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Keynes and the monetarization of economics***

by Carrie Sun Jul 16th, 2006 at 09:19:44 AM EST

This diary is a continuation of an exchange with Drew.

As I said there, I am trying to read Keynes' General Theory and I find it rather hard because it is a technical book written for professional economists, and moreover it is written as a polemic in which Keynes' ideas are not presented in a logical way, but primarily in opposition to (and as an improvement on) what was then mainstream (nowadays callled "classical") economics. One of the bits that strikes me as most interesting in this first reading so far is how he argues that all economic concepts should be monetarized in order to make economics properly quantitative. In this he is not wrong, and he is aware that he is throwing out some important things by making this decision, but like any good mathematician faced with an intractable problem he is deciding to tackle a different but related problem which is tractable, and trying to convince the rest of economists that this is the best way to make progress.

This ties in with our previous discussions of GDP, one-dimensional criteria of optimality, and so on. The idea is that one can only speak quantitatively of that which can be measured precisely, that the most precise economic measurement is in money terms, and so that all important economic concepts should be monetarizable.

Below the fold, some quotations and focused commentary.

From the front page ~ whataboutbob


Nevertheless these difficulties are rightly regarded as 'conundrums'. They are 'purely theoretical' in the sense that they never perplex, or indeed enter in any way into, business decisions and have no relevance in the causal sequence of economic events, which are clear-cut and determinate in spite of the quantitative indeterminacy of  these concepts. It is natural, therefore, to conclude that they not only lack precision but are unnecessary. Obviously our quantitative analysis must be expressed without using any quantitatively vague expressions. And, indeed, as soon as one makes the attempt, it becomes clear, as I ope to show, that one can get on much better without them.
To be slightly snarky, I will just recall some common jokes circulating among physicists and mathematicians to the effect that, when the professor says "it is natural", or "obviously", he is arguing "by intimidation": if it is obvious, and I don't see why this is, I must be stupid. And if I ask the professor to explain the "obvious" I will be exposed as a dunce. So I'd better not ask and convince myself that it is indeed obvious. Only children and madmen allow themselves to see that the Emperor has no clothes.

On with Keynes:

The fact that two incommensurable collections of miscellaneous objects cannot in themselves provide the material for a quantitative analysis [here Keynes is referring to the fact that it is an imprecise statement to say that production has increased if the production of some goods increases but that of others decreases] need not, of course, prevent us from making approximate statistical comparisons, depending on some broad element of judgement rather than of strict calculation,  which may possess significance and validity within certain limits. But the proper place for such things as net real output  and the general level of prices lies within the field of historical and statistical description, and their purpose should be to satisfy historical or social curiosity, a purpose for which perfect precision—such as our causal analysis requires, whether or not our knowledge of the actual values of the relative quantities is complete or exact—is neither usual nor necessary. To say that net output to-day is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement that Quess Victoria was a better queen but nott a happier woman than Queen Elizabeth—a proposition not without meaning and not without interest, but unsuitable as material for differential calculus. Our precision will be a mock precision if we try to use such partly vague and non-quantitative concepts as the basis of a quantitative analysis.
A somewhat flippant retort would be to point out that maybe it is quantitative analysis that should be given up instead of the fuzzy concepts he criticizes. But what Keynes is trying to do is actually quite reasonable:
In the case of an individual firm or industry producing a homogeneous product we can speak legitimately, if we wish, of increases or decreases of output. But when we are aggregating the activities of all firms, we cannot speak accurately except in terms of quantities of employment applied to a give equipment. The concepts of output as a whole and its price-level are not required in this context, since we have no need of an absolute measure of current aggregate output,  such as would enable us to compare its amount with the amount which would result from the ssociation of a different capital equipment with a different quantity of employment. When, for the purposes of description or rough comparison, we wish to speak of an increase of output, we must rely on the general presumption that the amount of employment associated with a given capital equipment wil lbe a satissfactory index of the amount of resultant output;—the two being presumed to increase and decrease together, though not in a definite numerical proportion.
Is he saying <gasp> that GDP is not a useful measure to compare performance between countries, but only within countries, and even then when the capital endowment of a country doesn't change appreciably? In any case, he is definitely saying that macroeconomics is not microeconomics, something that apparently needed to be pointed out to economists in the 1930s, and may still need to be pointed out today.

But now comes the best part, wherein Keynes tells us that the way to measure employment is not to count the number of employed people, but the aggregate wages.

