Beware of Slogans

...the characteristics of the special case assumed by the classical theory happen not to be those of the economic society which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience. -- JMK, GT 

The human perception system sees a checkerboard with a cylinder, while a basic SSR measurement [surface spectral reflectance] shows squares A and B read the same. “Illusion” implies that our system is fooled, but as far as useful information goes, the checkerboard interpretation is probably better. Try as they might, mathematicians can’t make the computers see the checkerboard. Rather than a demonstration of how easily fooled we are, optical illusions like this one are examples of the brain’s mysterious and irreplicable abilities. It interprets its environment with a sophistication that exceeds our ability to measure and reconstruct physical phenomena. The usual framing has it wrong: Despite A and B having the same SSR, humans are still able to see the checkerboard. -- Malcolm Harris, "Does color even exist?"

How you mix up the three ingredients of a cure is a matter of taste and experience, i.e. of morals and knowledge. -- JMK, Letter to T.S. Eliot

Does David Stockman Want Women to be Barefoot and Pregnant?

Apparently uber-supply-sider David Stockman is back:

There are powerful domestic and international economic forces and welfare state policy impacts—-such as the huge increase in Social Security disability and food stamp recipients—– that are roiling labor force participation rates and weakening labor hours utilized and labor productivity. Yet the Fed is led by a clueless, paint-by-the-numbers Keynesian “conomist” who is trapped in a 1960s “full-employment” time warp. Did she notice this over the last several decades?

So Stockman refers to Janet Yellen as a conomist. Cute! Why did Reagan appoint a historian to head the OMB anyway? Of course those were the days when supply side hacks ruled the White House. But FYI Mr. Stockman – Dr. Yellen is excellent at labor economics. The drop in the employment to population ratio since 2007 has been the result of weak aggregate demand not some alleged change in transfer payment policies that did not happen. Yes, transfer payments rise when we have recessions as they did in 1982. But if Stockman had an ounce of integrity, he might have told his readers that the employment to population ratio for women start rising even before Reagan made the mistake of letting Stockman head the OMB. With more women in the work force, some men have decided to take up more of the responsibility of raising the kids. I guess Stockman wants to return to the 1950’s where women just stayed home – barefoot and pregnant.

Jeb Bush Adopts Voodoo Economics

Jeb’s father in 1980 got it right with his phrase “voodoo economics”. Of course Papa Bush had to settle for being Reagan’s Vice President. We know George Jr. listened to the Three Stooges (Art Laffer, Lawrence Kudlow, and Stephen Moore). Daniel Strauss reports:

Former Florida Gov. Jeb Bush (R) voiced support for House Republicans' move to switch to a type of budget scoring that assumes tax cuts create economic growth and counterbalance lost revenue. Speaking in New Hampshire on Thursday, Bush was asked about House Republicans' move to adopt the "dynamic scoring" method for scoring budgets. Although critics argue that this approach to scoring is essentially "fairy dust" and "cooks the books" on budget scoring, many Republicans and even a few conservative Democrats have pushed for using the controversial method. In December of last year, House Republicans opted to not reappoint Doug Elmendorf as the head of the nonpartisan Congressional Budget Office, essentially paving the way to adopt dynamic scoring. At the beginning of 2016, House GOPers passed a rule requiring all budgets to use dynamic scoring in budget estimates. Bush first said he was "all in" for eliminating the "bean counters" who use the traditional "static scoring" method. "The House has done this and I think it's the right thing," Bush said in New Hampshire on Thursday. He went on to praise House Ways and Means Committee Chairman Paul Ryan (R-WI), who, in Sept 2014, actually floated the idea that the CBO adopt dynamic scoring. "One of the guys I most respect in Washington D.C. is Paul Ryan. He's thoughtful, he's optimistic, he believes that if you create the right conditions all of us interacting amongst ourselves will create far more benefits for far more people," Bush said.

Hey – I’m no fan of bean counters but could someone tell Jeb that Paul Ryan’s accounting is fraudulent?

Quiz: Denial, Then and Now

1. Is the end of the world at hand?
2. Is growth desirable? 
3. Is growth possible?
4. What is the real question?
5. How about just plain old "What is growth?"? 
6. So what is growth?
7. Is growth a means to the end of full employment? 
8. Is growth a bait-and-switch surrogate policy objective in its own right? 
9. Is growth a quantitative measurement of unmeasurable qualitative change?
10. What was the basic assumption of The Limits to Growth? 
11. Is the economic system self-adjusting?
12. Why shouldn't the productivity of most natural resources rise more or less steadily through time, like the productivity of labor?
13. Is that all there is?

Napoleon Solow and the Phantom Mechanism

I would like to say why I think that the Doomsday Models are bad science and therefore bad guides to public policy. ... The basic assumption is that stocks of things like the world’s natural resources and the waste-disposal capacity of the environment are finite, that the world economy tends to consume the stock at an increasing rate (through the mining of minerals and the production of goods), and that there are no built-in mechanisms by which approaching exhaustion tends to turn off consumption gradually and in advance. You hardly need a giant computer to tell you that a system with those behavior rules is going to bounce off its ceiling and collapse to a low level. -- Robert M. Solow, 1973

Sandwichman is agnostic on the built-in mechanism fable.

On the one hand, Solow's "built-in mechanism" is a metaphor -- a depiction -- and of course there is no "mechanism" strictly speaking, just as God is not an old man with a long, white beard. There are instead more or less spontaneous reflexes of economic actors that in the aggregate have observable effects. Such reflexes, however, are multitude. The probability of all these reflexes co-ordinating themselves spontaneously and independently -- without help from a Maxwellian demon, Walrasian auctioneer or Invisible Hand -- to produce a conjectured effect far in the future is infinitesimal.

Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion on cavalry tactics at the Battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon Bonaparte. -- Robert M. Solow

Aside from the multiplicity of so-called mechanisms, there is the slight inconvenience that a homeostatic regulator itself consumes energy to do its work (also known as 'transaction costs'). The more vast and complex the organism being regulated, the more energy the regulator will need to consume. When what is being regulated is the consumption of energy, a contradiction emerges: progressively more energy needs to be consumed to reduce the consumption of energy. There is thus a ceiling on vastness and complexity and a floor on reducing consumption.

It is not the finiteness of resource stocks, but the fragility of self organized natural cycles that we have to fear. Unfortunately, the services provided by these cycles are part of the global commons. They are priceless, yet ‘free’. Markets play no role in the allocation of these resources. There is no built-in mechanism to ensure that supply will grow to meet demand. Indeed, there is every chance that the supply of environmental services will dwindle in the coming decades as the demand, generated by population growth and economic growth, grows exponentially. -- Robert U. Ayres, 1998

Ayres highlighted another fly in the built-in mechanism ointment. To be fair, Solow did acknowledge the externality flaw in the price system. Fixing the flaw, he assured, would be simple and virtually painless:

The flaw can be corrected, either by the simple expedient of regulating the discharge of wastes to the environment by direct control or by the slightly more complicated device of charging special prices — user taxes — to those who dispose of wastes in air or water.  

What stands between us and a decent environment is not the curse of industrialization, not an unbearable burden of cost, but just the need to organize ourselves consciously to do some simple and knowable things.

Now that we know how that organizing ourselves consciously business has worked out, couldn't we please have a built-in mechanism to do that task too? What if there is a built-in mechanism in the price and profit system that militates against the social capacity "to organize ourselves consciously to do some simple and knowable things"?

Not all built-in mechanisms are equal

Finally, even if there was a built-in self-stabilizing market mechanism, it's interaction with natural systems may not lead to the gradual, advance adjustment that Solow conjectured:

We identify and prove that the interaction between a stable natural system and a self-stabilizing market mechanism can lead to cyclical or even chaotic behaviour. A built-in self-stabilizing market mechanism will not always serve the function of stabilization. Under certain conditions, it may increase the amplitude of fluctuations and have the effect of destabilization, as demonstrated in this paper. Therefore, by incorporating a self-stabilizing market mechanism, this model yields a result that contradicts Solow's (1973) conjecture that the market mechanism will have the effect of smoothing the time path of the world economy. -- Hans Gottinger, 1998

Are you for the TPP? OR WOULD YOU RATHER SEE THE TERRORISTS WIN?

THIS is despicable, fear-mongering propaganda:

Mathiness, Growth and Increasing Returns

The following was originally posted on Ecological Headstand in October, 2012 under the title, Endogenous Growth Theory and Ecological Unequal Exchange: linkage, displacement and deflection of 'diminishing returns'. Paul Romer's rant on mathiness has provoked a response from Lars Syll regarding the issue of increasing returns to scale, which I discussed in this post.

What the late Stephen G. Bunker wrote bears repeating:

The crucial difference between production and extraction is that the dynamics of scale in extractive economies function inversely to the dynamics of scale in the productive economies to which world trade connects them.

Rather than repeat what Bunker wrote, though, I'm going to cite, later, a longer piece by Nicholas Kaldor from his 1985 Hicks Lecture that makes a somewhat similar point. But first, I want to present some background on an old debate and a 'new' theory.

In December 1926, The Economic Journal published an article by Piero Sraffa dealing with "that difficult branch of economic theory" -- the theory of increasing returns. Over the next five years it published responses from Cecil Pigou, G. F. Shove, Lionel Robbins and Allyn Young and, in March 1930, a symposium on the topic by D. H. Robertson, Sraffa and Shrove.

Almost exactly 60 years later, in October 1986, The Journal of Political Economy, published Paul D. Romer's "Increasing Returns and Long-Run Growth," an important contribution to so-called New Growth Theory. Romer took his cue explicitly from Young's 1928 paper, "Increasing Returns and Economic Progress" and although he mentioned the precedents of Adam Smith's pin factory and Alfred Marshall's distinction between internal and external economies, he skipped over the rest of the debate in which Young's contribution had appeared.

Critics have argued that Romer's usage of increasing returns and external economies is not faithful to Young's formulation, in that it "overlooked Young's emphasis on the reciprocal relations between the division of labor and the feed-back into aggregate demand as a requirement for growth," "neglected Young's categorical rejection of the usefulness of Walrasian general equilibrium models" and wrested "Marshall's microeconomic concepts of internal and external economies out of his theory of value and price to serve as a basis for amending constant return production functions to exhibit increasing returns for the macroeconomy" (Rima 2004, 181-182).

My concern here is with a more conspicuous omission in Romer's analysis -- the distinction between increasing returns as characteristic of manufacturing and diminishing returns as dominant in agriculture and extractive industries (Young 1928, 528-529). The words "agriculture," "land" and "rent" do not appear in Romer's 1986 article. When Romer mentions diminishing returns, it is only in the context of research activity or the limiting assumptions of classical conventional growth models. But diminishing returns is a specific limitation, not a generality that can be indiscriminately "offset" by increasing returns. In a lecture given at Harvard in 1974, "What is Wrong with Economic Theory," Kaldor explained that "it is the income of the agricultural sector, (given the "terms of trade") that really determines the level and the rate of growth of industrial production, according to the formula:"

Or, in prose, economic growth depends on either a relative reduction in the income of agriculture or increased demand from agriculture for industrial products. And, of course, increased demand from agriculture implies increased agricultural production, which at some point confronts the problem of diminishing returns. In his 1985 Hicks Lecture, Kaldor explained the inverse dynamics of scale between industrial and agricultural areas, parenthetically, in terms of the "differing manner of operation of perfect and imperfect competition":

The basic requirement of continued economic growth is that the various complementary sectors expand in due relationship with each other -- that is to say that general expansion is not held up by "bottlenecks" in key sectors. However, in the course of time, under the influence of technical progress, both of the natural-resource saving and labour-saving kind, the requirements of expansion may become considerably modified. In the manufacturing sector which becomes more important as real incomes rise, there are considerable economies of scale, as a result of which manufacturing activities are subject to a "polarization process" -- they are likely to develop in a few successful centres, and their success has an inhibiting effect on similar developments in other areas. The realisation of these economies of scale normally requires also that numerous processes of production which are related to each other are carried out in close geographical proximity.

