Not talking about the finance modelers, I'm talking about classical economics and its offshoots. Particularly new classical economics. Building your models (here I mean any mathematical treatment, not just computational models) based around things like utility maximisation and rational choice theory are fine to help you map out the theoretical territory. They are woefully inadequate for explaining any observed market behaviour.
The problem arose when this kind of economics led to policy making that sought to adjust the real world to fit these models. For instance, unions are inherently bad because they cause the market to deviate from perfect competition. Or, developing countries should focus on agriculture because that exploits their comparative advantage. In a banal sense statements like this are true, but only at the level of a very crude first approximation. There is no accounting for the social and historical specificities of the situation. When the mathematical treatment rules, the social side of the problem is abstracted away.
The economic ideas that become accepted "truth" in any period are those which serve to validate the position of the powerful. In prerevolutionary France, the physiocrats stressed the primacy of agriculture, these days we stress the natural, impartial action of the market, interference in its workings a sacrilege. Well that is until the wealthy are looking at losing serious money, then all the state interference necessary to mitigate this is suddenly allowed. I'm not saying that saving the banks isn't the right thing to do right now, we haven't really got a choice, and that is another big issue, but its interesting to see how quickly the economic rhetoric can shift when its the rich that start to hurt.
Oooh, yeah, thanks, I am interested in that. Its on my "todo" list to get more acquainted with some more innovative modeling techniques. Its pretty clear we need to model differently, more feedback being the first thing that springs to my mind. There is way too much tuning of the assumptions to get the results desired in economics at present.
Its interesting you should say that. The split in political economy when the practitioners in the field got high on maths basically created sociology. I think that idea comes from JK Galbraith.
The way I think about it, is that we're trying to take a scientific mindset and methodology into sociology. An attempt to uncover some of the relationships that drive our social and economic behaviour. I don't subscribe to the "its all crap" mantra (obv) but I do feel that the very maths heavy, rational agent optimisation way of doing things is a bit of a misstep. It should really be a minor subfield of maths that deals with rational decision making. A bit like game theory. Helpful in mapping out the theoretical territory, but of limited application to the analysis of real issues in society.
There is some light in the tunnel however. As more and more of wider society see that the neoclassical emperor has no clothes, the stranglehold of that school on economic thought loosens. The financial crisis is going to help this, people have already stopped looking at you funny when you talk about wealth redistribution. What's next? Will we be able to talk about class antagonism?......
Part of the problem is that "the geeks" got hold of economics and constructed their big, deterministic, agent based models. Models can be illuminating true, but in the case of economics, when reality and models parted company, the economists bemoaned the inability of the real world to match theory.
What is desperately needed in economics is a more reality based outlook that attempts to truly deal with the social and economic problems of wider society, rather than a bunch autistic, antisocial, arrogant geeks who don't even realise they're only allowed to keep doing what they're doing because it serves the interests of the powerful (and they're not getting in the way too much).
The thing is, this "we deregulated too much" answer to the crisis is a bit of a red herring. The real issue here is the march of supply side, right wing politics in the west, from both "sides" of politics since Reagan and Thatcher. The lack of provision of basic essentials of human life for the poor. No state, or subsidised, housing, education and health, means that more and more of society is exposed to the credit system simply in order to have a decent standard of living. Combine that with an advertising (propaganda) campaign by the banking sector to move into household lending and here we are. The first major financial crisis where the debt burden is higher in the household sector than industry. Should be interesting.
However, as even a rudimentary introduction to economics will teach you
Yeah, and a rudimentary introduction to economics will also teach you that there are many and varied types of organisation that may arise through the operation of the market, some very far from optimal.
There is also a little thing called equity that some of us think is important as well, but you need to be a little less antisocial to understand that one.
Yes, and those people would be wrong. The market is inherently unstable, despite the fine propaganda effort to convince us its gods gift to man and somehow a state of nature for the human race.
Oh, I see what you mean. Well, here's the thing. Sometimes the economy finds itself in what's called a "less than full employment equilibrium", a recession. The big problem is that the business sector will not produce at full capacity because there are less people with sufficient income to purchase the output. Their lack of production (and sales) means that people who could be working for them aren't. Taken in aggregate, these people who aren't working are the ones who don't have sufficient income to buy the stuff. Chicken and egg situation.
if the state steps in and spends on a big infrastructure project, all of a sudden those people who were sitting idle are now working and earning an income. They spend that income, stimulating business activity. Now, thanks to something called the multiplier, this actually generates more business activity than the amount the gov spent on the make work project, as the funds go round and round the economy. The idea being that when the stimulus is ended there is demand in the economy for more workers, the ones who were working on your big project.
