posted
AS I said earlier, I don't think that Republicans have a monopoly on some of this behavior, I am really not a big fan of either party. However, as I stated earlier a lot of "blue states" simply deliver better services then "red states". That and Virginia is an odd beast that is fueled by NOVA ( Northern Virginia). It also does not hurt that Virginia has excellent public universities and policy within those systems that promotes keeping smart Virginians in Virginia graduate programs.
That and you would be off the wall silly to not see what reconstruction and the Civil War did to the South. It did not help that they most of the South's GDP came from agriculture.
That and I'm not a proponent for the Democrats, or even really "for" blue states. I just think it is fairly obvious that states that deliver more and better state services tend to have wealthier better off people. Those states tend to all be blue states, just look at the wealthiest per-capita states etc.
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quote:I just think it is fairly obvious that states that deliver more and better state services tend to have wealthier better off people.
Both not true, and in the slight way it might be true, you have the causation reversed.
You are welcome to your opinion about it, but none of what you just said should be taken as a given. It isn't. For one thing, you are claiming that blue states are better because the government provides more services. But that doesn't make them better, automatically - it makes them blue. That's why they are blue states - the people there vote for the government to do more and provide more. Those services aren't costless - if they were, why not have the government provide everything? Because there is a cost associated, and looking at the services without acknowledging what is lost is missing the picture.
Maybe if taxes weren't so high, driving up prices and driving away businesses, so many services wouldn't be needed. It is a complex issue without pat answers.
So what you are doing are claiming that blue = better and then trying to make the point that the red states are obviously inferior because they aren't blue.
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I thought that red states spent more money on services than blue states (cause more poor). Don't know what the numbers are on things like education and stuff though.
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idk. overall across all economic demographics, I recall that red states tend to be worse at educating their kids though. i.e., a school district in a red state will generally do poorer at educating than a school district in a blue state, even assuming equal economic status between the two. i do not know if this accounts for things like ESL student population though.
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Katharina, I'm not trying to argue the causation of the matter, simply stating an observation. I really do not have anything personal against "red states" other than a general belief that I have often seen and heard people from those states say that things would be fine for them if it was not for the federal government etc. Obviously that does not meant "all" red staters as it would be rather impossible for me to meet all of them.
Scholaratte, it might be true that some red states spend a larger percentage of their budget on welfare, however services do not equate o welfare. The state provides services in terms of infrastructure ( obviously with assistance from the federal government ), law enforcement, education, etc.
That and when you look at the top states for eduction in terms of college graduates, high performing universities, test scores, high school graduation rates. Well, you're pretty much looking at all blue states and "moderate" states.
That and my initial statement had little to do with blue state is better than red state. It was simply that I was tired of the general opinion from red states that it was somehow the federal government's fault for all their problems.
Government is not the answer to all problems, but neither is it the generator of all the problems. Conservatives tend to say things like government is bad, but police and the military are good ( this is just one obvious example ). Which misses the point that those are government! Conservatives equate a "small" government to being one with a small portion of GDP, but as a conservative I see "small" government as one that allows me to be me. However, that does not mean that the government cannot tell me what I can and cannot do, as that is pretty much the definition of law.
That and low taxes are wonderful, but they also reduce from services required for commerce. Also Republicans ( Democrats too ) have a long history of giving out lots of tax credits but not "spending" a lot. The problem of course is that getting $1000 tax credit is just as bad as spending an extre $1000.
All that means is that I feel a lot of Republicans have wanted to have their cake and eat it too. In a nut shell, as a conservative I want a new party that recognizes conservative values and is free from the religious right and the old Republican party machine.
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if you want a new party, you actually stand a pretty decent chance of getting one in your lifetime. The G.O.P. in its present incarnation is doomed, and will either be replaced or (more likely) stripped to its core and rebuilt radically.
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quote:All that means is that I feel a lot of Republicans have wanted to have their cake and eat it too.
Everybody seems to want that at present, it seems. The debate is now about not whether to cut taxes, but how best to cut them, even during expensive wars.
I suppose there's a good-sounding Keynesian argument that says now is the time for some deficit spending. But something tells me there'd be talk of tax cuts even if times were good.
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quote: I thought that red states spent more money on services than blue states (cause more poor). Don't know what the numbers are on things like education and stuff though.
quote: I recall that red states tend to be worse at educating their kids though. i.e., a school district in a red state will generally do poorer at educating than a school district in a blue state, even assuming equal economic status between the two. i do not know if this accounts for things like ESL student population though.
I live in Utah. I don't have the numbers so correct me if I am wrong, but it is knowledge taken for granted here that we spend a higher percentage of our budget for education then most states. However, since we also have more kids then most states, the ratio of dollar/kid is much lower then most states.
It is not so much that we spend more and get inferior results, but rather that demographics stretch out the dollar more then blue states.
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quote:Originally posted by Destineer: ... I suppose there's a good-sounding Keynesian argument that says now is the time for some deficit spending. But something tells me there'd be talk of tax cuts even if times were good.
Here's one.
quote:In early 2009, the IMF estimated the size of stimulus programs (pdf) in G20 countries: ... in the face of the crisis, Germany’s actions were very different from its rhetoric; it was pretty Keynesian in the crunch. I have no idea what was going on in Russia. But the main point here is that Korea and China both engaged in much more aggressive stimulus than any Western nation — and it has worked out well.
Part of the reason Asians felt empowered to do this was the fact that during the good years they did what you’re supposed to do. Keynesian economics is often caricatured as a policy of deficit spending always; but as I’ve tried to explain, deficit spending is what you should do only when the economy is depressed and interest rates are at or near the zero lower bound.
During the worst of the global financial meltdown, Berlin pumped tens of billions of euros into the economy and spent hundreds of billions propping up German banks. Now, the country is reaping the benefits as Germany is once again Europe's economic motor.
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General success? Nobody who could run the numbers was doubting that major governments with semi-credible economic control going a bunch into debt and spending a lot of money would make their economies look better. The doubt was over whether the incredible long-term pain of paying off that debt would end up being worth it.
For instance, the article you linked was just a few days before recent news about the European banks' "stress test" -- that showed the stress test was way, way too weak, meaning that among the banks that passed, there are almost certainly a number of them, ones with political clout, that are in deep trouble. After all, other stress tests had recently been run, so the only reason for Europe to go with a weaker test would have been an attempt to sweep some problems under the rug.
The US economy was, after all, giving similar rosy GDP growth predictions just a few months ago, if you recall.
On another note, China was being Keynesian, before? That's just nonsense. The government kept putting into place policies that were supposed to control the runaway growth, yes, but the fundamental policies driving those insane levels of growth were made by the same government. Entire cities have been built that nobody lives in! The rate of non-performance of corporate finance related to the Chinese stimulus, even right now in a time of economic growth (and in China that growth is more real than in Germany) is being estimated at over 30%! Rhetoric like that is just Krugman being wrong about China, like he frequently is.
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quote:if you want a new party, you actually stand a pretty decent chance of getting one in your lifetime. The G.O.P. in its present incarnation is doomed, and will either be replaced or (more likely) stripped to its core and rebuilt radically.