As a result different regions experience unequal rates of growth of output and of population. The industrial areas experience a growing demand for labour which may involve immigration from other areas once their own surplus labour is exhausted. Technological development in primary production on the other hand, tends to be more labour-saving than land-saving, so that the growth of output may go hand in hand with a falling demand for labour; and though output per head may grow fast in real terms, the level of wages will tend to remain low (and may even be falling) as a result of a growing surplus population. Since labour cost per unit of output is the most important factor in determining selling prices (at any rate under competitive conditions) the low wages prevailing, in terms of industrial products, will mean that the terms of trade will move unfavourably to primary producers, which may be the main factor, along with the low coefficient of labour utilisation, for their state of "under-development" characterised by low standards of living. The important contrast -- which I regard as a major factor in the growing inequality of incomes between rich and poor countries -- resides in the fact that the benefit of labour saving technical progress in the primary sector tends to get passed on to the consumers in the secondary sector in lower prices, whereas in the industrial sector its benefits are retained within the sector through higher wages and profits. (The main reason for this difference lies in the differing manner of operation of perfect and imperfect competition.)

Kaldor's parenthetical explanation suggests more than it reveals. Sraffa's 1926 discussion is the key to unpacking why Kaldor specifies perfect competition as characteristic of primary production and associates imperfect competition with manufacturing industry. The key determinants, in that view, are the shapes of the firms' supply curves (increasing or diminishing returns) and the nature of external economies.

Externality and Ecological Overshoot

Marshall's notion of "external economies" has gone through a series of modifications to become today's "externalities." Pigou extended the concept beyond Marshall's industrial agglomerations and distinguished between “incidental uncharged disservices” and "incidental uncompensated services." The former became known as negative externalities and the latter as positive externalities, although typically it is the negative environmental externalities that are referred to simply as externalities. There is a seeming but misleading symmetry to the two terms and a similarly illusory quality of reciprocity within each of them. When a disservice is uncharged or a service is uncompensated there is a presumption that there might otherwise have been a "whom" to charge or to compensate and that the missing invoice could have been denominated in currency. In other words, the charging and compensating would appear to be a financial transaction between two parties, both of whom must be assumed to be legal persons. In reality, the services or disservices performed may (or may not!) be extremely indirect and the parties affected incredibly diffuse, both in space and time. Mundane examples of factory soot and laundry hanging out to dry may be more mystification than illumination.

In the case of the external economies of increasing returns and diminishing returns, respectively, although they function inversely to one another it is a double inversion that ultimately produces parallel incentives to firms in manufacturing and agricultural or extractive industries. In other words, while firms in the manufacturing center are routinely considered to be the beneficiaries of external economies that generate increasing returns in the sense that they receive uncompensated services, firms in the extractive periphery may also benefit from the externalization of diminishing returns in that they are able to avoid being charged for the environmental disservices they inflict. In effect, the cost of diminishing returns is first displaced to poor regions where it is then deflected onto society and the environment. Unequal exchange thus takes place, that is to say, in the global external economies, "behind the back", so to speak, of formal monetary transactions.

A Veritable Epidemic of Mathiness

Paul Romer’s eruption against mathiness has been quite a spectacle.  Here you have an iconic name in modern economic theory throwing a fit in public, naming names (some of them also iconic) and denouncing his adversaries as enemies of scientific and ethical norms.  It’s a bit over the top, a bit overdue and a bit underconsidered.

I want to focus on the underconsidered part.  I was alerted to this aspect of Romer’s original paper by his sideswipes at Joan Robinson and the UK faction of the Cambridge capital controversy.  Now, it happens that I take a middle position on this dispute: I think they were both in some sense wrong.  The British Cantabrigians, along with their Italian comrades, were arguing from a model whose equilibrium assumption (equal rates of profit in all processes) is meaningless, in a mathiness sense, in an intertemporal context.  (If you think Lucas rational expectations is a stretch, Sraffa rational expectations is even crazier.)   But the MITers were also defending an aggregation of physical capital and its equivalence to a sum of financial capital that was also shown to be mathy—see here and here.  Romer’s attack on Robinson was signaling that a double standard was at work.

In fact, economics is a veritable empire of mathiness.  I agree with Romer that the use of algebraic entities that have no meaningful correspondence to real world objects and deliberate obfuscation through the use of words with multiple meanings are sins against science, but that is just the beginning.  Here are two more, one theoretical, the other empirical:

1. Equilibrium with mechanisms.  A large part of economic theory takes the form of equilibrium conditions and the comparative statics thereof.  Even theories that describe events transpiring through time usually take the form of traversals: routes mapped from an initial equilibrium state to its successor.  What usually goes missing are the mechanisms, the processes, in principle observable in the real world, by which actors revise their behavior and produce new collective outcomes.  Without such mechanisms the concept of equilibrium is meaningless: you can’t get there from here.  One symptom of this malady is the inability to distinguish between equilibrium conditions and identities—equal signs and identity signs.  The difference is that causal processes apply to the first but not the second, so if your theoretical world lacks processes altogether you won’t know what that extra little line, ≡ vs =, is all about.

