). Now just why would you assume that I’m quite ignorant of all that?

Is it because you always want to “put yourself into the right”? Me, I prefer “sticking to my guns”.

Oh, and BTW, it’s not clearly the case that the “developing world”, (a fine euphemism), suffered far more from the crisis than those in the developed world, (aside from the sense in which that is always the case). Red China responded, at least short-run, quite well, and just look at the Bovespa index from 2007-2010. Only 2 of the 30-odd “advanced” economies escaped recession. And though knock-on effects continue to hit the “developing countries” and we’re far from out of the crisis globally, your idea that neo-liberalism ever intended to benefit “developing” countries, because of the idea that the “marginal efficiency of capital” would be much greater there, precisely mirrors the claims of neo-classical economics. But it didn’t exactly work out that way, did it? So what then exactly would be the measure of “mal-investment”?

381

TM 05.03.14 at 3:31 am

Galbraith’s review of Piketty, in case anybody missed it:

http://www.dissentmagazine.org/article/kapital-for-the-twenty-first-century

He takes issue with the r>g flim-flam.

382

Lee A. Arnold 05.03.14 at 3:49 am

John C. Halasz #380: “why would you assume that I’m quite ignorant of all that?… the ‘developing world’, (a fine euphemism)…”

I know you are not ignorant of all that. What I am trying to establish is why YOU require that Krugman (or anybody else in the universe) must talk about constructing a valid General Theory of the Plutocracy, every time he talks about a manifestation of it, like the 2008 Financial Crisis and Fiscal Disablement Scandal — do this, or else, HE is ignorant of all that. Or lying or enabling or shilling.

I think it’s because they are two different levels of description, and none of the tools or concepts is very good, but you’ll have to ask him.

Would global total malinvestment = the global output gap plus social costs and environmental depreciation?

383

LFC 05.03.14 at 3:59 am

Ronan @378
When I’m sober
Saw what you wrote about Drezner at LGM. Wee bit of an exaggeration, perhaps ;)
Hope you enjoyed whatever you were drinking.

(ok, back to topic, I guess)

384

john c. halasz 05.03.14 at 4:09 am

@383:

“Would global total malinvestment = the global output gap plus social costs and environmental depreciation?”

Good start, but a tall order.

The only reason to focus on Krugman, aside from his prominent position and role as arbiter of the acceptable edge of “left-wing” opinion within the mainstream, is that he’s often quite obtuse. Just look, e.g., at his recent post on AGW. Rectifying the problem would only cost a few % of GDP per annum. Which, of course, could readily be incorporated within the current operations of “market” capitalism, so problem solved. Except, of course, for the blue meanies.

385

js. 05.03.14 at 4:33 am

To whoever linked Baker’s criticism of PK five days ago (BW?):

Thanks! That was a great piece. Lucid.

386

Lee A. Arnold 05.03.14 at 5:54 am

John #384 — It seems to me that you want two things simultaneously: 1. for Krugman to repudiate standard economics, even though there is no extended body of new tools, concepts and analysis to replace it. At the same time, you want: 2. Krugman to burnish and bear the fiery standard against the immediate effects of rightwing tribalism.

Okay well this is what bothers me: those two things could be in conflict both logically and practically.

Start with the rightwing tribalism. They don’t care about rational scientific explanations. (This could be a rather misleading way to say it, but it will do fine here. They compose a type of social ontology, maybe a true meso-causation. I am trying to get a list of canonical facts together about the beast here– http://crookedtimber.org/2014/04/30/right-wing-tribalists-a-lost-cause/#comment-525389 –so if anyone can think of a different category to add to it, I would love it if you did.)

Anyway the thing is, rightwing tribalism does not respect EVEN SO MUCH as facts.

So, why do you think that, if Krugman helped to start up an even less-established theoretical enterprise, rightwing tribalism would respect him even more? It is pretty clear from the social science research, quoted in that link, they only respect authority and hierarchy. I think the opposite: they would find it easy to get him discarded. (or let’s write, “even more easily, than already now.”) They would easily kill his role as arbiter in the “mainstream” (mainstream what? mainstream media?)

I agree we got problems. Look at a new one: the end of net neutrality will allow established newspapers, plutocratic news start-ups, and corporate P.R. and lobbying to fast-track themselves back into the human heart. That’s what we’ve got staring at us. Perhaps even cybernetically further than before, in case the stare doesn’t feel creepy enough. On the good side, we get to play with our own meso-constructions, and one of them might take off into wide acceptance.

HOWEVER I don’t think it is strategic to push an intellectual standard before it is conceptually well-founded.

We need new concepts. Bruce Wilder and I agreed about that, many years ago.

It could be we need new concepts in very different categories. It could be that we need a new concept of what it is to lead.

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Lee A. Arnold 05.03.14 at 5:58 am

Ronan (rf) — Always happy to try to remember.

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Lee A. Arnold 05.03.14 at 6:20 am

You are very kind. Thank you.

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mattski 05.03.14 at 12:04 pm

Lee Arnold,

I think your contributions in this thread have been quite brilliant, and I’m grateful for them. Thank you.

BTW, I am not by any means an acolyte of Mr. Sheldrake, but I do find him interesting. You might like this, for example.

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Peter K. 05.03.14 at 1:21 pm

From Skidelsky’s review:

“Deeply impressive in its style and learning, Piketty’s argument is nevertheless incomplete. His story is about the super-rich racing ahead of the rich (and everyone else) since the 1980s. He explains this by the power of the rich to set their own pay and the ease with which they can transform their super-salaries into capital. But there may be another explanation, which is that digital technology actually increases the marginal product of the top performers in all fields of endeavour, creating a global elite of superstars who are distinguished from the rest by their exceptional talents. This is the view of Erik Brynjolfsson and Andrew McAfee in their new book The Second Machine Age. To the extent that “technology increases the reach, scale, or monitoring capacity of a decision- maker,” it makes managers more “valuable.” This implies that supermanagers get higher pay because they are more productive, not just because they can set their own salaries.

Digital technology can also boost rewards to superstar writers and performers. For example, digitisation and globalisation have “supercharged the ability of authors like JK Rowling to leverage their talents… Rowling’s stories can be captured in movies and video games as well as text, and each of those formats… can be transmitted globally at a trivial cost.””

What if the correct answer is “all of the above”?

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Peter K. 05.03.14 at 1:25 pm

@384 Halasz:

“Rectifying the problem would only cost a few % of GDP per annum. Which, of course, could readily be incorporated within the current operations of “market” capitalism, so problem solved. “

I see it as “buying time.” Like with Obamacare. Others see it as buying off the masses so they’ll stop complaining. Reform or revolution? Can there be revolutionary reforms?

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William Timberman 05.03.14 at 1:59 pm

Tricky capital and managed prices, or why financialization leads to disinvestment, a case study: Enron-Style Price Gouging Is Making a Comeback.

Data, we gotta have data. Then, of course, we can all ignore it.

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J Thomas 05.03.14 at 2:12 pm

Anyway the thing is, rightwing tribalism does not respect EVEN SO MUCH as facts.

So, why do you think that, if Krugman helped to start up an even less-established theoretical enterprise, rightwing tribalism would respect him even more?

They don’t respect him the least little bit as it is. They say he is a liberal. They say that he uses whatever economic factoids he can find or make up to push the liberal agenda, and they mostly ignore what he says unless it looks so convincing they feel the need to repudiate it. So for example mostly they just say he’s wrong because he’s a liberal, but they published hundreds of refutations of his babysitting club metaphor because it was so easy to understand that it looked like a serious threat.

