The LSE Debate: Ormerod and Hodgson
Last night’s public debate “What kind of economics should we teach?” at the London School of Economics and featuring RWER authors Geoffrey Hodgson and Paul Ormerod proved an interesting occasion. We hope soon to have a podcast of the event, but meanwhile here is a link to Hodgson’s very useful slide show:
And here are Ormerod’s notes from his presentation.
DRAFT
We are here tonight to talk about economics, so I guess everyone here either is an economist or has an interest in the subject. Well, you are in for a pretty boring time if you haven’t.
I want to start off by being very positive about economics. At conferences, I come into contact with a wide range of people from other disciplines. For example, anthropologists, sociologists, physicists, mathematicians, control engineers, computer scientists. These are all conferences on social, economic and cultural topics, so there is a lot going on outside of economics itself.
But economics has one great insight which none of these other disciplines has, and without which many clever people struggle to understand events. I am talking about the role of incentives, and the fact that agents respond to incentives. I think it is this insight above all else which distinguishes economics from other disciplines. And it is something which I think should be taught much more widely, many more students in all disciplines should be exposed to this.
Of course, to say this does not mean that agents respond rationally, and economics has a lot to learn from other disciplines about this. But I’m going to come back to this point later.
I think that a serious problem with the way much economics is taught is that theorems are presented as if – that’s one of our favourite phrases, as if, so I can’t resist getting a mention of it in early – as if they had the same standing as, say, propositions in engineering textbooks. This is very far from being the case. Economics is much more a way of thinking about the world than learning about undisputed, scientifically settled theorems.
Here is what Clive Granger, Nobel Prize winner in 2003, has to say about it: ‘I think it is true to say that I am not the first Nobel Prize winner in economics to have little formal training in economics. I wonder if economics has less basic core material than is necessary for fields such as mathematics, physics, or chemistry, say.… Economic theory does seem to maintain common concepts and features but these may be quite simplistic and are not necessarily realistic.’
What I would like to do in fact is to look a bit more closely at the work of those who have been awarded the Nobel Prize in the 21st century. Most of which of course is based on their output in the closing decades of the 20th century. Here, I suggest, is the basis for a more eclectic, wider ranging syllabus for economics students now. We should be teaching them about the very best ideas in our discipline, the ones which will shape its future. I am not offering a detailed prescription, but a sketch of a wider ranging set of ideas to be explored by students. Some are already part of the standard curriculum, others are not.
I am fundamentally in agreement with Hayek when he wrote: ‘an economist who is only an economist cannot be a good economist’.
Let’s go back to 2000 and the micro econometricians Heckman and McFadden. Quite rightly, their statistical techniques are taught. But what about the implications of their work? Here is Heckman in his Prize lecture: ‘an important empirical regularity is the diversity and heterogeneity of behaviour’. Let me repeat this for emphasis: ‘an important empirical regularity is the diversity and heterogeneity of behaviour’. So why are we still bothering to teach models in which the behaviour of the whole economy is reduced to that of a single ‘representative agent’. Theoretical critiques of this are widespread, I might mention Alan Kirman’s brilliant article in the 1989 Economic Journal about the Emperor’s new clothes. But here is decisive empirical evidence on the pervasiveness of heterogeneity amongst agents.
All theories, even quantum mechanics, are of course approximations to reality. The question is always: how good are these approximations? And are we making the right simplifications. In terms of the representative agent, the evidence rejects the approximation decisively, and we should stop teaching it. Chemists stopped teaching their students about phlogiston over a century ago.
In 2001, we have Akerlof, Stiglitz and Spence. Their work on asymmetric information and bounded rationality goes back almost 40 years and, quite properly, is an important part of current teaching. But Akerlof and Stiglitz in particular have moved even further towards a rejection of rational agent models, think for example of Akerlof…..
Daniel Kahneman and Vernon Smith shared the prize in 2002, for their work in psychology and experimental economics. Kahneman’s summary of the entire corpus of this empirical work is: ‘humans reason poorly and act intuitively’. An empirical vindication of Herb Simon’s view expressed in the 1950s of how agents actually behave.