2. Misuse of null hypothesis significance testing.  Suppose you have a theory that A causes B.  You can’t observe this directly (or you haven’t bothered to try), but you can infer that, if this is true, a relationship between two measurable variables, an x and a y, will occur.  So you do a study on x and y, run a significance test and conclude you can reject the null hypothesis that x and y are unrelated.  And, if you are like most empirical economists, you will then announce that you have “tested” your theory about A and B and have found that the evidence is “consistent with” it.  But wait!  There are other theories that would also generate expectations on x and y and they may be inconsistent with yours.  If the x-y business actually lends more support to one of these other theories than to yours, the evidence is saying the opposite of what you claim it says.  The reality is that rejecting a null hypothesis says nothing at all about which of the many possible explanations for the non-null is correct.  A conscientious empiricist would put all the potential theories on the table and consider in a systematic manner how the new evidence alters the relative credence we should give them.  The reason utterly implausible theories live on, decade after decade, in economics is that low-bar implications—implications suggested by many theories of greater or lesser plausibility—survive significance testing and are then proclaimed “consistent with” the particular theory to which the researcher is attached.  This too is a kind of mathiness: lots of fancy econometric technique wrapped around a dishonest and thoroughly unscientific core.

So I have mixed feelings about the Romer meltdown.  I definitely understand where he’s coming from and how frustrating it is to see ideologues deploying math to obfuscate rather than clarify.  But the problem is much wider and deeper than he seems to realize.

Denial, Then and Now: "Is the End of the World at Hand?" "Is the Economic System Self-Adjusting?"

"I would like to say why I think that the Doomsday Models are bad science and therefore bad guides to public policy," -- Robert M. Solow, 1973

1973 was 42 years ago and 42 just happens to be the answer "to Life, the Universe and Everything," according to Deep Thought in Douglas Adams's Hitchhiker's Guide to the Galaxy. When challenged, the computer replied that he had "checked it very thoroughly and that quite definitely is the answer. I think the problem, to be quite honest with you, is that you’ve never actually known what the question is."

John Peet used that Deep Thought dialogue to frame his contribution to a 1997 forum, "Georgescu-Roegen versus Solow/Stiglitz." In his 1973 article, "Is the End of the World at Hand?" Solow framed his response to what he called the Doomsday Models with two questions, "You can ask: Is growth desirable? Or you can ask: Is growth possible?" "But..." as the title to Peet's commentary asked, "what is the real question?"

How about just plain old "What is growth?"? In his 1975 article, "Energy and Economic Myths," Georgescu-Roegen recalled that:

One confusion against which Joseph Schumpeter insistently admonished economists, is that between growth and development. There is growth when only the production per capita of current types of commodities increases, which naturally implies a growing depletion of equally accessible resources.

That is to say, if we are talking about growth, strictly speaking, then the depletion of resources is inherent in the process by definition. Solow's exposition of why he thought  The Limits to Growth was bad science relied on blurring the distinction between qualitative development and quantitative growth and counting the former as an instance of the latter. This sort of legerdemain is, of course, standard in so-called growth economics.

Momentarily I will exhume and dissect the entrails of Solow's 1973 rebuttal to Limits but first a word from Geoff Tily, senior economist with the Trade Union Congress in the U.K. In a review of Diane Coyle's GDP: A Brief but Affectionate History, Tily argued that

...the development of national income accounting was as a means to an end, not as an end in its own right. The accounts were developed to support policy: to resolve the unemployment crisis of the Great Depression and to aid the deployment of national resources to their fullest possible extent for the conduct of the Second World War. The value of GDP, or rather at that stage ‘national income’, was of only slight interest.

Moreover, it is, I think, fundamental to recognise that these theoretical and practical initiatives were aimed at the level of activity – at the increased and then full employment of resources and the full extent of national production – rather than the growth of activity. At this stage there was no notion on the part of policymakers that the level of activity might be encouraged to grow in any systematic or uniform way from year to year; the intention was achieving one-off level shifts.

In summary, full employment and the effective deployment of national resources were the ends sought and national income accounting was seen as a means to those ends. "Growth" of national income had nothing to do with it. Eventually, growth became the goal -- even to the extent that full employment has come to be viewed as a dispensable side effect of growth that needs to be constrained to avoid accelerating inflation.

This targeting and exaltation of GDP growth was not something that Keynes had proposed. Pointing out that growth wasn't a "regular economic concept" before the war, Roy Harrod, one of the pioneers of growth theory, didn't "see how Keynes can have been expected to have systematic idea on growth; his systematic ideas related to full employment." (quoted by Tily)

So what is growth? Is it a means to the end of full employment? Is it a bait-and-switch surrogate policy objective in its own right? Is it a quantitative measurement of unmeasurable qualitative change? Those are not the questions Solow addressed in "Is the End of the World at Hand?"

The question Solow asked instead was whether the "basic assumption" made by Limits to Growth was any good. What was that basic assumption? According to Solow, the basic assumption of Limits to Growth was "that there are no built-in mechanisms by which approaching exhaustion tends to turn off consumption gradually and in advance." No built-in mechanisms.

Rephrased positively, Solow was arguing that there are built-in mechanisms that will turn off consumption gradually and in advance. There are built-in mechanisms. There are built-in mechanisms. That is the answer: 42.

Lord Keynes took a different view in the BBC radio address in which he asked (and answered) the question, "Is the Economic System Self-Adjusting?" Keynes's answer, in a word, was "No." Of course Keynes was talking about employment, not the consumption of natural resources.

But wait... so was Solow! The core of Solow's argument was an analogy between labor productivity and natural resource productivity:

It is a commonplace that if you calculate the annual output of any production process. large or small, and divide it by the annual employment of labor, you get a ratio that is called the productivity of labor. ...

Symmetrically, though the usage is less common, one could just as well calculate the GNP per unit of some particular natural resource and call that the productivity of coal, or GNP per pound of vanadium. ...

Why shouldn't the productivity of most natural resources rise more or less steadily through time, like the productivity of labor?

After a brief discussion of productivity gains for various minerals -- or non-gains, "GNP per barrel of oil was about the same in 1970 as in 1951" -- Solow concluded:

So there is no really no reason why we should not think of the productivity of natural resources as increasing more or less exponentially over time.

