You know, in physics you can't get a Nobel prize for theory unless the theory has been confirmed experimentally. Which is why 't Hooft and Veltman had to wait nearly 30 years for theirs, for instance.

The brainless should not be in banking. — Willem Buiter

Right.

NYTimes.com: Economists question dominance of free-market ideas (July 11, 2007)

"There is much too much ideology," said Alan Blinder, a professor at Princeton and a former vice chairman of the Federal Reserve Board. Economics, he added, is "often a triumph of theory over fact."

...

And free trade is not the only sacred subject, Blinder and other like-minded economists say. Most efforts to intervene in the markets - like setting a minimum wage, instituting industrial policy or regulating prices - are viewed askance by mainstream economists, as are analyses that do not rely on mathematical modeling.

That attitude, the critics argue, has seriously harmed the discipline, suppressing original, creative thinking and distorting policy debates.

There is always a tradeoff between modelling a process correctly (ie without missing variables, entirely in terms of what has actually been observed and nothing else) and adapting an off the shelf model while hoping it will work out.

The reality is that the substantial effort required to model a process from scratch is not justified in nearly all cases. The few standard (statistical and physical) models that were developed from scratch since the Renaissance have been reused and extended many times, to the point that the cost of using them is merely a few years of university education.

--
$E(X_t|F_s) = X_s,\quad t > s$

Seen from the perspective of an anthropologist and a historian, the history of the field of economics has been one of a long flight from the complexity of reality into a warm numerical cocoon of fantasy.

We don't understand why people do things?  Let's just pretend that all people try to maximize their utility.  We can't model asymmetrical information in an adversarial market situation?  Let's pretend everybody knows everything.

The fact that these models and this way of thinking encouraged people to look away from the structural problems causing poverty, to look away from gluttonous parasitism at the top, to look away from the role of hierarchy and power in defining the market situation, was merely a bonus.  It's so much easier to just blame poor people for failing to maximize their utility.

In economics, like all social sciences, the unobservables are usually things that theoretically can never be observed but are presumed to exist based on thinking about the world in socially and existentially relevant ways.

A theory that is constructed based on what can be identified as unobservables that can never be observed but are presumed to exist ... is a theory that has been constructed blithely ignoring the institutionalist critique.

And then you continue to pander to the mainstream economists pretense that their's is the only approach with which to study economics by identifying the incorporation of the critique with a field of study rather than an approach to a field of study.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

At heart, you have risks, and you have rewards, and these can be improperly assessed, and unfairly allocated, under any system.

Ultimately, it depends on incentives, social and monetary. If you can make a lot of money gaming the system, and this is seen as "success", then you will game the system, however well it is designed.

My job as a banker, on any project, is to try to outthink the people that will try to game the system, and put contractual safeguards so that they can't do it. It can also mean, simply, choosing to not work with some people because, no matter what safeguards you put, if they are in bad faith they will always find a way to fleece you - or try hard enough that you waste a lot of resources preventing them from doing it.

Just like there are no manthematical models that give you an exact number on what risks you are taking in a project, there is no legal framework that will protect you against human nature.

Thus the need for bankers, exercising judgement and able to understand what the underlying project hypotheses are and to evaluate them. It's, fundamentally, a qualitative job, not a quantitative one.

In the long run, we're all dead. John Maynard Keynes

Value added is different.

Human capital is an unobservable characteristic representing something foregone in the present in expectation of a return later.

Aha. "Something foregone in the present in expectation of a return later": Opportunity cost is an event that has not occurred, ergo unobservable; and the universe of alternative transactions of equivalent value to the transaction which has occurred are innumerable.

Profit is an event that occurs and is measurable; it is the mathematical difference between transaction price and total production cost. Explanations of value-added calculation are legion, like satan, precisely because "profit" is an expression of human preference and ignorance.

"Human capital" is one means, skills and abilities, in particular or combination. One's means are observable in everything one does and in comparison to the performance of another. So, no, human capital is not unobservable. Ubiquitous though the phrase is today, I would argue, the urge to objectify idiosyncratic traits is antisocial behavior, predicated by intense competition among people for a limited number of wage labor opportunities.  But the greater difficulty for capitalists is assigning a monetary value to an activity per se --sex, for example-- that is easily replicated and transferable between people.