In dealing with the theory of employment I propose, therefore, to make use of only two fundamental units of quantity, namely, quantities of money-value and quantities of employment. The first of these is strictly homogeneous, and the second can be made so. [Not all jobs and workers are the same, but he's about to show us how to make them the same] For, in so far as different grades and kinds of labour and salaried assistance enjoy a more or less fixed relative remuneration, the quantity of employment can be sufficiently defined for our purpose by taking an hour's employment of special labour in proportion to its remuneration; i.e. an hour of special labour remunerated at double ordinary rates will count as two units. We shall call the unit in which the quantity of employment the labour-unit; and the money-wage of a labour-unit we shall call the wage-unit.
So if I make twice as much as you, I  count as twice as much labour as you do! Now, how is it that we cannot apply the same argument to inhomogeneous products, measure everything in price units, and rescue GDP from the limbo where it seemed to habe been banished?
This assumption of homogeneity in the supply of labour is not upset by the obvious fact of great difference in the specialised skill of individual workers and their suitability for different occupations. [obvious facts of experience are not known to stop an economist on his tracks: that much is a fact of experience </snark>] For, if the remuneration of the workers is proportional to their efficiency, the difefrences are dealt with by our having regarde dindividuals as contributing to the supply of labour in proportion to their remuneration; whilst if, as output increases, a given firm has to bring in labour which is less and less efficientfor its special purposes per unit-wage paid to it, this is merely one factor among others leading to a diminishing return from the capital equipment in terms of output as more labour is employed on it. [Keynes has earlier argued that increased employment correlates with lower wages] We subsume, so to speak, the non-homogeneity of equally remunerated labour units in the equipment, which we regard as less and less adapted to employ the available labour units as output increases, instead of regarding the available labour units as less and less adapted to use a homogeneous capital equipment.
To sum up, GDP is still banished to limbo:
It is my belief that much unnecessary perplexity can be avoided if we limit ourselves strictly to the two units, money and labour, when we are dealingg with behaviour of the economic system as a whole; reserving the use of units of particular outputs and eqquipments to the occasions when we are analysing the output of individual firms or industries in isolation; and the use of vague concepts, such as the quantity of output as a whole, the quantity of capital equipment as a whole and the general level of prices, to the occasions  when we are attempting some historical comparison which is within certain (perhaps fairly wide) limis avowedly imprecise and approximate.

Poll
Your reaction:
. Huh? 16%
. Hmmm.... 0%
. Aha! 0%
. Ho-hum 0%
. D'oh! 0%
. Duh 0%
. Zzzzz... 16%
. Gee-whiz! 0%
. Uh-huh 16%
. All of the above (not necessarily in that order) 50%

Votes: 6
Results | Other Polls
Display:
I don't have a lot to say at 2am that's coherent, hence I vote Zzzzz.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Tue Jul 11th, 2006 at 08:58:52 PM EST
For, if the remuneration of the workers is proportional to their efficiency

When has this ever been close to being true?

The whole argument seems very 19th century. It looks to me like Keynes sees efficiency almost in thermodynamic terms - a given amount of energy needs to be expended in production, and workers and/or machines expend this energy in a closed system. There doesn't seem to be any concept of less mechanistic work, such as salesandmarketing, which can apparently create value and hence 'product' indirectly.

(I suppose in the limit it's all entropy, one sort being physical and the other being informational. Still  - there's no sense of this in the argument.)

As for GDP - it's still a simplistic argument. Keynes and other economists seem to work on the basis that because more subtle measures are difficult, we should measure the things we can measure easily and build a system of economy around them.

Am I missing something here? Because as arguments go, this seems rather silly.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jul 11th, 2006 at 10:03:09 PM EST
Keynes and other economists seem to work on the basis that because more subtle measures are difficult, we should measure the things we can measure easily and build a system of economy around them.

Am I missing something here? Because as arguments go, this seems rather silly.

That's exactly how science makes progress, actually. Keynes does not try to claim that the resulting theory has a broader scope thanit actually has, which if you think about it is rather narrow. Part of the problem is that economics students will be exposed to some version of Keynes' theories, or to some other purely monetarized formulation of economics, without a discussion of scope or, even worse, with claims of universal applicability. Which is why reading Keynes is ultimately more instructive than just about any modern textbook. Similar remarks would aply to reading the original works in any discipline.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 06:02:41 PM EST
[ Parent ]
That's exactly how science makes progress, actually.

"?" Isn't there more science done by deciding what to measure on purely theoretical grounds, and then pushing technology to make those measurements possible?

That's somewhat different to deciding that because it's easy to measure X, Y or Z, everything else should be ignored.

Part of the problem is that economics students will be exposed to some version of Keynes' theories, or to some other purely monetarized formulation of economics, without a discussion of scope or, even worse, with claims of universal applicability.

Yes, exactly. Which is why from the outside it looks as if economists are taught stock answers, instead of being taught to ask deep questions.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jul 13th, 2006 at 05:49:45 AM EST
[ Parent ]
First you make do with what you have. Then you make do with what you can measure. Then you propose new things to measure. Then you figure out how to measure those things in the first place.

I know doodley squat about econometrics or its history, but I can tell you Keynes does discuss the issue of what to measure, what data are available to him, how they are inadequate for his purposes, etc. Maybe I should write a diary about it. The contemporary source that he talks about is Kuznets' econometric data for the US.

As a swedish kind of death points out [and Keynes also discusses] a prime source of economic data and economic concepts (as in, what can be measured) is government tax offices. Think of Inland Revenue and National Statistics, as analogous to CERN: "big science" econometrics.

