Weekend read – A STIGLITZ ERROR?

from Peter Radford

You can’t fight a war without understanding your enemy.  That’s an adage as old as war itself.  Which means it’s very old.

Joe Stiglitz doesn’t understand his enemy.

Now, that’s an odd thing to say bout someone who’s worldview is hardly a secret.  Stiglitz has given it his best shot for decades.  He’s one of the few big name economists worth reading on a regular basis.  But that doesn’t mean he always says things that add up.

He’s a roll lately and his latest book is attracting a lot of attention. So it should because it is an attempt to undo some of the immense damage economists have done to society over the past few decades.  In particular it is an attempt to reframe the notion of “freedom”.

Let’s set the stage:  In a recent article in Project Syndicate Stiglitz begins thus:

“Around the world, populist nationalism is on the rise, often shepherding to power authoritarian leaders. And yet the neoliberal orthodoxy – government downsizing, tax cuts, deregulation – that took hold some 40 years ago in the West was supposed to strengthen democracy, not weaken it. What went wrong?

Part of the answer is economic: neoliberalism simply did not deliver what it promised. In the United States and other advanced economies that embraced it, per capita real (inflation-adjusted) income growth between 1980 and the COVID-19 pandemic was 40% lower than in the preceding 30 years. Worse, incomes at the bottom and in the middle largely stagnated while those at the very top increased, and the deliberate weakening of social protections has produced greater financial and economic insecurity.”

What’s wrong with this? 

The eclipse part wo

from Peter Radford

What are we to say of a discipline that steadfastly ignores reality
in its pursuit of ever more formality in its methods?

Wow. Steve Levitt has really shaken me. I come not to mock, but to follow up …

Stand up and take a bow Ben Moll!  You daring soul.

Clearly I need to explain.

No sooner had I finished my comment on the irrelevancy of economics but I had confirmation — albeit unwittingly — in this morning’s Financial Times.  There on the editorial page was a short column by Soumaya Keynes talking about the rise of Hank.

For those of you not on the cutting edge, “Hank” stands for Heterogeneous Agent New Keynesian, as in a complicated model of the economy.

Hank is a whole new way of looking at model economies, with the really big breakthrough being that it includes — roll the drums please — more than one household.

Yes, economists are moving at a rapid pace.  Their research has shown that the economy includes more than one household.

Gasp.

If you are a sociologist or anthropologist you are forgiven at this point for laughing out loud.

Reflect, if you will, on the enormous hubris expressed by Steve Levitt when he criticized economics for becoming too inwardly focused and potentially irrelevant.  His condemnation was absolute.  He said that economics risked falling into the kind of disrepair that, in his mind at least, make sociology and anthropology laughingstocks.  Now, I don’t know sociology or anthropology all that well, but I imagine they don’t base a substantial amount of their theoretical effort on the notion that America has only one household.  Even if that household is “representative”.

Representative of what?  Some Chicago-trained logician masquerading as an economist?

Weekend read – The trouble with words

from Peter Radford

Words are not ideas.  They are our means to capture ideas and make them tangible.  The problem is that words are a porous net that inevitably lets some accuracy slip away, but sometimes captures irrelevant detail that shines brightly in the moment and then dulls in the light of later thought.

Trying to define something so a discussion can follow without ambiguity in meaning sliding in and muddying things.  Slippery isn’t it?

How about this:

“I sometimes wish we could take the energy expended on these antimacassar hand-me-down “rules” and apply it to working out a way to use awkwardly broad words like inclusion, equity, liberty and racism more clearly. The ever-evolving meanings of these words has a way of creating genuine misunderstandings — try defining “neoliberalism” — to the point of actually impeding communication.”

That’s John McWhorter in the New York Times a couple of days ago.  He teaches linguistics.

Try defining “neoliberalism”?

He’s been chatting too much with his fellow academics in the economics department.  They are the last people to ask.  Neoliberalism is easy to define.  It’s just that its definition keeps offending people who want to be neoliberal without having the recent taint associated with it rub off on them.  Or, at least that’s my opinion.

And when I say neoliberal is easy to define I must remind you that it is a term used most often in discussions about the political-economy of the past forty to fifty years.