What's its core? Family values? Small gov? Something else?
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quote:Nobody who could run the numbers was doubting that major governments with semi-credible economic control going a bunch into debt and spending a lot of money would make their economies look better. The doubt was over whether the incredible long-term pain of paying off that debt would end up being worth it.
I often doubt whether it will need to be paid off. Jamie Galbraith seems to me to have a point: money is nothing but paper and promises, so why not just write a few checks out of thin air whenever needed?
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quote:I often doubt whether it will need to be paid off. Jamie Galbraith seems to me to have a point: money is nothing but paper and promises, so why not just write a few checks out of thin air whenever needed?
Because it isn't just paper and promises. It is a proxy for other things, and when the dynamics of money do not match well with the dynamics of those other things, the resulting imbalances can wreak incredible havoc upon economies -- that is, they cause suffering for numerous individual people. Take a look at the countries that have tried to print their way out of economic problems in the past (and present!). The extreme is inflation that completely shuts down the "real economy" in favor of underground black markets. And while that is an extreme, it is an extreme governments keep going to -- the lesson is hardly so well-learned, and the extreme is hardly too extreme to be realistic! But even before the extreme, you have situations like Greece, where a country is so willing to rampantly borrow money (using either fiscal or monetary means -- in Greece's case, they had no real access to monetary borrowing, so they went with fiscal borrowing) that people (including its own citizens) become increasingly reluctant to lend to it. And that lending is absolutely necessary: there have been countries that have somewhat recovered from such crises through default, but been unable to drive economic growth (that is, make people better able to afford minor things like food and shelter) until they have made credible steps to show they were unlikely to default again (at least for a while).
If you don't buy that argument (though you should), there's a much simpler reason: most of the money the US owes, it owes to itself (meaning: Social Security) or US citizens. If the US government starts defaulting or heavily inflating away its debt, US citizens become much, much worse off. That's a stupid policy, any way you slice it.
And if you're a fan of Krugman, he thinks Galbraith's position is stupid, too
Or, as another example, Galbraith asserts the Japanese government has had no problem funding itself despite high deficits. On the contrary, the Japanese government is having serious problems selling bonds -- so much that it is trying to assert bond-purchasing is sexy. He's divorced from reality. The only thing keeping Japan in the game is cultural norms for high savings that it is desperately trying to shore up -- but must necessarily come crashing down as the aging population starts cashing in to pay for retirement.
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What you're saying makes sense, at least at the level I'm able to comprehend it. But I'm sure those who disagree would have equally persuasive answers.
Economics is too hard for me to understand, and I get the feeling from watching them that economists aren't much better at understanding it. Mostly I try to find the scholars who are making the least unrealistic (i.e. most pessimistic) assumptions about how rationally people behave in an economy, and then tentatively take their word for it.
One thing I don't believe for a second is that markets naturally tend toward optimum or nearly optimum efficiency. Or that there is such a thing as an economic "state of nature" that deserves the benefit of the doubt as opposed to more "artificial/hands-on" ways of constructing a market.
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quote:Originally posted by Destineer: ... I get the feeling from watching them that economists aren't much better at understanding it.
++
quote:Originally posted by fugu13: ... Rhetoric like that is just Krugman being wrong about China, like he frequently is.
Wrong or right, I would quickly note that the rhetoric itself is mostly paraphrased from David Pilling's column, "Asia’s Keynesians take pride in prudence" as the Asia editor of the Financial Times.
quote:But I'm sure those who disagree would have equally persuasive answers.
Not really. James Galbraith's position is pretty much entirely discredited, and as I point out, specific examples of his to support his position can be shown to be very untrue.
quote:Economics is too hard for me to understand, and I get the feeling from watching them that economists aren't much better at understanding it.
Depends on what we're talking about when we're talking about economics. The macro-economy, pretty definitely. Micro-economy, we've got a pretty good hand on. Even in the macro-economy, we're remarkably good on what matters long term. Unfortunately, most of what matters for politics is what happens short term. Also, there are many things we do know quite a bit about. For instance, we have pretty much conclusive proof that attempting to inflate one's way out of debt leads to runaway inflation that ruins the economy. There are plenty of examples of that happening. That alone makes Galbraith's position that it doesn't matter how much money the government prints ludicrous.
quote:Mostly I try to find the scholars who are making the least unrealistic (i.e. most pessimistic) assumptions about how rationally people behave in an economy, and then tentatively take their word for it.
Galbraith's assumption is that no matter how much money the government prints, someone will always buy its debt. In other words, he's assuming completely irrational (and, see above, counterfactual) behavior.
quote:One thing I don't believe for a second is that markets naturally tend toward optimum or nearly optimum efficiency.
You don't even believe they tend towards it? This has been studied quite a bit in markets of all sorts. For instance, take the stock market: if the stock market is not efficient, there is some near-sure way to make money by playing it (that's a necessary implication of lack of economic efficiency). Needless to say, such a way does not exist. Numerous other markets for products have been studied extensively, and many of them also exhibit characteristics that only exist when near-perfect efficiency exists. For instance, prices are generally just a tiny bit above break-even, in just about every consumer product you care to name.
It is important to keep in mind that you might be misunderstanding what an economist means by efficiency. In economics, efficiency doesn't mean goods are produced in a way that keeps waste to an absolute minimum; it means, given the means of producing goods available to firms (this includes business practices and all the human foibles for making things), and the amount customers are interested in the good in relation to their interest in everything else, the price set for goods will be at a level that leads to the most net welfare (note: not money, though in many cases that makes a good proxy) for the combination of the producers and the consumers.
While the assumptions that are required for there to be perfect efficiency are known to be wrong, serious economic models haven't been built based on those assumptions for many decades.
quote:Or that there is such a thing as an economic "state of nature" that deserves the benefit of the doubt as opposed to more "artificial/hands-on" ways of constructing a market.
I think you'll find that pretty much all the major economics thinkers are very aware that economies are constructed. That's why they have such an interest in economies being constructed in ways that make the most people the most better off, by studying the ways they work.
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Mucus: I have a lot of respect for David Pilling, and it is definitely true that China saved up a lot of cash, but I disagree pretty strongly with him on this point (though I'll freely admit there's a lot of debate -- while I often disagree with Krugman, he's rarely outside the realm of honest disagreement, unlike Galbraith). Certainly many parts of China's economy are going gangbusters, but the property bubble, even with the higher down payments, is very, very serious (I should point out that the property bubble is a near-mirror for Japan's, including the higher down payments, and that one didn't work out so well), and the extremely low rate of successful repayment (especially given how well many parts of the economy are doing) for recent stimulus loans is very worrying.
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This is interesting stuff, although I don't think I'll be able to really fully engage with it. I suppose my general position is just one of skepticism about any social science. I mean, when I hear a physicist say something is conclusively proven, I get skeptical, especially if another physicist in a major US department disagrees.