Nothing is 'mere'. — Richard P. Feynman

by Carrie (migeru at eurotrib dot com) on Thu Jul 13th, 2006 at 06:01:41 AM EST
[ Parent ]
That's somewhat different to deciding that because it's easy to measure X, Y or Z, everything else should be ignored.

That's an issue of scope. As long as you don't claim universal applicability, you're ok.

Nothing is 'mere'. — Richard P. Feynman

by Carrie (migeru at eurotrib dot com) on Thu Jul 13th, 2006 at 06:02:44 AM EST
[ Parent ]
But still relevant...

I am grateful for the following insight from our man in Lyons:

The Dutch East India Company, founded 400 odd years ago, was the first multinational, and the first to issue stocks.

Stocks are a method of raising capital to acquire assets such as ships, buildings, machines, land etc, i.e. to become the part owner of such physical assets.

Minders of these assets - called workers - are employed to keep the assets productive.

Also a control system is established to manage both the assets and the workers. The control system - management - needs to be at least as complex and as timely as the process it controls. All fine and good when we are talking about relatively simple 'factory processes'.

But then came along what might be called the 'Knowledge Economy' with its almost friction-free transactions. It is an economy based on the innovations of human minds working together. The capital requirements are extremely low, unless the human mind is considered a physical asset that can be owned. So what are the shareholders investing in? Why are they needed?

The second shift that the new economy brings is that the process is now so exceedingly complex and non-linear that it makes no sense (to who?) to set up an even more complex control system to control the process, that will be totally untimely - i.e. too slow to be of any use.

So what you do is subsume the control into the process.

Don't blame the Man from Lyons if this doesn't make sense - all the paraphrasing is mine.

That is where we are now. Corporations like Nokia are transitional - they are not yet more than partly self-organizing and still retain the old asset-ownership structure, diluted by making the process itself an owner.

No-one knows what future corporations will look like - or even if the very concept of incorporation will be needed. But however we gather together in the future to 'build' things, it is going to be different. It may look like a cooperative, or a university, or Oxfam, or something else that we haven't worked out yet.

And the ramifications will be fundamental.

You can't be me, I'm taken

by Sven Triloqvist on Wed Jul 12th, 2006 at 02:22:27 AM EST
Perhaps THIS is what we should be thinking about?

You can't be me, I'm taken
by Sven Triloqvist on Wed Jul 12th, 2006 at 04:01:40 AM EST
Perhaps, but in policy debate mainstream economists play on their home turf. We have to beat them there first and then we can change the rules of the game.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 05:23:35 AM EST
[ Parent ]
Is this part of the goalkeeper debate? ;-)

You can't be me, I'm taken
by Sven Triloqvist on Wed Jul 12th, 2006 at 06:09:36 AM EST
[ Parent ]
It's just a conceptual metaphor.

See? This is why you don't want my brain. Everyting is connected to everything else in there, it's kind-of exhausting.

Nothing is 'mere'. — Richard P. Feynman

by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 06:20:32 AM EST
[ Parent ]
Yep - I wouldn't get much for your brain on ebay - its been too used.

Give me a mint-in-box brain with 100 billion fresh neurons and I could probably swop it for something really worthwhile.

But I will get out of here now and leave the thread to get serious...

You can't be me, I'm taken

by Sven Triloqvist on Wed Jul 12th, 2006 at 06:32:51 AM EST
[ Parent ]
I'm very naive about economics, but it sure seems to me that by its very definition it's about money. Isn't the whole point of economics to study wealth, which is measured either in number of goats or number of Euros, with Euros being somewhat easier to transport?
by asdf on Wed Jul 12th, 2006 at 09:25:13 AM EST
If you have goats and I have cabbages, who has more Euros? Apparently is is "obvious" that everything should be expressed in monetary units only since Keyne's time, since he felt the need to argue that point to his fellow economists.

What is wealth?

What is economics?

Nothing is 'mere'. — Richard P. Feynman

by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 09:39:18 AM EST
[ Parent ]
Well, I don't think wealth should always be expressed in monetary units.

I guess I'm just terribly naive or insane.  

It's just that so many forms of value cannot be assessed in terms of production and labour or supply and demand.  When we start placing monetary value on them, then we begin fucking everything up.  (I'm thinking nature, cultural heritage, well-being...)

Those who can make you believe absurdities can make you commit atrocities. -Voltaire

by p------- on Wed Jul 12th, 2006 at 02:41:24 PM EST
[ Parent ]
I agree with you, but to asdf it is obvious that everything should be expressed in goats or Euros and Euros are more convenient. Note that I said it's "obvious" in scare quotes.

I guess a charitable way to state Keynes' point is that the scope of economic theory is limited to those things that can be measured in monetary terms, but that opens an entire new avenue of attack.