We cannot ignore this evidence. We should be teaching much more about empirical evidence on agent behaviour from the discipline of psychology instead of insisting on a single approach which is everywhere applicable or whose assumptions can only be ‘relaxed’ at a later stage. As Vernon Smith said in his lecture: ‘Within economics there is essentially only one model to be adapted to every application: optimization subject to constraints due to resource limitations, institutional rules and /or the behavior of others, as in Cournot-Nash equilibria’.
I am not saying that the standard model should not be taught at all. There will be circumstances in which its assumptions are a sufficiently reasonable approximation to reality. But we need to recognize explicitly that this is just one possible candidate model of how agents behave. The empirical evidence suggests very clearly that it is a special and not the general case.
It might be objected, indeed it is objected, that the standard model enables analytical results to be obtained, which is not necessarily the case with more realistic alternative models of agent behavior. Further, how do we know which one to use?
This brings me back to the fundamental points that, first, economics is a way of thinking about the world and not a set of theorems. Second, it must be empirically based. We must be teaching students to think about the appropriate assumptions on agent behavior in different contexts.
The personal computer frees us from the constraints of requiring analytical results in order to understand the implications of a hypothesis. Thirty years ago, this was a reasonable, indeed almost the only, way to proceed. But now, agent based models can be readily programmed and their implications explored using simulation techniques. There is an explosion of interest in this methodology in other disciplines, and economics risks getting left behind. We should be teaching the methodologies of simulation and agent based modeling to equip our students for the 21st century.
Let me move back to the Nobel Prize winners. I’ve already mentioned the 2000-2003 ones. 2004, Kydland and Prescott. Well, anyone can make a mistake. I just note in this context that when the American authorities saved the world in September 2008, they didn’t do so by consulting rational expectations and dynamic stochastic general equilibrium models. They acted, in conditions of great uncertainty, relying to a large extent on the economic history of the 1930s and hoping that it had something to teach them.
I’ve only got time to mention two more, though Elinor Olstrom’s recent award emphasizes the crucial need to broaden the curriculum, some knowledge of anthropology seems important for economists. But here is Edmund Phelps, 2006 winner: ‘After some neoclassical years at the start of my career I began building models that address modern phenomena. At Yale and at RAND, in part through my teachers William Fellner and Thomas Schelling, I gained some familiarity with the concepts of Knightian uncertainty, Keynesian probabilities, Hayek’s private know-how and M. Polyáni’s personal knowledge.’ Here is a whole syllabus in a single sentence! Surely following the financial crisis, we need, for example, to be teaching about Frank Knight’s uncertainty as well as how to solve the Black-Scholes model
Phelps mentions Thomas Schelling, 2005 winner and a great polymath. One of his most brilliant papers was on segregation, how strong residential segregation on racial lines can emerge even though no single agent has a preference for this. In other papers at around the same time he introduced the idea of ‘binary choice with externalities’. Agents are connected on a network. They have a 0,1 choice, buy or not buy, move or stay put. Their tastes and preferences are not fixed but can be altered by the behavior of other agents to which an agent is connected. Agents are heterogeneous in their willingness to be persuaded by others. They observe the behavior of the agents to which they are connected, and if the proportion making a different choice to them exceeds their personal threshold, they switch.
This is the one point I think it is essential to teach students. Tastes and preferences are in general not fixed, but can be altered by the behavior of others, not just indirectly via the price mechanism, but directly. We have only to look at the modern world to see how pervasive this phenomenon is. As a result, for example, market demand and supply functions become non-additive.
In the past 10 to 15 years there has been an explosion of work in other disciplines, physics, mathematical sociology, computer science, anthropology, on social networks, both in theory and in practice. And in particular on how cascades of behavior either spread or are contained across such networks. Economists in general have only the haziest idea, if they have heard of it at all, about such work. Yet it is fundamental to understanding how the modern social and economic world works.
It is essential that economics students are familiarized with this work, along with the techniques of simulation and agent based modeling.
There is certainly a place for the standard model, but as I say as a special and not a general case. Above all, we need a broader curriculum, in which are not afraid to borrow from other disciplines. More eclectic, less dogmatic, based more on empirics than on a priori assumptions.
