Welcome

I study economics as a hobby. My interests lie in Post Keynesianism, (Old) Institutionalism, and related paradigms. These seem to me to be approaches for understanding actually existing economies.

The emphasis on this blog, however, is mainly critical of neoclassical and mainstream economics. I have been alternating numerical counter-examples with less mathematical posts. In any case, I have been documenting demonstrations of errors in mainstream economics. My chief inspiration here is the Cambridge-Italian economist Piero Sraffa.

In general, this blog is abstract, and I think I steer clear of commenting on practical politics of the day.

I've also started posting recipes for my own purposes. When I just follow a recipe in a cookbook, I'll only post a reminder that I like the recipe.

Comments Policy: I'm quite lax on enforcing any comments policy. I prefer those who post as anonymous (that is, without logging in) to sign their posts at least with a pseudonym. This will make conversations easier to conduct.

How To Defend Capitalism

"It is possible to defend our economic system on the ground that, patched up with Keynesian correctives, it is, as he put it, the 'best in sight'. Or at any rate that it is not too bad, and change is painful. In short, that our system is the best system that we have got.

Or it is possible to take the tough-minded line that Schumpeter derived from Marx. The system is cruel, unjust, turbulent, but it does deliver the goods, and, damn it all, it's the goods that you want.

Or, conceding its defects, to defend it on political grounds - that democracy as we know it could not have grown up under any other system and cannot survive without it.

What is not possible, at this time of day, is to defend it, in the neo-classical style, as a delicate self-regulating mechanism, that has only to be left to itself to produce the greatest satisfaction for all.

But none of the alternative defences really sounds very well. Nowadays, to support the status quo, the best course is just to leave all these awkward questions alone." -- Joan Robinson, Economic Philosophy: An Essay on the Progress of Economic Thought (1962): p. 140.

These days, economists are not trained to competently address these questions. For one thing, economists would have to read both history and philosophy as part of their academic work.

The defenses Robinson offers for capitalism do not say any particular embodiment of capitalism does not require a lot of patching up.

I think Robinson's position that markets cannot be regarded as a "delicate self-regulating mechanism" has become even stronger in the last half-century. For my purposes, never mind looking out your door at our current situation. Consider what we now know about economic theory. My point is not merely that economists have no proof of the stability of a (unique?) equilibrium in models of markets. My point is that what we know about the question suggests that markets, in such models, are not likely to approach equilibrium. I am thinking of, for instance:

• the Sonnenschein-Mantel-Debreu theorem.
• Franklin Fisher's demonstration that one should impose the assumption of "no favorable surprise" to ensure an approach to general equilibrium.
• Fabio Petri's explanation that the Arrow-Debreu model cannot allow production to occur along the approach to equilibrium (since production will change part of the data defining the equilibria, namely the initial endowments).

Apparently, the situation is no better from the perspective of game theory.

I think that this perspective on equilibrium leads one to disbelieve that capitalism can be made self-regulating by establishing or restoring competitive forces that do not seem to be operative today. In short, Mark Thoma is simply wrong.

David Ruccio and "Larry, the Barefoot Bum" also have comments about Mark Thoma's editorial. I've previously noted that Marxist exploitation is compatible with perfect competition and every factor receiving the full value of their marginal product. I've also previously expressed my opinion that Marxist exploitation is not about describing an injustice when capitalism is viewed under the aspect of eternity.

References

• Franklin M. Fisher (1983). Disequilibrium Foundations of Equilibrium Economics, Cambridge University Press.
• Franklin M. Fisher (1989) "Games economists play: A noncooperative view", RAND Journal of Economics. V. 20, N. 1 (Spring) [To read].
• Fabio Petri (2004). General Equilibrium, Capital and Macroeconomics: A Key to Recent Controversies in Equilibrium Theory, Edward Elgar.
• Joan Robinson (1962). Economic Philosophy: An Essay on the Progress of Economic Thought.