Nothing is 'mere'. — Richard P. Feynman

by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 03:04:23 PM EST
[ Parent ]
I don't think you're terribly naive or insane, poemless.  But I think it's fair to say that issues regarding things like cultural heritage -- I leave nature out for important reasons here, obviously -- are the focus of other fields.  It's not that economics has nothing to say about them, but it, admittedly, has very little, beyond discussions of utility.  An economist could say, "Joseph is of Celtic heritage, and he enjoys using his earnings in ways that reflect his values in this regard."  So I wholly agree that something very real is lost in that, but I also think that it is expecting a bit much of a field that is concentrated on studying how we behave, largely with our money, when we dig into those sorts of issues.  Those are subjects for other fields to develop a deeper understanding of, whether sociology, psychology, or one of many others related to it.  And those fields all specialise is certain relevant subjects.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jul 12th, 2006 at 03:20:20 PM EST
[ Parent ]
I rather think that poemless was referring to economics inability to value those things and thus its difficulty in accounting for them. Does building a road through an ancient symbol of the nation  and an important archaeological  area make a nation richer or poorer?
by Colman (colman at eurotrib.com) on Wed Jul 12th, 2006 at 04:32:32 PM EST
[ Parent ]
On the other hand game-theoretic analysis of bargaining processes, which can be argued to fall within economics, includes such questions.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 04:35:08 PM EST
[ Parent ]
Does it? How?
by Colman (colman at eurotrib.com) on Wed Jul 12th, 2006 at 04:36:24 PM EST
[ Parent ]
Can't you formulate that question within social choice theory?

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 04:37:57 PM EST
[ Parent ]
Fah. That would be another whole new area I need to read about.
by Colman (colman at eurotrib.com) on Wed Jul 12th, 2006 at 04:45:00 PM EST
[ Parent ]
Now you can debate whether monetarizing everything is a proper solution to the social choice problem.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 04:47:39 PM EST
[ Parent ]
When I am cooking a Thai meal, while my daughter is playing guitar for me, I feel wealthy. But it is an entirely different value - it is the mortar that holds people together, and also maybe keeps them a little bit apart.

The more important economic question is why do we work?

You can't be me, I'm taken

by Sven Triloqvist on Wed Jul 12th, 2006 at 05:34:43 PM EST
[ Parent ]
With a broad enough definition of 'work' we can't help not to. But I suspect you have a narrower definition in mind.

How much would someone have to pay you to work on a project instead of cooking Thai to your daughter's playing? That's one way to quantify how wealthy you feel.

Nothing is 'mere'. — Richard P. Feynman

by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 05:42:29 PM EST
[ Parent ]
This sounds like the old one about the film producer and the starlet. "Will you sleep with me for a 100 bucks?" "Of course not" "Would you sleep with me for a thousand dollars?" "No" "How about a million?" "Maybe" "OK, we've established you're a hooker, now we're just arguing about the price".

You can't be me, I'm taken
by Sven Triloqvist on Wed Jul 12th, 2006 at 06:05:54 PM EST
[ Parent ]
The way I remember that one is "will you sleep with me for £1M?" "Maybe" "and for £100?" "What kind of woman do you think I am?" "Oh, we've established that, now we're just haggling about the price".

But cultural hiccups about sex and money being dirty (separately, let alone in combination) that is the only reasonable way to evaluate things.

Nothing is 'mere'. — Richard P. Feynman

by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 06:13:38 PM EST
[ Parent ]
I mean "cultural hiccups about ... aside, that is..."

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 06:14:34 PM EST
[ Parent ]
I must be having a bad memory day. You are right again.

I need sleep...

You can't be me, I'm taken

by Sven Triloqvist on Wed Jul 12th, 2006 at 06:21:59 PM EST
[ Parent ]
That is an unanswerable question for economics, because it would require measuring utility levels across people, which, of course, makes no sense.  You and I can, as individuals, be happy or unhappy relative to our other options as individuals, but economists can't say, "Colman's happiness with this situation outweighs Drew's lack of happiness."

The road will obviously make the nation richer in terms of dollars, just as drilling in the Arctic National Wildlife Refuge would, but, in the latter case, we've, at least so far, made the judgment that we're happier without that drilling -- that ANWR yields sufficient utility among a sufficient number of active participants in the political debate to inspire them to voice their preference by voting for a pro-environment candidate or pressuring their congressmen with phone calls, emails and letters.  So there are rough ways to discuss this in economics, as viewed through decisions within political institutions, because people presumably vote for candidates based upon their views on this and other issues, but it is clearly a very rough, and frustrating, means to measurement.

That's why I think economics can, and should, try to deal with the value of these, at least in a rough way, but it requires input from other fields to achieve anything that begins to resemble a solid grip on the issue.

Hope that makes at least some sense, but I'm having trouble figuring out how to word my explanation properly.  I know what I want to say, but I'm not sure how to say it.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jul 12th, 2006 at 04:51:38 PM EST
[ Parent ]
The road will obviously make the nation richer in terms of dollars, just as drilling in the Arctic National Wildlife Refuge would
Not necessarily, an archaeological site or a wildlife refuge is a potential tourist attraction. Also, it does not lack value and its destruction iss an irreparable loss.
That is an unanswerable question for economics, because it would require measuring utility levels across people
...
we've, at least so far, made the judgment that we're happier without that drilling
Presumably that happened non-economically?