Weekend read – Neoliberal angst?

from Peter Radford

I wonder why it is that neoliberals so reject the label we have given them.  Is it because they’e embarrassed?  I don’t think so.  They all seem very proud of their attachment to the old order.  Every so often one of them will surface and proclaim bitterly that they are misunderstood and they they don’t deserve the opprobrium piled on them by those nasty “leftists” who want to sully the pristine reputations of people like Mises and Hayek.  Poor dears.  Are we to feel sympathy for a group of thinkers who, collectively, opened the door to regression and decline?  All in the name of some misty eyed nostalgia for ideas that had been overwhelmed by history in the early part of the twentieth century?

I recently came across this problem at a much narrower and personal level.  A correspondent engaged in an short investigation into what neoliberalism is and determined that  “there is no single definition”.  It is thus a meaningless concept.

No it isn’t.

But why do proponents of neoliberal ideas have to take this tack?  Why is it necessary for them to go underground and conduct an anonymous campaign rather than defend neoliberalism from behind the recognizable ramparts its originators erected for themselves?  Why do they relish the notion of being underdogs engaged in a struggle against the oppression of government and tyranny?

Because neoliberalism failed.

Wages. Just for fun.

from Peter Radford

This is just for fun.  It’s nearly the holiday season after all.

Let’s tell a story: a friend of ours here in southern Vermont was looking for a job.  She saw an advertisement posted by a local business.  Or, perhaps, she heard something about a job from a friend.  In any case she applied and got the job.

Well done.

Her wage is, naturally, determined by her marginal productivity.  We all know that.  All wages are determined by individual worker marginal productivity.

Right?

Our friends’ new employer has an education in economics and remembers what Mankiw says:

“Economic theory says that the wage a worker earns, measured in units of output, equals the amount of output the worker can produce. Otherwise, competitive firms would have an incentive to alter the number of workers they hire, and these adjustments would bring wages and productivity in line. If the wage were below productivity, firms would find it profitable to hire more workers. This would put upward pressure on wages and, because of diminishing returns, downward pressure on productivity. Conversely, if the wage were above productivity, firms would find it profitable to shed labor, putting downward pressure on wages and upward pressure on productivity. The equilibrium requires the wage of a worker equaling what that worker can produce.”

That’s pretty clear.  Open and shut.

Our friend’s wage is determined by her output.  Measured in units.

Weekend read – The great re-boot. Perhaps.

from Peter Radford

I keep coming upon ideas that seem to make such sense that, surely, they have been imported into economics.  But, no, hubris prevents an expansion of the discipline to include such novelty.  The threat they represent to the entire mainstream edifice is too much of a threat.  The guild closes ranks.  The guild closes its mind.  And gets quite snooty in the process.  Outsiders are seen as simple, lacking in basic understanding, or naively misunderstanding the great explanatory powers hidden in some distant niche of economic theory.   Yes, the guild closes ranks.  It is sensitive to criticism from without.  Perhaps it feels vulnerable?

[Cue a great deal of eye-rolling amongst economies tired of being criticized.  Why can’t we just all leave them alone to get on with whatever it is that they do.]

To understand this ongoing problem we must revisit well-worn history:

The neoliberal project was from its inception about power.  Simple power.  The power to undo the democratic progress represented by the policies of the New Deal and similar efforts around the world.

Milanovic gets feisty

from Peter Radford

To ignore power is to ignore reality.

How can you construct a theory of economic activity that excludes the power embedded in relationships between the various actors on the stage you are directing?  More to the point why would you?  To ignore power is to ignore reality.

I think, perhaps we need to reverse those two questions.  You see, power matters even in the construction of economic theories.

The reason you ignore power is because the powerful want you to.

It’s that simple.

I have just finished reading the excellent new book by Branko Milanovic.  It’s called “Visions of Inequality” and is a tour through the history of economics since the days of Quesnay.  More specifically it takes a look at how a handful of prominent economists have treated the topic of inequality.  Most of you will have covered this territory before, but examining how people such as Quesnay, Smith, Ricardo, Marx, Pareto and Kuznets discussed the problem of distribution is not only an excellent refresher on their individual thought, but is also a tour through the evolution of economics itself.

