How We Do Intellectual History at the New York Times

It is in the Fashion & Style section.

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.

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.

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.

Sorry wrong link above, should be:

http://krugman.blogs.nytimes.com/2014/04/24/on-gattopardo-economics/

@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?

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.

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.

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.”

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.

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”…”

“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…

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

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.

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

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

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.

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.

LFC: http://en.wikipedia.org/wiki/Macavity

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.

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.

Walt @ 37

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

@ 46

???

You just accused Piketty of the same!

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.

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.

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.)

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?

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.

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

@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.)

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.

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

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.

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

@ 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.

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)

@71:

Really Mattski, Rogoff?

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…

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.

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

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

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.

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

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.

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…

@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.

“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.

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.

“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….

@ 92

WHO is advocating for “extreme equality?”

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

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

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.

TO J. Thomas. Yes.

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

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.

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.)

” 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.”

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. ;-)

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 |-(

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.

Thanks to whoever freed my 105. Much appreciated.

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.

” 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.

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”.

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

@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?

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.

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.”

#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.

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.

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).

“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?

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

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.

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.

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.

“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.)

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.

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

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

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.

Good stuff.

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.

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.

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.

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).

@ 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.

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?

does not suffer DECLINING marginal returns

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

Yeah, no.

“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”.

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.

“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.

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).

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).

#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.”

“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.

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

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.

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.

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?

@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)?

“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.

“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.

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.

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.

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 . . .

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?

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

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…

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

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.

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.

@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?

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?

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.

Mainstream macro I should have said.

JWM @229
thks

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.

@ 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.

“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.

“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”.

“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.

“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.

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.

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…

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 ?

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)

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

Noted.

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).

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.

@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.

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.”

@ 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.

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.

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.

Lee A. Arnold @ 270

Come up with something new.

As you have done? Modesty forbids.

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.

Lee A. Arnold @ 273

Which demand would that be?

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.

#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.”

“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.

@ 282

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

Yikes.

# 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….

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.

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

@ 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?

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.

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

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.

On this subject, you, not I, have made him out to be an idiot.

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.

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.

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.

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.

FT: The Nice Stages of a Picketty Bubble

@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.

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.

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.

Palley goes on in both posts about the evils of the marginal productivity theory of distribution…

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.

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.

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

:^)

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.

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.

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?

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.

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!

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.

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.

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”).

“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?

“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.

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.

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.

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.

“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.

J Thomas #353: “I don’t see how it matters”

Exactly. As I wrote, “it is useless and boring”

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.

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.

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.

@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.

@ 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?

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.

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.

The ’14 Bonnie and Clyde, Ro’ and B

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.

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:

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!:

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.

;^)

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.

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)

To whoever linked Baker’s criticism of PK five days ago (BW?):

Thanks! That was a great piece. Lucid.

Ronan (rf) — Always happy to try to remember.

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.

@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?

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.

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.

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.

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.’

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.

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…

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.

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.

“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….

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.

@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.

(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.)

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.

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).

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.

The maya that is money, but not the language that is money (and capital)

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.”

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.

So judgmental roy!

:^)

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?

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”.

@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.

J Thomas, yep.

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.

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.

“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.”

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?

“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.