But then the overshoot and collapse are no longer the inevitable trajectory of the world system, and the typical assumption-conclusion of the Doomsday Model falls by the wayside.

But Solow was not the first to compare the productivity of labor to the productivity of coal. Stanley Jevons did it a century earlier: "It is wholly a confusion of ideas," wrote Jevons in The Coal Question, "to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth." He went on to explain:

As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before.

So there you have it -- nothing to worry about, really. There is a built-in mechanism. The built-in mechanism will see to it that the economical use of natural resources will turn off consumption gradually and in advance lead to an increase in consumption. Well, er, pretend you didn't see that built-in mechanism...

Unpacking the tension between Solow, Keynes and Jevons, it would be safe to say that those "built-in mechanisms" don't always give exactly the results that would please us the most. There are feedback loops and then there are loops feeding back the feedback. The productivity of coal is connected to the productivity of labor in a way complementary to the way that full employment of labor is connected to the consumption of coal (or other natural resources). Either the built-in mechanism won't save us or, alternatively, there is no built-in mechanism. Select one from that menu.

To reprise Deep Thought's deep thought: "I think the problem, to be quite honest with you, is that you’ve never actually known what the question is."

The Party of Order in Greece

As Greece lurches dramatically to its final economic showdown, there is an uncomfortable question that needs to be asked: is there an authoritarian grouping in the country whose seizure of power would be recognized and supported by its European “partners”?

It is absolutely clear at this point that a major objective of the current European leadership is to depose Syriza.  But there is no democratic mechanism by which this can be accomplished.  Assume an economic breakdown in which Greek savings accounts are wiped out.  There will be mass discontent, but it will not be unanimous; many Greeks will see this cataclysm as a deliberate assault to humiliate and suppress them.  Without new elections, which are still far off, there will be political upheaval but not regime change.  This is where the Party of Order comes in, literally.  If there is an alliance between segments of the military and a portion of the business class, it can suspend the constitution and install a new government.  I expect that there are discussions in some circles right now about this possibility.

The first question is, who would step into this role?  The second is, is any contact between them and key decision-makers in Europe currently taking place?

My personal view is that the old-school authoritarianism of the colonels (echoed in Golden Dawn) is not the primary threat, although I know nothing of the situation on the ground.  I suspect Europe is more likely to support a liberal authoritarianism, one that gives lip service to personal freedom and enlightenment ideals.  I can imagine some figures from the previous political establishment, backed by tanks, who call for peace, normalization and new elections.

If conversations along these lines are not ongoing, European policy is incoherent.

Mathiness is Next to Growthiness

What should worry economists is the pattern, not any one of these papers. And our response. Why do we seem resigned to tolerating papers like this? What cumulative harm are they doing? -- Paul Romer

It is bracing to see the intense (dare I call it petulant?) indignation expressed by Paul Romer toward papers by McGrattan and Prescott, Lucas and Moll, and Boldrin and Levine. He goes so far as to confess "embarrassment" that his suggestions as discussant were acknowledged by McGrattan and Prescott in an earlier version of their paper. He complains of "a lemons equilibrium in the market for mathematical theory" and laments "years of being bullied by bad theory."

Economists detained after theory rumble between "Freshwater" and "Saltwater" gangs

Superficially, Romer's diatribe against mathiness may recall Nicolas Georgescu-Roegen's principled objection to unhinged "arithmomorphism." But any perceived resemblance is purely coincidental.

Georgescu-Roegen was described in a critical note as "the methodological conscience of the profession for over a decade" whose mathematical renown rendered "his closely argued objections to the domination by mathematical methods... all the more welcome." In "Methods in Economic Science" (1979), Georgescu-Roegen wrote:

"According to the temper that has prevailed for some time now in the social sciences, but especially in economics, the contributions that deserve the highest praise are those using a heavy mathematical armamentarium; the heavier and the more esoteric, the more worthy of praise. Protests against this situation have not failed to be made sufficiently often to have deserved attention. What is more, protests of this kind were made not only by "verbal" economists, such as Thorstein Veblen and Frank H. Knight, but also by some who were well familiar with the mathematical tool, for example, Alfred Marshall, Knut Wicksell, and Lord Keynes. Knight lamented that there are many members of the economic profession who are "mathematicians first and economists afterwards." The situation since Knight’s time has become much worse. There are endeavors that now pass for the most desirable kind of economic contributions although they are just plain mathematical exercises, not only without any economic substance but also without mathematical value. Their authors are not something first and something else afterwards; they are neither mathematicians nor economists. How dangerous is the infatuation with pure mathematical symbolism is proved by the fact that voices from the circle of natural scientists have also often denounced it. ...

The fundamental reason why we cannot do without dialectical concepts is that actuality, at least as seen by the human mind, continuously changes qualitatively. … 

The most we can expect from an arithmomorphic model is to depict pure growth, or rather pure quantitative variations of qualitatively different but self-identical elements. 

In a 1981 commentary on Georgescu-Roegen's paper, Salim Rashid defended economists' persistence in undialectical methods as lying "not in their failure to appreciate the importance of dialectical logic, but in the institutional structure within which they live and work." To illustrate the utility of mathiness to career survival "at any reasonably good university," Rashid offered what he described as a "somewhat exaggerated" account of the "inimitable merits of mathematics" for facilitating "the process of grinding out articles." Furthermore, he maintained,

"...it is not the good mathematical economists or econometricians who insist upon the value of mathematical methods... The best users of mathematics can always move to a related field and do their research; it is the hordes of practitioners with lesser abilities who feel it essential to insist upon the value of mathematical methods."

By this account, then, the value of excessive mathiness was that it enabled mediocre junior faculty to survive and gain promotion in "any reasonably good university." In his reply to Rashid's commentary, Georgescu-Roegen asked, "Since publish or perish applies to all academe, why is it that economists alone can subsist by automatically grinding out empty exercises from the mathematical mechanism?" His answer was that "the American economics profession is dominated by a powerful and well-entrenched establishment determined to defend at all cost the type of economics by which virtually all its members climbed to the summit."