One thing I've seen Galbraith say (that I like) is that the good that can be served through government spending on entitlements is much more easy to predict than the long-term impact of that spending on the market. This seems like exactly the way to reason when working with what appears to an outsider like me to be an early-stage, unreliable science.
quote:For instance, we have pretty much conclusive proof that attempting to inflate one's way out of debt leads to runaway inflation that ruins the economy. There are plenty of examples of that happening. That alone makes Galbraith's position that it doesn't matter how much money the government prints ludicrous.
Is it really so well established that printing money invariably leads to runaway inflation? It has historically when the nation printing the money is otherwise in pretty poor shape compared with other nations. On the other hand I'm not sure we have much evidence that large deficits lead to runaway inflation in a strongly positioned country like the present-day United States.
I mean, deficits are extremely high and interest rates extremely low right now. Isn't that rather hard to account for on the standard picture of the risk that comes with deficit spending?
quote:Galbraith's assumption is that no matter how much money the government prints, someone will always buy its debt. In other words, he's assuming completely irrational (and, see above, counterfactual) behavior.
Really? My impression of the view is that he doesn't believe it's necessary for anyone to buy bonds in order for the government to create money.
quote:You don't even believe they tend towards it? This has been studied quite a bit in markets of all sorts. For instance, take the stock market: if the stock market is not efficient, there is some near-sure way to make money by playing it (that's a necessary implication of lack of economic efficiency). Needless to say, such a way does not exist.
By "near-sure," you mean certain to work if someone knows the right game to play (the way a Dutch bookie is sure to make money). Right?
If that's what you mean, I'd be surprised if there weren't at least one and perhaps a number of near-sure ways to make money off the present stock market. It could just be that these perfect opportunities are impossibly hard to detect in practice given human capabilities.
In other words, do I think an omniscient super-being could find a sure way to make money off our present-day stock market? Very likely.
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quote:Is it really so well established that printing money invariably leads to runaway inflation?
Large amounts of money? Yes. Even fairly well-off economies have been sent into spirals of inflation due to bad monetary policy. Mexico has been a good example (take a look at their GDP per capita before you dispute with "fairly well-off") at several times, as have a variety of other countries.
quote:I mean, deficits are extremely high and interest rates extremely low right now. Isn't that rather hard to account for on the standard picture of the risk that comes with deficit spending?
No, because other assets are riskier. Prices are set based on relative, not absolute, riskiness. Furthermore, what matters more than deficit is debt, and US levels of deficit are only coming onto par with a lot of the world just now -- our debt levels are still quite low compared to many nations. Combine that with the other sources of US long term strength and you can see why bonds backed by the government of the US would be assessed as among the most low-risk assets out there.
quote:Really? My impression of the view is that he doesn't believe it's necessary for anyone to buy bonds in order for the government to create money.
To quote:
quote:What people worry about is that the federal government won't be able to sell bonds. But there can never be a problem for the federal government selling bonds. It goes the other way. The government's spending creates the bank's demand for bonds, because they want a higher return on the money that the government is putting into the economy.
As I said, counterfactual and assuming irrationality.
quote:In other words, do I think an omniscient super-being could find a sure way to make money off our present-day stock market? Very likely.
The question is whether there is ever a situation where a person without information about the future (or things unknowable, or really anything that's less known than semi-public things -- of course someone who knows about a major deal happening no one else is aware of can make money) could make money off the stock market, not whether an omniscient super-being could. This has been studied in quite a bit of depth, and no one has ever found a way. Indeed, whenever someone comes close to finding a way, that, by nature, closes the way. Note: the strong form of the EMH is, I think, misguided. I am only supporting the weak form, and not even fully that. I think it is possible to make money above average playing the stock market, just not generally any more money than could be made expending a similar amount of effort in another field. I consider the evidence fairly straightforward: despite the huge amount of ingenuity spent on playing the stock market, nobody does make more than that, under reasonable distributional assumptions, except insofar as they're able to change the behavior of companies by gaining sufficient shares.
You might find it interesting to know that one of the few classes of human able to do fairly consistently better than average is members of Congress (who are effectively exempt from insider trading restrictions). Coincidentally, they almost always make money in areas related to their Congressional responsibilities.
Also, you should consider the price evidence I mentioned after the stock market. Efficient markets are ones where the cost to produce things is just about equal to the prices set for those things -- that is, producers make no more than a small profit as a percentage. This is true of by far most things in stores (and can be verified from the other end by looking at the profit margins of large businesses -- they're rarely more than a couple percent, averaged over several years); if there is no tendency towards efficiency, why is that true?
Posts: 15770 | Registered: Dec 2001
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quote:One thing I've seen Galbraith say (that I like) is that the good that can be served through government spending on entitlements is much more easy to predict than the long-term impact of that spending on the market.
If only. Economists might not be the best at predicting, but they can be fairly exact at measuring costs, and a lot of entitlements create far more harm than they do good. That isn't necessarily a bad thing, provided the good they're doing is concentrated among people who need it, and the harm is reserved as much as possible to people who can stand a bit, I think, but that's rarely the case. More usually the good is concentrated among people who are already quite well off, and hurt the people who need more hurt the least. Most farm subsidies fall into this category -- milk and sugar are excellent examples. Government support for ethanol caused problems for the poor worldwide, while helping a small number of rich corn farmers. I can go on and on, if you like. In other words, politicians are really, really bad at reacting to the good or harm of entitlements, even when an entitlement has been known to be very harmful to people for many decades.
I do agree that some things are worth a decrease in efficiency. I am strongly against misery, and as I have stated numerous times on this board, support very large cash subsidies to the poor, likely in the form of a reverse income tax that ensures a minimal income, then tapers off at a discounted proportion of earned income. The results would be inefficient, but I think they would be worth it in the reduction in misery, due to targeting the single largest cause of misery: not having enough money to pay for housing, food, basic education, and other fundamental needs.
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quote:Large amounts of money? Yes. Even fairly well-off economies have been sent into spirals of inflation due to bad monetary policy. Mexico has been a good example (take a look at their GDP per capita before you dispute with "fairly well-off") at several times, as have a variety of other countries.
The idea I was trying to get at is that the US might in some sense be "too big to fail." In other words, if our creditors were to stop facilitating our borrowing, they themselves would inevitably make things much harder for themselves. That's never been true of Mexico.
quote:To quote:
quote: -------------------------------------------------------------------------------- What people worry about is that the federal government won't be able to sell bonds. But there can never be a problem for the federal government selling bonds. It goes the other way. The government's spending creates the bank's demand for bonds, because they want a higher return on the money that the government is putting into the economy. http://voices.washingtonpost.com/ezra-klein/2010/05/galbraith_the_danger_posed_by.html
As I said, counterfactual and assuming irrationality.
It does seem unlikely that he could be correct that there is absolutely no risk of undesirably high interest rates. His position strikes me as too inflexibly radical to be entirely true. That said, I don't see how he could be wrong in stating that if the US spends without issuing bonds, there's nothing to stop this unless the nation loses its sovereignty.
quote:The question is whether there is ever a situation where a person without information about the future (or things unknowable, or really anything that's less known than semi-public things -- of course someone who knows about a major deal happening no one else is aware of can make money) could make money off the stock market, not whether an omniscient super-being could. This has been studied in quite a bit of depth, and no one has ever found a way.
