Sunday, October 14, 2012

Art Shipman — Epicuro Samos: "Forget Market Rules"

At Mike Norman's, Tom Hickey links to Andrew Sheng and Xiao Geng — Micro, Macro, Meso, and Meta Economics.
The New Arthurian Economics
Epicuro Samos: "Forget Market Rules"
Art Shipman

Art's post is largely a posting of a comment that distinguishes market rules from the economy, which is ruled by laws. While I agree that markets are dependent on economic factors rather than vice versa, I don't agree with the idea that economics is based on natural laws, at least any that that have been put forward so far in an explanation that has withstood the test of prediction very well as a theory.

It is tempting to say that economics is based on human behavior and therefore has a real basis in fact, i.e., what people do individually and in concert, whereas markets are largely subjective and based on participants' projections that may or may not turn out. There are two sides to every trade. If markets were "lawful," this would not be the case.

But what about economies. There are many ways that economies can be structured, and economic history is a record of some of them. Are there invariant functional relationships of independent and dependent variables that hold "economically" across the board? It does not seem so — anymore than there are laws that have been discovered that hold socially and politically. In fact, there is still still nothing like an agreed upon "normal" paradigm in psychology. So how could a claim that there be "laws" of human action be sustained?

Rather, several factors stand out as primary, such as culture, knowledge and skill, institutions, energy, and money, which may be viewed as more relevant than land, labor and capital. These factors can be combined in many ways and have been historically to yield different kinds of economies and different types within the kinds. Economic history is quite heterogeneous rather than homogenous, as it would be expected to be if law-like.

So I would say that circumstances dictate what options are available at any particular time and economies must hew to those opportunities and contraints that are given at any point in time. This presents a range of possibilities that can be achieved through particular policies, strategies and tactics, but the outcomes are uncertain since the future is unknowable when it involves complexity and reflexivity, for instance.

It seems to me that as practiced economics is both a theoretical enterprise and also a policy endeavor, and that sometimes these are conflated. This can be compared to the quest of physics for a "theory of everything" and the task of engineering to create systems that get the job done that they were designed to do. 

Physicists and engineers don't conflate these. Theoretical physicists are not found found inserting themselves into engineering design and decision-making. Biologists and physiologists don't practice medicine as an adjunct of their discipline. Nor do engineers and physicians just make it up as they go along. They are cognizant of developments relevant to the field. 

However, in economics, there are economists who are chiefly theorizers and policymakers who are politicians with little or no knowledge of economics. Disconnect. As a result people who are primarily theoreticians are consulted about policy formulation and asked to put on the hat of a social and political engineer. What could possibly go wrong?

While it would be nice to know "everything" — and admittedly the quest for more comprehensive knowledge has spun off useful discoveries and inventions — modern civilization is built on engineering successes achieved incrementally by people experience in applying the methodology of engineering in addition to being grounded in the scientific field in which they are working. Economists and policymakers take note. Economies are either labs nor playgrounds.

I find it interesting that there are engineering schools and engineering degrees and a highly developed engineering profession. Economics and policymaking. Not so much. And it shows.

26 comments:

The Arthurian said...

While writing the "Epicuro" post, I was remembering a discussion you and I had Tom, some time back at Heteconomist. Looks like you remembered it, too.

Here's a "law" for ya: Wealth accumulates.

paul meli said...

"Here's a "law" for ya: Wealth accumulates."

Actually that is one of the fundamental properties of a capitalist economy.

From that one can formulate a pretty strong rationale for progressive taxation and deficit spending, demonstrate why businesses cannot possibly create jobs and also why consumer debt is unsustainable.

In very simple terms.

Tom Hickey said...

I would call that "wealth accumulates a "rule" instead of a "law." This is important for this discussion because many economists presume that there are laws of economics that establish the parameters of an "ideal" economy to which all actual economies approximate, just as all planetary systems in this universe conform to the laws of planetary motion. I think this is a grave mistake, in that it prevents economists from seeing what is actually happening.