Romer lionizes Robert Solow and Gary Becker in contrast to Prescott, et al. In my opinion, Romer vastly overstates the cogency of Becker's contribution. As for Solow's growth theory, Georgescu-Roegen had a few things to say about that, too. In "Dynamic Models and Economic Growth" (1975), Georgescu-Roegen characterized Solow's model as one of "the most pertinent examples of the shortcomings of the mechanico-descriptive approach":

The economic literature of the last hundred years abounds in examples of this [mechanico-descriptive] category. The situation is the inevitable consequence of the mechanistic epistemology of our Neoclassical forefathers, who succeeded in convincing almost every subsequent economist that, if economics is to be a science at all, it must be set up as 'the mechanics of utility and self-interest'. We may mention, first of all, the picture of the economic process as  a self-sustained circular movement between production and consumption (indifferently, between consumption and production) which adorns the most respected manuals. Perfect reversibility is present everywhere. It constitutes the main pillar of the theory of market equilibrium. According to the ultra-familiar picture, if demand shifts from D to D ', the market moves from E to E'; and should, later, the factor responsible for the shift disappear, the market would return to E, in a manner perfectly similar to that of a mechanical pendulum which can swing back and forth with equal ease. True, no economist has even suggested that a process of production may be reversed so as to convert pieces of furniture back into trees. However, the classical theory of business cycles -- as this traditional name indicates -- rests on the idea that the entire economic process may come back to any previous position by following the same path in reverse. We should also note that the entire theory of production is still based on the simple formula known as the production function, which is not a satisfactory description even of the reproducible process of production, i.e., of the simplest possible arrangement. But the most pertinent examples of the shortcomings of the mechanico-descriptive approach are the standard dynamic models beginning with that of Harrod and Domar and ending with those of Solow and Leontief. ...

…no analysis which, instead of assuming away the qualitative change associated with an actual process, focuses on that very change can attain its aim through an arithmomorphic model alone. The reason is that there is an irreducible incompatibility between qualitative change, i.e., between essential novelty, and arithmomorphic structures. It is this last point that shatters the generally accepted validity of the standard dynamic models as adequate representations of actual processes.  

…mere growth -- i.e., change confined to quantity -- cannot exist in actuality continuously. The same is true even for the so-called stationary state.  Briefly, continuous existence in a finite environment necessarily requires qualitative change. And it is this qualitative change that accounts for the irreversibility of the economic process, of any actual process for that matter.   

Irreversibility and reversibility are the very properties that distinguish actual processes (which all are evolutionary in some sense or another) from those governed only by the laws of mechanics. We may therefore define a purely dynamic system as a system capable of returning to any of its previous positions. Certainly, all dynamic economic systems fulfil this condition: the fundamental notion behind dynamic economics is that investing and disinvesting, growth and contraction, are absolutely symmetrical operations.

Note that Georgescu-Roegen didn't exclude the "stationary state" from his critique. In a footnote, he singled out the fallacy of the Limits to Growth prescription: "Incidentally, this conclusion exposes the fallacy of those topical programmes which see the ecological salvation of mankind in a stationary state -- as the Club of Rome, for instance, does. See Donella Meadows et al." In "Energy and Economic Myths" (1975), however, Georgescu-Roegen noted the irony that Limits to Growth caused such consternation among economists -- "criticism of the report has come mainly from economists" (including Solow) -- apparently because it "employed analytical models of the kind used in econometrics and simulation works." What irked economists, in Georgescu-Roegen's view, was the intrusion on what they regarded as their turf:

Let us begin by recalling, first, that economists, especially during the last thirty years, have preached right and left that only mathematical models can serve the highest aims of their science. With the advent of the computer, the use of econometric models and simulation became a widespread routine. The fallacy of relying on arithmomorphic models to predict the march of history has been denounced occasionally with technical arguments. But all was in vain. Now, however, economists fault The Limits to Growth for that very sin and for seeking "an aura of scientific authority" through the use of the computer; some have gone so far as to impugn the use of mathematics. Let us observe, secondly, that aggregation has always been regarded as a mutilating yet inevitable procedure in macroeconomics, which thus greatly ignores structure. Nevertheless, economists now denounce the report for using an aggregative model. Thirdly, one common article of economic faith, known as the acceleration principle, is that output is proportional to capital stock. Yet some economists again have indicted the authors of The Limits for assuming (implicitly) that the same proportionality prevails for pollution — which is an output, too! Fourthly, the price complex has not prevented economists from developing and using models whose blueprints contain no prices explicitly — the static and dynamic Leontief models, the Harrod-Domar model, the Solow model, to cite some of the most famous ones. In spite of this, some critics (including Solow himself) have decried the value of The Limits on the sole ground that its model does not involve prices.  

The final and most important point concerns the indisputable fact that, except for some isolated voices in the last few years, economists have always suffered from growthmania. Economic systems as well as economic plans have always been evaluated only in relation to their ability to sustain a great rate of economic growth. Economic plans, without a single exception, have been aimed at the highest possible rate of economic growth. The very theory of economic development is anchored solidly in exponential growth models. But when the authors of The Limits also used the assumption of exponential growth, the chorus of economists cried "foul!" This is all the more curious since some of the same critics concomitantly maintained that technology grows exponentially. Some, while admitting at long last that economic growth cannot continue forever at the present rate, suggested, however, that it could go on at some lower rates.

As these observations from Georgescu-Roegen testify, mathiness has always been deeply implicated in growth theory from the earliest days. This analysis continues in the follow-up post, Denial, Then and Now: "Is the End of the World at Hand?" "Is the Economic System Self-Adjusting?"

Horse Race Coverage, Eurozone Finance Edition

The US press is infamous for covering domestic politics largely in terms of “who’s ahead?” rather than “whose policies are in loose conformity with reality?”  The same seems to go for its international economic coverage.