Nonetheless, it seems extremely likely that an agent with no disallowed knowledge who is much better at extrapolating trends and much quicker in its decision-making than a normal person could find a sure-thing bet in the stock market. The fact that humans haven't been able to do so is pretty weak evidence that this isn't possible.
As an analogy, think of computer science. Any computable function can be calculated by some Turing machine, even though constructing some of these machines would be beyond any human's capabilities. Likewise, I suspect the sort of reasoning that could "break" the stock market is possible in principle, but in practice is far outside our powers.
quote:Efficient markets are ones where the cost to produce things is just about equal to the prices set for those things -- that is, producers make no more than a small profit as a percentage.
Is this a definition? If so, then obviously our present economy is efficient, by definition.
quote:This is true of by far most things in stores (and can be verified from the other end by looking at the profit margins of large businesses -- they're rarely more than a couple percent, averaged over several years); if there is no tendency towards efficiency, why is that true?
I'm not saying there's no tendency, of course, only that as far as I can see the tendency is overstated and there are probably better ways of achieving efficiency (along with the other things we want out of our economy) than a free market system. Not that we've figured these better ways out yet, but I'd be surprised if they weren't out there waiting to be found.
Anyway, in broad strokes the economic explanation for the small rate of profit you mentioned is probably pretty reliable. On the other hand I'm certain that the true explanation is psychological, as it is for all human behavior. And there are many psychological variables not accounted for in economics (or in present-day psychology for that matter). Scientific theories can do good, reliable explanatory work without being true or even close to true, as the Bohr model of the atom demonstrates. I suspect the situation with contemporary economics is very similar.
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quote:More usually the good is concentrated among people who are already quite well off, and hurt the people who need more hurt the least. Most farm subsidies fall into this category -- milk and sugar are excellent examples. Government support for ethanol caused problems for the poor worldwide, while helping a small number of rich corn farmers. I can go on and on, if you like. In other words, politicians are really, really bad at reacting to the good or harm of entitlements, even when an entitlement has been known to be very harmful to people for many decades.
That's a fair point, but I maintain that those entitlements not tied to porky business interests do a lot of good in our society. Unfortunately Americans seem to want to "target" their entitlements at very narrow segments (like corn farmers) rather than just taking from the rich and giving to the poor, as you suggest. That is a sad feature of our nation, politically.
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quote:Nonetheless, it seems extremely likely that an agent with no disallowed knowledge who is much better at extrapolating trends and much quicker in its decision-making than a normal person could find a sure-thing bet in the stock market. The fact that humans haven't been able to do so is pretty weak evidence that this isn't possible.
As an analogy, think of computer science. Any computable function can be calculated by some Turing machine, even though constructing some of these machines would be beyond any human's capabilities. Likewise, I suspect the sort of reasoning that could "break" the stock market is possible in principle, but in practice is far outside our powers.
Reread my definition of efficient in the context of economics. Economists have never been asserting some of the things you seem to be considering must be true for a market to be efficient.
quote:Is this a definition? If so, then obviously our present economy is efficient, by definition.
It is not a definition, but it is a necessary implication of the definition. Certainly there are other reasons one could imagine it happening -- some sort of strange compulsion among business leaders? -- but I'm having a hard time imagining what would cause it other than a general tendency towards efficiency. That's what I'm asking you: if there isn't a general tendency towards efficiency, then why do market prices largely behave like we'd expect to see if there was?
quote:there are probably better ways of achieving efficiency (along with the other things we want out of our economy) than a free market system.
No, there really aren't. You'll find that even the most heterodox economists nowadays are usually willing to concede that the basic operation of the free market has to remain intact -- whatever social support system is put up about it, or set of subsidies try to help specific sectors -- to have a system that generates prosperity. Not even idiots like Galbraith are claiming that basic market interactions are not essential to a prospering economy. Indeed, it is fairly easy (note: for a certain definition of easy to prove that under reasonable assumptions 1) if people act in their own interest and have enough information to weigh the probability of what that is (and we have a lot of information that people do act in their own interest -- though frequently not as others believe their interest to be), the outcome will approach maximal efficiency and 2) calculating how to distribute things to reach the same outcome is dauntingly difficult. Now, those reasonable assumptions are not completely true. But even simulated markets based on very limited assumptions of rationality (including where actors get only vague hints of how much their actions benefit them and how much they're due to random chance, and actors have very easily fooled learning functions) quickly reach states where most economic activity happens quite efficiently. Markets are extremely resilient even under assumptions known to be worse than real life situations.
(edit: and, as an interesting side note, many times when someone has run a small, stylized study and found some psychological quirk that would lead to inefficient markets, when that problem is checked for in a real-life situation, the psychological quirk stops leading to the same problem. For instance, people in lab studies were very susceptible to changing their behavior for a dish that stayed at the same price by changes in the prices of other dishes in ways that should have left the constant dish equally appealing -- but when some economists had a chance to try it in a real restaurant, with real diners, the susceptibility completely disappeared).
quote:That's a fair point, but I maintain that those entitlements not tied to porky business interests do a lot of good in our society.
If you'd like some at least fuzzy cases that are broader, consider the strong employment protections in France. Then consider how they've created a population of out of work 20 somethings who regularly riot. Consider how women who might get pregnant are particularly unlikely to find jobs. By burdening individual businesses with the cost of many social protections for their employees, France has guaranteed a high rate of unemployment and unrest among the young.
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quote:The problem of course is that getting $1000 tax credit is just as bad as spending an extre $1000.
Not true. First, "tax credit" implies that the money belongs to the government first and letting people keep it is a gift from the government.
Second, collecting taxes and then spending it on a program is a not a costless endeavor. Taking $1000 from someone's income does not mean the government has $1000 to spend. It, of course, costs money to collect and distribute money, so there is a loss along the way. I'm not sure how much it is, but let's say 10%, to be extraordinarily optimistic. That means just collecting and distributing the money to the same person reduces the amount available from $1000 to $900.
Maybe you consider government paper pushers to be a legitimate economic stimulus, but it definitely isn't the most efficient or beneficial way to spend money. Some government infrastructure is totally necessary. Superfluous government infrastructure is a drain. (I say that AS a federal employee.)
Third, your scenario assumes that the government spending the money produces better results than the individual spending the money. This is true in some cases, but it isn't always and often isn't. Individuals are more nimble and better able to determine the most efficient use of their own money and the best way to meet their needs.
Like the balance between services and taxes, there is a sweet spot for this. Saying that more services is always better and that a tax credit costs as much as a spending item is flat out wrong.
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quote:Originally posted by fugu13: ... (though I'll freely admit there's a lot of debate -- while I often disagree with Krugman, he's rarely outside the realm of honest disagreement, unlike Galbraith). Certainly many parts of China's economy are going gangbusters, but the property bubble, even with the higher down payments, is very, very serious ...