We have known all along, have we not, that economics is contingent.  Ideas are created to explain problems that pose themselves in the era under study be individual economists.  Their solutions are designed to explain something they see before them.  It is only more recently that the arrogance of universality has crept in to infect the thinking. 

Andreesen at bay

from Peter Radford

The machine makers are restless!

There’s quite a debate going on about something called “techno-optimism” which roughly translates as anything technological is good and will, inevitably, make us all much better off.  That it makes fortunes for its owners is of secondary importance.

The debate has emerged as a result of the publication of Marc Andreesen’s ‘Techno-Optimist Manifesto’, a strange and rather long paean to the many virtues of technology and the much more abundant vices of the dullards like you and me who do not innovate or break things on a regular basis.  We are, apparently, a bunch of softies incapable of moving civilization forward and we thus rely on the virility of our superiors like Andreesen and Peter Thiel who have, collectively, saved us from the endless drudgery implied by life in a low-tech world.

Andreesen we might recall was the inventor of Netscape.  More recently he has become a financier.  So he no longer innovates — he simply pays for other people to do the inventing.  That this might move him out of the virile crowd and in amongst us softies appears lost on him.

We don’t need to spend much time on what Andreesen actually says.  None of it is novel.  It is a mash-up of Ayn Rand, Milton Friedman, and other heroes of the far right.  The point being that those of us with a slightly more cautious attitude to the onslaught of technology have become a blockage against the march of humanity towards a technology mediated utopia.  What is striking is how right wing economics with its single-minded reliance on markets, facilitates and enables the extremism of people like Andreesen.  Indeed, the two lines of thought, technology as inevitably good, and markets as inevitably correct and efficient, share the same fatal flaws of deliberate naivety and an obdurate unwillingness to engage society as a whole.

Weekend read – An order of men

from Peter Radford

And women in this more enlightened era.

One of the great ironies of the last few decades is the ascendancy of “individualistic” thinking in  economic theory combined with the primacy of the “collective” we call the corporation in the real world.  The two offer highly contrasting explanations of how economic activity takes place.  The one is based upon relationships between individuals acting rationally and equipped with amounts of information — and, presumably, the computation power to go with it — that only deities can possess.  The other is based upon the hierarchical assertion of power over a circumscribed set of resources carved out in time and space to defy competition and create rents.  

Individualistic thinking is, of course, highly attractive politically.  It sells well to voters.  No one wants to think of themselves as merely a cog in some vast machine.  Plus, the battles of the past two or three hundred years to unshackle ourselves from the deadweight of religious, monarchic, military, or other authoritarian rule has led us, necessarily, to create a politics of affirmative individuality.  How can we break free of millennia of oppression without first establishing ourselves as free agents to do whatever we please?

Smith’s observation of the incessant division of activity in an economy appeared to create space for the individual-as-agent to co-exist with collective action.  Someone has to occupy the ever increasing speciality niches and someone else has to organize or connect those specialities into a coherent whole.  But that isn’t how theory developed.  Economists bent on defending the hyper-individual argue that no one organizes anything, but that the coherence is emergent from the interplay of the individuals — this is the “hidden hand” argument.  Realists argue that such a coherence cannot emerge without the assistance of considerable energy being spent on forcing connections into being — this is the “visible hand” argument.

Notes for the beginning of: what to do?

from Peter Radford

This is how I explain what has happened to myself.

Nobody should begin without warning.  So we ought jot down some initial observations that provide a starting point for what follows.  Some will become highly relevant.  Others will fade as we dig deeper into our subject and discover that they were not germane to the main theme.  They are in no particular order, since imposing order suggests a level of understanding unjustified by experience.  We simply do not know what we do not know and therefore ought make no pretense otherwise. [My economist friends please note!]