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Real-World Economics Review Blog 
Yes, I attended the lecture but as I pointed out to the audience there appears to be a total lack of REAL creativity, and imagination. This caused amusement amongst the students, and possibly a few “glares”.
However, I was unabashed, and then went onto to mention my p2pfoundation project on Transfinancial Economics, and the vital reality that money itself is largely ELECTRONIC DATA. This may be self-evident but it is understanding the IMPLICATIONS, and possible APPLICATIONS of this which are HUGELY important.
I made the point somewhat “feebly” with some pauses that money is the key stone of how limited resources were used, and indeed, ofcourse abused…..
…..Furthermore, I mentioned to the audience about how banks create money out of thin air electronically (ie. credit creation), and indicated that mainstream economics does not reveal, or fully present the full IMPLICATIONS of this legalised “con-trick” as understood in “radical” monetary reform..
Robert:
I think the interpretation of all economic activity as the transformation of information is something to ponder. You and I may not agree on much of what you say on your website, but I think we can agree that mainstream economics makes a complete hash of money!
You are right ..that is why “serous” reform is vital irrespective of whether it is conventional, or otherwise.
Both Ormerod and Hodgson hit excellent points. I find it tiresome and disappointing, though, that we need to repeat the commentary of so many illustrious economists – some of whom are nominated here for shame – about the rotten state of the subject. The long line of Nobel Prize winners who have lambasted the subject they created leads me to wonder whether there isn’t a massive disconnect between those who create it and those who teach it. How can so many of the leading lights be ignored?
Nonetheless there is hope. I thought both these speakers opened the door to a refreshing, real world, yet rigorous form of economics. I am particularly happy to see the embrace of complexity, uncertainty, and bounded rationality. Along with a recognition of the role of culture and society at large – embeddedness in Granovetter’s word – are these concepts not the core of the new economics?
Knight’s uncertainty is not the same as Keynes’s concept of uncertainty. Knight is very neoclassical — and`his uncertainty concept is similarto assymetric information in the sense that for certain possible outcomes, a (very small) objective probability exists, but the human decision makers do not now this probability. [Only Mother Nature kows this information.]
Knight’s uncertainty is an epistomoligcal unertainty concept equivlent to Taleb’s black swan — where th pobabilit is so small, that given the size of a decision makers historical sample, one may not know a black swan exists!! It is a once in a century– or even a thosand year — eventwhere the existence of a black swan is recorded. Thus Kight’s uncertainty (and unique events)still obey the ergodic axiom
Keynes’s uncertaint is ontological — and the future probabilities of any event can be created by human actions today. It is the equivalent of George Soros’s reflexivity, and it throws out the ergodic axiom.
Conclusion: teaching Knight’s uncertainty is not teaching anything other than an extreme version of classical economic theory.
Paul this is a tremendously important distinction you make. The difference between ontological uncertainty and epistemological uncertainty is not only key to getting Keynes right but also, to mu mind, getting social science right. It is rather astonishing how wedded social scientists in general, not just economists, are wedded to epistemological uncertainty but recoil from ontological uncertainty. Perhaps they do not like the humility such an ontological position would entail.
Do we not need to embrace both? It seems that uncertainty is the most pervasive property of an economy. In both senses you mention. The existence of ontological uncertainty does not eliminate the need for methods to contain or account for epistemological uncertainty.
In practical terms I look at a business firm as technology for dealing with the latter subject, always, to the former.
Peter Radford wrote:
“Do we not need to embrace both?”
Sure but too often I think social scientists think they get at both with the recognition of epistemological uncertainty and harbour a suspicion that recognizing ontological uncertainty will undo the very possibility of social science. Which they would be right if they are working within a neo-positivist frame. Put differently epistemological uncertainty is the only kind of uncertainty that neo-positivist social scientists can get their heads around.
“In practical terms I look at a business firm as technology for dealing with the latter subject.”
Funny that, I am just writing an article on the limits of conceptualizing the firm as an institution for managing, after the fact, change (uncertainty).
With modern technology it is feasible to have a more accurate “scientific” understanding of the “workings” of the real economy. Thus, economic forecasts could become more accurate, and credible. See my p2pfoundation entry on Transfinancial Economics where this is explained.