If Krugman said something that was fundamentally out of the mainstream, thousands of conservative economists could announce on Fox News and Forbes and WSJ etc that he had finally gone around the bend, he was just loony, he made no sense, he wasn’t an economist any more. They say that anyway but some specific claim would rile them up and get them to focus on him for maybe a month or two until they could announce that he was finally discredited for good and no sensible person should ever again pay any attention to anything he said. Would it persuade people who weren’t already persuaded? I don’t know.

It’s a puzzle. If your spokesmen point out a real, serious disagreement then the rightwing tribalists will try to discredit them utterly, and it might work. But if your own side is careful not to disagree with the nutty opinions on the other side, then they’re already herding you and that can’t lead to any place you’d really want to go.

They would easily kill his role as arbiter in the “mainstream” (mainstream what? mainstream media?)

I say there used to be a mainstream, and now there isn’t. Now there are maybe two mainstreams, there’s the rightwing tribalist mainstream that doesn’t respect facts at all, and then there’s everybody else. There are people on the left who’d like to mirror the right, but they don’t have the resources so we don’t get a third mainstream. Those guys have to share the regular mainstream with the people who do care about facts.

Why should the right get to decide who’s important in the mainstream? They have their own, why let them have so much influence on the other one?

We need new concepts. Bruce Wilder and I agreed about that, many years ago.

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

I’m not sure we need new concepts. We’ll find out what new concepts we need after we discard the old concepts that don’t work.

1. The Invisible Hand. There’s a widespread concept that because of markets everything works out for the best. This is wrong, but a lot of people believe it. It’s true that there are feedback mechanisms that regulate things, but the question is how do the setpoints get set for those feedback systems? Why should anybody believe that they optimize anything in particular? Perhaps we could get a bunch of EEs who design feedback systems every day to write about this. It’s only natural for a feedback system to settle into a limit cycle, not approach an equilibrium, but sometimes they oscillate wildly, wander into chaotic behavior, etc. Usually feedback systems have patterns of inputs that can destabilize them. Of course they can’t do much about things which happen faster than their reaction times, note OODA.

It might help to design a collection of video games where you create a feedback system that’s supposed to regulate an economy, and watch what happens.

So if there is a magical way that free markets create optimal criteria for themselves to optimize things we want optimized, then the guys who design feedback systems deserve to find out how it works so they can use it. That would be a wonderful advance for the people who design automated factories, and everybody else who’s supposed to regulate anything.

The idea that free markets optimize something we want optimized, deserves to be either understood well enough to use, or else discredited. That would make a great big difference in the world, either way.

2. The idea that something in economics gets optimized. Consider the pencil metaphor. Somehow everything it takes to make pencils gets created and organized to make pencils, without anybody understanding in detail the whole process. People argue that this could not be done by planning, that it is done optimally by free markets.

But there is no reason to think that free markets do it optimally. They do it adequately. Most of the planning is by tradition. If you sold X number of ferrules last year, you can plan to make X+n number of ferrules this year in the hope that the economy will expand by n/X and the number of pencils will expand the same amount. Something like that. The last n ferrules don’t cost you much and you can hope to sell them at a nice profit. You’d rather recycle them than sell them cheap, though, because that might cut into your sales. Unless you can sell them cheap overseas and cut into somebody else’s sales….

Central planners could do the same thing exactly, if they had good enough communication with the local guys who know the local data. Say you plan to increase production by 5% across the board. Find out where the bottlenecks are, where Liebig’s law of the minimum applies, and you’re close. Notice what doesn’t need to increase as much as the rest, and you’re doing better. You have the problem that people lie, but the market has that problem too — everybody’s flying blind because they have to guess what their suppliers and competitors and customers will do, because everybody lies. It’s just a cost of doing business.

We mostly plan by figuring things will be about the same they are now, but we hope better. Sometimes that works. For a long time the US economy grew x% per year while oil consumption increased x% per year. We could mostly do the same things over again but more, and it all worked out. We made a big deal about innovation but it didn’t really matter whether we had hula hoops or frisbees, they used close to the same amount of plastic.

When things are changing fast the planning breaks down, whether it’s markets or government doing the planning. We need a better way to do that sort of thing, but people lie and also when things change fast people have no idea how to predict what they will do or what they will need. Fast changes result in inefficiency of various sorts. Everybody tries to cope, and coping adequately means you get to stay in business. We don’t optimize, we cope.

3. Feedback systems can be tuned to respond more the way we prefer. However, people who know how they work can usually find ways to game the system. Probably we need social controls on that. Get it clear that the systems we design are supposed to work for particular goals, and they can be gamed. Catch people who milk them while providing no particular value, or who intentionally crash them, and hold them up for public scorn. Yes, it can be done. No, it isn’t clever, it isn’t admirable, it doesn’t deserve any reward. We need to look for ways to protect our economic feedback systems from agents of foreign governments who might want to damage us.

4. Establish that the invisible hand gropes randomly, and that we can design systems that mostly do what we want at some inefficiency and some risk. Then the question becomes what do we want. This is a political question. We should get political scientists, sociologists, anthropologists, psychologists, or somebody to help with that. Economists have been sidestepping this question all along and there’s no reason to expect them to stop doing that any time soon. But the methods to get desired results will mostly be control theory methods, so economics should become a branch of control theory.

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Ronan(rf) 05.03.14 at 3:19 pm

LFC – a little OTT, perhaps ; )

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Bruce Wilder 05.03.14 at 4:18 pm

Peter K. @ 390

Skidelski’s review — particularly the portion Peter K quotes — evidences the kind of weak-mindedness that the introduction of marginal product analysis of income distribution seems to induce.

. . . digital technology actually increases the marginal product of the top performers in all fields of endeavour, creating a global elite of superstars who are distinguished from the rest by their exceptional talents. This is the view of Erik Brynjolfsson and Andrew McAfee in their new book The Second Machine Age. To the extent that “technology increases the reach, scale, or monitoring capacity of a decision- maker,” it makes managers more “valuable.” This implies that supermanagers get higher pay because they are more productive, not just because they can set their own salaries.

seems gratuitous, and not just because it introduces the ideas of a completely different book to the review. Skidelski’s thesis, apparently, is that we can think whatever we want. Look, he seems to say, it could be predatory power. Or, joy, it could be marginal product! (In which case, the moral explanation should focus attention on “their exceptional talents!” Like writing a best selling inspiration for a script for a blockbuster movie makes you Shakespeare.)

Peter K sums it up: What if the correct answer is “all of the above”?

Yeah, because this was all just a multiple choice quiz, and the easy, non-committal answer could be right.

If marginal product analysis was invoked by Skildelski for any other narrative purpose than moral vindication, I don’t see it in this review. Certainly, he didn’t use it correctly, in an analytical sense. It was introduced, not to further critical thinking, but to suspend it.

Several commenters have suggested that we need “new ideas”.

I think we need to renew our critical capacity to reject the bad ideas. That’s what we are struggling, collectively, and very unsuccessfully, to do. Krugman cannot see that the mainstream economics that created the GFC may have had a fault somewhat more serious than inattention to the novelties of shadow banking. Skidelski cannot apply marginal product analysis as anything but a trope of moral narrative and to give permission to readers to choose any opinion they like that day.

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Bruce Wilder 05.03.14 at 6:06 pm

J Thomas @ 393: I’m not sure we need new concepts. We’ll find out what new concepts we need after we discard the old concepts that don’t work.

My hero!

Invisible Hand

Nothing is as pernicious in economics as the core concept that there is an immanent natural market, emergent from the private pursuit of self-interest, and adequately constrained by the (competitive) private pursuit of self-interest, ready to optimally organize all economic activity. Expertise in the science (sic) of political economy, in this view, need not consist in anything more than a righteous conviction, cultivated in the pursuit of a purely speculative philosophy, sufficient to convincingly admonish the philistines to stand back, abandon false worship, and behold the mysterious working of the market’s magical creative will.