Actually, I'm not entirely unsympathetic. Certainly Hong Kong has had any number of property bubbles and China's has many of the same symptoms. On the other hand, there are pretty amazing things being done with the stimulus infrastructure-wise in the areas of high speed trains, subways, and renewable energy.
But that wasn't really my point. I guess I was just pointing out the source and that the previous was not (as you also note) a marginal position but well, within the realm of relatively mainstream disagreement.
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quote:Reread my definition of efficient in the context of economics. Economists have never been asserting some of the things you seem to be considering must be true for a market to be efficient.
Here's the definition:
quote:given the means of producing goods available to firms (this includes business practices and all the human foibles for making things), and the amount customers are interested in the good in relation to their interest in everything else, the price set for goods will be at a level that leads to the most net welfare (note: not money, though in many cases that makes a good proxy) for the combination of the producers and the consumers.
It's not immediately obvious to me how it's supposed to apply to the stock market, since I'm not sure who the producers are supposed to be in that case. Are they the ones who issue shares of stock?
You then said:
quote:For instance, take the stock market: if the stock market is not efficient, there is some near-sure way to make money by playing it
quote:The question is whether there is ever a situation where a person without information about the future (or things unknowable, or really anything that's less known than semi-public things -- of course someone who knows about a major deal happening no one else is aware of can make money) could make money off the stock market
Now, I maintain that as far as we know someone could find a certain way to make money in the stock market, if they were much smarter than the people who've tried so far. You seem to grant that I'm correct about that. So are economists only saying that efficiency implies it's impossible for someone of near-average intelligence to exploit a market for certain gain?
quote:under reasonable assumptions 1) if people act in their own interest and have enough information to weigh the probability of what that is (and we have a lot of information that people do act in their own interest -- though frequently not as others believe their interest to be), the outcome will approach maximal efficiency
As I understand it, these "reasonable assumptions" include standard (Savage-type) decision theory, right?
If so, that's one assumption which isn't reasonable at all. The axioms of decision theory imply it's "irrational" to be risk-averse -- anyone who'd prefer a certain gain of 1 utile to a 50-50 game with a payoff of 2 utiles must violate the sure-thing principle (or the dominance axiom). But it seems obvious to me that this sort of risk-aversion is rationally permissible. I imagine it's also very common, though I don't know of any studies.
quote:No, there really aren't. You'll find that even the most heterodox economists nowadays are usually willing to concede that the basic operation of the free market has to remain intact -- whatever social support system is put up about it, or set of subsidies try to help specific sectors -- to have a system that generates prosperity
Of course one would expect economists to agree about this. Why else would they become economists? But while there is good evidence that free markets are overall pretty beneficial, I don't see the evidence that untried alternative systems couldn't be more beneficial.
This seems especially likely given that technology is constantly reducing the difficulty of constructing complex systems. Also, the same technology is making it very difficult to apply a true market system in some areas of the economy (like intellectual property).
quote:Certainly there are other reasons one could imagine it happening -- some sort of strange compulsion among business leaders? -- but I'm having a hard time imagining what would cause it other than a general tendency towards efficiency. That's what I'm asking you: if there isn't a general tendency towards efficiency, then why do market prices largely behave like we'd expect to see if there was?
I suspect there is at least a weak tendency toward efficiency as you've defined it at large scales. But like I said before, the true explanation must ultimately be something about human psychology. It certainly can't be because people act rationally. As you mentioned, under lab conditions they don't.
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Also, let's get serious about the empirical evidence for macroeconomics. It's extremely weak compared with past theories in hard science that have been totally overthrown. There's no way to put together controlled laboratory conditions. Cosmology/astrophysics is the only branch of physics that faces the same problem to any degree, and it suffers for it. The very plausible and well-supported theory that the universe's expansion isn't accelerating was blown out of the water at the end of the '90s.
We're talking about a domain so simple that only one force (gravity) applies to it. Yet the best theory we could come up with 10 years ago was completely off base.
Now I'm being asked to accept a theory in economics where the amount of uncontrolled, un-accounted for variables is vastly greater. Maybe printing money always invariably leads to inflation. Or maybe it only leads to inflation under the very complicated, poorly-understood conditions that have prevailed during the dozen or so points in history when it's actually happened.
There don't seem to have been many big scientific revolutions or paradigm changes in economics. This does not increase my confidence in econ. What are the odds that economists have been more correct about their ill-understood, poorly-controlled subject matter than physicists have been about their precise and well-defined domain?
Couple this with the fact that many distinguished economists deride the work of their "top" colleagues as total garbage. Furthermore, the subject matter is bound up with political issues which very likely serve to bias many of the practitioners. This looks to me like a toxic situation very ill-suited to producing good science.
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quote:Game theory not a big enough paradigm shift for you?
I don't see it as something that superseded a previous, well-established alternative theory the way relativity overthrew Newton's mechanics or cognitive psych overthrew behaviorism. So I'm not sure I'd count it as a paradigm shift.
Even if it is, one is not many.
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My reading list is long enough, thanks. If you'd like to explain my mistake, that would be welcome.
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I don't think anything short of reading what was accepted theory before, during, and after the time Nash first suggested his early theories will convince you.
It's also an awesome book. Posts: 32919 | Registered: Mar 2003
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If you don't want to, that's fine. But I promise I'm not as dogmatic and mean as most Hatrackers seem to be these days.
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I do think that if fugu, who knows WAY more about economic theory than I ever will, cannot convince you, then I have no hope. But I think Sylvia Nasar just might be able to.
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quote:Originally posted by fugu13: General success? Nobody who could run the numbers was doubting that major governments with semi-credible economic control going a bunch into debt and spending a lot of money would make their economies look better. The doubt was over whether the incredible long-term pain of paying off that debt would end up being worth it.
Ha! Actually, that's my primary source of interest in watching the various european responses to the crisis, because if the heavy-handed stimulus response plans leave those countries in fair shape, you can bet that they will be crudely copied much more readily the for the next crash.
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SamP, problem is they are cutting off the money now, before any kind of real recovery has kicked in. Which is against Keynsian economics. If anything their rather haphazard slashing of budgets shows that they really don't believe in stimulus spending, certainly not at the moment.
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Also, Hayek is a much better economist than John Maynard Keynes. You should do a search on youtube for the economist's rap, definitely worth your time.
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quote:Originally posted by Black Fox: Also, Hayek is a much better economist than John Maynard Keynes. You should do a search on youtube for the economist's rap, definitely worth your time.
quote:It's not immediately obvious to me how it's supposed to apply to the stock market, since I'm not sure who the producers are supposed to be in that case. Are they the ones who issue shares of stock?
The stock market is indeed more complicated, in that people are both producers and consumers (sometimes sort of both in the same transaction). The 'cost to produce' is the cost to have engaged in previous (and the current) transactions (typically stock market transactions) that generated the capital for the stock market.
quote:Now, I maintain that as far as we know someone could find a certain way to make money in the stock market, if they were much smarter than the people who've tried so far. You seem to grant that I'm correct about that. So are economists only saying that efficiency implies it's impossible for someone of near-average intelligence to exploit a market for certain gain?