There is a huge difference between law-like behavior and rules-based behavior. Laws are expressions of universally applicable invariance whereas rules are context-dependent and serve as norms, values, and procedures within a type of system, such as modern financial capitalism, which the rules are somewhat different from what they were in 18th century industrial capitalism, which was still operating in a feudal-mercantilist-colonial framework and the US was just a blip on the screen. Now the world is transitioning away from nation states toward a global capitalism dominated by multinational corporations and global finance within the context, with the American empire dominant instead of the British empire.

But there is a strong narrative to the effect that Adam Smith discovered the fundamental laws of economics that were later formalized by the neoclassical economists, and everyone should just get on board with this. Institutionalists disagree with this. Rules shift over time and many rules can be altered by taking decisions to do so.

Matt Franko said...

" and also why consumer debt is unsustainable."

Do you think that this is ultimately what Keen is trying to prove mathematically?

rsp,

Tom Hickey said...

@ Matt

Yes. Definitely.

paul meli said...
This comment has been removed by the author.
The Arthurian said...

"Here's a "law" for ya: Wealth accumulates."
Actually that is one of the fundamental properties of a capitalist economy.


Yes, in our few hundred years, it is a fundamental property of the system we have in place.

But human nature remains unchanged under postmodern multinational capitalism and modern financial capitalism and 18th century industrial capitalism and mercantilism and feudalism and the dark age before all that, and the dark age after. And the civilization before, and the civilizartion after. Human nature remains unchanged.

Wealth accumulates because of what Adam Smith called "self-interest".

paul meli said...

"I would call that "wealth accumulates a "rule" instead of a "law.""

I agree with this. It's not a "law" that wealth accumulates, the rich can always behave differently and choose to give it away instead. Not likely though. I suppose we could say human behavior "causes" the wealth to accumulate (hoarding, for whatever reason).

Once that is established, the mathematical reality is established until some external action changes it.

Tom Hickey said...

Wealth accumulates because of what Adam Smith called "self-interest".

Another myth, and the basis of the neoliberal myth. Wealth accumulates due to collusion of the privileged, until they either destroy the economy due to overreach, or loose their privilege through either some shock, like being conquered, or a domestic revolt. If there is a historical "law," it is that "everything changes."

Tom Hickey said...

Wealth accumulates where it does in any society, if it does, due to the institutional structure of the society. Institutional arrangements are rule-based rather than law-like. Those rules change historically.

paul meli said...

"Wealth accumulates because of what Adam Smith called "self-interest"."

You posted while I was writing, but…

Whatever human behavior "causes" wealth accumulation we agree that the behavior is established.

After that it's a pretty simple math problem.

The Arthurian said...

Wealth accumulates where it does in any society, if it does, due to the institutional structure of the society. Institutional arrangements are rule-based rather than law-like. Those rules change historically.

sure, but those rules always serve the law.

paul I think I agree with that.

paul meli said...

"Do you think that this is ultimately what Keen is trying to prove mathematically?"

Matt,

This is something I've been working on:

https://www.evernote.com/shard/s82/sh/a595a830-a21b-4917-89ac-1b9d4764999d/407c1d79b7df9a1e13d9e488271d391f

Seems a lot simpler to illustrate than Keen's approach but then I'm not sure what he's trying to show.

Tom Hickey said...

sure, but those rules always serve the law

I would says that if a scientific law is to be found wrt human behavior it will be in biology, e.g., evolutionary theory, not pop philosophy or economic "theorizing" aka assumptions.

Tom Hickey said...

Seems a lot simpler to illustrate than Keen's approach but then I'm not sure what he's trying to show.

He is attempting to formalize Minsky.

paul meli said...

"He is attempting to formalize Minsky."

I will have to take your word for it because although I have seen the name mentioned gazillions of times in MMT discussions I know nothing of his work.

Anyway I believe in a lot of ways the "view from Mars" can be a useful approach and I look at economic problems from that perspective. There are many different strategies possible for solving a problem.

Hopefully they all converge on the same conclusion.

Tom Hickey said...