This false idea is deeply rooted in the traditions of the discipline and in the canon of market failures, which is trotted out uncritically to explain manifest problems and to “justify” (the verb commonly used is exactly that) exceptional state intervention. The implication is that markets just emerge and work perfectly as well as naturally, but in certain exceptional cases (and economists have a particular list to help identify genuine cases), state intervention might be justified. I say, “might”, because the Friedmanite doctrine is that, while common market failures are often venial sins, state intervention is nearly always a mortal sin, and prudence suggests that as a practical matter, a limping free market may perform better than a market in the shackles of clumsy state regulation.

Expecting that the immanent market will emerge at any moment with the right answer is more than Dr. Pangloss’ conviction that we live in the best of all possible worlds. It is the continual and nearly automatic vitiation by ideology of all valid economic ideas, and the substitution for them of denial and null results. Conservatives like nothing more than the null results of financial economics and macroeconomics: the efficient financial markets hypothesis that asserts no mere mortal can reliably identify a “wrong” market price (and therefore no one could recognize even a $5 trillion housing bubble or predict a financial crisis as a result), or Barro’s interpretation of Ricardian Equivalence, which seeks to assert, against abundant evidence, the impotence of deficit-financed stimulus spending.

It won’t be enough to simply discard zombie ideas. It will be necessary to break the engine of ideological vitiation that keeps creating and reviving them.

Somehow, we have to find a way past this odd and empty religious dogma to a political economics that actually knows something useful about how to go about organizing production and distribution, investment and control.

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J Thomas 05.03.14 at 7:52 pm

I think we need to renew our critical capacity to reject the bad ideas.

Yes!

That’s what we are struggling, collectively, and very unsuccessfully, to do. Krugman cannot see that the mainstream economics that created the GFC may have had a fault somewhat more serious than inattention to the novelties of shadow banking. Skidelski cannot apply marginal product analysis as anything but a trope of moral narrative and to give permission to readers to choose any opinion they like that day.

If you believe that whatever a market does by itself has to be for the best, then y0u get to avoid a lot of moral quagmires. Like, we don’t have to worry about whether voters get the government to do bad things. Any time government distorts the economy it has to be bad. If people take risks and lose? They get what they deserve. Even if it’s a crooked game, they should have known it was a crooked game and not played if they were going to lose.

This is an excellent morality to spread when you are collecting riches by questionable methods.

But once we give that up, then we have the question of what to replace it with. If we accept that there is no way we can do adequate planning, or trial and error, then we should leave things however they happen to be because nothing we do can be an improvement. So we should get some examples of planned improvements.

Here is a trivial case: When I was a kid, whenever my father went to the bank he had to stand in line. There was a different line for each teller, and people would guess which line would be shortest, and then get upset when they were wrong. (Now of course with so much plastic money and direct deposit etc there aren’t such lines.) Somebody made the suggestion to have one line, and whichever teller was ready should call for the next customer. Under some circumstances this was provably fairer. Lots of people liked it better. Now I look at things I stand in line for, and the grocery stores still have a separate line for each cashier but the computer store does not, they have up to 8 checkout stands and one line, and the first cashier who’s ready calls for the first customer.

There’s more than one way to do it and sometimes you can tell which one is fairer.

It might be valuable to do research on ways to run commodity markets. Some ways are obviously bad. In general, markets should be designed to maximize the convenience of actual buyers and sellers, and not to maximize the profits of middlemen.

How much business competition do we want? Schumpeter argued that monopolies encourage innovation because when a monopoly increases prices, that encourages innovators to create alternative products which do not directly compete with the monopolist (which they can’t after all do) but to compete indirectly. The innovators might have a much harder time of it without the monopolist giving them a head start. I have some doubts about this and figure that maybe we could get results just as good by taxing obsolescent technologies. Do we want lots of cut-throat competition all the time? What can we do to influence levels of competition?

If we give up the idea that it’s immoral to influence the economy, then we’re stuck noticing what we want and what we can do to get it. There are hard questions there.

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Bruce Wilder 05.03.14 at 9:20 pm

I don’t know about you, J Thomas, but I, generally, stop at traffic lights showing red. Not always. Late at night, when the streets are deserted, I have been known to stop, look both ways (as my mother taught me), and then proceed through a red traffic light before it changes (not what my mother taught me at all!). (Shocking, I know, that I would confess to being such a scofflaw.)

In the world of complete and perfect information, of rational expectations and the like, which economists, in their theorizing, often imagine, it doesn’t have to be late at night, the roads deserted, for the rational actor to ignore the rules and govern his own behavior solely with his judgment of immediate circumstance. The market intersection needs no clunky traffic lights — it has market-clearing equilibrium price to erase all possibility of collision or accident. The price is the only datum a driver on the highways and byways of the competitive market economy system needs in addition to what he, himself, can observe and judge. Ah, freedom!

Against this ideal, is the reality of systems of rule-governed behavior, with many arbitrary rules and conventions — traffic systems are certainly an example. The economic theorist, always a capable rationalizer, can certainly offer insights into the whys and wherefores of a system of governing social cooperation by elaborate behavioral rules. There’s a vast literature, showing how all kinds of bizarre behavior — going to graduate school is a prime example — can be an effective signal, rational and, indeed, profitable in a market economy of asymmetric information. Transactions costs! There’s an awkward label, surely capable of explaining a lot. Surely, it explains why people go with guy on the right has the right-of-way (or is it guy on the left has the left-of-way? Is that how the English do it?) rather than calling in a Walrasian auctioneer for a round of tatonnement, that would allow optional allocation of the intersection by market price. Much better than a (bribable?) traffic cop giving a ticket to a driver, who didn’t have an accident, or failing to cite a driver who did, all because of silly rules!

Here are a couple of links on systems design that might entertain:

why American eggs would be illegal in a British supermarket and vice-versa

Roads gone wild

In relation to economic analysis, I suppose there are several points worth making.

One is that Hayek was wrong: a decentralized economy of private, self-seeking agents, distributed decision-making coordinated by market-price alone is impossible. Price doesn’t tell you everything you need to know that you don’t know already. There’s actually a lot you don’t know. And, potentially, a great deal you could not calculate. Systems have to prescribe a lot of seemingly arbitrary rules, enforce these rules (this will be unpleasant), and simplify the choices presented to individuals navigating the system

Another is that there are systems of feedback and control, controlling for more than the allocation of factor resources. (Collisions! costly!) Enforcing the rules (did I mention that would be unpleasant? hate traffic tickets!) and those rules will seem arbitrary and costly. That’s always going to be a sticking point, I suspect, politically and ideologically: the legitimacy of the system design — which no one operating inside it necessarily understands — is always going to be under criticism, and by its nature, the experience of the system will be of apparent arbitrariness of the rules or of punishment (or corruption, as people ignore the rules or bribe their way past them).

And, finally, the rule-making and enforcement cannot be a private affair. The rules are a public good, and conformity with rules, to the extent that it is achieved, is also a public good. Neither markets nor traffic intersections can function without the public good of institutional systems of rules. Conventional economics hides this, or hides from it — tastes may vary in assessing that. But, that whole thing about a natural market emerging from private self-seeking only, without the state — that’s b.s.

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bob mcmanus 05.03.14 at 9:38 pm

David Harvey, Seventeen Contradictions of Capitalism admires W Brian Arthur’s The Nature of Technology 2011

Nevertheless, Arthur’s theory of relatively autonomous technological evolution has deep implications for understanding how the economic engine of capital functions. It sheds considerable light on the contradictions that technological changes now spawn for the perpetuation and reproduction of capital. There are some important transitions occurring.