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 04:57:44 PM EST
[ Parent ]
Not necessarily, an archaeological site or a wildlife refuge is a potential tourist attraction. Also, it does not lack value and its destruction iss an irreparable loss.

In the case of many parks and sites, that's certainly true.  There was certainly no shortage of tourists when I visited the Smoky Mountains (and, by the way, none of them should have been allowed to drive on mountain roads -- my future mother-in-law more so than anyone).  As it is, ANWR only has a few hundred visitors each year, so I think it's safe to say that the oil business would produce more money, unless these poor tourists are coughing up insane amounts of money to visit.

Presumably that happened non-economically?

What do you mean?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jul 12th, 2006 at 05:14:41 PM EST
[ Parent ]
Some people would have us believe that all such decisions boil down to some sort of cost-benefit analysis. Also, if a decision was made not to drill, it must be that the economic necessity of drilling just was not there, or was not sufficient. But you said the question could not be decided within economics.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 05:24:18 PM EST
[ Parent ]
Some people would have us believe that all such decisions boil down to some sort of cost-benefit analysis.

The pro-drilling side would suggest that there is little by way of cost: "America needs energy, and most of the need will be for gasoline, so, with rising prices, the benefit of drilling in ANWR, thereby increasing supply, must trump any costs that exist, anyway."  The anti-drilling side has engaged in the discussion more honestly, in my opinion, and it goes beyond whether a bunch of deer die of exposure to industry.  We also have to take into account the fact that, by drilling, we would be extending our reliance on oil, which, in the end, is economically -- even ignoring the costs associated with global warming -- stupid.

Also, if a decision was made not to drill, it must be that the economic necessity of drilling just was not there, or was not sufficient. But you said the question could not be decided within economics.

It must be that the gains to drilling were not sufficient to push Americans to support opening ANWR, if the current situation holds, because Americans have, up to now, exercised their rights in pressuring Congress to not allow drilling.  That can be looked at in an economic framework, I suppose, but the analysis necessarily spreads into political science, sociology and psychology, because, as I said, we can't compare utility levels clearly across people.  I can't say, "Americans who oppose drilling gain a higher level of utility from saving ANWR than Americans who support drilling lose."  I can say, "Americans who oppose drilling exercised greater influence over the Congress."

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jul 12th, 2006 at 05:41:25 PM EST
[ Parent ]
There is a lot of politics, sociology and psychology implicit in Keynes' discussions (just look at the chapters on "the propensity to consume"). Don't let the arbitrary divisions between academic disciplines distract you from important features of the problems you study.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 05:45:06 PM EST
[ Parent ]
There has to be a lot of politics, sociology and psychology in economics in order to get an idea of how to develop solid theories.  Otherwise we'd all be Neoclassicalists. </snark>

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jul 12th, 2006 at 05:51:29 PM EST
[ Parent ]
Snark aside, the problem is that the politics, sociology and psychology are inside a box that no one is supposed to examine too closely.

I don't think economics really exists as a separate discipline. I think it exists as a kind of academic cult cursed by delusions of infallibility, but the practical policy foundations are always based on politics, sociology and psychology - with a bit of game theory and statistical analysis at the more rigorous end.

In terms of real-world decision making, I think it really isn't possible to understand economic relationships except in terms of politics, sociology and psychology. They're not footnotes or distractions, they're fundamentals.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jul 13th, 2006 at 06:23:53 AM EST
[ Parent ]
It can't exist as a fully-separate discipline from politics, sociology and psychology, -- you're, of course, right -- but it's important to remember that economics also has an impact on these three, as well.  It's a similar relationship to our discussion on wealth and military power.  It would be foolish to expect any of these sorts of fields to exist fully independent of the others -- with the exception of psychology, in some areas, obviously.  The entire purpose of academia is to have researchers looking into many different parts of life in order to develop an understanding of each, so that they can be smashed, for lack of a better word, together, thus yielding a more accurate picture.

Politics obviously plays an enormous role, because governments are enormous actors in the economic arena.  Psychology's role is growing -- there is actually a sub-discipline called Economic Psychology, although it's still in its infancy -- because psychologists can help economists develop a stronger understanding of (say) happiness or buying habits or or or....  Sociology and economics have always had a great deal of overlap, and academics from each work together quite often.  (My uncle, who is a retired sociologist, is an example.)  If I wanted to write a book on Africa's current economic situation, I would likely need to get in touch with someone who understands African culture and politics, because it would shed a great deal more light on the issue for me.  Proposed solutions to problems are, obviously, useless if they do not work properly with the cultural and political situation (as when FDR had difficulty pushing Keynesian worker programs in an era of American politicians seeking a consistently-balanced budget).