Some of the greatest geniuses on the planet have tried and failed. Economics is only bounded by available technology: that includes the people and the tools they have available. If the analytical tools or the people don't exist to be used, they aren't part of economics yet. Of course someone going back in time a thirty years with modern analysis algorithms and trading capabilities could make more money on the stock market back then (until his methods were adopted). Though we have good reason to believe that hyper-geniuses couldn't make much money (beyond what I've previously mentioned) on the market, either -- the evidence shows that stock market prices react in a very short span of time (minutes, at the outside) to new information about a stock, pricing that information in.
quote:As I understand it, these "reasonable assumptions" include standard (Savage-type) decision theory, right?
If so, that's one assumption which isn't reasonable at all. The axioms of decision theory imply it's "irrational" to be risk-averse -- anyone who'd prefer a certain gain of 1 utile to a 50-50 game with a payoff of 2 utiles must violate the sure-thing principle (or the dominance axiom). But it seems obvious to me that this sort of risk-aversion is rationally permissible. I imagine it's also very common, though I don't know of any studies.
No, risk aversion is entirely compatible with the fundamental math of equilibrium. What's more, risk aversion is a common aspect of economics models -- not all economics models, since sometimes it just isn't what is being studied, but it is becoming more and more popular nowadays. Though I think you'll find risk aversion isn't as common as you might imagine in everyday economic decisions: generally, people aren't asked to choose between two things with wildly different likelihoods of payoff but similar expected values. Try to think through your life; how often does that come up?
quote:Of course one would expect economists to agree about this. Why else would they become economists? But while there is good evidence that free markets are overall pretty beneficial, I don't see the evidence that untried alternative systems couldn't be more beneficial.
There is plenty of evidence. Most of it is mathematical. Instead of pointing you at the math, I'll instead point out that it is the same math (arrived at independently) that drives evolutionary models of organism change (into forms that efficiently available niches). While evolution isn't perfectly efficient (by an analogous definition), it is pretty darn close. Basically, there is some optimum allocation of resources, given the preferences of all those available to consume the resources and the trade offs they are willing to accept. Note: economics generally takes individual preferences as a given, not something to be imposed. It can be shown by simulation that even under crippled conditions, individual agents acting in their own self interest and engaging in market interactions tend to approach that equilibrium within a small margin. There's nowhere for the better system to fit (note: systems that transform people's preferences are currently outside economics).
quote:This seems especially likely given that technology is constantly reducing the difficulty of constructing complex systems. Also, the same technology is making it very difficult to apply a true market system in some areas of the economy (like intellectual property).
Obviously there could be extreme developments, but I think you'll find that the markets are doing rather well with intellectual property, even under antiquated legal regimes (I'd suggest looking through past posts of mine on this subject, I elaborate on how important law and custom is to the existence of markets). Legal music, for instance, is doing quite well, with prices having converged on a fairly low cost that isn't too far above the price of distribution (Apple, for instance, makes money mostly on the hardware, not the music sales), and illegal music transactions happening, but mostly not hurting sales. What's hurting sales is that the bundling required to drive costs down with previous technology broke apart once it was no longer necessary. People buy individual songs instead of albums.
quote:I suspect there is at least a weak tendency toward efficiency as you've defined it at large scales. But like I said before, the true explanation must ultimately be something about human psychology. It certainly can't be because people act rationally. As you mentioned, under lab conditions they don't.
If by "weak tendency" we include "tendency that seems to have led to near-efficiency in most of the markets we observe", sure. And I think you'll find that the most nuanced psychological theories out there are but caricatures of the complexity of the human mind. Heck, except maybe for certain very fundamental theorems in physics, all theories are wrong. They're projecting overarching structure to situations that are, necessarily, far more nuanced, but due to the rules in play, behave in aggregate in ways that are predictable to various extents. Just like one wouldn't try to appeal to every nuance of individual chemical interactions to construct a theory of psychology, I doubt there will ever be a time where appealing to psychology beyond general tendencies and classes of behavior will be involving in constructing useful theories of the economy. After all, why are you stopping at insisting economics must change to rest on psychology? Why not more fundamental sciences, like biology, or chemistry, or physics?
Who knows, maybe it will someday, but that day is millenia away, if that.
quote:Also, let's get serious about the empirical evidence for macroeconomics. It's extremely weak compared with past theories in hard science that have been totally overthrown.
For there being macroeconomics? No, I think the evidence for that is pretty much conclusive (nearly as conclusive as the existence of gravity) . I'm not sure what you are speaking to -- every macroeconomic model ever made? You seem to be treating macroeconomics as overly monolithic. Macroeconomics is a very fractured field, with few overarching models.
quote:There's no way to put together controlled laboratory conditions. Cosmology/astrophysics is the only branch of physics that faces the same problem to any degree, and it suffers for it. The very plausible and well-supported theory that the universe's expansion isn't accelerating was blown out of the water at the end of the '90s.
We're talking about a domain so simple that only one force (gravity) applies to it. Yet the best theory we could come up with 10 years ago was completely off base.
For some things in macroeconomics we can deal with things at a level below the whole earth, and those are things we're more sure about. But yes, the lack of laboratory is a pain, and one that makes things less sure. This is not a revelation, as I've been stating it all along. Of course, most of the things I've been saying to you have been microeconomics, not macroeconomics . And you'll hardly surprise me that social sciences are less exact than physical sciences. The problem also pervades psychology, the field you seem especially enamored of. By the way, you probably know that psychologists are a field particularly fond of taking jabs at economics -- and usually falling short. Being closer to the behavior of individual humans does not make one much closer to the behavior of the aggregate, any more than being a chemist makes one a good ecologist.
And you might find some disagreement in physicists that gravity is the only force acting, so I wouldn't be so quick to pronounce that it is all that matters for theory
quote:Now I'm being asked to accept a theory in economics where the amount of uncontrolled, un-accounted for variables is vastly greater. Maybe printing money always invariably leads to inflation. Or maybe it only leads to inflation under the very complicated, poorly-understood conditions that have prevailed during the dozen or so points in history when it's actually happened.
*shrug* Obviously there could be something extremely different that could happen another time. But between the practical examples and the theory that backs it up (very simple theory, too: if there is X amount of good and Y amounts of money in the economy, and then the amount of money doubles to 2Y while the amount of goods remains the same, what happens to the prices of the goods?), a government would have to be bone stupid to treat it as anything other than established fact. Treating economies as laboratories where one tries things that have been completely disastrous every time they've been tried, and for obvious reasons, on the off-chance that maybe one marginal professor on the edge of his profession is right about it being different this time, in this situation, is a bad idea (to put it mildly). You know I'm not saying we know things like that with the certainty of mathematics. But just as you know that shutting a guy in a room with no sensory input beyond that needed to keep him alive for a few years is bad for him, despite there being numerous complex mechanisms at work that maybe, for a small number of people at a small number of times, would lead to that being beneficial, I know that greatly increasing the money supply is bad for the economy. They're both inexact theories, but some things aren't in doubt (and yet, I bet you I can find proponents among psychologists of treatments at least that bizarre).
quote:There don't seem to have been many big scientific revolutions or paradigm changes in economics. This does not increase my confidence in econ. What are the odds that economists have been more correct about their ill-understood, poorly-controlled subject matter than physicists have been about their precise and well-defined domain?