The shift from a machine to an organic model of the economy has implications for economic theory. ‘Order, closedness, and equilibrium as ways of organizing explanations are giving way to open-endedness, indeterminacy, and the emergence of perpetual novelty.’ Arthur here instinctively echoes Alfred North Whitehead’s astute observation that nature itself (and human nature is no exception) is always about the perpetual search for novelty. As a result, Arthur continues, ‘technologies are acquiring properties we associate with living organisms. As they sense and react to their environment, as they become self-assembling, self-configuring, self-healing,
and “cognitive,” they more and more resemble living organisms. The more sophisticated and “high-tech” technologies become, the more they become biological. We are beginning to appreciate that technology is as much metabolism as mechanism.’

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bob mcmanus 05.03.14 at 9:56 pm

The reasons I like “Capital is Language”

1) Who is in charge of language? The political correctness thread discusses the process in which the “n-word” is disappearing. This wasn’t really by nature of law and the state. We are not in Orwell’s authoritarian world.

2) You get democracy and socialism and communism by assuming it already exists and that “we” we WE are for some reason denying the obvious ourselves. You assume power is everywhere and belongs to everybody already.

We are fighting the wars and funding the defense dept and cutting food stamps. We are maintaining the drug war and paying banksters billions. We need to stop doing these things.

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otpup 05.03.14 at 11:34 pm

This has been a great thread. Kudos. I have a couple of questions.
1) @Ronan, which Sam Bowles book are you referring to?
2) @BW (let me add my voice to those saying they would read a book of yours on these topics).
My question is, if allocative efficiency is the great red herring, how show we understand the difference in productive capacity between the Soviet system and Western capitalism? Where does that extra productivity come from?
(possible answers)
a) The markets really do add something, maybe what that something is remains a bit unclear
b) The Soviets suffered from inadequate information flows (and/or wasteful corruption) given the nature of the regime
c) There is something to Schumpeterian creative-destruction story so that the competition in capitalism (even if take place on a institutional, administrative level) is the special sauce.
d) historically contigent reasons (and the progress of technology is exogenous)
d) some, any or none of the above.
Just spit-balling here, I am not trying to be provocative. I do think we would know much more about the nature of the economic (and political) world if the natural experiment of a command economy with a democratic polity ever got tried. Btw, I don’t think a command economy is the only (or even a preferable) way to organize a socialist society (which I favor). The same might be said for a parecon model as well.

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Bruce Wilder 05.04.14 at 12:27 am

natural experiment of a command economy with a democratic polity
Japan of the 1950s & 1960s ?

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john c. halasz 05.04.14 at 12:45 am

Germany 1870-1900? (The implicit model for Japan, where the LDP was neither liberal, nor democratic, nor a party).

I’ve always thought Tito’s Yugoslavia was given short shrift. For a while at least, it was a fairly successful development state. Until the IMF got its hands on it…

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William Timberman 05.04.14 at 12:52 am

Bruce Wilder @ 402

The wise heads at MITI. I know next to nothing about how they actually worked, but I remember the astonishing transition from the lithographed tin toys I played with in my childhood to the colorful transistor radios of my teenaged years, followed at seemingly breakneck speed by Nikon, Pentax and Canon cameras, Sony receivers and TVs, Honda motorcycles, Infiniti, Acura and Lexus luxus. And then, what…?

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J Thomas 05.04.14 at 3:22 am

The market intersection needs no clunky traffic lights — it has market-clearing equilibrium price to erase all possibility of collision or accident. The price is the only datum a driver on the highways and byways of the competitive market economy system needs in addition to what he, himself, can observe and judge. Ah, freedom!

I can imagine that could work. We already have little electronic devices people can use to prepay for toll bridges etc and avoid standing in line. We could have something like that for intersections. You pay the government whatever fee you choose for the right to go through intersections. Then every time you approach an intersection the device lets you know whether you have the right of way. If somebody else is already crossing, you don’t. If they paid more than you did, you don’t. You don’t have to pay anything but then you’re always last-priority. It might help if we redesigned all the intersections so there was a place for you to wait….

You’re not going to break the rules when it means you have an accident that’s your liability. Usually not.

Roads gone wild

I’d seen that stuff before. When the priority is safety, the slower the traffic the safer it is. Give people lots of uncertainty and they slow down. Also, drivers hate it and they will try to avoid that route, and less traffic makes it safer too.

When you want the traffic to go fast, giving people workable rules helps them do that.

There were some “exceptions”. Well-designed traffic circles sometimes plain work better than traffic lights, for example. But the rules for merging into a traffic circle aren’t less complicated than a stop light. They just seem less authoritarian. Of course you don’t want to cause an accident, so you do the right thing. Not like waiting for a red light until you have permission.

One is that Hayek was wrong: a decentralized economy of private, self-seeking agents, distributed decision-making coordinated by market-price alone is impossible. Price doesn’t tell you everything you need to know that you don’t know already. There’s actually a lot you don’t know. And, potentially, a great deal you could not calculate. Systems have to prescribe a lot of seemingly arbitrary rules, enforce these rules (this will be unpleasant), and simplify the choices presented to individuals navigating the system.

When it’s businesses, isn’t a whole lot of it personal relationships? Long-term repeat customers are vitally important. You can depend on them to order something similar to what they did last time, so they provide a lot of stability. When they don’t, they tell you why or at least make plausible excuses. They don’t like it if you capriciously increase prices. “Sorry, my suppliers have increased their prices” is an OK excuse. “Supplies are tight so I can gouge my steady customers” is not.

The customer who only compares prices is not real important, except for final consumers. If I want some printer cartridges I can go online and check 8 or 10 places and get the cheapest price. If I want a used book I can check Amazon and ABE and one of the ABE suppliers will be cheapest. I send them the money and they send me the book. I’m likely to pay hardly any attention to the bookseller, I just want the book.

But when it’s important business, people try to make it personal.

All that doesn’t completely substitute for system rules enforced by outside powers, but outside force doesn’t substitute for that, either. People try to avoid cheating their long-term customers and suppliers not so much because they can get in trouble with the law, but more because the continuing relationship is worth more than the immediate scam.

Neither markets nor traffic intersections can function without the public good of institutional systems of rules.

Yes. Particularly when it turns into almost-anonymous interactions with random strangers, then you need enforceable rules.

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J Thomas 05.04.14 at 4:29 am

My question is, if allocative efficiency is the great red herring, how show we understand the difference in productive capacity between the Soviet system and Western capitalism? Where does that extra productivity come from?

The systems aren’t comparable enough to really compare them.

But we can try. While the USA was having the Depression, the USSR was having purges. From what I’ve read it seemed like they lost a lot of skilled people that way. Some ways it was worse than the Depression for us, though they had lots of politically-reliable recently-trained young people to replace the skilled guys who were gone.

Then there was WWII. We built a lot of industry for war production, and some of it was fairly easy to convert for peacetime. The USSR lost a lot of industry to invasion and airstrikes. After the war, we created extra demand with the Marshall Plan which did a lot to rebuild Europe and Japan. Meanwhile the USSR did not participate in the Marshall Plan and they rebuilt all by themselves. They lost maybe 10% of their population in the war too.

We took apart the British Empire and dominated trade with the former colonies. We got the benefits of colonies without the overhead of governing them. The USSR got eastern europe plus scraps we mostly didn’t want — Iraq, Syria, Egypt, Cuba, etc — places that tended to need more military aid than they could pay for in oil, wool, cotton, sugar, etc.

