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Real World Economists Must Lead

from Robert R Locke

I think the people in this blog need to show more leadership. That might be hard to understand for those who are use to thinking of the economy as a self-regulating mechanism and of economists as observers and thinkers. But the economic crisis is too important to be left to passivity.

The problem area is not difficult to identify. It is not socialism versus capitalism or free enterprise versus government, as neoliberal, tea party ideologues would have it. The problem that real world bloggers need actively to investigate and manage is a massive system of private investor capitalism at the heart of today’s economy. It emerged from five post WWII mostly noneconomic phenomena: First the information revolution that spun out of the Pentagon during the Cold War, which allows twenty-four hour a day trading of financial packages on money markets worldwide. Two, the end of the Cold War, which opened up vast stretches of the former Communist world to private investor capitalism in an integrated system of stock markets and financial service, Three, the growth of institutional investors in associations like private pension funds that funnel unprecedented amounts of money into private equities, hedge funds, and investment banks. Four, the rapid growth of business schools and departments of finance economics that preach an ideology of unrestrained private investor capitalism and furnish investor capitalism’s skilled labor force, and Five, the development of neoliberalism in economics that justifies the ethical bankruptcy of investor capitalism. 

The need for intervention arises not just because the new system of investor capitalism badly distributes the “wealth” the economy generates, thereby making a major contribution to the growing gap between the rich and poor (a subject that many blogs cover), but because it inherently destabilizes markets and is crisis prone, witness the subprime mortgage crisis, the GFC, and the Sovereign Debt-Euro crisis that followed on each other. Economists should not stand around as neoclassical theory specifies and wait for a system that is in fact permanently out of equilibrium to stabilize itself; imbalance requires economists’ active intervention.

The interventions should take three forms.

 1.The intellectual critique.

Bloggers have devoted much space, too much perhaps, to a critique of the scientific credentials of neoclassical economics. The orthodox economists, when they bother to reply, usually say that the real world economists have no science to replace neoclassical economics, which for the former ends the debate. But why should this debate be important in the first place. Economics does not have to be science to be useful or admired. It could be a skill, what the Germans call a Kunstlehre or a Technik (a combination of knowhow and science) without the subject being compromised. In Germany engineering is called a Technik not a science but degrees in the subject are just as respected as those in science; whereas in England traditionally a degree in physics is much more appreciated academically than one in engineering, because of a lingering disdain for nonscientific craft based qualifications (which engineering was much longer than in Germany) compared to academically earned science degrees. Neoclassical economists are probably clinging to this sort of academic prestige when they insist on economics being a science. In any event, the discussion distracts bloggers from the sort of careful observation and discussion needed to evaluate the applicability of economics to the management of economies in the real world and from the sort of shape economics would have to assume for it to management crises effectively. 

2.The institutional critique.

Also not enough has been said in the blogs about the shortcomings of the institutions charged with the implementation of economic policies (IMF, World Bank, ECB, Federal Reserve, etc.). Fullbrook has pointed out elsewhere that all these institutions are filled with econometricians and neoclassical economists, who are reluctant interventionists. This subject needs to be more thoroughly aired. Nor has much been said about the business schools and departments of economics that house economists. Most people acknowledge that real world economists have little voice in the prestige departments and have problems publishing heterodox articles in the prestige journals of their field. But nothing much is said about how this could be changed. 

Of course, rarel if ever do those within an educational citadel engage in radical change, mostly it is forced on them from outside, from the greater academic community, government, political circles, or the community at large. Examples of this extra-mural pressure for change can be found in this blog, where so many of the critics of neoclassical economics are non-economists, i.e., mathematicians, scientists, systems thinker, historians, etc. There is some comment as well from non-economists in the literature about the dysfunctional nature of educational institutions. In my own work on business schools (Confronting Managerialism), my co-author and I recommend reforms that would make BSs less subservient to business and financial interests and more responsive clients to the needs of community. 

It is unacceptable that a discipline like economics that has been so discredited in its science should be left in the hands of neoclassical economists who practice and defend that discredited science, thereby preventing economics from playing any effect role in solving financial and economic crises. People in the blog need aggressively to discuss institutional change

 3.The political critique.