As far as infallibility is concerned, in any field -- in my experience, at least, and I must admit to having little in the hard sciences (so I'll leave that to Miguel, Colman and anyone else who has said experience) -- you'll find people who take this view of their discipline, but I think you'll find plenty of examples, especially among the big names, of economists who do not believe in the infallibility of economics.  In fact, the book Miguel wrote this diary on was one built to challenge a previous failure in the field, as were Friedman's writings on things like the Phillips Curve.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jul 13th, 2006 at 12:08:53 PM EST
[ Parent ]
I totally agree.  Esp. with the academic cult part. ;)

Those who can make you believe absurdities can make you commit atrocities. -Voltaire
by p------- on Thu Jul 13th, 2006 at 02:15:56 PM EST
[ Parent ]
we can't compare utility levels clearly across people.  I can't say, "Americans who oppose drilling gain a higher level of utility from saving ANWR than Americans who support drilling lose."  I can say, "Americans who oppose drilling exercised greater influence over the Congress."
Operationally, there is no distinction between one and the other,  since utility cannot be measured except implicitly by its impact on peoples' beaviour. If the anti-drilling side had not put enough pressure to bear onthe Congress you'd have to conclude that they were either not numerically strong enough or not motivated enough (or both), and in either case you could ascribe it to an insufficient loss of utility from drilling. But the assumption that a utility function comparable across people exists is fraught with problems, though. I don't like utility, and I don't know why you feel the need to keep bringing it up if you (as it appears) don't find it a particularly operationally useful concept either.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 05:52:46 PM EST
[ Parent ]
Much of economics is indeed organized around the concepts of wealth and its relatives (income, consumption). When economists address a more abstract level, they often speak of utility, or value-to-a-person, which in turn is often taken to be a measure of differential happiness.

This collection of concepts breaks down in at least two ways: the hedonic treadmill (increments in income, etc., produce only transient happiness, vide infra), and the difference between life satisfaction and happiness. The latter difference, in turn, has some relationship to the non-unitary nature of the human mind -- internal goals conflict in ways that make the notion of an individual's utility less useful.

However, people and societies are products of evolution (and it is often unnecessary to ask what is biologically evolved and what is cultural). One can argue that an evolutionary function of the hedonic treadmill is to drive people toward the accumulation of ever more wealth and power, which in turn aid the propagation of the characteristic features of "successful" people and societies.

Put more bluntly and focused on GDP: greater national wealth enables greater military power. World affairs therefore tend to be dominated by cultures and nations that pursue wealth, and their cultures tend to be imitated.

Words and ideas I offer here may be used freely and without attribution.

by technopolitical on Wed Jul 12th, 2006 at 12:09:59 PM EST
[ Parent ]
Put more bluntly and focused on GDP: greater national wealth enables greater military power.

This is an interesting take on it, but I'm not sure it's true historically. Firstly military power doesn't necessarily translate to political influence - as the US discovered in Vietnam, and is discovering in Iraq.

Secondly, successful military power is used to grow empires. Not vice versa. The Romans and the British had empires because of their superior military skills and technology, not vice versa.

I think a necessary, but not a sufficient condition for empire is that there has to be a background of aggressive acquisition driven by a political system of internal competition. E.g. Roman acquisition was driven by political and economic status within the oligarchies that ran Rome.

If a system isn't internally competitive, there's less drive to expand outwards and acquire resources away from home.  

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jul 12th, 2006 at 03:26:31 PM EST
[ Parent ]
I'm not sure we can establish causality in only one direction, at least not to a "crystal-clear" degree.  Surely the desire to maintain power in the international arena has led numerous American governments into adventures under the banner, "Securing Our Interests," but, then again, this ties in with growing empires.  The two feed on each other.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jul 12th, 2006 at 03:42:33 PM EST
[ Parent ]
I agree with the dualfeeding, and will offer an example from the history of the British empire.

During the Napoleonic wars Britain bankrolled many of France´s opponents on the continent. This economic power enabled Britain to in the long run win and thus end up with (among other things) a lot of possesions in India.

And although I disagree with the notion that GDP measures national wealth, I agree that a large GDP enables a big army. As GDP measures taxable transactions, it gives a hint of how large spendings a government can get going, among those spendings military spendings. Of course this only really applies to our modern day states with high-tech expensive weapons.

In roman time a main portion of wages was pay in land on retirement, thus creating a drive to conquer more land. Not that that was the only force pushing for expansion...

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Jul 12th, 2006 at 06:28:15 PM EST
[ Parent ]
GDP doesn't measure national wealth.  It measures the nation's annual income.  National wealth would be equal to national assets minus national liabilities.  America's GDP should be roughly $13t by the end of the year, but its wealth is about $60t.  That's why I maintain that America's national debt, while too high for my taste as someone who admittedly a bit militant about balanced budgets, is not incredibly high.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jul 12th, 2006 at 08:25:28 PM EST
[ Parent ]
Quite right. That is the defintion of GDP.

To clarify, in that paragraph I was responding to this statement by technopolitan:

Put more bluntly and focused on GDP: greater national wealth enables greater military power.

And I also made a rather convoluted reference to a previous discussion where I stated my answers to Migerus socratic questions as:

1. What does GDP measure?
Tax base.

2. Why does it need to grow?
To enable politicians to keep their promises, wheter in expanding services but not increasing taxes or lowering tax percentages while keeping services constant. Or both. Few run on a platform of increased taxes and lowered services. Or on a reality-based platform where you need to pay for what you eat. Fiscal conservative is just a oppostion position, when in power you need to keep promises.