Robert: If the economic world is subject to onto;logical uncertainty –as I argue va the rejection of the ergodic axiom– then past and current data provides no reliable information for making a judgment about the objective future outcome of decisions made today– just think of Schumpeter’s creative destruction as a process which destrys the basis for making future reliable statistical predictions — no matter how much technology you have today!!!
PD. Yes, but please notice the word If in your sentence. Since present day economics is in doubt what you said is likewise no matter how well-known, and respected academically you are.
With full Transfinancial Economics we could get highly accurate raw data en direct from the economy via identified transactions (via special barcodes)instantly sent to the inflation department of a bank. We can then have upto the minute picture
of supply,and demand for any number of registered/identified products,and services in any part of the country. This would show very accurately how much uncertainty there is in the economy.
If necessary, super-flexible electronic controls could be activated (automatically, or by human command) and be able to instantly ADAPT themselves to any problem including “unforeseen” ones. Since registered products, and services are electronically tracked, and identified they can be electronically targetted. Thus, instant temporary subsidies, or instant automatic inflation deductions(a sort of “tax”)could be created.
I suspect you do not understand TFE but it does take into account the question of uncertainty, and this
is not necessarily a problem. I know all this may sound like science fiction…but technology is moving fast (eg. High Frequency Trading!).
It is not science fiction that you are talking about — but I believe, a misunderstanding of theproblem of uncertainty in an inertemporal setting where monetary contracts calling for future events.
If I nuderstand you correctly, your bar code solution for the sub prime housing problem would be to assure us as long as everyone buying a home (financed by a sub prime mortgge) was equal to the number of homes being sold to sub prime bmortgaged borrowers — there is no problem!! yes?
But as we now know the problem was not when the sub prime borrower bought his home– or even when the subprime borrower got a mortgage from a mortgage originator — the problem arises in the future when the sub prime borrower can no longer service his debt obligation!. How is your bar code solution today going to resolve the default problem of tomorrow?
With respect, I was not discussing the sub-prime market, and over-lending. I said nothing about bar-coding, and mortgages.
As for the question of over-lending, and sub-prime defaulting in a crisis like the one we have been experiencing…there is an answer, or possible answers. In TFE for example, it is recognized that banks computers could be programmed in such a way as “to know” how much new money (as repayable loans ofcourse) could be created electronically. The basis of determining this is from the accumalative electronic checks, and data which would come directly from the registered economy (via largely daily transactions/accounting info sent electronically by businesses, and other sources). If banks tried to “over-lend” this could be stopped by an inbuilt computer overide, or more flexibly the Central Bank could with the appropriate legislation continually track lending by banks, and send an alert which could be electronically enforced to the “offending” bank.
Perhaps more controversially, such lending would not need to be “constrained” by reserves held as the whole process does not have to be “backed” by anything as it is wholly electronic, and would be based on far more accurate data than presently exists (ie. Economic Indicators).
There is a big subject….
Robert Searle seems to be describing ‘window guidance’. See my book ‘Princes of the Yen’ (M.E. Sharpe, 2003) or ‘New Paradigm in Macroeconomics’ (Palgrave Macmillan, 2005).
Richard Werner,
Yes, it is similiar to “window guidance” or “moral suasion”. However, another approach is that the Central Banks could raise, or lower the amount of interest (paid for on behalf of the customer by them, and sent to the banks). This novel approach which could be used in TFE may well be more acceptable. However, the data on which the raising, and lowering of interest would occur would be based on the electronic accounting/transacting data from the economy itself, and give a highly accurate assessment of any inflationary pressures on a day to day basis unlike conventional Economic Indicators.Bank computers, and probably supercomputers could be used, and programmed in such a way as to reveal the “real” inflation rate in a more scientific manner as never before….
Unlike present day economics TFE is concerned with the possible development of Non-Debt Based Economics in which a transition process first occurs in which taxation, and interest are ultimately phased out altogether.