       Since they are primarily concerned with developing a system of formal logic for a self-regulating market-driven system, for neoclassical economist’s pro-activism is a nonstarter. Since real world economists think the economy is often if not always in disequilibrium, they are advocates of intervention. Such intervention requires in the current financial context the implementation of a host of wealth redistributive, fiscal regulatory, taxation, and other measures that could turn investor capitalism into a system of finance that supports a robust social market economy from one that now underpins the internationally predatory system of investor logic in London and New York. 

At present the rather anemic discussion is directed at people in the English speaking world and Europe, as if the political constellations favoring reform were similar in both. They are not. In the USA the regulatory acts needed to control investor capitalism cannot be passed because of the ideological hold the Right wing has on the electorate. In the UK, where the Labor Party embraced the City, the situation is hardly better. In Continental Europe, however, investor capitalism only scored a half-victory when it took over investment banking in the 1990s. Center-Right politicians and Brussels’ bureaucrats, many of whom were trained in neoclassical economics, are allies of UK and US finance capitalism; they back the austerity policies that are being saddled on the peoples and governments especially of Southern Europe in the interest of investor capitalism. But the European Left is still strong and the Center Right austerity policies not only unpopular but economically dumb inasmuch as they shrink economies and increase unemployment and social misery. There is a good chance as in France that Center-Right parties supporting austerity will be defeated in future elections, thereby ushering in expansionist policies and finance reform by the Left. 

If this happens European governments would be pitted against government policies protective of investor logic in the English speaking world. Such an outcome might pose painful political choices to bloggers. Would they in the interest of countering the UK-US anti-social financial control, support radical reform of banking and finance in Europe that could end up with Europeans opting out of the current UK-US dominated financial system, or would they support maintaining the UK-UK system, thereby destroying the social market economy in Europe, fatally weakening European cohesion, and leaving the world to the mercy of the gnomes of London and New York?

  1. August 7, 2012 at 12:42 pm

    This is a statement from somebody to whom the discussion on economics became too boring for it seems to be repetitive and leading to nowhere. Perhaps it is excessive to state that “the real world economists have no science to replace neoclassical economics”, for they are actually looking for it. The greatest problem remains on the recognition of a new paradigm and the way to reach the consensus about it. It is hard to avoid cognitive dissonance for a new paradigm necessarily is a new idea which must be preceded by the evidence that the neoclassical and monetarist paradigms are wrong and not simply misapplied.

    Strongly reinforcing the difficulties, “Most people acknowledge that real world economists have little voice in the prestige departments and have problems publishing heterodox articles in the prestige journals of their field. But nothing much is said about how this could be changed”.

    Gerson P. Lima

  2. August 7, 2012 at 2:16 pm

    Economists as activists, that’s the call, and d*mn right too. Not the only activists, of course, but especially those active against those in the universities, government agencies, and the press still engaged in a conspiracy of critical silence to defend a ‘science’ that has neither a heart nor, consequently, an honest politics. The politics of Wall Street and the institutions mentioned is deception, dishonesty, greed, and theft.

    Economists might do their part, as Stiglitz’s latest book illustrates, to put the politics back into political economy, from whence it was so rudely ripped out by those who imagined a rigorous science of economics:

    http://www.nytimes.com/2012/08/05/books/review/the-price-of-inequality-by-joseph-e-stiglitz.html?_r=1&ref=review

  3. August 7, 2012 at 6:00 pm

    Robert Locke wrote:
    “Bloggers have devoted much space, too much perhaps, to a critique of the scientific credentials of neoclassical economics. The orthodox economists, when they bother to reply, usually say that the real world economists have no science to replace neoclassical economics, which for the former ends the debate. But why should this debate be important in the first place. Economics does not have to be science to be useful or admired. It could be a skill…”

    Some history bearing on the scientific credentials of neoclassical economics may be useful:

    Economics was on the correct track until the “marginal revolution” of the 1870s, when Jevons, Menger, and Walras undermined time as an analytic variable by overlooking time on the consumption side. Since then the discipline has been on a “siding” running more or less parallel to the correct track for mathematical economics. True math-econ theory has proceeded (on the correct track and also on the siding) through the work of numerous scholars, both orthodox and heterodox. Very recently (2011) a switch and track segment on the neoclassical siding has been constructed which promises to return neoclassical economics to the correct track (where the switch and track-segment unifies Gossenian [starting 1854] and neoclassical [starting in the 1870s] math-econ, thereby restoring time to mainstream economics).