3. Does the need for GDP growth outweigh any other policy goal?
Policy is set by politicians right? Then - almost always - yes.



Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Wed Jul 12th, 2006 at 09:31:03 PM EST
[ Parent ]
Ha!  Well in answering Miguel's questions, although, in fairness, Reagan did run on a platform of lowering taxes and spending.  I think he technically met that promise, in real terms, but he also ran enormous deficits, obviously, because of his tax cuts and the recession.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jul 13th, 2006 at 01:24:07 AM EST
[ Parent ]
Yes, the causes and connections are more complex than my sketch. (I'd describe the GDP/conquest relationship as spiral causation, when it works effectively.)

My aim was to suggest why minds and cultures that seek happiness through wealth/power will tend to spread, in part because gaining wealth/power in fact yields no satisfaction or lasting happiness.

Words and ideas I offer here may be used freely and without attribution.

by technopolitical on Wed Jul 12th, 2006 at 11:42:18 PM EST
[ Parent ]
I'd describe the GDP/conquest relationship as spiral causation, when it works effectively.

That would be my take on it too. I think it starts with a military advantage, which can then create a positive feedback loop where there's an interest in empire building.

But there's another angle, which is how economic and political domination as a substitute for physical warfare. US interests are no longer served by sending in the marines and killing anyone who refuses to pay tribute.

Instead there's the World Bank and the World Trade Organisation, which set trading terms favourable to the US and make military action in pursuit of US interests less necessary.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jul 13th, 2006 at 09:25:59 AM EST
[ Parent ]
You can't get a military advantage without economic advantage.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Thu Jul 13th, 2006 at 09:27:40 AM EST
[ Parent ]
Yes you can, because an economic advantage is one way to gain a military advantage. But it's not the only one.

5th Century Rome was incredibly wealthy in local economic terms, but was taken down by bands of nomads who considered themselves lucky to own a wagon.

Some of the tribal groups had a numeric advantage, with migrations that literally stretched across entire countries.

Others had a huge advantage in military skill and tactics - including better technology, with a short bow that could punch through a metal shield at a distance of hundreds of yards.

Conversely when Rome originally started to expand, its only advantage was military. It wasn't any richer than its neighbours, but it knew how to put together and drill an extremely effective citizen army.

Today if terrorists had more imagination and skill than they seem to have, it would take very little money to do huge, even terminal, economic damage to London or one or more major cities in the US. An insignificant fraction of the US military budget would be more than enough.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jul 13th, 2006 at 01:47:51 PM EST
[ Parent ]
What about North and South Korea?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jul 13th, 2006 at 04:07:31 PM EST
[ Parent ]
Studying wealth is only one part of economics, and it falls under growth theory, if I'm not mistaken, which had been part of macroeconomics, but is now a field unto itself in most departments.  "Economics," broadly, is the study of how people make decisions with their resources (money).  It's fairly standard stuff for a social science: Start with a theory (intuition), and run the regression(s) to see what you find.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jul 12th, 2006 at 12:15:23 PM EST
[ Parent ]
Read Galbraith instead. He was a follower of Keynes, but his writing is much clearer (and more witty) and he had a much more skeptical view of economists.

Keynes was a genius at practical actions, but his explanations were a bit ex post facto.

The ability for capital to slosh around the planet as it now does and for companies to allocate their earnings and expenses to whatever region they wish means that national based theories are inadequate.

If you really want to discuss better measures that the GDP than that might be a good topic for a new diary.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Wed Jul 12th, 2006 at 09:29:06 AM EST
Or a topic for an old diary.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 09:33:02 AM EST
[ Parent ]
With all due respect to Galbraith, he was no John Maynard Keynes.  This is, to be clear, the same Galbraith who claimed that there exists a long-run "clear choice--the trade-off--between high employment and inflation as against unemployment and relatively stable prices," and that "This trade-off is present in all accepted thought."  That is absolutely false, and has been understood to be false for decades.  In fact, it was laid to rest back in the 1970s by Milton Friedman and is what got Keynesianism into so much trouble, justified or not.

He was, of course, referencing the Phillips Curve -- an idea that came about because Phillips noticed an inverse correlation between inflation and unemployment.  Anyone who lived through the '70s should know of this.  Economists, who are, unfortunately, prone towards jumping on bandwagons, jumped on this one, as well.  What this "trade-off" really implies is that businesses are fooled temporarily by an increase on the money supply.  If the money supply increases without a corresponding increase in price, then, cet. par., prices have fallen in real terms, and demand is likely to pick up.  Employment picks up with the increased demand, and -- voila! -- we have our "secret weapon" for fighting unemployment, right?

Wrong.