After the war, the USSR faced US nuclear-carrying bombers from every direction except China. We kept talking about nuking them even after they got a credible deterrent, though we never actually did it. Given their history of being weak and getting invaded by practically everybody including the Swedes, they concentrated a lot of production on military stuff which itself was utterly unproductive. A big part of their innovations staye military secrets, while it’s plausible that most of ours that had commercial applications got applied. (Though I don’t know much about our military secrets that are still secret.)

So — they lost a lot more skilled people to purges and war than we did. We lost a few to blacklists but not that many. Our neocolonial empire was worth far more than theirs. Their internal natural resources were probably far better than ours but needed development across vast distances. Our infrastructure was hardly damaged by WWII, theirs was badly damaged. We needed far less military expenditures than they did, but still we spent a lot and they bluffed some, probably spending less than we thought they did.

Lots of confounding factors. Hard to separate out the effects of an attempted command economy. Oh yeah, the CIA etc may have been doing some sabotage. Chernobyl might possibly have been CIA sabotage. It’s hard to tell how much that sort of thing mattered — it’s probably still secret.

I don’t claim the USSR functioned well, only that it’s hard to measure what happened. Similarly, it’s hard to measure what’s happening here when a significant fraction of the economy is underground to avoid taxes or legal issues.

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Lee A. Arnold 05.04.14 at 5:12 am

Economics has to be transcended by the proper concept of what concepts are. The “concept of concept”, as the later Gödel sought, to put underneath logic. The abstract idea of what abstract ideas are.

Why? Because a foundational condition of all concepts is that they are economizing — very much in the sense of Ernst Mach’s “Economy of science.” Having an idea serves to order the world in a more useful way. Economics has been unduly restricted by one concept, the market economy. But this is just a mere subset of the real expanse of the topic. The proper study of economics is ALL concepts, whatsoever.

One concept is choice. You have the intention, and act upon it, of distinguishing at least two different things: thus, 1. there is a split line of intentionality to 2. the differences between two or more things.

Another concept is language. There is 1. a split line of common definition and reference extending to two (or more) speakers, to facilitate 2. the communication between those two or more speakers.

Another concept is the context of a relationship. You have a relationship with another person(s) — family, business, love — which 1. extends a split line of responsibilities and expectations to two or more people, informing 2. the current exchanges and trades between two or more people.

Another concept is a capital good like a tool. It makes easier or accelerates some transformation of matter or energy, like a hammer driving in a nail. Thus tool has within it 1. some type of ontological split, that directly aids 2. the translation of physical force (say) between two or more moments in spacetime.

Another concept is a business firm. It has 1. an entrepreneur who splits attention, to direct 2. the tranformations between two or more employees.

Another concept is an institution. A rule set is imposed over transactions. Thus a 1. system of rules and judgments splits the application of influence over two or more people, to facilitate 2. the specified transactions between those two or more people.

The market is only one such institution. The rule set is money, prices and property, and 1. their application splits over 2. the transactions between two or more people.

– In each one of these, there are two very different kinds of flows : 1. a line coming from the context/rules/leader, a line of responsibility/judgement/choice, which split to apply to two or more members, in order to impact 2. the translations, transformations, transactions, exchanges, between those same two or more members.

So, the “concept of concept” = “1. a context, ruling over 2. a distinction between at least two poles”. It is one thing with two very different parts. I drew a visual picture of it above, at #204, and showed that it has both individual and group manifestations.

And every one of these is a form of economizing.

Note that it is always economizing, or else you wouldn’t do it.

That is not to say that it remains efficient. You may find a better concept, a better language, a better hand tool, a better institution.

But this is what economics is digging at. Thus, until economics reorganizes along the lines that these are ALL the same kind of thing, one kind of thing with two different kinds of connections inside, it isn’t going anywhere. It will not be serious. The fact that there are many kinds of capital may be a sideshow: the real action is that capitals and institutions are all the same kind of thing — that government is just as efficient as a business firm depending on the good we need to have.

Thus a new economics would not discard markets, just vastly deaccentuate their importance.

Also, mathematics is generated by this thing. So math does not sit outside, as a tool to be employed in economics. Math is an economizing thing. Any serious theory of economics would have to be general enough to describe what math does cognitively.

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Ronan(rf) 05.04.14 at 9:23 am

otpup – ‘Microeconomics: Behavior, Institutions, and Evolution’ (though I havent read it cover to cover or anything – and its prob above my paygrade- it’s pretty interesting)

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J Thomas 05.04.14 at 10:05 am

“above my paygrade” Interesting phrase.

I certainly don’t want to pick on you, you reminded me of something.

Karen Pryor in Don’t Shoot the Dog described a collection of methods to break bad habits — habits you don’t like, in yourself or others.

One of them was to reward it. When the dog does the thing you don’t want, you reward it. Then you narrow it down, you reward it under specific circumstances, when you give it a signal that you want it to do that specific trick. And then you mostly stop giving it the signal.

Why would that work? Somehow, if the dog gets firmly in mind that it’s doing the behavior to get the reward from you more than for its previous desires, then it only does it when it gets the reward. This doesn’t really make sense but it tends to work.

A friend-of-a-friend used to go caving a lot. Pretty much every weekend he’d go explore caves. But then he got a connection. A movie company needed to film inside a cave, and he knew caves that they could walk into with cameras, close to roads, that they could drive golf carts into, etc. They paid him. After awhile his buddies would call him up to invite him to go caving. “What, caving with you? For free? No thank you. I’m busy.”

Similarly, the way I usually hear “that’s above my paygrade” goes like “They don’t pay me to think. So I won’t.” Sometimes meant ironically, but still….

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Ronan(rf) 05.04.14 at 11:46 am

I was just being falsely humble.

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J Thomas 05.04.14 at 11:55 am

Ronan, thank you for the reference. It looks tremendously important, it’s been out for 10 years and has hardly made a ripple. This might relate to university press fees that tend to suppress the spread of information.

It’s available used hardback at ABE for $44, ebook from google at $37.50, and there’s a dodgy Russian site that might let you pirate it for free if you trust them enough to let them run javascript on your computer.

Apparently the book gives you the right to access online agent-based simulations.

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Ronan(rf) 05.04.14 at 12:03 pm

There’s a pdf of it somewhere online, which was how i got it, but can’t find it at the minute. I’d usually pay (within reason) but the big publishers and star names are taken care of financially, so one could make an exception in that context.

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otpup 05.04.14 at 12:53 pm

@BW 402. I don’t think Japan qualifies as democratic enough, it is perhaps the one advinddemo that’s even more undemocratic/corrupt than the US (hey, and guess who wrote their constitution?). But thanks for the effort.

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bob mcmanus 05.04.14 at 1:22 pm

I don’t think Japan is command-economy enough.

Famous two-tiered economy with 70% small business and service, much supplying huge firms (and these by design fiercely competitive), but much else wild competition especially consumer goods.

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otpup 05.04.14 at 1:22 pm

(isn’t above paygrade military in origin, implying lack of authority and/or access to information?)

@JT, good account of the historical case. One tweak in a contrary direction is that the Soviets did get the GDR out of their imperial efforts which while obviously devastated did become a jewel in their economic crown.

As good and substantial as the case I don’t think it takes into account that the performance gap widened over time. Chernobyl was probably due the Soviets trying to turn the energy production up to ’11’ when the Gorbachev era leadership realized how badly they were losing the military/economic race (that story comes out of the Gorby inner circle). We also should remember that not only did the Soviets get outproduced but also that their environmental record was abysmal (which is a structural failure that probably deserves study in its own right).