Today’s New York Times has a hit piece on Yanis Varoufakis, who it says has a “flair for inflaming the debate about his country’s economic future.”  Inflaming or informing?  Does it matter?  Does anyone at the Times bother to ask?

Anyone who is paying attention to the eurozone situation knows that the driving force pushing Greece to the wall, in the immediate term, is the European Central Bank, which has been dripfeeding the Greek financial system, intensifying capital flight and all but guaranteeing a financial collapse—the Fahrenheit 451 of central bank firefighting outfits.  Greece, of course, would have massive problems in any case, but the gun directly to its head belongs to the ECB.

Mario Draghi, the guy who would “do whatever it takes” to shore up the market for peripheral sovereign debt in the eurozone, has made an exception for Greece.  His official justifications are transparently erroneous.  Fear of suffering losses?  It’s no different for Greece than Spain, Portugal or anyone else: if the ECB firmly backstops the market with its unlimited ability to buy bonds, no default is possible.  It’s the same with any central bank that controls a currency in which the debt is denominated.

If the official reasons are wrong, what’s the real reason?  This is where Varoufakis comes in.  He says it’s because the German representatives to the ECB are holding Draghi hostage.  I don’t know whether or not this is true; I’ve seen speculation to this effect, but whether it’s the story behind the story, or even a part of it, is unclear.  Since Varoufakis has not tried to talk back his remarks, I assume he wants to spur public debate on the Bundesbank and its pressure on the ECB.  Perhaps he thinks that there is a difference between that arm of the policy apparatus and the views of Merkel and Schäuble.

In its diatribe against Varoufakis, the Times article never stops to ask, is he right about the Bundesbank and ECB?  Nor, of course, do they devote even a single word to the question of whether the ECB position on Greece is anything less than insane.

And as for the “convoluted scheme” suggested by Varoufakis, that Greece borrow from the European Stability Mechanism rather than the ECB, it’s no more convoluted than the current arrangement, and the apparent justification is political rather than economic—to reduce the direct pressure of the ECB on the day to day survival of the Greek financial system.

I’m reminded of an old saying: you point to a problem in the world and the press writes an article about your finger.

Exit, Voice and Misbehavior

Publication of Richard Thaler's Misbehaving has brought renewed attention to behavioral economics and to the "Libertarian Paternalism" advocated by Thaler and his co-author in their 2008 best-seller, NUDGE. In an earlier post, Libertarian Paternalism and the Pantomime of the Rational Actor, Sandwichman expressed deep reservations about the conceptual coherence of the LibPat argument. He compared the incongruous pastiche of rational choice and nudging to a parallel mash-up that occurred in Marxism, as criticized in the late 1940s by Harold Rosenberg.

My co-blogger, Barkley Rosser, claimed that my argument was "substantially the same" as the anti-paternalist libertarian case advanced by Mario Rizzo and Douglas Whitman. Having now read their "Little Brother Is Watching You: New Paternalism on the Slippery Slopes," I can affirm that I am "in league with" those authors' views when they write, "Our claim is not that slippery slopes are the only objection to the new paternalism." Beyond that, my main objections to LibPat are fundamentally different than Rizzo's and Whitman's. I part company with the latter authors at a point where they are still in consensus with Sunstein and Thaler.

Rizzo and Whitman state that their main problem with the libertarian paternalist framework is that "it defines freedom of choice (and libertarianism) in terms of costs of exit, without any attention to who imposes the costs and how [emphasis in original]." The go on to make it clear that they define choice as corresponding to property and personal rights and public policy as a coercive abridgement of those rights.

In other words, Rizzo and Whitman agree with Sunstein and Thaler's narrow framing of choice exclusively in terms of the cost of exit. This is essentially a marketplace definition of choice, as Albert Hirschman pointed out in Exit, Voice and Loyalty. Neither Sunstein and Thaler nor Rizzo and Whitman address the other element of choice: voice.

Turning to Hirschman's classic to borrow his definitions of exit and voice, I realized that Hirschman framed his discussion explicitly in terms of the misbehavior of economic agents. The following passage from the introduction to Exit, Voice and Loyalty proposes a much more satisfactory approach to the "misbehaving" of humans than does the technocratic framing fix of Nudge:

Under any economic, social, or political system, individuals, business firms, and organizations in general are subject to lapses from efficient, rational, law-abiding, virtuous, or otherwise functional behavior. No matter how well a society’s basic institutions are devised, failures of some actors to live up to the behavior which is expected of them are bound to occur, if only for all kinds of accidental reasons. Each society learns to live with a certain amount of such dysfunctional or misbehavior; but lest the misbehavior feed on itself and lead to general decay, society must be able to marshal from within itself forces which will make as many of the faltering actors as possible revert to the behavior required for its proper functioning. This book undertakes initially a reconnaissance of these forces as they operate in the economy; the concepts to be developed will, however, be found to be applicable not only to economic operators such as business firms, but to a wide variety of noneconomic organizations and situations. 

While moralists and political scientists have been much concerned with rescuing individuals from immoral behavior, societies from corruption, and governments from decay, economists have paid little attention to repairable lapses of economic actors. There are two reasons for this neglect. First, in economics one assumes either fully and undeviatingly rational behavior or, at the very least, an unchanging level of rationality on the part of the economic actors. Deterioration of a firm’s performance may result from an adverse shift in supply and demand conditions while the willingness and ability of the firm to maximize profits (or growth rate or whatever) are unimpaired; but it could also reflect some “loss of maximizing aptitude or energy” with supply and demand factors being unchanged. The latter interpretation would immediately raise the question how the firm’s maximizing energy can be brought back up to par. But the usual interpretation is the former one; and in that case, the reversibility of changes in objective supply and demand conditions is much more in doubt. In other words, economists have typically assumed that a firm that falls behind (or gets ahead) does so “for a good reason”; the concept — central to this book — of a random and more or less easily “repairable lapse” has been alien to their reasoning. 