Richard Werner,
Yes, it is similiar to “window guidance” or “moral suasion”. However, another approach is that the Central Banks could raise, or lower the amount of interest (paid for on behalf of the customer by them, and sent to the banks). This novel approach which could be used in TFE may well be more acceptable. However, the data on which the raising, and lowering of interest would occur would be based on the electronic accounting/transacting data from the economy itself, and give a highly accurate assessment of any inflationary pressures on a day to day basis unlike conventional Economic Indicators.Bank computers, and probably supercomputers could be used, and programmed in such a way as to reveal the “real” inflation rate in a more scientific manner as never before….
Unlike present day economics TFE is concerned with the possible development of Non-Debt Based Economics in which a transition process first occurs in which taxation, and interest are ultimately phased out altogether.
“Black Swans” are not swans, they are birds looking like swans in shape, and are black. They are no more significant than a wallaby. All that is built on the idea is nonsense.
Josh Billings remains the best economist ever, for he said that it is better to know nothing than to know what ain’t so.
There was not over-lending to sub-prime borrowers, it is just that the terms were wrong. It was the only thing keeping the US out of the depth of slump now. The unregulated banks needed to print money because no central bank did so adequately. Now that so much credit has left the economy as asset values collapsed, that needs to be replaced by dollar bills.
The borrowers were only “sub-prime” because they had their jobs stolen by government policies, exchange rate and fiscal.
Stockport
Political Economy comes from Nathan Meyer Rotschild’s term for politicians pretending to use economics for their political purposes. The Jew called them political economists. As he did not write down his public statements, all capital letters are speculation. There needs to be a special type for spoken statements.
NMR gave evidence to the Secret Committee in 1819 that if it continued with its restrictions on the money supply, “many persons will be ruined”. Kynaston, The City of London. The Bank of England secretly moved the goalposts and the restrictions were reduced – Clapham, 1944. Kynaston confirmed Clapham in 1994 when commissioned to write a history of the Bank to date.
In Lancashire and Cheshire, the protesters at Peterloo had the support of most of the local aristocracy, as well as Robert Owen and Lord Brougham in London, see Hegginbotham FRSCE, LSAL, FRHS, JP. The History of Stockport, 1882, published by subsciption.
Shooting all the cheque kiters would leave some financial districts quite deserted.
Rational uniform expectations of market actors don’t just deny psychology they arise from other abstractions that are clearly over-simplified, such as uniform access to markets or reliable pricing or the ability to liquidate even very liquid assets at anything like a fair market price. Agreed that models could deal with this very well, but in practice they don’t. We probably need some standard sims against which many models could be tested. But market behaviour isn’t the only issue.
Even deeper in my view is the assumption that all capital assets are fungible at least into cash, which in practice is a much more complex beast than most admit.
Money just doesn’t have a real theory behind it. When you look into it, you find credit and fiat and not much else. No coherent sense of how financial capital is psychologically constructed from social, instructional and individual (human body) components that make any operational sense. Also no sense of how infrastructural and natural capital differentiate, they’re just lumped together as ‘physical’ in most models ignoring that nature repairs itself while infrastructure must be fixed:
“You will always be able to tell nature from the infrastructure. The infrastructure will be the part that doesn’t work.” – Sean McShane (McShane’s Maxim)
Similarly, human beings need rest and recreation while machines wear out in quite a different way. There’s some promise in the work of people like Costanza or Lev or Adler to understand what’s going on operationally that makes us believe in money but it may just ultimately be a house of cards, a theology of the bankers.
In which case, they’re easily replaced, hopefully with biologists or someone with a chance to understand organic large system behaviour, set biodiversity metrics or whatever. Plenty of trends in that direction in genuine world finance, notably the IMF (and Soros) proposal to issue SDRs to pay for costs of climate harm prevention. Or the payments to Ecuador to keep oil in the ground under the rainforest. Or any of the various other biodiversity finance schemes. Economics is worthless as a profession to tell us why these things might make sense to do or not. Making it worthless, period, in its present form.
I also generally agree with Robert Searle that technology makes “the information problem” much more solvable in some contexts, forcing us to revisit some of the old debates (Hayek, von Mises, etc.) about centralized planning versus markets. One doesn’t have to look much further than Wal-Mart or China to see centralized planning working fairly well when implemented using modern tracking technology. It’s reasonable to assume that over time cheap tracking and sampling and auditing mechanisms will radically improve the efficiency of centralized planning methods.