(Aside, for those who are interested in the subject of empire and economics, one factoid is that the Cuban leadership were never exactly enthusiastic about the terms of trade they got with the Soviets.)

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J Thomas 05.04.14 at 2:47 pm

“One tweak in a contrary direction is that the Soviets did get the GDR out of their imperial efforts which while obviously devastated did become a jewel in their economic crown.”

Sure, and we got West Germany which we rebuilt with aid from an undamaged economy.

“As good and substantial as the case I don’t think it takes into account that the performance gap widened over time.”

That’s an important point. They had perhaps 14 million military deaths out of an army that never had more than 3 million men at a time, and up to 20 million civilian deaths. That’s a big chunk of the young men who would be rebuilding things later. But if they were growing faster, they would have started to catch up. If they were growing at the same speed the exponential gap would stay the same but the absolute gap would increase. Likely they were growing slower.

“Chernobyl was probably due the Soviets trying to turn the energy production up to ’11′”

That’s quite possible. It was a rare event and I don’t know how to get good data about why it happened. If the CIA claimed credit for it (in a world where people wouldn’t be horrified) we couldn’t necessarily trust them. During WWII the Germans claimed that Irish saboteurs helped cripple the British war effort. The British claimed that the IRA took German money and then did nothing but claim credit for normal industrial accidents. Both claims were self-serving, I don’t know how much to believe either of them.

“We also should remember that not only did the Soviets get outproduced but also that their environmental record was abysmal”

True, but we shipped a whole lot of our pollution overseas rather than figure out how to cheaply avoid making it. The USSR could not depend on overseas production because of the US Navy, and they had lots of undeveloped land within their own borders. They were bad but we were good only because we arranged our statistics so it didn’t count. That neocolonialism thing again. We paid third-world autocrats to let us pollute their countries, and it isn’t our responsibility because they’re sovereign.

“…the Cuban leadership were never exactly enthusiastic about the terms of trade they got with the Soviets.”

Understandably. The Russians were not exactly enthusiastic about the cost of the sugar they got either. It was not a great economic match but they were stuck with each other.

I don’t claim there was anything good about the USSR, just that it’s hard to make a direct comparison to the USA. In hindsight the Cold War kind of looks to me like a couple of guys competing to see who can hurt himself the most, and the USSR won that competition. The USA came in second and hasn’t exactly recovered yet.

“The USSR is ahead of us at building expensive ICBMs. We have to catch up!” “If the USSR stuck beans up their nose would you think you had to stick more beans up your nose than they did?”

We might have gotten inspired at doing to them what we did to ourselves, maybe. We had Vietnam, then they had Afghanistan. We had Three Mile Island and then they had Chernobyl. Etc. We might have been really good at manipulating them into repeating our mistakes, bigger. Or it might all be in my imagination.

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Ronan(rf) 05.04.14 at 4:03 pm

To play devils advocate

http://www.amazon.com/review/R33RQ4EGWK5140/ref=cm_aya_cmt?ie=UTF8&ASIN=1843312360#wasThisHelpful

question – has anyone read/what do they think of James Coleman’s book ‘Foundations of social theory’ ? Gintis gives it a bit of a going over in a review, but his take is a little too contrarian seemingly based solely around disagreements over rational actor theory.

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Bruce Wilder 05.04.14 at 4:22 pm

Lee A Arnold @ 407

Concepts are always self-conscious, and being self-conscious, insistently demanding attention to the issues of their own existence and value and lineage, like children wanting parental acknowledgement, admiration, permission, and release, growth and maturity, all at once: each a Pinnochio — a construction, a poor representation and a liar, who wants to be real.

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Lee A. Arnold 05.04.14 at 5:00 pm

Basically the metaphysics of Leibnitz or Whitehead, underlying an additional contention that it must cause some form of alienation. The question for me is still, for each of us, what does your own description economize upon? Could be different things: economize in an effort to transcend economics (without new concepts?! Good luck, there!) — or perhaps to economize in an effort to transcend the false self (a very good conceptual description is given in Patanjali’s Yoga Sutras).

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Bruce Wilder 05.04.14 at 5:23 pm

WT @ 404: MITI

Zaibatsu and what, for lack of a better descriptive term, you could call the patriotic spirit of the people. I think about how Japan handled Deming and statistical quality control, as a kind of mass movement, mediated by the professions. People saw their personal purposes aligned with a common purpose in building the nation as a common wealth, at both elite and mass levels. A similar spirit was in Germany, 1870-1905, too.

I don’t know what democracy and command economy represent to people, in combination. Economic interests and purposes can be private, individual and disparate, or public, collective, communal. I thought popular consent and identification with the purposes of elite management, a sense of belonging to a shared enterprise as well as serving a shared enterprise might be dispositive.

I counseled a young man in love, recently, who questioned if this was real, if she was the one, all the usual rubbish. Finally, he said, “I just want this to last . . .” I said, “you are not going to last.”

No social system lasts. How it fails does not necessarily tell you much about how it worked, only about how it aged and attempted to reproduce.

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William Timberman 05.04.14 at 6:07 pm

BW @ 420, 418

Yes, thanks. As a narrative weaving of the threads of Japanese cultural development since 1945, or more broadly, since the beginning of the Meiji era, this sounds plausible. Some of the threads in it are familiar to Westerners, or at least we think they are; others are probably less accessible to those who haven’t grown up in the culture. In any event, the remarkable social cohesion evident in the Zaibatsu/Keiretsu forms was probably unique to the era, and no more robust in the face of prolonged global exposure than any other, that much seems relatively clear.

And to move for a moment onto a more metaphysical ground — verweile doch, du bist so schön — the self-consciousness of concepts is a juicy aphorism indeed. Reminds me of the sort of thing that got Nietzsche and later, Sartre, into so much trouble with certain witty Englishmen. To echo God knows how many philosophes, since — what — the 17th century? — acts of cognition are inevitably entangled with motive in a way that’s hard enough to disentangle for individuals, let alone for entire cultures in the aggregate. If we want to know what makes economics hard, and, as often as not, turns economists, brilliant or otherwise, into chumps, we hardly need look any further.

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Bruce Wilder 05.04.14 at 6:12 pm

Lee A Arnold

What constraints do your concepts identify or acknowledge? That’s how I would approach the economy of concept.

This is what distinguishes the Enlightenment from medieval or scholastic enchantment.

(Macro)Economic theory is stuck at a very high and unproductive level of abstraction right now, because it loves Euler for all the wrong reasons.

Newton translated observed regularity into principles of conservation. Conservation is the limit of conceptual economy. And, it is hugely powerful, as Newton and then Euler proved, by showing how system dynamics can be derived from application of a conservation law.

Newton and Euler had shown to the moderns, as Aristotle and Euclid had shown the ancients, that conceptual speculation could be more than definition and tautology. But, they had gone further by revealing how conceptual speculation could penetrate the hidden working of a system. And the key is identifying a constraint, a constant, a limit, a conservation law.

Economics goes wrong because it cannot accept that geometry is not a map of the space, let alone the space itself, and because it wants an equilibrium, without committing to a conservation principle from which the system can be derived. It’s all “first we assume a can opener”, first we assume intertemporal optimization, rather than look for the constraints that prevent a system from completing an attempt to achieve what would be the veritable miracle of intertemporal optimization, if it ever occurred.

Economics wants to deny constraint, wants enchantment. That’s why economists are willing to project linear growth forever. Dow 36000. Different this time. It likes the magic of the market, and prefers to ignore the mundane struggle of command and control. It is endlessly fascinated by the maya that is money.