    A look at the history of science suggests that our neoclassical train will likely ignore the switch-over for many additional years, for reasons ranging from vested interests (of all kinds) to legitimate fears about social instability. In the mean time we’ll have incomplete neoclassical theory (much of which is good stuff) which must come up short in defining good policies and institutions, just as incomplete physics/engineering theory must inevitably come up short.

  4. August 7, 2012 at 6:51 pm

    There is an alternative economic science to neoclassical economics. It is the science of Keynes’s General Theory

    [ NOTE: Not what Samuelson called neoclassical synthesis Keynesianism– as I have pointed out in my books, in quotations directly from Samuelson, Samuelson found the general theory “unpalatable” and he insisted on merely assuming it was a classical Walrasian theory with fixity of wages, This despite a chapter in the General Theory that is entitled “changes in money wages” which demonstrates that even if wages and prices are perfectly flexible there is no automatic market mechais to restore full employment.].

    I have spelled out this laternative Keynes science theory t in detail in my book that is part of Macmillan’s “Great Thnkers in Economics” series entitled JOHN MAYNARD KEYNES.

    As for presenting this science in terms thatt the average laypersion politician (engineer???) can use to build policy bridges see my 2009 book THE KEYNES SOLUTION: THE PATH TO GLOBAL ECONOMIC PROSPERITY.

    Until we nonneoclassical economists unite around an alternative economic science theory, we are left to neoclassicals to either ignore us or put us down with a divide and conquer strategy.

    Paul Davidson

  5. Fernando Sende
    August 7, 2012 at 7:55 pm

    I thought Keynesian economics died with Milton.

  6. Paul Schächterle
    August 7, 2012 at 9:37 pm

    Quote: “In the mean time we’ll have incomplete neoclassical theory (much of which is good stuff) which must come up short in defining good policies and institutions, just as incomplete physics/engineering theory must inevitably come up short.”
    Sorry, but I have to disagree. Why on earth would you say most of neoclassical economics is “good stuff”? Have you read Keen, Steve: “Debunking Economics”? I would argue that neoclassical economics is so obviously and patently false from the ground up that I am really having difficulties to accept it as science at all. It has more of a political ideology or even a religion.

  7. August 8, 2012 at 12:37 am

    “Posts are by authors of papers published in the Real-World Economics Review. Anyone may comment. RWER is a free open-access journal,… restricted to subscribers.. However subscriptions are free.” Real World Economics Review
    Why not use this forum properly. When a question is asked, just answer it.
    Yes, I have asked “foolish ” questions but they are asked with a hope for a profound answer.
    Publically challenge any question,improve it, change it, do whatever is necessary to make it
    worthwhile.
    My foolish question seeking a profound answer, This post states, ” The problem that real world bloggers need actively to investigate and manage is a massive system of private investor capitalism at the heart of today’s economy.”
    OK, Would the problems be solved by taking away from private for profit banks the guarantee of the govnmt to pay their losses, as well as allowing them (banks) to issue currency? Is the Answer in “Don’t End The Fed, Amend The Fed” a possible fix?

    *****”The need for intervention arises not just because the new system of investor capitalism badly distributes the “wealth” the economy generates****
    Question, “Perhaps the answer lies in how you redistribute the wealth of a nation; as well as how you acquire it?
    To lower taxes,you must raise revenue somewhere.How does a government fund, “a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”” at the same time reduce personal income taxes to zero ?

    Read: “Don’t End The Fed, Amend The Fed”
    http://bit.ly/MlQWNs
    Turn it into a RWER paper, it is all taken from this and that articles on the internet.

  8. August 8, 2012 at 12:54 am

    Where would I post the question, “How can the government increase revenue and at the same time reduce federal income taxes to zero”?
    Justaluckyfool answers: “As Minsky and Keynes agree; euthanize, separate the banks from the central bank and establish “free banking”.
    The central bank is to be the only issuer of currency (limitless) and shall do so via loans with compound interest attached.
    Just “Amend the Fed”.

  9. August 8, 2012 at 2:50 am

    One profound lack in economic reasoning at the highest levels of academic and other more free thinkers is the complete divorce between anything practical and economic thinkers, mainstream neo or otherwise.