Hyman Minsky, Financial Instability Hypothesis

paul meli said...

Tom, thanks. I'll give it a go.

Tom Hickey said...

Whatever human behavior "causes" wealth accumulation

Wealth means net worth. Net worth is financial assets plus real assets. Historically, financial assets accumulate through economic rent, and real assets through enclosure and privilege. Generally "privilege" involves the ruling elite using the power of the state. For this reason,

Libertarians and social anarchists want to reduce or eliminate the power of the state to be used by the privileged. The way between these extremes of right and left is to institute good government, but even if good government is instituted it can be corrupted.

There are no simple or obvious answers to the issues involved, e.g., functions relating variables that can be controlled. Different systems can be designed and perhaps implemented but maintaing them over time is also an issue.One big problem is that there are no historical examples of this every having been even seriously tried on any scale, let along on the scale of the contemporary economy.

What we see instead is running battles with different groups emerging victorious, either absolutely or proportionally, and determining the rules (institutions) accordingly.

As a result, social, political and economic structures are ever in flux, with different distributional effects. It's not a single economy running iaw fixed laws that just changes in terms of the individuals successful in it.

Anonymous said...

Wealth accumulate because we live in a capitalist economy in which those with ownership claims on the means of production are able to use those legally protected powers to determine for themselves what share of the output of the productive enterprises they will keep. The chief theorists of capitalism argued that we have to permit these liberal arrangements, because only under such arrangements will producers and entrepreneurs have the proper incentives to organize the new productive enterprises that promote industry and lead to material progress.

I don't think we can separate the accumulation of financial assets from the accumulation of real assets. A financial asset is a legally binding entitlement to a flow of money, and money is a purchasing claim on real goods or services. Real goods are constantly sold for money, and the money is then sent to those with financial claims on the money. They can of course then use the money to buy other things - consumption goods or further fixed investment goods used in more production. Or they can simply save their claims and deploy them later.

This process was all supposed to be disciplined by competition, so that owners who got to greedy in the amount of the productive surplus they retain for themselves would be outcompeted by those who retain less and are therefore able to provide the same products at a lower per unit cost. But both historical experience and a huge economics literature on market failure show that these competitive mechanisms are sufficient to prevent gross inequalities in wealth, and the inequalities themselves then provide the wealthy with both monopoly power in the economy which further undermines competitive constraints and political power in the arena of government.

Anonymous said...

But both historical experience and a huge economics literature on market failure show that these competitive mechanisms are sufficient to prevent gross inequalities in wealth,

should be:

But both historical experience and a huge economics literature on market failure show that these competitive mechanisms are insufficient to prevent gross inequalities in wealth,

Matt Franko said...

Good graph Paul...

My suggestion: have the govt pay the interest part to the bank lender as principle payments are made (1% max and fixed)... that way at least it is not 10 dogs after 8 bones...

rsp,

Unknown said...

cool graph Paul

paul meli said...

"I don't think we can separate the accumulation of financial assets from the accumulation of real assets."

True statement.

The value of most real assets is contingent upon financial assets being in the hands of wage-earners and some level of spending.

Walmarts business model will not do well if it has to sell into the 0.1%.

The value of residential real-estate will decline if the number of potential buyers declines.

The "value" of a real asset isn't "real" until one buys it. That takes a willing and able buyer. Prices are set this way but everyone (or even a significant subset) can't realize the value of their real assets at once.

Trying to do so would drive prices, and thus value down, because there isn't enough money in existence to buy them. It would be the equivalent of excess inventory.

Tom Hickey said...

Grave error not to see the fundamental difference between the financial and the non-financial. Acquisitors know it well and are interested in controlling real assets. Financial assets are just one means for doing this. Historically, most of this has been accomplished through title and law rather that purchase. Purchase without law and title is powerless in acquisition.

paul meli said...

Tom.

Been reading the paper you linked to. Saw this:

"In a more complex (though still highly abstract) structure, aggregate profits equal aggregate investment plus the government deficit." - pgs 5-6

Leads me to believe I'm on the right track.