Personally I believe the right approach to this is not to expand government from it’s present 1/2 of the developed world’s economy to 2/3, but instead to formalize a “commons sector” (as Peter Barnes proposes) in which natural and instructional capital are protected and maintained in a trusteeship model, apart from government. Multi-party democracies have proven fairly good at managing social and infrastructural capital but grossly undervalue globally shared assets like nature and knowledge. An economy 1/3 private, 1/3 collective, 1/3 entrusted to agents with mandates only to protect and enhance life-critical assets like the oceans, free software, power grids, rivers, etc., might be a better division of function than today where the latter third is left up to nations in conferences where everyone must agree on every word of every document and there’s no actual enforcement mechanism. If such measures as the IMF issuing SDRs to deal with climate change prove successful, one could argue that as much as half of all SDRs might be issued for uncontroversial measurable improvements to protect all life, or even just human life. Then currencies would compete in part to better enhance those improvements, with currencies becoming more valuable as they increase DALYs or carbon takeup or biodiversity or whatever package of instruments is the least controversial. This beats a system based on gold which historically was prized at least in part because it was universally useful to buy weapons – who needs that?
As for the distinction between protecting or recognizing individual creativity vs. social trust vs. instructional integrity, while unethical lawyers lump these into a bogus non-category “intellectual property” to justify applying inappropriate laws formulated for one to apply to another, there’s good reason to believe that copyright (individual), trademark (social) and patent (instructional) law do reflect at least a tacit intuitive division into underlying operational capital asset types or styles. Richard Stallman suggested as much in his papers about this, that the three types of law have more differences than similarities (term of ‘protection’, what causes it to lapse, what constitutes abandonment, and so on). For instance, regarding the duration or term of protection, copyright laws were very deliberately constructed with 50 or 75 year after death of author deadlines to reward all persons in the immediate family of the author. While patents expire and are not renewable one generation (17 years) later and do not reference author lifespan at all. Meanwhile, trademarks are renewable essentially forever as long as the name is invested in as a marker for a product or service or enterprise. It is fairly obvious that these three instruments protect three different capital types or styles and that different strategies are required to reward persons who put individual talent, common social front, or difficult instructions together. It would be nice to see economists make at least the distinctions that laws do…
Maybe the right way to start is just to shoot all the economists who say that it’s “too expensive” to deal with climate change preventatively. Couldn’t hurt, really.
Tobin Tax. As a replacement for the gold points, the cost of shipping gold, it is a very good action. The idea that it would raise any revenue is deluded. Some dealer will offer slightly better terms than the Central Bank, and collect the profit. Just as the cost of shipping gold went to the shippers.
It is the old problem of a few people with a high personal interest against the populace with little to gain in their estimation. The people have been brainwashed to erase their former perfect understanding of the “tragedy of the commons”.
Tom Paine pointed it out, but deportation to Australia was a powerful antidote.
There are a number of variants on the “Tobin Tax” idea but all of them basically require purchasers who are increasing systemic risk in the market (by increasing volatility, or speculating, etc.) to pay for that risk. Obama’s proposed “too big to fail” tax is more of a sort of insurance premium, that is because it targets enterprises that are of a specific size and not those who are engaged in risky behaviour, and isn’t cognizant of whether the firm got TARP or did and paid it back, it is not targetted at those who increase systemic risk but rather those who may represent a future government liability if they have to be bailed out. Interestingly the objections to it from the financial sector are mostly that it is *not* like a Tobin Tax, unlike UK and some other proposals that would systematically punish risky behaviour.