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Bruce Wilder 05.04.14 at 6:20 pm

The maya that is money, but not the language that is money (and capital)

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Harold 05.04.14 at 6:43 pm

Faith in equilibrium is like the Aristotelians presupposing harmony — a hidden theistic assumption of a benevolent Providence.

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mattski 05.04.14 at 7:47 pm

Harold,

I don’t know about the Aristotelians but presupposing balance is not absurd on its face. Everything kind of hangs on ones frame of reference, doesn’t it? After all, it is hardly radical (or is it?) to suppose that the total energy of the universe is zero.

“Only such a universe can begin from nothing.”

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Bruce Wilder 05.04.14 at 7:57 pm

I can see how the archetype of cycles, maybe even endless repetition of cycles, might emerge from pre-conscious awareness, but the economist’s affection for ergodic linearity requires a special stupidity.

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roy belmont 05.04.14 at 8:01 pm

Either the universe is harmonic or it’s beyond harmonic. Above it.
Only an idiot would insist there’s some kind of cosmological dissonance.
Only an inharmonious idiot in need of an excuse for the dissonance of his inability to harmonize with what is.
Sociopaths see the universe as a static petri dish for their schemes of gratification. And when that vision fails, fault the universe.

Harmonic imbalance is the redemptive.

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J Thomas 05.04.14 at 8:13 pm

“Only an idiot would insist there’s some kind of cosmological dissonance.
Only an inharmonious idiot in need of an excuse for the dissonance of his inability to harmonize with what is.”

Yes, and then an inharmonious idiot might create an ugly economy with lots of dissonance and imbalances, a poor lopsided thing which he then claims is balanced and harmonious and perfect, because he has analysed how it has to be and there is no possibility it could be anything but perfect.

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mattski 05.04.14 at 8:36 pm

So judgmental roy!

:^)

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Lee A. Arnold 05.04.14 at 10:08 pm

Bruce Wilder #422 — There are concepts without constraints, without conservation principles: e.g., emergence, innovation, creativity. Yet like all concepts, these are still terms which economize on thought.

Economics has two very different conceptual approaches, equilibration and maximization. David Warsh refers to them by the metaphors “invisible hand” and “pin factory” (because the bifurcation starts in Smith) while charting their course through economic theory in a very nice pop book on growth theory, Knowledge and the Wealth of Nations. The “pin factory” portion of the story, i.e. the “mystery” of economic growth, has been deaccentuated all along, largely because it is almost intractable to predictive mathematics.

The other portion of the story, the “invisible hand”, i.e. toward market equilibrium, IS the economists’ scientific conservation principle. What they conserve is “allocative efficiency”, or “Pareto optimality” — not an efficiency at all really, instead it is largely the current distribution of income and political power. “Economics, far from a science, is simply politics in disguise.” (Hazel Henderson).

So, having established what it is, that is to be “conserved”, what economists did after that was to start describing why it isn’t met: the various categories of rent-seeking and market failure. Thus, far from “denying constraint”, economists use the concepts of undue rents and market failures as “the constraints that prevent a system from completing an attempt to achieve what would be the veritable miracle of intertemporal optimization, if it ever occurred.”

I think economics is a klooge and a dodge, but I do not see how “economics wants to deny constraint”.

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john c. halasz 05.04.14 at 10:53 pm

L.A. @ 430:

What I think you’re missing is how much of the “explanatory”/analytic apparatus of “mainstream” neo-classical economics is a logically inverted approach. And how that is a perverse way of grasping some of the core issues. ( E.g, Markets might stimulate and promulgate innovations in processes and products, but of themselves don’t produce them. which largely occurs off-market within production systems and public institutions. So defining efficiency in terms of competitive market-exchange, with decreasing returns and declining profits is, er, unenlightening. And “equilibrium” is a tendency that gets oscillated around, but not a fixed condition that can be pre-supposed and summed up as a macro state, without explaining the mechanisms and dynamics by which such a state would or would not be achieved).

One thing that is puzzling is the regression in learning that has taken hold in macro-economics specifically, whereby the original founding Kaynes/Kalecki insight into the principle of real effective aggregate demand, whereby the system as a whole doesn’t behave in the manner of its constituent parts or as their summation, has been completely lost from view, and Friedman’s positivist “epistemology”, whereby the unrealism, artificiality or even sheer uninterpretability of premises doesn’t matter, only the success of a models predictive results, has come to rule the roost, despite massive predictive failure, which even the mainstream of the discipline cops to, (because complexity, blah, blah, blah).

Economics is not a science, rather s social study, and perhaps precise predictive results under ideal conditions are not to be expected. (Even with respect to physics, Whitehead remarked that exactitude is a “fake”, because the ideal logical conditions of laboratory experiments don’t obtain in reality). The practical basis and reference of its theories need to be taken into account, and not simply abstracted from with technical mathematical “sweetness”. Which is why your insistence that an exact replacement is required before any “destructive” criticism is allowable, (in the manner of natural science), is itself obtuse, if not perverse. Why insist on the sheer illusion of understanding and control, while denying the observable practical feed-back from results?

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Bruce Wilder 05.04.14 at 11:15 pm

Kludge and dodge, indeed.

I disagree, respectfully, about how the language of “rent-seeking” is used. It is used as a pejorative, anchored to no consistent model, and the rhetorical purpose is substitute a moral fairy tale for technical analysis. It is the same thing with displacing Keynesian animal spirits with “rational expectations” on one flank and “business confidence” on the other. When a supposedly distinguished academic “explains” economic performance by reference to reactionary business’s displeased anticipation of scary Obama policies, you’ve departed from a world where employment is constrained by spending (effective aggregate demand), and passed into a degenerate world beyond the looking glass, where symbolic meanings “cause” symbolically significant states of being. It might as well be astrology. Calculating statistical quantities is just part of a priestly ritual. The kind of constraint that focused Newton’s attention on mechanism is lost, along with the search for mechanism that allowed Darwin to discover natural selection.

Smith, good Enlightenment philosophe, was looking for a force, which like gravity, would operate on scales large and small, as gravity explained the motions of the planets and the falling of an apple from a tree. He found it in specialization.

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J Thomas 05.04.14 at 11:25 pm

I’ve come to see one of Lee Arnold’s points now.

It goes like this.

We’ve explained to each other at some length that mainstream economics is based on fundamental premises that don’t work, and it proves theorems based on the wrong axioms to get wrong results. Mainstream economists attribute their wrong results to the wrong reasons and continue to make more.

The obvious solution is for mainstream economists to admit that they are wrong and they know very little, and then for them to learn what they can from the real world and develop a new economics that does work.

However, there is no reason whatsoever to think they will do that.

So the backup solution is for somebody else to develop a new economics that might work. If it does work then mainstream economists will flock to it over a period of roughly the next 80 years or so, and it will eventually become the new mainstream.

And the obvious people to do that work are the ones who recognize that mainstream economics is wrong.

As it is, mainstream economists get a little bit of respect and a reasonable income. If they admitted they were wrong that would go away. What incentive do they have to do that? Telling each other that they ought to do that, will accomplish nothing except give us the happiness that comes when we agree with each other about something.

So telling us to do the work is not a put-down. It isn’t saying “You don’t have a solution either so just shut up”. It’s saying “You’re the ones at the right time and right place to do the task that needs to be done. Very likely nobody else will do it”.

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Michael Harris 05.04.14 at 11:35 pm

As it is, mainstream economists get a little bit of respect and a reasonable income. If they admitted they were wrong that would go away. What incentive do they have to do that?

So, incentives matter? ;)

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john c. halasz 05.05.14 at 12:07 am

@434:

Yes, that’s what economists endlessly preach to the plebs. The problem is that the economists themselves often don’t seem to have much of a clue as to just which incentives matter and how.