The second cause of the economist’s unconcern about lapses is related to the first. In the traditional model of the competitive economy, recovery from any lapse is not really essential. As one firm loses out in the competitive struggle, its market share is taken up and its factors are hired by others, including newcomers; in the upshot, total resources may well be better allocated. With this picture in mind, the economist can afford to watch lapses of any one of his patients (such as business firms) with far greater equanimity than either the moralist who is convinced of the intrinsic worth of every one of his patients (individuals) or the political scientist whose patient (the state) is unique and irreplaceable. 

Having accounted for the economist’s unconcern we can immediately question its justification: for the image of the economy as a fully competitive system where changes in the fortunes of individual firms are exclusively caused by basic shifts of comparative advantage is surely a defective representation of the real world. In the first place, there are the well-known, large realms of monopoly, oligopoly, and monopolistic competition: deterioration in performance of firms operating in that part of the economy could result in more or less permanent pockets of inefficiency and neglect; it must obviously be viewed with an alarm approaching that of the political scientist who sees his polity’s integrity being threatened by strife, corruption, or boredom. But even where vigorous competition prevails, unconcern with the possibility of restoring temporarily laggard firms to vigor is hardly justified. Precisely in sectors where there are large numbers of firms competing with one another in similar conditions, declines in the fortunes of individual firms are just as likely to be due to random, subjective factors that are reversible or remediable as to permanent adverse shifts in cost and demand conditions. In these circumstances, mechanisms of recuperation would play a most useful role in avoiding social losses as well as human hardship. 

At this point, it will be interjected that such a mechanism of recuperation is readily available through competition itself. Is not competition supposed to keep a firm “on its toes”? And if the firm has already slipped, isn't it the experience of declining revenue and the threat of extinction through competition that will cause its managers to make a major effort to bring performance back up to where it should be? 

There can be no doubt that competition is one major mechanism of recuperation. It will here be argued, however (1) that the implications of this particular function of competition have not been adequately spelled out and (2) that a major alternative mechanism can come into play either when the competitive mechanism is unavailable or as a complement to it. 

Enter “Exit” and “Voice”

The argument to be presented starts with the firm producing saleable outputs for customers; but it will be found to be largely—and, at times, principally—applicable to organizations (such as voluntary associations, trade unions, or political parties) that provide services to their members without direct monetary counterpart. The performance of a firm or an organization is assumed to be subject to deterioration for unspecified, random causes which are neither so compelling nor so durable as to prevent a return to previous performance levels, provided managers direct their attention and energy to that task. The deterioration in performance is reflected most typically and generally, that is, for both firms and other organizations, in an absolute or comparative deterioration of the quality of the product or service provided. Management then finds out about its failings via two alternative routes: 

(1) Some customers stop buying the firm’s products or some members leave the organization: this is the exit option. As a result, revenues drop, membership declines, and management is impelled to search for ways and means to correct whatever faults have led to exit. 

(2) The firm’s customers or the organization’s members express their dissatisfaction directly to management or to some other authority to which management is sub ordinate or through general protest addressed to anyone who cares to listen: this is the voice option. As a result, management once again engages in a search for the causes and possible cures of customers’ and members’ dissatisfaction.  

KLUDGE

There once was a very wealthy man whose children loved to play with toys. One day he came home only to see that his house was on fire.

"Fire! Fire!" the man shouted, as loud as he could. But the children didn't hear and went on playing with their toys.

"I have some wonderful new toys for you!" he called. And out of the house they ran and were saved.

Can TPP Be Saved And Is It Worth It?

Of those who post here and probably most of our readers, I remain more attached to the general argument for free trade, which is the cause that the TP, now doing badly in the US Senate after the failure to stop debate on fast track authority for it.  However, as Dean Baker has been pointing out from Day One, it is unclear if it is really a free trade agreement at all.  I see three big problems with it, and one possible thing that might both improve it and help it pass.

The one that would help improve it would be add some serious assistance for laid off workers.  It may be that the GOPsters simply will not support this, but this would probably get some Dems in the Senate to change their votes, and it is the right thing to do.  I have been looking at the international data on Active Labor Management Policies, and the US simply has near zero.   We are way behind all other high income nations on this.  Those Nordic nations are very open, far more than we are, totally dependent on exports, and so very free trade, and they spend a lot on this, with Denmark spending 2.3% of its GDP on it.  Sweden used  to be tops, but they are down to 1.1%, making Denmark the "new Sweden."  OTOH, the US is barely above zero, and if anything the TTP is supposed to cut the little we have.  What is with this?  This is really a no brainer.  Help those who might lose out, and maybe it might be worth it.

Maybe.  The next big problem with it is all the secrecy.  We do  not know what is in this, and the president and its supporters have gone out of their way to keep it secret.  This is just insane.  Senators can only look at it in a sealed room with no aides.  What are they hiding?  This just makes me lose pretty much all enthusiasm I might have for this.  What were (are) they thinking.  Just plain nuts.  (BTW, I have read that Vietnam would be the big gaining country, which I have no problem with, but given all this secrecy, how is anybody supposed to know?)

Finally, there is the whole intellectual property rights part.  Again, details are missing, but most reports suggest that enforcing US intellectual property rights abroad is a very big part of this, maybe the biggest, a point Dean B. has emphasized.  But it is probably the case that we have overdone this already in the US.  We are already paying way too much for drugs, and why on earth should Disney own the rights to Winnie the Pooh nearly a century after the books were written.  We are supposed to support the imposition of this sort of rent seeking nonsense on the rest of the world too?  My enthusiasm is nowhere at all on this part, quite the opposite.  Dump this stuff.

Again, at the bottom line, given that we do not even know which industries in the US are  most likely to be hurt by all those Vietnamese imports, it would behoove the supporters to do something to minimize the damage to those who might be injurned, the laid off workers.  Put some decent support in their for those, and this thing might be worth passing, might.

Barkley Rosser