Here goes [borrowing along the way from DeLong, Gerstle, and one or two others]:

The spate of growth experienced in industrialized nations accelerated radically sometime around 1870

1. The spate of growth experienced in industrialized nations accelerated radically sometime around 1870
2. The trajectory of that growth appears vertiginous and is, therefore, unlikely to be maintained.  But, we have grown accustomed to it and find it hard to face a future without it.  We make the assumption that the present is not an anomaly, but is a new normal
3. This rapid growth — usually expressed in the terms economists use, and based entirely upon technological innovation — is the foundation upon which all modernity now rests.  Everything we enjoy, better health, longer lives, greater opportunities, broader cultural exposure, and better day-to-day security of existence, in sum our better wellbeing, are all due to the surge in economic growth since 1870.  Everything sits on an economic foundation — economics needs a better explanation of why/how this all happened
4. This moment in history then, as many have observed, ought to be propelling us towards a future very different from the abject nature of all previous human history — we have broken free [temporarily?] from what has become known as the Malthusian trap and the fabled Utopia ought be within our grasp
5. In particular this growth has allowed us to reshape our societies in ways that the constraints of the past disallowed.  We have created what we call democracies that include even the least privileged people — albeit haltingly —  in the political decision making framework
6. It was the degrees of freedom created by rapid economic growth that gave traditional elites — aristocratic, monarchic, religious, military, and landed — both an incentive and the space to share their privileges.  Including the masses became both necessary, [as motivation], and wise, [as reward], in order to maintain elite benefits from growth.  The alternative, per the period 1789 through 1917, was revolution and destruction of traditional elite power
7. Rapid growth also compressed history insofar as change occurred not across generations but within them.  Eras that used to be timed in terms of centuries are now timed in decades.  Couple this with the existence of multiple generations simultaneously and the traditional cohesion of memory and experience has been overturned.  We live with multiple histories and cultures competing for pre-eminence within each society all at once.  This complicates politics — inter-generational conflicts muddle class conflicts
8. The political sharing of elite power and the greater speed of change initiated/was initiated by a vastly increased political conflict over the distribution of wealth.  Whereas traditional societies had set patterns of distribution based upon time honored social structures, modernity had to invent its own distributional values.  The battles to reach a so-called fair distribution has ebbed and flowed largely swept along by shifts in technology and ownership/use of that technology
9. Distributional conflict led to a period of intense ideological creativity and argument: Fascism, Communism, and classic liberalism all emerged to compete as frameworks to establish and divide power, wealth, and status.   This argument appeared to end sometime in the late 1980s.  After which one ideology dominated for a while.  Some argued that history had ended, whereas it was only in abeyance
10. Because things started to go wrong.  The pace of innovation slowed which, in turn, slowed the pace of productivity improvement; the degrees of freedom for elite power sharing were thus reduced; tension mounted; pre-modern social structures began to re-emerge; distribution consequently began to revert to traditional arrangements; ideological conflicts re-arose; politics soured.  The re-mergence of radical inequality — both vertical and horizontal [per Elizabeth Anderson] — undermined, if not destroyed, democracy.
11. The march towards utopia [per DeLong] — despite our evident historic prosperity — stalled.  Why?
12. Because we went back in time — society congealed into more noticeable classes once more, only this time the elite was populated not by monarchs, aristocrats, the landed gentry, or military and religious leaders.  It was comprised of an upper echelon business class and its technocratic supporters or adherents [including academic economists per Diane Coyle].  This class accumulated a disproportionate share of the national wealth which it used as a resource to entrench itself by capturing government, dominating the framing of public and intellectual discourse, purchasing influence within the media and judiciary, and by upending the institutions meant to maintain balance in society
13. The chokehold of this new elite class is the primary cause of our malaise.   As this class syphoned off wealth from everyone else — as elites have usually done in the past — it ignored the ongoing structural transformation of the economy.  It benefitted from the globalization of capital and so could maintain its own upward trajectory, and, at the same time, overlook the long term consequences of climate change, demographic mix and aging, and the implications of the transition into a service rather than industrial economy
14. To these issues our elite has no answers — it has too narrow and self-serving a perspective to create novel responses to potential crises.  The intellectual bankruptcy of the ruling class became particularly evident in the lead up to, and in the aftermath of, the Great Recession.  Its obvious self-justification and rent-seeking have been on full display ever since.  It is a corrupting and negative influence that has to be eliminated if we are to return to our prior path of shared prosperity and relative political harmony.  We have collectively sacrificed any meaningful definition of liberty and justice at the altar of shareholder profit.  To restore any semblance of democratic dignity we need to rebel.  How?

