The Economist as Scientist, Historian, and Philosopher

The persistence of one thinker in economics over another is something I have been wrestling with, but haven’t come to any sound conclusions. In reading the big names over the last couple hundred years, you can see the threads of who influenced whom and who dropped out of importance. Either their ideas were dead ends to most people and thus remain a historical curiosity like the Classicals, or they have been explained better. We still talk of Keynes but don’t use his models.

It strikes me because what is appealing to me is that Economics is a field still under contention. When I was a kid in undergrad studying Chemistry, part of what was alienating was that most of the big questions had been answered, or so it seemed. To really understand the interactions of particles at these nano-scales you had to get into physics and then into probabilistic math – once you’re thinking of electrons as probability fields and not point particles, a lot of the simple models seem like child’s play even if they’re fairly accurate representations of how the world works.

And it’s this piece of how does the world work is why I keep learning and exploring. I doubt I’ll ever scratch but the surface, but it is a fun journey. So it circles back to economics – we build models to formalize the narratives we were looking at. These models have assumptions built in and should have much fewer graduations of meaning than the slippery human language. The problem I worry about is if this reliance of the mathematical models takes us away from the larger picture. You build the model and look at the data and see if the data fits the model in the past and then see if it fits it going forward. Then if it does or it doesn’t, we can still have argumenta about the model or the data you chose or if it falls prey to Goodhart’s law or the Lucas critique.

Because here’s what I image is the ultimate endpoint in mathematical economics: assume an all-powerful super-computer with access to all the economic data points ever collected. With these powers, it is able to build a model so complex that no living human mathematician can even begin to understand it. But it is perfectly predictive and adaptive to outside shocks and following the recommended policy put forth from this machine maintains low inflation and full employment.

Here’s the question though – would you trust it if no one could explain why it came to those conclusions? I don’t know if I would. And this is why straight mathematical reliance seems to me a dead end. We have to be scientists, yes, but also historians and philosophers to know what the math is really saying. That means not losing contact with the past.

Veblen in Modern Economics: Category Error?

Before this section, I only really knew two things about him.

The first was that he wrote the book the Theory of the Leisure class and that the idea of conspicuous consumption is tied to his work. And that’s not bad. If in 100 years the only thing that a reasonably educated person knows about me is a book I wrote and a concept from it, I’d call that a win. We can’t all be Marx, right?

But what really struck me was how contemporary the description of him by the authors and his work excerpted in book actually is. If you’ll forgive me, Veblen is nothing if he is not “Woke”.

That made me wonder why he doesn’t really pop up more. The authors say on one hand one reason that even contemporary socialists don’t cite him more is that he was too pessimistic.

But I think it could be something else. I think it’s a categorization issue. Because the math revolution was taking off, a more subjective narrative-based economics didn’t fit the bill. So he gets shuttled aside to sociology and anthropology programs and the economists don’t look at him.

This could be indicative of a larger problem. Economics sees itself as the queen of the social sciences and thus will look at other fields and try to apply their methods to them, instead of learning what can be useful in analyzing the world from the fields themselves.

Is Veblen’s current marginalization in the halls of deliberate, or just an oversight?

Hang the Venture Capitalists

“Something Ventured” is a documentary celebrating Silicon Valley venture capitalists. The movie made me angry.

I have to first admit, I am not sympathetic to the people on this movie. Now, they come across as nice enough in the edited version of their conversations, but when at the close they do that thing where they show the characters at the end of the movies and give a capsule synopsis of what happened after that’s what make me think something’s off. One of the guys had built and operated the world’s first fully computerized yacht. Another noted that his favorite charity was the Ayn Rand institute. They literally must have called this guy up after most of the production was done and basically asked him “what do you want to be your legacy?” and he said the Ayn Rand institute.

Here’s the problem with that. You can talk about how good these guys are since they helped lend expertise and cash to companies at early stages when they needed the capital to grow. Perhaps we can see them as something like the Walrasian crier, helping the market work. But to think that they’re the ones with the new idea, the ones really taking risk to the point where they identify with Randian principals is laughable. The Objectivism ideal is that it is the entrepreneur who is taking the risk, the individual superman who is making the world going. If anything, the VC people are parasites and leeches on the people who are making contributions to society. For every Genentech where the VC helped and ended up saving lives, there’s an Apple or Cisco where the founder was kicked out unceremoniously. That’s not making the economy work better, that’s predatory.

And then we have to struggle with the fact that VC as an industry has not been around forever. Now it is attached to Silicon Valley, but the question I had when I was watching this was “Where was the VC that helped Edison?” Business formation happened before these vulture funds came to being. But an even bigger question in terms of business formation is why has it dropped? If VC funds are really making the economy more efficient, there would be more jobs created by these new firms. So a chart like the one below would trend up, and not down (there are a lot of variables having an effect here, not just VC firms).