The Economic Consequences Of Mr. Draghi

This post is somewhat on current events, and about topics I'm even less expert in than usual. I suggest that a certain historical analogy might be useful for understanding certain aspects of the Greek crisis¹. Not that I'm willing to propose a solution. I look to, for example, Yanis Varoufakis for more informed takes on the Euro².

John Maynard Keynes, in 1925, wrote a pamphlet, "The Economic Consequences of Mr. Churchill". Keynes' title is a suggestion of his previous best-seller, The Economic Consequences of the Peace, another work in which Keynes foresaw the dire consequence of then current events. In the case of Churchill, Sir Winton was then serving as Chancellor of the Exchequer.

Britain had gone off the gold standard during World War I. Churchill oversaw the restoration of the gold standard, with the Treasury insisting on establishing the foreign exchange value of the pound sterling to its pre-war parity in gold. Apparently, according to Keynes, the market value was about 10% below that at the time. The foreign exchange rate of a currency combines with the general price level to determine the standard of living in terms of foreign goods. If the British wanted to maintain their then-current standard of living, and Churchill insisted on the pre-war parity, then prices and costs, including wages, must drop 10%. And this process of deflation could be expected to be resisted. In fact, widespread unemployment and general labor unrest were some of the economic consequences of Mr. Churchill. I think you can see some of these consequences in the 1926 general strike in Great Britain.

Churchill refused to acknowledge the necessity of devaluing the pound. In the case of Greece, they do not have control over the value of their currency, as long as they remain on the Euro. So they cannot devalue their currency. But, as in the case of the British population in the 1920s, they are being asked for the functional equivalent - that is, for a general reduction of prices and wages throughout the country. Maybe the consequences in Greece will resemble the consequences in Britain in the 1920s. I don't see how this is likely to increase the odds of Greece fully paying back their external debts.

Footnotes:

1. I think of this post as, perhaps, an illustration of the usefulness of studying economic history and the history of economics. Even if you conclude that my suggested analogy is too facile, you might accept that discussing it is a useful point of departure.
2. D-Squared also has a view on the topic, given certain constraints.

Playing With Fractals

Figure 1: An Enlargement Of A Piece Of The Mandelbrot Set

A number of years ago, I loaned Heinz-Otto Peitgen and Peter H. Richter's 1986 book, The Beauty of Fractals: Images of Complex Dynamical Systems to a relative. This is a coffee-table book that, apparently, was issued as a companion piece to a digital art exhibition. This book was returned to me at Christmas.

So, for fun, I've been writing a fractal-drawing program. I'm not sure what the point of this is, besides reviewing certain aspects of Java programming. I don't plan on distributing my program, even if I did include some help capabilities, icons for various windows, and such like. I deliberately have not looked at any programs that may be out there on Windows, Icon, Mouse, Pointer (WIMP) platforms. I eventually did look at a free app for a touch interface. This app cued me to think about assigning colors on a logarithmic scale, with lighter shades being near the Mandelbrot set boundary.

In software development, a difficulty is often how to define what you want to do. And one can always think of additional capabilities. In my case, at some point I included capabilities to save and load the current state, to print the current canvas, and to provide user-control over the number of iterations and various colorings. I struggled with how to define coloring algorithms. I'm curious about how one might implement Sigel discs, that is, regions of convergence for limit points and cycles within a Julia set. A history capability would also be nice.

Anyways, I haven't been reading all that much economics while taking this excursion into recreational mathematics.

Figure 1: A Julia Set

Some Stupid Stuff From David Levine

Suppose you can get people to refer to some theory or principle that you advocate as "Motherhood and Apple Pie". A rather stupid way to argue against opponents is to rely on the mere label. So one can argue against a strawperson - one can say that one's opponents are against motherhood and apple pie. Economists happen to have this nonsensical rhetoric strategy readily available, given some of the names of their models. For example, if one were a fool or a knave, one could say that opponents of Dynamic Stochastic General Equilibrium models all preferred static, deterministic, partial equilibrium models - obviously not as good a thing.