Leftists are not “anti-market”

from Peter Radford

I have been reminded by Tyler Cowen of Bryan Caplan’s simplistic theory of left and right.  It’s short and to the point.  Leftists are, he says, “anti-market”.

He is wrong.

Leftists are anti-market obsession.  They are anti-market fanaticism.  They are anti-market worship.  Specifically, they are opposed to the form of idealization used to articulate “the market” in economics.

There’s a difference.  And I assume Bryan Caplan knows as much.

There has been a recent attempt amongst mainstream economists of various nuanced differences to soften their discipline’s unhealthy attachment to markets.  This seems to be a recognition of the absurdly monotonous application of market-this or market-that to whatever problem falls within the purview of economics.  The discipline has become trivialized by its inability to think a bit more broadly about economic problems.  We all understand the urgency of the need felt by the mainstream to denigrate any form of intervention onto the hallowed ground by the sullied hands and minds of government technocrats.  That ideological urgency is well known to all.  Having erected its intellectual defenses around the logic of the idealized market and all the munificence derived therefrom, economics has a great difficulty in going beyond.  

A problem flowing naturally, and frequently, from this homogeneity of focus, is that economists have become casual in their language.

Silicon Valley Blues

from Peter Radford

The circumstances of Silicon Valley Bank are well rehearsed by now.   The bank sat at the epicenter of the tech-bro start-up ecosystem and played a pivotal role in the collection and disbursement of all the cash that flows through that system.  It was an extremely odd bank.  Unlike the everyday banks most of us deal with it had very few deposits that originated from regular customers.  Most of its deposit base consisted of the chunky piles of cash belonging to start-ups and their various hangers-on.  That meant the average size of each deposit account was well in excess of the limit the FDIC insures.

This odd customer base added to the strain on the bank during recent years when the combination of low interest rates and excess cash slopping about the economy led to a surge in start-up activity.  The bank benefitted from that activity — if benefit is the right word — and saw its deposits grow rapidly.

This presented the bank with a problem.  What to do with all those incoming deposits?   Because the bank had so few ordinary customers, and generated so few regular assets, it had few options.  Unwisely it chose the riskiest:  it

Wolf knows better. I know he knows

from Peter Radford

What am I supposed to make of this?

Martin Wolf, someone whose work I always pay attention to, flubs it and leaves us with a partial picture.  That’s unlike him.  Perhaps it was the editing?

In any case the notion that the UK needs to generate more savings, which is what Wolf is arguing in his recent Financial Times article, needs a slight augmentation in his basic analysis.

The problem begins when he says that “Investment is financed by savings”.  This is a very un-Wolf like statement.  He is as aware as we are that savings do not cause investment.  This is simply one of those accounting identities that sometimes confuses people into imagining causation where there is none.  This unfortunate sentence then opens the door for the avoidance of the sort of deeper thinking we associate with Wolf.

For instance, whilst the causation does not run savings-to-investment, we could argue that there is causation in the other direction.  Investment in productive projects creates flows within the economy that do, or rather can, create savings.

What’s missing in the article is the relationship between consumption and the availability of productive projects worthy of investment.  Strong levels of consumption provide profitable investment opportunities.  That’s how investment decisions are made.  Banks are willing to provide financing for such projects.  Their credit risk assessment tells them they will get repaid from the profits of projects based on solid consumption prospects.  Banks will create the cash to fund such projects.  That’s the happy advantage of our banking system.  We can invest without having any savings.

State of play at year end

from Peter Radford

Is it just me?

Or is the realm of punditry in a state of confusion?

There seems to be an emerging consensus that something big is happening.  It’s just that we don’t quite know what.  The problem is that the template we are all applying is frayed if not shattered.  Consequently we are searching for the safety of explanations but finding that our questions do not elicit comfortable answers.  This is not a place we like to inhabit.  What are we to do?

Let’s speculate.

Stagflation?  Growth seems to have slowed dramatically over the last decade if not longer.  There’s talk of malaise.  There’s talk of a post-growth economy.  Some folks even applaud the idea that the days of vertiginous growth are behind us.  Now, we are told, we can focus on the environment and pivot to a less material way of life.  We can manage with less stuff after all.  How many homes, cars, and trinkets do we really need?