Revenue raising isn’t the point of it so much as discouraging large numbers of small transactions that arise strictly from a deaf, dumb and blind technical analysis of the market over extremely short term. While there are some forms of this (sector stabilization bets for instance where a longer term analysis says the prices should be in a certain ratio and accordingly there’s arbitrage to be made just after a big sale or purchase) that may have a case to be excluded from the tax, in general any form of extremely short term market action has to be assumed to be technically motivated, not motivated by any fundamental risk analysis or hedging strategy. Something bought and then sold in under four seconds obviously is not being bought and sold because something has just changed in the market, but because of price information. There are exceptions but it’s quite reasonable to charge a transaction tax and then have an efficient system to report when a hedge or fundamental valuation factor (like a reported merger, or something) has motivated the trade so that particular trade can then be exempted. It’s quite easy for spot audits to discover cheaters…
One interesting possibility is eliminating the rule against selling on a down-tick: It could simply be charged a higher transaction tax because it is increasing systematic risk of a crash. It might be worth modelling what would be the implications of three levels of tax: the highest for selling on a down-tick (easy to justify because it is presently forbidden), a lesser tax for buying on an up-tick (keeping the systematic bias of the system towards up-ticks but not quite as flagrantly as before the taxes), and a lower one yet for any buy/sell within some threshold of time (maybe the same as the delayed feed time to the general public, ensuring that the public cannot possibly be charged that tax!).
While it seems onerous to prove that transactions are hedges against fundamental risks or responses to bona fide (non-price-signalled) market news, this is actually a requirement of any financial risk management framework whatsoever. You simply can’t design a regulatory system to identify and protect against systematic risks in a market if you can’t tell a hedge from a speculative bet, so this probably means committing to some common data framework for scenario parameters, price correlation and causality data, and so on. It isn’t necessary to prove that the hedge works! Just that there’s a rationale for constructing it.
The only alternative is to tax everything below a certain time threshold and just see what happens, which is arguably the best approach for certain instruments that are heavily traded and carry very high systemic risks such as a minor currency.
Taxes do raise huge sums of money. There is no doubt about it. But we should have the MENTAL MATURITY that this is an unnecessary approach. In spite of taxation the rich, and super-rich are still with us along with the poor, and very poor. If the aim is to achieve “real” redistribution of financial wealth it has arguably failed.
A 21st Century approach to funding should be seen in the light of Non-Taxation as understood by TFE. MONEY IT SHOULD BE FOREVER REMEMBERED IS MAINLY EXISTING AS ELECTRONIC INFORMATION..which can be if necessary tracked, and controlled electronically.
In limited Transfinancial Economics it would be possible to create new money to help fund many things such as charities, and public services to some extent but not fully as full electronic monitoring would be non-existent, or in the process of being phased into the banking system. However, full TFE there is no taxation, or interest on credit at all. This is a later phase.
The idea of creating new unearned money may seem SOCIALLY UNACCEPTABLE but it must be forever remembered that there are many social/economic problems which are also socially unacceptable, and crying out for some financial aid.
MOREOVER, FUNNY MONEY ALREADY EXISTS as new capital electronically created by banks as something repayable, as opposed to something non-repayable. Thus, it is meaningless to call the latter as being Funny Money. We already have it as already stated but as a debt, or loan!!!
In TFE there is a new vision of money seeing it not only as a means of transaction but also as having a higher human value especially where the need arises.
Wealth transfer isn’t the only point of taxes. That’s not why most countries put high taxes on liquor or tobacco for instance. They do it to actually pay for the high social externalized costs of its consumption, and to discourage too much use especially by the poor (if the rich consume too much, presumably, they pay for the damage they do to themselves in lost marginal income and additional taxes paid and assets lost), and because they can (these products are morally disapproved of and so can be more easily heavily taxed, as a simple way to raise revenue).
As for what is “unearned” or “real” money or inventing questionable-proper-named-and-capitalized terms such as “Transfinancial Economics” I see no value added here by those debates or terminology. Money has four well known functions (store of value, standard of deferred payment, unit of account, medium of exchange) and others less well documented. It can serve in all four functions with or without taxation or interest, though it’s hard to see how there can be any standard of deferred payment without credit. The debates about the merits of letting people with money receive a sort-of-automatic return on it as interest are longstanding, certainly the issue is heavily debated in Islamic economics (where the arguments are very well developed and most worthy of review) where the preferred (and traditional) model is something more like ethical funds of micro-venture-capital. In many ways the modern investment environment is coming to resemble the medieval Islamic financial world, which is a very good thing according to very many people.
But you don’t have to cite nor avoid any particular tradition (Islamic, Christian, LETS, etc.) of no-interest banking to investigate the question of ‘what money is’.