Oh, physicists' track record is much better than economists' (with the traditional domains of physics, at least). So? It is also much better than psychologists', yet you seem to like that field well enough. As I said, economics is a social science. It is inexact. It is fuzzy. But that doesn't mean it doesn't need to be studied, or that the study of it can't lead to better understandings of how reality works.
Returning to the paradigm shift question: Lets start with Adam Smith and the enlightenment. The creation of modern economics was a complete paradigm shift (that, incidentally, changed the world). Heck, the mercantilism that preceded it was a complete change in how economics had been practiced from what had gone before. Or then there's Ricardo and Comparative Advantage. Marxism is a great example of a failed paradigm shift: it well demonstrates the propensity. Marginal utility completely changed things yet again. Oh, Pareto. His math changed the entire architecture underlying economics. Arrow created an entirely new field, social choice theory! Economists completely reassessed how economies worked when Coase came along. And, as Rivka notes, game theory was no small deal, especially for understanding of monopoly and the like. I'm skipping over numerous gigantic changes (and splits, as the social sciences seem especially susceptible to), of course.
That you are not aware of paradigm shifts has more to do with your lack of familiarity with the field than the existence or non-existence of paradigm shifts.
quote:Couple this with the fact that many distinguished economists deride the work of their "top" colleagues as total garbage. Furthermore, the subject matter is bound up with political issues which very likely serve to bias many of the practitioners. This looks to me like a toxic situation very ill-suited to producing good science.
Want me to go digging in the bickering of, oh, just about any field, including physics? I've touched on several fields, due to my work with network science, scientometrics, and information visualization (all of which tend to interact with numerous fields). Economics isn't more virulent to speak of than any other field I've come across. You're more aware of what is happening in economics because it emerges into the public more often. However, I think you'll find that the major economists are usually pretty collegial, even when they disagree. I can cite you plenty of healthy debate with give and take between people who think each other entirely misguided in the economics blogs, if you like (and many prominent economists blog, so this is not so small a demonstration).
quote:Ha! Actually, that's my primary source of interest in watching the various european responses to the crisis, because if the heavy-handed stimulus response plans leave those countries in fair shape, you can bet that they will be crudely copied much more readily the for the next crash.
The sad thing is, the debt incurred will probably be discounted as a "necessary evil" and not included in public evaluation of policy success. Any harm it does will not become evident until long down the road, and it will only be obviously attributable in the most extreme cases.
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Let me clarify: I don't think psych is a paragon of a well-developed science. Far from it. If politicians put a lot of stock in the opinions of psychologists, I would have a problem with that too.
I do think it's obvious that psych is more fundamental than econ, although as you point out it's less fundamental than the hard sciences. But we don't seem to disagree on that question.
quote:No, risk aversion is entirely compatible with the fundamental math of equilibrium.
That must mean that the math of equilibrium doesn't presume decision theory. What does it use to define rational choices, then?
(Note: I'm not talking about risk aversion modeled as diminishing marginal returns. That's not an adequate way of representing it in my opinion.)
quote:For there being macroeconomics? No, I think the evidence for that is pretty much conclusive (nearly as conclusive as the existence of gravity) . I'm not sure what you are speaking to -- every macroeconomic model ever made? You seem to be treating macroeconomics as overly monolithic. Macroeconomics is a very fractured field, with few overarching models.
Sorry, I was being unclear. What I meant to say is: the empirical evidence for any given thesis put forward in macroeconomics is extremely weak, compared with theses in other areas of science that have nonetheless proven to be very far from the mark. Hence our confidence in any given thesis in macroeconomics, be it Keynes's or some alternative, should be set very low. And we should be very hesitant about basing public policy on such theses, except where there's no other basis for deciding.
(I grant that much of the time, there is no other basis. I don't have a problem with economists advising politicians. I do have a problem with people treating their advice as reliable prediction rather than somewhat-informed guesswork.)
quote:That you are not aware of paradigm shifts has more to do with your lack of familiarity with the field than the existence or non-existence of paradigm shifts.
That could very well be. Given my opinion of the field, I've never been much inclined to delve very deeply into it.
quote:Some of the greatest geniuses on the planet have tried and failed. Economics is only bounded by available technology: that includes the people and the tools they have available.
Does that mean that improvements in available technology don't go along with an increase in "efficiency" as you're defining it?
The definition is starting to seem artificial enough that I'm not sure why efficiency so defined is supposed to be desirable.
quote:Economics isn't more virulent to speak of than any other field I've come across. You're more aware of what is happening in economics because it emerges into the public more often.
Fair enough. Just like it's hard to tell how a couple gets along in private, it's hard to accurately assess how academics really relate to each other.
But don't you think the very fact that economics is so intertwined with public policy is likely to make it a breeding ground for unscientific bias? I mean, what is the incentive for someone like Larry Summers to re-evaluate his central views, given the effect it would have on his public service activities? (The same applies equally to Krugman and Galbraith, of course.)
quote:I can cite you plenty of healthy debate with give and take between people who think each other entirely misguided in the economics blogs, if you like (and many prominent economists blog, so this is not so small a demonstration).
I'm not saying that economists are mean, I'm saying that the best ones appear to disagree about pretty much everything. Someone like me who doesn't trust his own judgement about the topic is left with no way to break the resultant impasse. I could take your word for it, or I could take the word of Krugman and friends.
This is very different from climate science (for example) where the consensus of the experts is pretty clear. It's possible that contemporary climate science is largely on track, in the sense that practically all of the scholars are correct in their basic approach. In economics, that seems impossible.
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quote:I'm not saying that economists are mean, I'm saying that the best ones appear to disagree about pretty much everything.
Oh, not at all. Just the complicated problems (especially the short term complicated problems). The basic consensus about what makes a prosperous economy in the long run is fairly solid.
quote:This is very different from climate science (for example) where the consensus of the experts is pretty clear.
The consensus of experts on one specific, heavily studied issue is pretty clear. I bet you I can talk to three climate scientists and get five opinions about a number of other issues in climate science .
quote:Does that mean that improvements in available technology don't go along with an increase in "efficiency" as you're defining it?
The definition is starting to seem artificial enough that I'm not sure why efficiency so defined is supposed to be desirable.
Technological improvement changes what the efficient outcome is. Imagine somebody develops a process to extract salt from seawater much more efficiently -- the global economy would change pretty much overnight (one of the powers of prices as information signals is that the adjustment would happen fairly automatically). Economics can't possibly predict that such a possibility even exists, as you seem to be asking it to do by what you want a definition of efficiency to do. By adopting a definition of efficiency that's independent of the technology available, economists don't have to predict the future. All they're concerned with is, given the available technology (and this includes humans and policy and a bunch of other stuff beyond machines), what's the allocation of resources that makes the most people the most well off on their own terms? That's efficiency, in economic terms: how to allocate resources with the most improvements for the most people without decreasing the allocation of others. This is hardly a meaningless definition. Applying that definition sells ads on the internet, allocates doctors to residencies, assists Africans in forming consortia to control local water supplies, and huge numbers of other things that matter very directly to making people better off (not to mention preventing human suffering).
quote:That must mean that the math of equilibrium doesn't presume decision theory. What does it use to define rational choices, then?