So the state has got the economic engine running again, and you've got some infrastructure which will help you to be even more competitive. This is what they mean by "create jobs" not the directly created jobs, well they play those up, but in an economic sense its the new employment generated by the stimulated activity that's really important.
As to why gov doesn't do it all the time. Well they do sort of. In the US military spending is a big pump primer for the economic system. Also, welfare is sort of like an auto stimulus. As people are put out of work, due to a downturn, gov spending rises automatically, propping up demand and hopefully preventing further unemployment. Lastly, the economy is a complex beast, sometimes it fixes itself, sometimes it doesn't. This latest downturn is going to give us lots more real world data to play with, especially since different countries will tackle it in different ways. Come back in about 5 years, I'll be able to give you a better answer then:)
Well, somethings are too risky for the private sector not just because they're inherently risky but that the time horizon for profitability may be too long. Large scale transport infrastructure is a good example.
Or it may be that too many interconnected things need to be done at the same time to make any one part profitable, like digging a mine, constructing the refinery, laying down the rail line to the port, building storage capacity etc etc for some extractive industry. In this case, government commitment to part of the project may make it profitable for industry to tackle certain parts of it.
Lastly, some spending is simply socially desirable, such as health, defence, or transport any may never be "profitable" in itself, but is profitable to society as a whole when we have it.
The bit you're missing is the point of spending $x. Investment is different to simply buying something. You invest to increase your stock of productive assets. For example, borrowing to build a rail line that enables people to move goods more cheaply may result in increased economy activity, more business are profitable now than they were before the rail line. The tax take goes up, I easily pay off the $x over time, even though I pay an interest premium on it.
The problem really is borrowing to pay for a non-productive asset. Something that doesn't add to your, or societies, capability to make more "stuff" (which could be services too). This is why household debt is such a problem, it will have to be paid from future production, but the nature of what people spent the debt on (that awesome plasma say) does nothing to help them or society pay that debt.
Dead right. Don't get all caught up in the money side of it. Look at the resources. This "crowding out" of the private sector by government spending is only really relevant in a situation of full employment, exactly the opposite of a recession.
In a recession there is unused capital capacity in the economy, either machines that make things, or labour, well both usually. Government spending puts this capacity to work, more "stuff" is made, income is generated, by putting the people in work, giving you a population standing ready to buy the "stuff". Round and round it goes.
The supply side, anti state, perfect market, neo-classical economics the grandparent post is appealing to is, in a word, bullshit.
Thanks for making me feel better about my trolling point (first in 10 years on/.)
No problem... hardly a troll though I have to say. Its something that I think about from time to time. Whiteox, above, calls it complacency, and its partly that, but complacency exists in all countries I'm familiar with (Greece being the exception, they fucking burn it all when they don't like it). Australian's aren't complacent, they're quite highly motivated, its just that they have no fear of the state, at all. I have no data to back this up, but I would put money on a referendum on this issue being passed by the Australian public.
Also, the laid back thing. Its a complete load of crap. Aussies are some of the most hard working, conscientious, least chilled people around.
You're so right. Having lived overseas for over ten years I really feel it when I'm back in Australia. It is hard to put your finger on, a combination of excessive government propaganda on tv, small bylaws that of a kind that exist everywhere, but in Oz are enforced excessive zeal by police that just don't live in the "real world" but some kind of "well its the law...." kind of thing.
Hmmm, the way people are just so afraid of conflict and will NEVER question a representative of the state. I agree with you, but its hard to put into clear words. Anyone else want to try...?
You're dead right, it is a bi-partisan failure, and its even deeper than simply "underhand and vile financial instruments". Looking at just the subprime issue, how did this came about? Why did this lending happen? The surface reason is that the banks were able to make money by making those mortgage deals and offload the risks (supposedly) through securitisation. the underhand instruments you mention. Perhaps this would have worked if house prices kept going up...
This is only half the story though, the deeper one being, what are unemployed and poor people doing taking out mortgages in the first place? Had there been some kind of provision of adequate social housing to those people, directly from the state or some other mechanism, there would have been no need for them to be buying houses. More broadly, what the privitisation of essential services, housing, medicine, education is doing is giving people no option but to make use of the credit system. Not to be entrepreneurial, take risks and freely enter into business, which is the upside of capitalism, but simply to support a decent standard of living. I don't know the figures but 700 billion would have provided a lot of social housing, big boost to the economy too, you can't offshore a roofer. Instead we're spending it to prop up the system and ideology that drove us to this point. Sad.