David K. Levine insults the reader's intelligence in this way. He has an article, "Why Economists Are Right: Rational Expectations and the Uncertainty Principle in Economics" (part I, part II) in the Huffington Post. He focuses on the label "Rational Expectations:

"In simple language what rational expectations means is 'if people believe this forecast it will be true.' By contrast if a theory is not one of rational expectations it means 'if people believe this forecast it will not be true.' Obviously such a theory has limited usefulness. Or put differently: if there is a correct theory, eventually most people will believe it, so it must necessarily be rational expectations. Any other theory has the property that people must forever disbelieve the theory regardless of overwhelming evidence -- for as soon as the theory is believed it is wrong.

So does the crisis prove that rational expectations and rational behavior are bad assumptions for formulating economic policy? Perhaps we should turn to behavioral models of irrationality in understanding how to deal with the housing market crash or the Greek economic crisis? Such an alternative would have us build on foundations of sand. It would have us create economic policies and institutions with the property that as soon as they were properly understood they would cease to function." -- David K. Levine

I know of nobody who advocates constructing models based on irrational expectations. On the other hand, I can easily imagine a model in which diverse agents might have different theories of the world and rely on different heuristics. Maybe the agents in such a model might not converge on a single model for the world. (Levine does mention issues of convergence, in a wholly inadequate way, in Part II of his article. Even if one accepted his emotionally-charged story, economists still lack any general argument for convergence to a rational expectations equilibrium.) One might construct such a model of short term interest rates. The equilibrium interest rate at any moment of time would be a balance of bullish and bearish forces.

These are hardly unknown ideas in economics. I am drawing directly on Chapter 12 of Keynes' General Theory of Employment, Interest, and Money. G. L. S. Shackle called this a restless equilibrium. Paul Davidson wrote about human decision-making in an environment characterized by processes, of which some are non-ergodic. Nowadays, one might experiment with implementing agent-based models in computer simulations. I could even cite Brad DeLong, Andre Shleifer, Larry Summers, and Robert Waldmann's work on noise traders. Economists in these sort of traditions are well aware of the impact of economic theory on the behavior of economic agents. They even explain why agents might find it rewarding to knowingly persist in behavior based on assumptions that prices will continue deviating from fundamentals, if the idea of a fundamental price is even coherent. Some somewhere have even talked about "performativity".

In short, Levine has completely failed to grapple with the economics literature at all. He is merely misrepresenting the state of play to a popular audience.

So far, I have not mentioned Levine's rationalization of why economists cannot predict crashes and depressions (or even identify bubbles?). Now, clearly some economists did forecast our current hard times. Steve Keen is probably one of the most well-known. But I'll turn to another incident. On 10 July, K. Bastiaensen, P. Cauwels, D. Sornette, R. Woodard, and W.-X. Zhou predicted a crash of the Shanghai Composite index. They stated the crash, with certain confidence estimates, would come between 17 to 27 July 2009. The China Shanghai composite index was around 3,400 during the week of 27 July. And it was around 2,860 during the week of 31 August, a decline of 16%. According to Levine, these successful predictions are just a matter of those with secret methods sometimes being lucky:

"If I say every year 'there will be a crisis this year' eventually I will be right. If 100 people each pick a different year then one of them is bound to be right. A reliable method of predicting a crisis must be a rule that anyone (or at least anyone with the requisite technical expertise) can apply and reach the same correct conclusion as anyone else using the same method."

I am not totally unsympathetic to the above view. But notice that according to the theory of rational expectations, people with divergent theories, models, and heuristics do not exist. On Levine's view, how can he account for the existence of such a range of predictions? How is it that the agents in the model are possessed of superhuman powers not available to mere mortal economists looking on?

Selected References

• K. Bastiaensen, P. Cauwels, D. Sornette, R. Woodard, and W.-X. Zhou (10 July 2009). "The Chinese Equity Bubble: Ready to Burst".
• Paul Davidson (1983-1984). "Rational Expectations: A Fallacious Foundation for studying Crucial Decision Making Processes". Journal of Post Keynesian Economics, V. 5.