(Note: I'm not talking about risk aversion modeled as diminishing marginal returns. That's not an adequate way of representing it in my opinion.)
There are lots of definitions that work. How about you describe how you think risk aversion works, in the sense of a situation, an agent, and the framework the agent would use to make a risk averse decision that would have been made differently absent risk aversion, and I'll show you how that's compatible with an efficient equilibrium?
quote:But don't you think the very fact that economics is so intertwined with public policy is likely to make it a breeding ground for unscientific bias? I mean, what is the incentive for someone like Larry Summers to re-evaluate his central views, given the effect it would have on his public service activities? (The same applies equally to Krugman and Galbraith, of course.)
Sure, though economics isn't monolithic. Many economists have nothing to do with politics to speak of (but are still very influential on economic thought and theory). And, of course, it would seem rather silly to have a science for theorizing about the economic behavior of humans and not get those people involved in policy decisions. What's the improved alternative?
quote:(I grant that much of the time, there is no other basis. I don't have a problem with economists advising politicians. I do have a problem with people treating their advice as reliable prediction rather than somewhat-informed guesswork.)
I'm surprised you seem to be a fan of Galbraith, then, who acts as if he is sure what the government is capable of doing. Most economists right now are completely open that they don't really know what to do given the situation, and are just giving possible prescriptions based on existing theories that don't seem completely implausible. Because, ultimately, it is better to keep using a theory known to be problematic than to attempt to have a go without a theory (or rather, I'm not sure humans are capable of having a go without a theory). The only thing that can kill a theory is a better theory (not just in economics -- physicists regularly keep around theories with major flaws when no better one has been arrived at), and figuring out what the better theory is in as fuzzy a field as macroeconomics is a very difficult problem. It does happen, though. You won't find a pure Keynesian about, even now; the Keynesianism people are adopting at the moment is neo-Keynesianism, which is a superior theory based on Keynes' general ideas.
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OK, your position is sounding more and more sensible. I do have a few remaining comments.
To go back a couple posts...
quote:But just as you know that shutting a guy in a room with no sensory input beyond that needed to keep him alive for a few years is bad for him, despite there being numerous complex mechanisms at work that maybe, for a small number of people at a small number of times, would lead to that being beneficial, I know that greatly increasing the money supply is bad for the economy. They're both inexact theories, but some things aren't in doubt
I agree that basing policy on the assumption that hyperinflation won't happen if we print money would be foolish.
But, while treating the correlation between printing money and inflation as "not in doubt" might be good methodology in some areas of study, when we step back to the big picture I think it should be in doubt. It's no better established empirically (in fact, it's far less well-established) than scientific laws that looked exceptionless in the past and turned out to be only special cases with all sorts of exceptions outside their limited domain.
Furthermore, people should be working to find cases where purported laws like this do fail. It's a truism, although an often-overstated one, that good scientists try to falsify their best theories. (Of course we shouldn't be experimenting left and right with the real-world economy, but I would hope that some safe means of experimenting could be found. Maybe there already is one.)
This is one thing I do like about psychologists. In my experience they're very accepting of the evident fact that since their theories idealize and simplify the complicated stuff going on in the brain, psychological laws are pretty much certain to have exceptions all over the place.
quote:Sure, though economics isn't monolithic. Many economists have nothing to do with politics to speak of (but are still very influential on economic thought and theory). And, of course, it would seem rather silly to have a science for theorizing about the economic behavior of humans and not get those people involved in policy decisions. What's the improved alternative?
I'm not sure how much changing this would improve things, but I don't like to see people move back and forth between government positions and academic postings. I don't think that's conducive to fair-minded research. Of course it shouldn't be against the rules, but it should be seen as bad form.
But with the amount of cross-pollination these days between government and the press (of all things), this sort of thing is probably here to stay.
quote:I'm surprised you seem to be a fan of Galbraith, then, who acts as if he is sure what the government is capable of doing.
I don't consider myself a qualified judge of his work. I'm a fan of his in the sense that he supports some policies that I also support, for egalitarian reasons. I suppose I see him as an ally, but I have no basis for judging whether he's a good economist.
quote:There are lots of definitions that work. How about you describe how you think risk aversion works, in the sense of a situation, an agent, and the framework the agent would use to make a risk averse decision that would have been made differently absent risk aversion, and I'll show you how that's compatible with an efficient equilibrium?
The examples I have in mind are very simple. Joe finds $2 exactly twice as desirable as $1. But he will always prefer a game with a certain payoff of $1 to a game with a 50-50 shot at $2. In other words, he prefers one game to another even though the two games have equal expected utility.
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We seem to be reaching at least mutual understanding
Continuing with the risk aversion line of thought:
quote:The examples I have in mind are very simple. Joe finds $2 exactly twice as desirable as $1. But he will always prefer a game with a certain payoff of $1 to a game with a 50-50 shot at $2. In other words, he prefers one game to another even though the two games have equal expected utility.
Yes, but when does that happen, outside of casinos (that all have negative expected payoffs, anyways) and academic studies? There are circumstances, but if you think through your life, I think you'll realize that they come up very, very little. In other words, that there is such a behavioral quirk does not mean it matters very much for the general behavior of the economy.
By the way, the situation you gave is very easy to model with a simple discount to riskier dollars, giving nuanced behavior. For instance, would a person prefer a 50-50 shot at $2 to a certain payoff of, say, 80 cents? 50 cents? 10 cents? At some point it sways the other way, for pretty much everyone. Incorporating at least that much risk aversion into a model is extremely common, for models attempting to look at situations where risk aversion might matter.
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quote:Yes, but when does that happen, outside of casinos (that all have negative expected payoffs, anyways) and academic studies?
I feel like I've employed that sort of reasoning in putting together my retirement investments, for one.
Also, I think a lot of people are "risk averse" in pursuing personal enjoyment: they stick with a lazy, proven activity (like watching TV) and avoid a night out that will probably be really fun but might go sour. A lot of laziness seems to me to be related to risk-aversion.
quote:By the way, the situation you gave is very easy to model with a simple discount to riskier dollars, giving nuanced behavior. For instance, would a person prefer a 50-50 shot at $2 to a certain payoff of, say, 80 cents? 50 cents? 10 cents? At some point it sways the other way, for pretty much everyone. Incorporating at least that much risk aversion into a model is extremely common, for models attempting to look at situations where risk aversion might matter.
A friend of mine from grad school who works on decision has convinced me that no model which discounts payoffs, or in general which models risk aversion cases as situations where the non-risky choice has higher expected utility than the risky one, will suffice. True risk-aversion requires preferences that cut against expected utility.
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