    Am I the only applied economist who thinks about the marginal efficiency and value of people poop and how to collect it to reduce eutrification and bring Monsanto to its knees?

    Would anyone out there like to sign on with me to develop information-age democracy using your home computer? I probably built the first interactive corporate model on earth and created a democracy in the corporation doing it. C’mon. Forget how many angels dance on pinheads, let’s do some real economics.

    Why do economists avoid the nitty gritty of applied econ and the drudgery of actual calculations of cancer cost for, say, plastic windows in envelopes? Ever notice that the return letter with your check has an open window without a plastic window? How many economists peel the plastic before recycling the paper? Yuck on the estrogen dose from the glues involved.

    If economists are ever to assume a leadership position, then plain ol’ dirty work details are what need to be done. What companies should i boycott? How much per hour do I earn working in a ten square Meter garden? How much do civilization and the planet benefit? These are real economic questions that real people need answers for.

    You want high ground moral issues? Unite behind the clear economic principle that removal of all subsidies and let the dust settle for a decade is the only possible way to even see what real economics in a real culture is all about.

  10. August 8, 2012 at 8:27 am

    In response to Paul Schächterle (#5):

    First, I didn’t write “most of it” but rather “much of it”. It is clear, however, that a great deal of neoclassical micro-economics is arguably false. Take ordinal utility as a central consideration. Here it is clearly the case that not only is utility cardinal (where utility is time-integrated feeling-state—with both time and feeling-state empirically measurable) but it is essential in modeling choice (as pointed out by Leontief, [1966, Pg 26] in his “considering the problem of choice under conditions of uncertainty”). How did false ordinal utility take center stage? Its genesis was with Walras’ and Jevons’ direct identification of utility with commodities, rather than consumption-duration, in the “marginal revolution”. Pareto and Hicks decades later concluded—setting aside complications like uncertainty—that utility was ordinal in elementary market exchanges.

    Regarding “good stuff” in neoclassical economics, we may conclude that almost 200 years of study by scholars of mathematical economics have certainly yielded more than a few ideas of value. Here we can recognize Clark’s contribution (1899) expressing the rate of real interest in terms of the marginal productivities of labor and capital—a relationship evident in the real-world. Leontief—mentioned above—derived a relationship between uncertainty and choice that also bears directly on real-world behavior. Many other scholars have made contributions that we would only eventually rediscover should we toss basic neoclassical theory overboard.

    Turning now to Steve Keen and his “Debunking economics”, he is mostly on-target in criticizing neoclassical economics. But his main focus is on money (“…the core of neoclassical theory”), where marginal-utility theory of micro-economics resides at a more fundamental level. He does make a strong argument against the “representative agent”: that “You can’t treat macro-economics as blowing-up micro,” and “Macro is not applied micro”. But so what? The same is true in physics, where equations-of-state depend on the inter-relationships of molecules for variable densities. Economics needs to similarly take account of human interrelationships—such as the effect of social-identity which is a prominent concern of social psychology. But marginal-utility theory (this time completed) is the empirically-based foundation on which to build.

    • Paul Schächterle
      August 8, 2012 at 9:29 am

      Re: “First, I didn’t write “most of it” but rather “much of it”.”
      Sorry, I misread that.
      Re: “Regarding “good stuff” in neoclassical economics, we may conclude that almost 200 years of study by scholars of mathematical economics have certainly yielded more than a few ideas of value.”
      I would rather argue that most of the ideas of neoclassical theory are more misleading than ideas of value. In my opinion we have to put the whole approach of neoclassical theory into question.
      Re: “Here we can recognize Clark’s contribution (1899) expressing the rate of real interest in terms of the marginal productivities of labor and capital—a relationship evident in the real-world.”
      As I see it, a lot of neoclassical ideas are either tautological or false. Clark’s distribution theory can serve as an example. (I am not really an expert on that subject, though, so correct me if I say something wrong.) The notion that a firm won’t employ a labourer if he/she does not add to the company’s profit is not really a problem. That is more of a tautology. But stating that marginal productivity determines wages and profits needs strong assumptions—which are false. The first problem is static analysis. The real world is dynamic and any optimization over a period of time may look completely different than an optimization for the moment. Then the assumption of falling marginal productivity is highly problematic or could even be considered disproved. The concept of economies of scale seems rather alien to neoclassical micro.
      Re: “But marginal-utility theory (this time completed) is the empirically-based foundation on which to build.”
      The whole topic critique of neoclassical micro is probably too complex to be discussed in a forum conversation. What I actually wanted to state is that my view of neoclassical economics seems much more critical that yours. I would say that marginal utility theory is not “incomplete” but on the whole a misleading model with false assumptions and flawed logic even on an individual basis. And as far as I am aware it is not at all based on empirical evidence. The problem of aggregation then adds on top of that and completely invalidates all of “representative agent” models even if the micro model were true.
      So my approach is: Don’t try to extend neoclassical theory, rather examine it thoroughly to see what’s so wrong about it, and try to rethink the very foundation of economic modelling.