On The Lack Of Persuasiveness Of Austrian-School Economists

Mattheus von Guttenberg exemplifies what I think are defects in many fanboys of Austrian school economics. Among these defects is an uncritical acceptance of Ludwig von Mises' characterization of his own theories. And another defect is uncritical acceptance, likewise, of what Mises, or even worse, Murray Rothbard, had to say about the mainstream economics of their day. And a third defect is to apply these characterizations to mainstream economics of our day, while remaining quite ignorant of relevant trends in contemporary economics. Without more widespread correction of such defects, advocates of the Austrian school should not be able to persuade many economists, both orthodox and heterodox, of the worth of their views.

For this post, I focus on the theory of choice.

Here are examples of arguably a weak understanding of both the Austrian school and of mainstream economic theory:

"...we're not rejecting cardinal utility functions because it's hip and counter-culture. There's a distinct reason utility functions are impossible and unrealistic, and that's because utility cannot be known or measured... The degree to which we draw swooping utility functions overlaying cost curves is a unacceptable practice borrowed from coordinate geometry. Utility, again - is ordinal, it is intrinsically subjective, and it cannot be made known by other people." -- Mattheus von Guttenberg

"The concept of diminishing marginal utility is implicit in the logic of action, the Austrians just draw it to the fore." -- Mattheus von Guttenberg

The claim that utility reaches an interval-level measurement scale is a conclusion formally drawn from the Von Neumann and Morgenstern axioms (which can be considered independently of game theory). Most introductory economic textbooks claim that utility only reaches an ordinal-level measurement scale, anyways. The introductory textbooks have a different set of axioms, where choice among a set of goods with specified probability is not formally modeled. And they assert that the utility obtained is not interpersonally comparable. Mattheus' objections are not addressed to any views prominent in mainstream economic teaching for at least half a century. And to assert that diminishing marginal utility is consistent with utility reaching only an ordinal-level scale requires an argument. (I'm actually intrigued by J. Huston McCulloch's 1977 attempt to make such an argument, the one example of which I know in the last quarter of the last century.)

Mises incorrectly asserted that much of his theory could be deduced from a single postulate.

"The only axiom is 'man acts' and we draw the entire body of economic science spanning a thousand pages." -- Mattheus von Guttenberg

"...I have always been interested in rewriting [Human Action] 'as a set of numbered axioms, postulates, and syllogistic inferences using, say, Russell's Principia.' I believe it can be done." -- Mattheus von Guttenberg

I think such a rewriting, as it starts from the above informally stated premise, would be unconvincing.

Furthermore, the current state of decision theory suggests that analyses other than Mises' approach, are consistent with this axiom. The Austrian school approach is roughly akin to Samuelson's revealed preference theory. (One important difference is that Austrian advocates have some silly things to say about the impossibility of indifference.) Anyways, the idea is that an acting human, when presented with two lists of goods, decides between them. But social choice theory, as developed by, say, Amartya Sen in the late 1960s and early 1970s, has shown how to dispense with the formalization of choice as a binary relation as a primitive notion. Instead, one can start with a choice function, that is, a mapping from each menu that an agent might be presented with to a set of best choices for that menu. The derivation of a complete and transitive binary preference relation from a choice function requires additional structure on how menu choices relate across menus. And why the imposition of those additional requirements follows from human action needs to be argued. For example, why are not increasingly prevalent models, at least in research literature, of divided selves consistent with human action?

Elsewhere

• The Non-Equilibrium Social Science community and newsletter.
• Mike Beggs, in Jacobin Magazine, on Occupy Economics.
• Robert Johnson, in Time, on Economists: A Profession at Sea.
• Yanis Varoufakis has been building on his paper, "The Dance of the Meta-Axioms: On the Dynamic Mechanism by which the Inescapable Theoretical Failures of Neoclassical Economics Reinforce Its Dominance".
• Noah Smith has a couple of posts that I find hard not to read as implying that mainstream economists are trained into, at best, ignorance.