Lots.  Lots say the pro-growth crowd.  Just look at the cornucopia we call contemporary America.  It is stashed full of goodies.  Our poor ancestors would be green with envy at all the gadgets, the health care, the cozy homes, and the relative lack of physical exertion needed to provide it all.  Why would we not want more?

Ah.  Some others say.  We might be knee deep in goodies overall, but there appears to a problem with the distribution of those goodies.  Too many end up in too few hands.  That’s not good.  It eats away at social cohesion.  It isn’t, as the elitists inevitably say, that the poor are envious.  Not at all.  It’s that the concentration of goodies leaks into a concentration of power.  And the elitists use that power to preserve what they have.  They reject the very nostrums of the liberalism they espouse.  They abhor competition.  And they absolutely don’t want to partake of anything social.  Except for the exotic parties and trips they enjoy.  They prefer their society over our society.

Inflation? 

Reflections on the US election results

from Peter Radford

Let the dust settle.

Absorb the information embedded in the results.

Take a deep breath and avoid partisan primping.

First: this election was insanely expensive.  Candidates seeking election to Federal office spent an estimated $8.9 billion.  Their state level counterparts spent a further $7.8 billion.  

Second:  all that expenditure had little effect.  Sure, the House changed hands, but by the slimmest of margins, and for all the pre-election talk of various color waves the reality is that only 40 House seats were truly competitive — if by competitive we mean that the victory margin was  5% or less.  That means 90% of the election was decided before the starting gun.

Third: elections have thus become a major industry that produces little change.  America is, as one or two observers are now saying, is ossified.  It’s ability to produce major shifts in policy is, for the present, non-existent.  Trench warfare dominates a more mobile and responsive version of politics. 

We need our Hutton

from Peter Radford

– the question is how does economics get its much needed revamp?

This caught my eye:

“Debreu noted in his Nobel Prize lecture that the success of the mathematization of economic theory depended “on the fact that the commodity space has the structure of a real vector space”. We have shown that this is incorrect. The “price vector” is not a vector, and GET [General Equilibrium Theory] is therefore false. But we may go further and assert that not only was the proof incorrect, what was set out to be proved was not true in the first place. The real economy cannot be brought into equilibrium by adjusting prices. And indeed, the real economy is never in equilibrium.”

That’s the concluding paragraph in Philip George’s paper in the recently published Real World Economics Review #101.

The emperor, apparently, has no clothes.

But, then, we all knew that, didn’t we?

I wrote earlier this week about the difficulty we have in determining the efficacy of a supposed body of knowledge.  The arbiters of knowledge have a vested interest in maintaining the outward appearance of whatever it is they study.  They act like a priesthood intoning in ancient languages and using secret signs to distinguish themselves from the ordinary folk whom they intend to control or influence.  The problem is that we, those of us on the outside, can only rely on those arbiters for assurance that the efficacy they proclaim for themselves is actually, well, efficacious.  Worse, within a wide discipline such as economics, or applied mathematics as it has now become, the various sub-specialities are so specialized and the knowledge so arcane that anyone not within close proximity to it is unable to offer an opinion as to its validity.

This has become a fundamental and defining issue within economics.  The discipline needs good jolt of reality.  It needs a new direction.  It needs to shake off the errors of its past and begin anew.

The price of economics

from Peter Radford

Thank you Mariano Torras.

You said the following in a letter to the Financial Times:

“I would venture that there is a professional motive for perpetuating — through the use of elegant and abstract models — the fantasy that economics is a science.  The prestige, the stature and influence that such a myth permits is undeniable.  Yet, far more perniciously, the ostensible neutrality of “economic science” provides seemingly unshakeable ideological cover against critics who (more realistically) accentuate power, inequality, and politics.”

That about sums it up.

Economists do not study economies.  They study economics.  They study their own models and other stylized facts in ever more detail and abstraction.  They have substituted technical wizardry for contemplation.  They privilege mathematics over other kinds of analysis.  And they scrupulously avoid entanglement with history which might drag them into a conversation about just how they arrived atop Mount Economics far above the plains of reality below.