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Michael Harris 05.05.14 at 12:18 am

@435:

Then who does? (Being curious, not disingenuous.)

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Lee A. Arnold 05.05.14 at 12:30 am

J Thomas, yep.

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john c. halasz 05.05.14 at 12:35 am

@ 436:

Likely one should look and institutional patterns and constraints, rather than assuming that stick-figure, the utility-maximizing individual operating on pure markets, which itself is just an artifact of marginalist equilibrium assumptions. And since just about anything can be defined in a utility function, maybe a better account of mixed human motives might be in order, rather than assuming it is always somehow self-interested and maximalizing. Just look at all the incentives built into the Wall St. apparatus of structured securitization and how perverse and often corrupt to the point of fraudulence they were. Just how could economists have missed (or rationalized away) all that?

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Lee A. Arnold 05.05.14 at 12:35 am

John C. Halasz #431; “why your insistence that an exact replacement is required before any “destructive” criticism is allowable”

1. It is allowed, but not required. “Destructive criticism” is certainly allowable, even when it comes spottily from Krugman. He too is allowed — but he is certainly not REQUIRED to do it, until a “scientific” theory surpasses it, and he still wants to proclaim himself a scientist.

I mean something quite inverted: that repudiating the old theory is not a precondition to finding a better one. Additionally, this is not the same thing as believing in the old theory.

2. Yet you justify: “What I think you’re missing is how much of the “explanatory”/analytic apparatus of “mainstream” neo-classical economics is a logically inverted approach… Economics is not a science, rather a social study… The practical basis and reference of its theories need to be taken into account, and not simply abstracted from with technical mathematical ‘sweetness’.”

I didn’t miss it, I formulated that same opinion for myself 35 years ago and have been strongly advocating it for over 10 years on the internets.

What I think YOU are missing is that what you wrote, there, is a good hard concept for a possible cognitive systems theory. It could point a way to rewrite “choice” so that social choice is valid, too, and voting can be understood as a decisionmaking apparatus as important as prices, and necessary for different goods. This could reclaim the Beckerian “subject” (see Kieran Healy’s new post about Foucault’s insight) as the historical actor in an institutional drama too.

3. Thus finally, I just don’t understand the intellectual inertial drag. The assertion was made and seconded above, “We’ll find out what new concepts we need after we discard the old concepts that don’t work.”

Well I don’t really think you should take that for granted.

Indeed at this point I wonder about the intellectual vacuum being flooded by a populist fascism, especially if the good guys have already fallen to the tawdry emotional melodrama of needing a superstar media ego with a “Bank of Sweden” under his belt, to make it happen. It is getting unseemly and a bit morbid.

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Michael Harris 05.05.14 at 1:16 am

John @438

I admit my @434 comment was a tad flippant. But then, I spent several years on a university social science cross-disciplinary initiative (it had the grand name of an “institute” until it was shut down), surrounded by sociology/anthro/polisci/archi/planner types, and it was all very interesting.

Not least when they turned to issues of university “politics” and structure and how difficult proper integration and collaboration between disciplines was (beyond, say, the regular ad hoc co-authorships that occurred); and to a woman and man they would all shake their heads and bemoan the fact that the deans and so on had all the wrong incentives and were rewarded on keeping as much of the money and the glory within the virtual walls of their particular faculty. Hence pan-university initiatives, while worthy, were frustrating at best and doomed to failure at worst.

So, while not disagreeing with what you wrote in @438, I’m not clear on how it’s meant to help me in the kind of work I do. Of course, maybe that’s not your concern, which is fine.

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Lee A. Arnold 05.05.14 at 1:26 am

Michael Harris #436: “Then who does?”

Parents raising children. Philosophers of intentionality: Bolzano to Husserl to later Wittgenstein. Experimental economists finding altruism in lab results. Writers of history, drama and fiction. Political scientists analyzing opinion polls. Management consultants seeking to sell improved business performance. Advertising, public relations people, lobbyists, and politicians looking to influence opinions. –This is not facetious. They all find very good ideas of what incentives matter and how. This is the cross-disciplinary category of actors who observe it.

Theoretical economists bungled it, focusing on “self-interest” (also known as “rationality”, another horrible destruction of word meaning). My theory for this egregious mistake is not merely the need to set up transitive preferences for mathematical transitivity or whatever it is. I think it comes from much earlier: their natural curiosity in the phenomenon of money, and the fact that some of those theorists dabbled in financial markets, made them look to incentives in the financial markets for the conceptual apotheosis of how the rest of the system must work –and how the whole system must be made to work.

Then of course Western liberalism and the cult of individualism have given primacy to freedom of individual choice, regardless of its consequences.

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john c. halasz 05.05.14 at 2:28 am

@440:

Who was it that said that the reason academic disputes are so furious, is because the stakes are so small?

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J Thomas 05.05.14 at 2:55 am

“So, incentives matter? ;)”

Of course incentives matter! We have more than 50 years of experimental psychology doing experiments that demonstrate that incentives matter.

For that matter we have 5000 years of religion claiming that incentives matter.

I guess we have a few hundred years of economics chiming in on the religious claims too.

Why would anybody think that incentives don’t matter?

On the other hand, you have to look at the incentives carefully.

Here’s a joke:

The US trade secretary offers a deal to the president of Ecuador. “See, here’s a nickel and here’s a dime. Which do you want to be the hourly wage in Ecuador?”

The Ecuador president says, “The nickel is bigger, I’ll take that.”

The Cuban ambassador hears about it and talks to the president. “The Americans think you’re stupid. You should take the dime, it’s twice as much money.”

And the president says sadly, “But if I insisted on ten cents an hour my people wouldn’t have any jobs at all.”

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Michael Harris 05.05.14 at 3:02 am

Lord, I seem to have started some kind of game of whack-a-mole without even meaning to.

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Lee A. Arnold 05.05.14 at 3:48 am

Michael, you weren’t asking how to study kinds of incentives, you were asking what to do if their incentives are to keep money in their own departments?

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Bruce Wilder 05.05.14 at 8:06 am

J Thomas @ 433

I don’t understand why Lee wants a presumption in favor of the disproven.

This isn’t a choice between grief and nothing. It is a choice between having nothing and denying it, on one hand, and having nothing, and knowing and acknowledging it, on the other.

The arguments are going to continue as long as humans, probably longer. We have no defense against our own credulous nature, except critical methods. We fail to apply them at our peril.

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J Thomas 05.05.14 at 11:51 am

“I don’t understand why Lee wants a presumption in favor of the disproven.

“This isn’t a choice between grief and nothing. It is a choice between having nothing and denying it, on one hand, and having nothing, and knowing and acknowledging it, on the other.”

I don’t think that’s what he’s doing.

I think he is pointing out that “mainstream economists” WILL NOT acknowledge that their methods are bad.

If you personally are a mainstream economist then we might as well try to convince you to admit that you have nothing. It can hardly do much harm. But you are not. I don’t think there are any mainstream economists in this comment thread, arguing with us. They wouldn’t dare. They wouldn’t want to. They wouldn’t bother.

Even worse, economics might be like physics, where in every tiny subdiscipline every active researcher is doing research that he believes gives him a theory that’s better than the “mainstream” at least for his specialty, and the mainstream is simply the old leftovers that people used to be taught that are still believed by everybody who hasn’t kept up.

If the “mainstream” will ignore your criticism, whoever and whatever the “mainstream” is, why not go ahead and do better yourself? They will ignore you whether you only tell them they are worthless or whether you do something worthwhile. But somebody else may pay attention.

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mattski 05.05.14 at 1:17 pm

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