I have to say I find amusing the disconnect between sentiment like this, the supposed preparation of citizens of the US to die for liberty, and the easy sweeping away of your constitutional rights after a visually spectacular but relatively minor attack that knocked some bankers off a building. Perhaps you're not as ready to die for liberty as you thought?
My God! That truly is an insightful post. I myself fall into the "no need for average citizens to own firearms" camp. The arguments about needing such weapons to "resist tyranny" have never rung true to me, I always put it down to not being from the US. This argument however is wonderfully sensical, it doesn't shift me from my position, but it has added a little bit of nuance.
The big problem is that once we absolve the state from providing that protection what is to stop a "war of all against all"? Do we want to live in a society in which might makes right? It seems to me that simply filling a society full of weapons is a poor solution to the very real problem jadavis identified. The mindset that is engendered here is the problem, the constant fear and need to defend oneself. Most people in European societies go about their business, interacting with their fellow humans without the constant fear that they are about to come under attack. This is implicit position in all these "defence of self" arguments, that you are constantly in fear of harm. It seems a very poor way to live ones life and I am still not convinced that allowing people to arm themselves would help in making us all feel safer.
Yeah, just like the way Americans will give up all the freedoms they bleat on about because some bankers get knocked off a building, when if they were really worried about their safety, they'd never get in a car again.
I don't get people who ignore the real hazards in life to focus on the unlikely ones.
The rights you've claimed here are just a snapshot of the current situation as understood in lay terms. You haven't really addressed the issues at all, just claimed lots of property rights over what other people may do with their property (e.g. use their printer say to print an altered copy of your story) without digging any deeper and finding any sort of rigourous basis for those rights.
I should be able to tap into that market, exclusively, for a given period of time
I have every right to profit from it.
Do you? Who says? This is the issue at stake here. What rights do people have over the ideas they produce? This is what all this is about. Unless you present a firm basis for these claims, the rest of your argument doesn't add anything to the debate.
Slashdot Mirror
Not talking about the finance modelers, I'm talking about classical economics and its offshoots. Particularly new classical economics. Building your models (here I mean any mathematical treatment, not just computational models) based around things like utility maximisation and rational choice theory are fine to help you map out the theoretical territory. They are woefully inadequate for explaining any observed market behaviour.
The problem arose when this kind of economics led to policy making that sought to adjust the real world to fit these models. For instance, unions are inherently bad because they cause the market to deviate from perfect competition. Or, developing countries should focus on agriculture because that exploits their comparative advantage. In a banal sense statements like this are true, but only at the level of a very crude first approximation. There is no accounting for the social and historical specificities of the situation. When the mathematical treatment rules, the social side of the problem is abstracted away.
The economic ideas that become accepted "truth" in any period are those which serve to validate the position of the powerful. In prerevolutionary France, the physiocrats stressed the primacy of agriculture, these days we stress the natural, impartial action of the market, interference in its workings a sacrilege. Well that is until the wealthy are looking at losing serious money, then all the state interference necessary to mitigate this is suddenly allowed. I'm not saying that saving the banks isn't the right thing to do right now, we haven't really got a choice, and that is another big issue, but its interesting to see how quickly the economic rhetoric can shift when its the rich that start to hurt.
Yeah, its a big step in the right direction.
Oooh, yeah, thanks, I am interested in that. Its on my "todo" list to get more acquainted with some more innovative modeling techniques. Its pretty clear we need to model differently, more feedback being the first thing that springs to my mind. There is way too much tuning of the assumptions to get the results desired in economics at present.
Its interesting you should say that. The split in political economy when the practitioners in the field got high on maths basically created sociology. I think that idea comes from JK Galbraith.
The way I think about it, is that we're trying to take a scientific mindset and methodology into sociology. An attempt to uncover some of the relationships that drive our social and economic behaviour. I don't subscribe to the "its all crap" mantra (obv) but I do feel that the very maths heavy, rational agent optimisation way of doing things is a bit of a misstep. It should really be a minor subfield of maths that deals with rational decision making. A bit like game theory. Helpful in mapping out the theoretical territory, but of limited application to the analysis of real issues in society.
There is some light in the tunnel however. As more and more of wider society see that the neoclassical emperor has no clothes, the stranglehold of that school on economic thought loosens. The financial crisis is going to help this, people have already stopped looking at you funny when you talk about wealth redistribution. What's next? Will we be able to talk about class antagonism? ......
Ooops, went too far...