    • Paul Schächterle
      August 8, 2012 at 9:34 am

      Addendum: Funnily, the one thing in neoclassical theory I don’t have a problem with, is the concept of ordinal utility.

  11. August 8, 2012 at 9:47 am

    “One profound lack in economic reasoning at the highest levels of academic and other more free thinkers is” land, the forgotten factor of production.

  12. August 8, 2012 at 12:45 pm

    To Paul Schächterle and anybody else interested in dismantling the neoclassical economics: a comprehensive demonstration of why the neoclassical notion of supply is wrong – and hence why there is no neoclassical notion of price formation, may be found in the paper “A Mathematical Demonstration of Why Neoclassical Theory is Wrong”, available at http://www.macroambiente.com.br/downloads/newdown/eng/mathematica_demonstration.pdf. Despite all the shortcomings neoclassical people must defend its microeconomics because it is necessary to support another fake idea – that the stock of money variation causes prices to vary.
    Gerson P. Lima

    • August 8, 2012 at 1:04 pm

      they do not have to defend the idea that the stock of money variation causes prices to rise. They merely impose the axiom of neutral money — and an axiom is something everyone “believes ” to be a universal truth and therefore needs no proof.
      The neutral money axiom asserts that changes in the quantity of money cannot affect output and therefore must affect the price level.

      If you don’t believe me see Milton Friedman’s response to my criticism of his analytical framework in a debate we had in the JPE in the 1970s. This debateh was later published as a book entitled MILTON FRIEDMAN’S MONETARY FRAMEWORK: A DEBATE WITH HIS CRITICS [university of Chicago press, 1974]. There Friedman insists that money must be neutral at least in the long run!.

      as I point out in my book THE KEYNES SOLUTION, Keynes, on page 16, of the GT complained that classical economists were like Euclidean Geometers in a non euclidean world that see lines apparently parrallel often crash rebuke these line for colliding into each other. But instead Keynes argued they should throw over the axiom of parallel lines and work out a nonEuclidean geometry. And Keynes stated something similar is required in economics, i.e., throwing over classical theories axioms to make the equivalent of an noneuclidean economics. The axioms Keynes threw over were: (1) neutral money axiom, (2) ergodic Axiom, and (3) the gross substitution axiom. Why? Read my book and see why.

  13. August 8, 2012 at 7:06 pm

    Prof. Paul Davidson, Squire.
    I do not intend to quarrel about monetary “theory” because I have somewhere proved that it is not theory but faith or faith and fraud blended. What I wrote here is only that the (interpretation monetarists give to the) quantity theory of money is scientifically wrong. Neutrality of money I suppose to be a simple application of the quantity theory of money, and I am not worry about that.
    I am sorry but I must confess that I did not read the book you recommended. I am also sorry if I cannot be positive, but I of course I read some works and many other papers at JPKE, but I concluded that, despite the good intentions, you are not actually proposing an economic macroeconomic theory and paradigm which is so potent that could replace the neoclassical/monetarist ones. To see why I could suggest reading my textbook: Economia, Dinheiro e Poder Político (Economics, Money and Political Power) but it is written in Portuguese. Instead, I suggest reading the paper “Economic Reasons Why Monetary Policy Is Fraud”, available at http://www.macroambiente.com.br/downloads/newdown/eng/economic_reasons.pdf.
    I have been looking for publication of this paper in some important outlet, but my personal experience make me understand that probably it cannot be accepted by JPKE. Quoting Locke once again: “Most people acknowledge that real world economists have little voice in the prestige departments and have problems publishing heterodox articles in the prestige journals of their field. But nothing much is said about how this could be changed”.
    Gerson P. Lima

    • August 8, 2012 at 10:04 pm

      Thank you,please keep informing anyone anytime you can.
      Justaluckyfool wishes to ask a foolish question in hope of receiving a profound answer.
      For the solution:”We cannot solve our problems with the same thinking we used when we created them”.Albert Einstein

      Perhaps the answer lies in how you redistribute the wealth of a nation; not in how you acquire it.

