Monday, January 5, 2009

Wonk v. Wank II: The Big Picture

by the Sandwichman

Not all economic models lack "any connection with reality". In "Managing Without Growth: Slower by Design, not Disaster", Peter Victor used a model called LowGrow "to explore different assumptions, objectives and policy measures" regarding the Canadian economy. I suppose the biggest difference between LowGrow and Paul Krugman's Optimal Fiscal Policy in a Liquidity Trap model (I'll call it OptiTrap) is that LowGrow uses actual data to explore possibilities while OptiTrap assumes consumers who "maximize an intertemporal utility function".

In other words, OptiTrap leaves all the important qualitative decisions to a bunch of spectral rational agents tucked away in a black box. The obvious question would be: if those agents were so rational how did they get into such a liquidity trap mess in the first place?

The point of LowGrow is to make the nature of qualitative choices that must be made and the variety of outcomes based on different choices as transparent as possible. There is not a single, "optimal solution" in LowGrow. Nor is there a single, "big bang" policy prescription that issues from it -- like OptiTrap's "So let's get those [spending] projects going." Instead, multiple runs of tLowGrow using different assumptions are made to tease out an array of complementary policy recommendations.

At first glance it may seem that OptiTrap ignores such issues as climate change, peak oil, poverty, mass unemployment and happiness. Not so! It just assumes that its intertemporal utility-maximizing rational agents will deal with that shit.

All OptiTrap needs to worry about is how to get the damned economy moving again. Once it's back on the good old growth track those rational agents -- who, incidentally, bought all those overpriced houses with securitized sub-prime mortgages and voted for George W. Bush twice -- anyway, as I was saying those rational agents will take care of the ah... er... nevermind.

But if you'd like to view a cogent discussion of the disappointments of economic growth, the limitations of natural resources and how it may be possible to avoid both environmental and economic disaster and possibly even live richer fuller lives, please watch the video of Peter Victor's lecture at the Royal Canadian Institute for the Advancement of Science from November 23, 2008.

4 comments:

Ken Houghton said...

How much longer does it take? And how many fewer starfish are saved?

AIG will be paying bonuses with taxpayer money in two months. Meanwhile, those taxpayers are losing their jobs, falling through the net, and stunting the growth of their children.

Anonymous said...

Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.

In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

Hence, the Keynesian paradigm I = S is not verified.

The purpose of Quantitative Easing being to lower the yield on long-term savings and increase liquidity it doesn't create $1 of investment.

In a Liquidity Trap the last thing the Market needs is liquidity.

Quantitative Easing does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on long-term savings.

Those purchases maintain the demand for long-term asset in an unstable equilibrium.

When this desequilibrium resolves the Market turns chaotic.

This and other issues are explored in my tract:

A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order



Abstract:

This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

It solves most of the puzzles of macro economy: among which Unemployment, Business Cycles, Under Development, Trade Deficits, International Division of Labour, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...

It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.


A Credit Free, Free Market Economy will correct all of those dysfunctions.


The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.

A Specific Application of Employment, Interest and Money


Press release of my open letter to Chairman Ben S. Bernanke:

Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.


Yours Sincerely,

Shalom P. Hamou
Chief Economist & Master Conductor
1776 - Annuit Cœptis.

TheTrucker said...

Well, Mr. Hamou,

That's all real nice, I'm sure. But perhaps we would do better to understand the solution you propose to the problem as you see it. Maybe then some of us can work backwards to get to what it is you are trying to tell us. Who knows?

Are you sure that you want to take the position that credit is wrong? perhaps you are taking the position that interest on loaned money is wrong? I find it hard to believe that someone would think that financing things that are worthwhile would be wrong.

But I see up there in your stuff that you claim that saving does not equal investment and then you say that the rich people save and that almost all that savings is invested. That seems a contradiction unless you happen to think that buying T-Bills to finance tax cuts for the rich is an "investment".

Anonymous said...

"Are you sure that you want to take the position that credit is wrong? perhaps you are taking the position that interest on loaned money is wrong? I find it hard to believe that someone would think that financing things that are worthwhile would be wrong."

I am not saying that saving is wrong we will need people who will save and invest in stocks not in bonds or interest bearig asset.

"But I see up there in your stuff that you claim that saving does not equal investment and then you say that the rich people save and that almost all that savings is invested. That seems a contradiction unless you happen to think that buying T-Bills to finance tax cuts for the rich is an "investment"."

Even saved in a T Bill it ends up invested in a normal environnement (TBill are priced in a way that people will always prefer long-term assets in a normal environnement.