Part of the problem is that "the geeks" got hold of economics and constructed their big, deterministic, agent based models. Models can be illuminating true, but in the case of economics, when reality and models parted company, the economists bemoaned the inability of the real world to match theory.
What is desperately needed in economics is a more reality based outlook that attempts to truly deal with the social and economic problems of wider society, rather than a bunch autistic, antisocial, arrogant geeks who don't even realise they're only allowed to keep doing what they're doing because it serves the interests of the powerful (and they're not getting in the way too much).
IAAE
The thing is, this "we deregulated too much" answer to the crisis is a bit of a red herring. The real issue here is the march of supply side, right wing politics in the west, from both "sides" of politics since Reagan and Thatcher. The lack of provision of basic essentials of human life for the poor. No state, or subsidised, housing, education and health, means that more and more of society is exposed to the credit system simply in order to have a decent standard of living. Combine that with an advertising (propaganda) campaign by the banking sector to move into household lending and here we are. The first major financial crisis where the debt burden is higher in the household sector than industry. Should be interesting.
However, as even a rudimentary introduction to economics will teach you
Yeah, and a rudimentary introduction to economics will also teach you that there are many and varied types of organisation that may arise through the operation of the market, some very far from optimal.
There is also a little thing called equity that some of us think is important as well, but you need to be a little less antisocial to understand that one.
Nice post.
Yes, and those people would be wrong. The market is inherently unstable, despite the fine propaganda effort to convince us its gods gift to man and somehow a state of nature for the human race.
Oh, I see what you mean. Well, here's the thing. Sometimes the economy finds itself in what's called a "less than full employment equilibrium", a recession. The big problem is that the business sector will not produce at full capacity because there are less people with sufficient income to purchase the output. Their lack of production (and sales) means that people who could be working for them aren't. Taken in aggregate, these people who aren't working are the ones who don't have sufficient income to buy the stuff. Chicken and egg situation.
:)
if the state steps in and spends on a big infrastructure project, all of a sudden those people who were sitting idle are now working and earning an income. They spend that income, stimulating business activity. Now, thanks to something called the multiplier, this actually generates more business activity than the amount the gov spent on the make work project, as the funds go round and round the economy. The idea being that when the stimulus is ended there is demand in the economy for more workers, the ones who were working on your big project.
So the state has got the economic engine running again, and you've got some infrastructure which will help you to be even more competitive. This is what they mean by "create jobs" not the directly created jobs, well they play those up, but in an economic sense its the new employment generated by the stimulated activity that's really important.
As to why gov doesn't do it all the time. Well they do sort of. In the US military spending is a big pump primer for the economic system. Also, welfare is sort of like an auto stimulus. As people are put out of work, due to a downturn, gov spending rises automatically, propping up demand and hopefully preventing further unemployment. Lastly, the economy is a complex beast, sometimes it fixes itself, sometimes it doesn't. This latest downturn is going to give us lots more real world data to play with, especially since different countries will tackle it in different ways. Come back in about 5 years, I'll be able to give you a better answer then
Keynes is back!! And now he's pissed off!!
Well, somethings are too risky for the private sector not just because they're inherently risky but that the time horizon for profitability may be too long. Large scale transport infrastructure is a good example.
Or it may be that too many interconnected things need to be done at the same time to make any one part profitable, like digging a mine, constructing the refinery, laying down the rail line to the port, building storage capacity etc etc for some extractive industry. In this case, government commitment to part of the project may make it profitable for industry to tackle certain parts of it.
Lastly, some spending is simply socially desirable, such as health, defence, or transport any may never be "profitable" in itself, but is profitable to society as a whole when we have it.
The bit you're missing is the point of spending $x. Investment is different to simply buying something. You invest to increase your stock of productive assets. For example, borrowing to build a rail line that enables people to move goods more cheaply may result in increased economy activity, more business are profitable now than they were before the rail line. The tax take goes up, I easily pay off the $x over time, even though I pay an interest premium on it.
The problem really is borrowing to pay for a non-productive asset. Something that doesn't add to your, or societies, capability to make more "stuff" (which could be services too). This is why household debt is such a problem, it will have to be paid from future production, but the nature of what people spent the debt on (that awesome plasma say) does nothing to help them or society pay that debt.
Does that make sense?
IAAE
Dead right. Don't get all caught up in the money side of it. Look at the resources. This "crowding out" of the private sector by government spending is only really relevant in a situation of full employment, exactly the opposite of a recession.
In a recession there is unused capital capacity in the economy, either machines that make things, or labour, well both usually. Government spending puts this capacity to work, more "stuff" is made, income is generated, by putting the people in work, giving you a population standing ready to buy the "stuff". Round and round it goes.