It also made me think about what kind of distortions these funds have on the market. There is money to be made, but there are very few Googles. So the firms have to spread their money around, hoping to have a major hit that makes up for their losses elsewhere. This does two things that I can think of. First, it takes away the incentive to go public and face the reporting requirements that that brings. Second, it increases valuations all around, boosting balance sheets on companies that really haven’t figured out how to make a profit. I’m thinking here specifically of Uber, which is using flows of VC money to undercut the taxi industry worldwide and it’s going to be horrible to see that bubble pop and all the diminished capacity that exists because everyone was chasing this phantom yield.

And finally, we have to ask if they’re even that good. Most of the top flight people with long experience interviewed in this film were lamenting that they didn’t give money to apple. Why didn’t they see the promise in what is now one of the largest companies in the world? Jobs and Wozniak were smelly hippies with poor time management skills and assholes to boot. So these titans of foresight and capital allocation didn’t give them money.

Look, in a capitalist economy, incentives need to be in place so that capital is allocated to the place where it will benefit the most people. The profit motive is strong and there are a lot of winners – some much bigger than others. But we don’t need to celebrate these people as heroes. 

Joan Robinson: Investment and Thriftiness

Joan Robinson devotes entire chapters to describing the causes and likely consequences of changes in investment and changes in thriftiness. Summarize her main points in at most two pages. Why is this discussion so important for her?

The course which it is best for everyone to pursue in his own interests is rarely the same as the course best calculated to promote the interests of society as a whole, and if our economic system appears sometimes fantastic or even insane—as when foodstuffs are destroyed while men go hungry—we must remember that it is not surprising that the interaction of free individual decisions should lead so often to irrational, clumsy and bewildering results (Robinson I).

Keynes was a good aphorist. I like to think that the group he ran with in Bloomsbury must have had some good influence on him as some of his turns of phrases and metaphors stick in the systems as we move along, where people can cite the Keynesian beauty contest and make a joke about how in the long run we are all dead then someone literate enough will smile and nod at your reference. But he also had the happy accident of influencing Robinson, who was a clearer writer as an explainer of ideas than her antecedent was (see above her rejection of an invisible hand).

I’m going to turn around the question though and answer the second part of the question first. It is through the changes in investment and the changes in thriftiness which are what determines the output of the economy. In my original answer I referenced these two as the “deep parameters” we spoke about in class. When we draw a mathematical model of these or a picture of the circular flow, it shows an illustration of the ideas that she hits upon in or common mathematical language but in words.

In the simple model, savings is equal to investment, but Robinson makes a point to state that “saving is not the same thing as investment” (5) so that the act of saving does not lead directly to investment. Instead the decision to invest and the decision to save are separated.

In chapter II, Robinson looks at these two decisions separately. She describes a situation where an entrepreneur wants to grow their plant while the propensity to save stays the same. In this case, the income will grow, and wages go up meaning more money is spent in absolute terms while the same rate of saving will create a larger pile of savings.  This then rises to the point where in the aggregate new savings equals the level of the new investment.

But it does not go in reverse. New savings without being driven by new investments causes trouble in our circular flow. What happens if more people save without a change in the level of investment means that activity in consumption will fall off because there are only two things one can do with their money: spend it or save it. If more of your original income is saved in the economy, then there is less spending. And since “one man’s expenditure is other men’s income, and when one man spends less other men spend less” (7) then you have the Keynesian paradox of thrift happen. More people want to spend less money and save more money, but in the whole, everyone having this feeling is a net bad for the economy.

If, all things being equal, investment is good for the economy’s output and savings detracts from it, then as policy we want to drive investment and discourage thriftiness. How do we do that? One way of doing that is to keep the interest rate down. Low interest rates make perspective investments much more profitable and being the reason to invest, we want to keep those perspective profits up (15). What we really need is a world where “population is increasing, new inventions are constantly being made, and new territories opened up to trade, the demand for capital goods is constantly expanding” (16), then we will be just fine. But the world is not always so. Constant expansion is not the name of the game. Sometimes people do fall for the paradox of thrift and want to hold their money in. They do this for various reasons. Thriftiness may come aligned with changes in trade, either up in down. The stock prices in the news may cause someone to pull back or let loose depending on the news of the day (22). Other outside influences come into play as well, such as the state running a deficit which is thrift of another kind (22). Also seen is greater thrift in unequal societies (23), as well as moral stances socially (24).

We must remember that from a policy standpoint the more important aspect is to drive investment either through private industry with various mechanisms or with the purse of the state. It is this new consumption introduced into the system that creates employment and output. We want to do what we can to not have the savings rate increase and take the wind out of the sails of the economy, but it is with new investment that the tiller of the economy is steered.

References

Robinson, J. (1969). Introduction to the theory of employment. London.