Value added is merely the present additional production attached to a commodity for the purpose of sale.

No. "Value-added" is an expression of "quality" --which is a characteristic of the perceived value of every good and service available for sale. I thought you had recognized that microeconomic SAW in your comments above.

education, networking, beauty enhancement, physical training, milk baths, whatever

Your hypothetical value chain (in your words, "quality improvements" or  CapEx capital improvements "capital investments) of prostitution is an apt expression of cost structure underlying a fee-for-service business model. You just refuse to demonstrate productivity as a function of profitability. To do that, you'd have to postulate cost of a prostitute's capital apart from "physical" characteristics and rudimentary skill.

"Present additional production" is a peculiar turn of phrase. I take it to represent either surplus inventory or excess capacity (unrealized inventory), an estimate of which purportedly discounts "fair market" valuation of quantity available for sale at a given point in time ("attached to a commodity for the purpose of sale"). One cannot deduce from aggregate data nor is such expectation of market behavior given as a rule of theoretical economics.

See, surplus is a macroeconomic bug bear. It's the recurring terror of price equilibrium and "efficiency" that disproves the so-called Law of Supply and Demand,  where price (P) ∩ Q = S ∩ D = R = P x Q, the invidious value assumption is P = C, a nonprofit condition that no self-respecting capitalist will either pursue or tolerate.

Profit (p) is of course surplus value component of P at every point on the supply chain (S) that guarantees p > R - C prevails, irrespective of Q. If p = 0, P = C. If p < 0, R <  C -- price paid for production inputs is unrecoverable. As many have noticed recently, producers will continue operating anyway.

The epic intellectual failure to reconcile reality and symbol has given rise to exercises such as decomposition, econometric computing, and behavioral economic modeling to construct some multivariate expresion of D or "what the market will bear"  in terms of preference, incentive, skill, knowledge, --asymetric and perishable  information, etc) to justify stochastic output volume (sometimes price, sometimes unit "level").

Productivity measures profit, or profitability, which is the objective of a capitalist enterprise. Q is not the object of the productivity evaluation, it's one term of the production function which is to generate profit.

Total annual value-added, for example, is another term for GDP,

GDP is price of all transactions --total revenue (R).  Profit (synonyms are "mark-up" or "opportunity cost" or "interest" or "premium" or "risk"), and cumulative costs, including but not limited to cumulative cost of money  are components of total revenue. Last I heard. C, I, G are fundamentally the same activity, transaction. X-M is a gross approximation of Inflation (money supply in circulation), a rate describing net present value of so-called national current account cash flow. I guess.

while human capital, like all capital,

Human capital engrosses classes of labor attributable to homo sapiens. The other class of labor is mechanical, a/k/a "plant and equipment," or real capital including "energy". At firm level, "value-added" and "quality" are yoked to price and brand differentiation among competitors within an industry sector selling similar commodities, substitutes.  See wiki primer.

labor, and land are not part of any income accounting

Absolutely incorrect. Firstly, cost of labor (salary and wages, or "general administration") is a component of OPERATING COST in every P&L statement. In so-called knowledge-intensive sectors, employee compensation approximates employee "capital" expropriated for exclusive employer use and resale. That is mark-up fee-for-service or premium "attached to" stock produced.

Second, P&E (plant and equipment) is a component of ASSETS in every Balance Sheet statement. GAAP requires DEPRECIATION, AMORTIZATION applicable to such assets be reported in the P&L statement. More interesting is GAAP recognition and reporting of GOODWILL, an entirely intangible asset valuation attributed to profit (loss) and premium paid on transaction and, ultimately, to cumulative "human capital" of the ongoing concern. Further, some companies have developed elaborate "intellectual asset management" accounting techniques to quantify, cultivate, and appropriate "know-how" of internal business activities.

because they are not really commodities until they, or part of them, are actually exchanged for something.

You're grasping.

And I gotta go to soccer.

Diversity is the key to economic and political evolution.