All economics is ‘transfinancial’ in that it is, as Lynn Margulis correctly stated it once, simply the study of how humans make a living in the same sense that ecology studies how non-humans make a living. A scientific view of human economics would be as a subfield of ecology (all economic activity takes place in the biosphere as part of it) which also intersects with psychology, anthropology and a few abstractions such as capital asset models, Pareto curves and so on, that are models of assets and actions.
As for ‘higher human value’ we have to recognize that past attempts to put some clique in charge of money creation and destruction (with or without debt or credit mechanisms) have had mixed results. I wouldn’t advocate doing it without at least some pretense at mechanisms of control (not just broad “charity” or “public service” rationales but something like an official climate model proving that you had reduced mayhem by creating say $100B in SDRs, as the IMF is now proposing doing). Ecological goals are measurable in a way that social/human goals aren’t, so I believe we hold back the current useful trend to biodiversity finance and the improvement and institutionalization of carbon finance if we start blathering on about social goals which by definition improve the lot of one group of people vs. another. In other words, all of human rivalry enters the picture the second that you propose to create money to help someone out who has presumably failed in the past, as opposed to help out what is already believed to be working (the human economy) or already clearly working (nature underlying the human economy). While there are probably non-controversial investments (clean drinking water, primary school education for children) that could also be made by say creating SDRs, it’s unclear how to audit them. Any high school kid can test the CO2 concentration in the atmosphere from anywhere on Earth with cheap equipment, and we can verify the levels of forestation in the Amazon or Indonesia by looking at Google Earth these days. These are now auditable. How would you audit your charity or service goals?
To anyone who views money as something worth working for, who thinks it’s “earned”,
money is obviously a reflection of some past action (as Marx put it, “capital is dead labour”, though it could also be stolen goods or past frauds) that we decide collectively to accept as a marker of credit in modern society. It’s clearly and only a human thing (you can’t bribe a bear not to eat you) so the pretense that it’s some kind of physical reality or mystic quantity is nonsense. It’s a technology, and like all technologies it may someday be replaced by some other way of dealing with any or all of store of value, unit of account, medium of exchange and standard of deferred payment. I suggest you explain how your theories would change those functions, and how they would better reflect an operational capital asset model (deal better for instance with asset differences such as the fact that nature grows slowly and self-repairs while manmade items degrade and must be fixed or replaced from time to time, or that humans need rest and machines don’t). Not attempt to invent terms into existence or interpret slang like “funny money”. All money is “funny” in the sense that bears won’t take it as a bribe not to eat you. However, bears do participate in natural ‘economies’ such as the cycle of taking a few bites out of salmon and dumping them on the riverbank to let other species have their fill, and then the rotting corpse fertilizing the forest. No ‘higher human value’ there, except leaving it all alone.
So, Robert, you’re going to have to be much clearer what you are talking about and reference both the known functions of money and any unknown functions you claim…
Yes, you are right ofcourse. Taxation is not just about wealth redistribution it also has other uses especially ones which you mentioned. In TFE these might be termed civil deductions to try, and discourage certain types of behaviour. Indeed, there is something akin in TFE to an instant electronic “tax” at the point of transaction but is only used if absolutely necessary.
However, unlike our orthodox understanding of taxation money from the above examples is destroyed, or rather deleted electronically. In the case, of an inflation “tax” the “over-inflated” portion of a product, or service is deducted electronically. This in turn helps to maintain the value of money in the economy.
Ofcourse, direct, and indirect taxation proper would be phased during the transition period in TFE. This would be replaced in time with new unearned money created electronically. Interest on credit would also be phased out, but banks would still benefit (if necessary, and if desired) by being paid by the Central Bank, or some independent public authority. This ofcourse would be new non-repayable money created electronically.
TFE is still in development, and no doubt there are grey areas remaining. These would be tackled by appropriate experts. What is important for now is to get it into the public domain so that the basic evolving concepts of TFE are better known, and may in time be taken more seriously. We need to move away from Debt-Based Economics to Non-Debt Based Economics. This should be the future scenario.
I hope to make a clearer, and more simplified version, or versions of TFE so that it becomes more easily understood.