The supply side, anti state, perfect market, neo-classical economics the grandparent post is appealing to is, in a word, bullshit.
IAAE
Thanks for making me feel better about my trolling point (first in 10 years on /.)
No problem... hardly a troll though I have to say. Its something that I think about from time to time. Whiteox, above, calls it complacency, and its partly that, but complacency exists in all countries I'm familiar with (Greece being the exception, they fucking burn it all when they don't like it). Australian's aren't complacent, they're quite highly motivated, its just that they have no fear of the state, at all. I have no data to back this up, but I would put money on a referendum on this issue being passed by the Australian public.
Also, the laid back thing. Its a complete load of crap. Aussies are some of the most hard working, conscientious, least chilled people around.
Merry Crimbo to you too...
You're so right. Having lived overseas for over ten years I really feel it when I'm back in Australia. It is hard to put your finger on, a combination of excessive government propaganda on tv, small bylaws that of a kind that exist everywhere, but in Oz are enforced excessive zeal by police that just don't live in the "real world" but some kind of "well its the law...." kind of thing.
Hmmm, the way people are just so afraid of conflict and will NEVER question a representative of the state. I agree with you, but its hard to put into clear words. Anyone else want to try...?
Hahahahahaha, wow. People like you are really out there. Amazing.
Or are you trolling, gotta be, surely....
You're dead right, it is a bi-partisan failure, and its even deeper than simply "underhand and vile financial instruments". Looking at just the subprime issue, how did this came about? Why did this lending happen? The surface reason is that the banks were able to make money by making those mortgage deals and offload the risks (supposedly) through securitisation. the underhand instruments you mention. Perhaps this would have worked if house prices kept going up...
This is only half the story though, the deeper one being, what are unemployed and poor people doing taking out mortgages in the first place? Had there been some kind of provision of adequate social housing to those people, directly from the state or some other mechanism, there would have been no need for them to be buying houses. More broadly, what the privitisation of essential services, housing, medicine, education is doing is giving people no option but to make use of the credit system. Not to be entrepreneurial, take risks and freely enter into business, which is the upside of capitalism, but simply to support a decent standard of living. I don't know the figures but 700 billion would have provided a lot of social housing, big boost to the economy too, you can't offshore a roofer. Instead we're spending it to prop up the system and ideology that drove us to this point. Sad.
Matt
So I'm guessing that makes all those soldiers blowing stuff up in public places in Iraq criminals.... I'll call The Hague.
I have to say I find amusing the disconnect between sentiment like this, the supposed preparation of citizens of the US to die for liberty, and the easy sweeping away of your constitutional rights after a visually spectacular but relatively minor attack that knocked some bankers off a building. Perhaps you're not as ready to die for liberty as you thought?
My God! That truly is an insightful post. I myself fall into the "no need for average citizens to own firearms" camp. The arguments about needing such weapons to "resist tyranny" have never rung true to me, I always put it down to not being from the US. This argument however is wonderfully sensical, it doesn't shift me from my position, but it has added a little bit of nuance.
The big problem is that once we absolve the state from providing that protection what is to stop a "war of all against all"? Do we want to live in a society in which might makes right? It seems to me that simply filling a society full of weapons is a poor solution to the very real problem jadavis identified. The mindset that is engendered here is the problem, the constant fear and need to defend oneself. Most people in European societies go about their business, interacting with their fellow humans without the constant fear that they are about to come under attack. This is implicit position in all these "defence of self" arguments, that you are constantly in fear of harm. It seems a very poor way to live ones life and I am still not convinced that allowing people to arm themselves would help in making us all feel safer.
That's The Young Ones, not Monty Python...
Errr, aren't all taxes (ultimately) about redistribution of wealth?
Yeah, just like the way Americans will give up all the freedoms they bleat on about because some bankers get knocked off a building, when if they were really worried about their safety, they'd never get in a car again.
I don't get people who ignore the real hazards in life to focus on the unlikely ones.
The rights you've claimed here are just a snapshot of the current situation as understood in lay terms. You haven't really addressed the issues at all, just claimed lots of property rights over what other people may do with their property (e.g. use their printer say to print an altered copy of your story) without digging any deeper and finding any sort of rigourous basis for those rights.
Do you? Who says? This is the issue at stake here. What rights do people have over the ideas they produce? This is what all this is about. Unless you present a firm basis for these claims, the rest of your argument doesn't add anything to the debate.
hahaha, yeah, gotta love those "great American proverbs", here get a clue...