Professor Torras inspired me to dig out the following:

“More generally, how does a scholarly community determine that a proof is valid, especially when the proof is highly complex and when there are few people in the community with the technical skill to understand the proof? And what might “understanding a proof” entail?”

That’s Roy Weintraub speaking in his excellent book ”How Economics Became a Mathematical Science”.  Go read the book.  It’s highly instructive.

But it isn’t my intention to poke too much at the mathematicians we now call economists.  It isn’t for me to say whether economics has progressed as a consequence of restricting itself to the confines of applied mathematics.  The profession seems comfortable to be so restricted.  It wallows in its arcane nook and appears content to portray itself as a repository of analytical capability rather than of economic insight.  That’s all we need to know.

A broader question is worth delving into though.

How do people outside of the profession know that what economists state as knowledge is actually worth knowing?  How does anyone not within the hallowed halls and not grounded in the accepted or iconic modeling know that the knowledge professed to be possessed by economists is actually worth anything?  Anything at all?

Share buybacks — again?

from Peter Radford

What isn’t said is often more telling than what is.  The silence denotes either a disrespect for thorough analysis or an ignorance of issues beyond the ken of the speaker.  Then, of course, a third option arises: that those issues are an embarrassment to the point being made and are thus best left unmentioned.

For some reason stock buybacks appear to fall into such a zone of silence.  There is some controversy currently about the topic because of the recent proposal to impose a very modest tax on stock buybacks here in the U.S.

The usual arguments have been put forward to defend buybacks.

Michael Mauboussin, who is head of something called consilient research in an arm of Morgan Stanley, recently wrote this in an op-ed for the Financial Times:

“An essential role of an efficient economic system is the reallocation of capital away from businesses with limited prospects to those with more potential. Buybacks facilitate this process, and nearly all of the proceeds are reinvested in the shares of other companies.”

All you need to know about the oddity of the topic is contained within these two sentences.

Tax stock buybacks?

from Peter Radford

Taking a short break from my crusade to get information taken more seriously in economics …

Yesterday’s Financial Times includes, on page 9 of the print edition, one of its regular “Market Insights” columns.  This is the space the FT allocates to sundry financial market types to opine on subjects of general interest to other financial market types.  It’s always a good read if you want to gain insight into how our magnificent financiers talk to themselves whilst allocating capital appropriately around the economy.  Well that’s what they see themselves doing, so let’s not nitpick.

The column yesterday was written by a luminary of the investment community, someone who sat on the board of a popular retirement fund, and who has written extensively on subjects related to finance, investing and so on through the years.  The subject was the possibility of eliminating the new tax that Congress just established on stock buybacks.  The new tax, all of 1% and thus hardly onerous, has stirred up a ton of ire in the corporate world where stock buybacks are viewed as a centerpiece of good “stewardship”.  That is if you consider stewardship to be centered purely on making shareholders happy.

Say it ain’t so

from Peter Radford

re-visiting economics’ basic concepts

I am nothing if not annoying.  Allow me to elaborate.

Let’s be basic.

I mean really really basic.

Our model world initially consists of two people, Adam and Eve.  I know, it’s been done before.  But we are economists.  What are we interested in?  What problems that Adam and Eve face do we want to study?

Well, they need energy.  Human bodies, like all ordered structures, need flows of energy to maintain that structure.  The Second Law of Thermodynamics is the damndest thing.  It gets in the way.  But that’s life.  So what do Adam and Eve do?  They go look for energy, which in our speak we call food.  They avert death by searching for, finding, and consuming food.  Problem solved.

What do we make of this?

Demand — the need for a supply of energy — precedes its supply.  And that the search for, location of and ultimately the consumption of that energy requires more energy.  We are stuck in a loop.  We can summarize the search and location parts of the process as work.  And work requires its own source of energy.  

One thing leads to another as they say.  But cut to its absolute minimalist core, work is about sources of energy.  It is the application of energy to a task, which in a primitive sense is simply survival.  And the sum of all the work being done is the sum of all the energy gathered and processed to satisfy the demand for — energy.

I know.  This is absurd reduction.  But that’s where we need to go in order to clarify what an economy actually is.  It is the sum of work being done.  It is an energy flow.