It turns out that, just as Friedman predicted back then, price stickiness will only take that game so far.  Eventually businesses will respond to the jump in demand by raising prices, thus avoiding shortages that inevitably are the result of too-low a price (cough Nixon cough).  In other words, the Phillips Curve shifts outwards.  Surely anyone with any bit of common sense should've seen this coming.  When the Great Productivity Growth Slowdown, along with the oil shock, shook the US in the 1970s, the Phillips Curve turned out to be a crock of shit.

That's one reason for why I don't take Galbraith very seriously.  Paul Krugman is the man who called Galbraith on this in the 1990s, and Galbraith never did forgive him.  The only problem, for Galbraith, is that any college freshman taught by a faculty that makes even a half-assed effort can tell you this.  As Krugman article points out, -- and, for the record, I must confess to having stolen the above example from Krugman long ago -- Galbraith was also not a believer in the power of monetary policy, and I think the evidence points quite clearly to Galbraith being wrong on that.  (He can also hardly have considered himself a follower of Keynes while rejecting monetary policy.  Economic stimulation from the Fed is simply the other side of the same coin to deficit spending.  What separates the two is the fact that the former occurs in the private sector; the latter, in the public sector.)

Now, did Galbraith inspire many progressives thinkers?  Or perhaps the better question is, "Is there any doubt?"  I think the answer clearly that, yes, he did inspire many -- DeLong, Mankiw, (probably) Romer, and many other very famous economists of the modern era.  Was he a great writer?  I think he was a fair writer, although I don't think he held a candle to Keynes, as far as being witty is concerned.  But to greet Galbraith with less scepticism than "conventional economists" (whoever they are) is a fatal error and demonstrates an attraction to nothing more than writers who will reaffirm your settled prejudices.  And that, Robert, is sad.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jul 12th, 2006 at 03:04:27 PM EST
[ Parent ]
You have the makings of a great economist. Not seeing the faults of one's heros is always a good first step.

Policies not Politics
---- Daily Landscape
by rdf (robert.feinman@gmail.com) on Wed Jul 12th, 2006 at 03:45:19 PM EST
[ Parent ]
How I cherish such Galbraithian wit.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jul 12th, 2006 at 03:52:53 PM EST
[ Parent ]
And, further, an interesting remark coming in a thread about a book written when an economist noticing the faults of his heroes.

Oops....

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jul 12th, 2006 at 03:55:26 PM EST
[ Parent ]
Regarding wealth and happiness, a recent issue of Science has an article (for subscribers), Would You Be Happier If You Were Richer? A Focusing Illusion by Kahneman et al..
The abstract:
The belief that high income is associated with good mood is widespread but mostly illusory. People with above-average income are relatively satisfied with their lives but are barely happier than others in moment-to-moment experience, tend to be more tense, and do not spend more time in particularly enjoyable activities. Moreover, the effect of income on life satisfaction seems to be transient. We argue that people exaggerate the contribution of income to happiness because they focus, in part, on conventional achievements when evaluating their life or the lives of others.

And this particularly memorable paragraph:

Evidence for the focusing illusion comes from diverse lines of research. For example, Strack and colleagues (5) reported an experiment in which students were asked: (i) "How happy are you with your life in general?" and (ii) "How many dates did you have last month?" The correlation between the answers to these questions was -0.012 (not statistically different from 0) when they were asked in the preceding order, but the correlation rose to 0.66 when the order was reversed with another sample of students. The dating question evidently caused that aspect of life to become salient and its importance to be exaggerated when the respondents encountered the more general question about their happiness. Similar focusing effects were observed when attention was first called to respondents' marriage (6) or health (7). One conclusion from this research is that people do not know how happy or satisfied they are with their life in the way they know their height or telephone number. The answers to global life satisfaction questions are constructed only when asked (8), and are, therefore, susceptible to the focusing of attention on different aspects of life.

(Hurrah! for Kahneman and all his works.)

Words and ideas I offer here may be used freely and without attribution.
by technopolitical on Wed Jul 12th, 2006 at 11:49:40 AM EST
But, Miguel, is it not obvious that the answers in your poll follow necessarily in that order? ;)

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jul 12th, 2006 at 12:05:36 PM EST
Possibly not the last two, which were added as an afterthought.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 12:07:55 PM EST
[ Parent ]
I hope you are all paying attention...

from the Telegraph

'City faces meltdown if debt crisis hits'

The Bank of England is also increasingly concerned about the complex and risky financial instruments devised by banks and hedge funds, of which little is known.

The Bank is believed to feel that many institutions using these instruments, such as credit derivatives, are "sitting with their fingers crossed, hoping that the music doesn't stop"



You can't be me, I'm taken
by Sven Triloqvist on Wed Jul 12th, 2006 at 05:49:10 PM EST
Hedge funds don't devise exotic derivatives, but banks do, to trade "over the counter". I have seen exotic derivatives described as elaborate arketing scams.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Wed Jul 12th, 2006 at 05:54:22 PM EST
[ Parent ]
I tend to stick to the UTC markets ;-)

You can't be me, I'm taken
by Sven Triloqvist on Wed Jul 12th, 2006 at 05:59:13 PM EST
[ Parent ]


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