Is There One Economics?

What I think I’m trying to ask is if there is ever really a singular thing out here that we can call “economics” as a course of study?

Because it seems so context-dependent. In our own time they literally just had a big conference with some of the heavy-hitters of Macro talking about post-crisis economics and what it should look like compared pre-crisis economics. 2008 hit us in the teeth right as we were in a period that economists were calling the “great moderation” and cockily claiming that the main macro problems of the business cycle were solved.

So maybe economics was working, but what changed was not the science itself but instead the economy in a qualitatively way that made the old science obsolete.

I think we see a bit of this in the move from Labor Theory of Value to the Marginalists – enough that we called it a revolution. What was different about the economy that Smith, and Malthus and Ricardo were studying than the one Jevons and Menger were looking at? It wasn’t static. One thing to look at would be the rise of the corporation and the diminishing in power of the landlord class. With the rise of the corporation we have the rise of a new class, the managerial class. This helped lead to the need for a new economics. Businesses were no longer the solitary price taker in the market place, but corporations which were islands of order in the chaos of the market. New economy, new economics.
What will our new economics look like?

Is Globalization Good?

I don’t know if there will ever be a final word on this argument. The Ricardian argument for comparative advantage feels right in the model, but once you start looking at the actual results of periods of globalization, it is troubling. Because what we have to be careful when we’re asking if globalization is good is who is it good for. Is it good for the world economy in aggregate? Is it good for workers or business owners or both or neither? 

For me, I have called myself a Free Trade Marxists because for me my religion has long been summed up by the call in the last lines of the Manifesto: Proletarier aller Länder vereinigt Euch!

All Lands

In the long term we have to have worker unity across cultures and languages and realize that the myth of national borders is just another form of bourgeois social control where we are angry at the wrong people. It is not the Mexican worker that is stealing jobs, but the owner of capital using the logic of capitalism to ship those jobs elsewhere or to even mechanize them away.

Because what is happening in the short term is that the benefits of globalization are spread thin. We as consumers are able to save pennies on our consumer goods at Walmart or Aldi. The problem is that the costs are spread in a much more chunky manner. If you work at the Whirlpool factory or live in the community that is supported by that factory and Whirlpool’s parent company decides to cut costs, globalization’s costs far exceed the reality of a cheaper consumer good. Your income goes to zero and you can’t buy that consumer good, no matter how cheap.

This disconnect has given rise, in concert with other issues, to economic nationalism reflected in the Brexit vote or the Electoral College victory of Donald Trump. What I’m afraid of is that these political actions won’t lessen the costs – there is no movement towards a large retraining or relocation plan. One of the key plans Trump has supported is lessening the so-called “War on Coal,” which is fighting its own market forces in light of a larger move towards cleaner energy generation. This is a move backwards. Then on the other hand there is a move to eliminate the benefits of free trade, in ripping up agreements. The hope is that these manufacturers will reshore, but the reality is that to rebuild factories where once thousands were employed will only have a fraction of that because of technological advances. And then you have to hope people are trained for your needs. This will raise costs for everyone and not be the panacea that is hoped for by the people who need jobs and have seen the productive capacity of their towns leak away. 

So politically, globalization is a huge issue in terms of how we as an individual country react to it. I just worry that in pushing economic nationalism we will be throwing out the baby with the bathwater.

Eurocentrism! In Economics?

The study of economics is very Eurocentric. This is reinforced by the reading in the History of Economic thought where once we get past the Physiocrats we’re really talking more about the history of economic thought in England – Smith, Ricardo, Malthus, Bentham, Say, Senior, Mill. Bastiat is Frenchy, so he’s the outlier. Marx was from Trier but he popped on over to France and then the image of Marx is him huddled over books in the reading room of the British Museum. He lived and died in England and sponged off an Engles-man.

We don't even know Ho over here either

And it doesn’t just stop there and spread out. I looked at the list of Economic Nobel winners (and real Nobel or not, it does represent the top line of the consensus of the more orthodox line of thought) and there is one person not from Europe or the Americas. And even then, Amartya Sen was educated in the Western system. That’s weird, right? This is subjective, but I can only think of a handful of people outside of this structure, some Aussies and a couple of Japanese Marxists.

So the question is why this is. Why did it begin that way and why does it persist? In a way I can understand why the Fathers of Economics are where capitalism started. You’re not going to study something as a system if you’re not close to it. And then if you are looking at how society reproduces itself in a non-capitalist or pre-capitalist system, what you are writing has no worth as capitalism took over the world. But where are the non-European or American economists? Are they, like Sen, pulled to the western canon and system? Do they exist but are marginalized? Or are they just not there? Who is the sub-Saharan Samuelson, the African Arrow, and the Thai Thaler? Should we be doing what we can to help create these people, and why haven’t we?