      “…for the public debt not to follow an explosive trend upwards, it would be necessary either 1) that the public debt interest expenditure be positively associated with the tax revenue while the interest rate is positive, or 2) that if the correlation of the public debt interest expenditure with the economy and consequently with the tax earnings is negative, as expected, while the interest rate is also negative. Given then that these two conditions are unattainable in the real world, the conclusion is that under normal conditions the public debt once initiated will display a mathematical tendency towards infinity and will never attain an equilibrium level, Q.E.D.
      Quote from : http://www.macroambiente.com.br/downloads/newdown/eng/economic_reasons.pdf
      Does this mean, based upon the way the Monetary Sovereignty know as the United States of America issues its currency, it can never be able to pay the interest on its debt? Stated simply,
      in order to to pay the present amount it would need to pay interest on that issuance and therefore
      never attain an equilibrium level. Or as Mises states,
      “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” — Ludwig von Mises

      Perhaps, just perhaps , Is this a solution???????????

      Please,please read: “Don’t End The Fed, Amend the Fed” by justaluckyfool
      http://bit.ly/MlQWNs
      An explanation of where we went wrong with a solution to how we can fix it.
      Challenge it.
      Improve it.
      Turn it into your own, “Don’t End The Fed, Amend The Fed”.

      ***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC), Hindu Prince, founder of Buddhism

      • Garrett Connelly
        August 9, 2012 at 12:05 pm

        I also suggest “Wealth, Virtual Wealth and Debt,” by Frederick Soddy. Frederick was a young Nobel prize winner in physics who one bright day looked up from his new fame and noticed that economics did not conform to the laws of physics. He educated himself in economics and set out to explain “The Solution Of The Economic Paradox.”

        Bankers and economists attacked him as a mere mortal who’s idea of value was the same as any common housewife shopping for deals at the grocery store. Frederick, being the guy who had figured out the age old wizard’s quest of transformation of elements simply smiled; knowing how bankers scheme while others sleep and the immense yet child-like egos of politicians who believe they understand the game, he kept at his chosen task knowing it would be a century or so before people figured out that a fully functional democracy includes the economy.

        It is no small mistaken oversight that money was not included in the metric system.

      • August 9, 2012 at 3:42 pm

        Thank you again.
        “Economics, Soddy claims, has confused debt – a claim on wealth – for wealth itself. Modern economics has therefore woven for itself a hopeless tangle, in which money is counted as an asset – that is, as if it were wealth itself – whereas in reality it is a liability – an obligation of the community to provide wealth on demand. ”
        “Soddy points out that, though a discovery once made is made for all time, the production of wealth will always require contribution of the second and third factors. ‘Perpetual motion machines’ do not exist. The machine and the use of power are levers which extend the range of human effort more and more – but never replace it entirely. Consequently, when an investor or speculator makes an income by, say, investing in debt or driving up the price of commodities, the only effect of such efforts is that the investor takes for himself some wealth that has been created by the effort of others. It is the economic power given to such persons to batten on those who do create wealth that causes the ‘economic paradox’ of poverty in a world technically capable of creating sufficiency for all.”

        EXCERPTS FROM:
        COMMITTEE ON MONETARY AND ECONOMIC REFORM
        FREDERICK SODDY
        – and –
        THE DOCTRINE OF ‘VIRTUAL WEALTH’
        – – – – –
        A PAPER PRESENTED TO THE 14TH ANNUAL CONVENTION
        OF THE EASTERN ECONOMICS ASSOCIATION
        BOSTON, MASS. MARCH 1988
        – by –
        J. MARTIN HATTERSLEY, Q.C., M.A., LL.B.,
        FORMER PRESIDENT
        ECONOMICS SOCIETY OF NORTHERN ALBERTA

        **************
        READ IT, Challenge It, if after due examination you find it to be true endorse it , disclose it for all for the betterment of mankind (comment based on Buddha quote)
        Basilovecchio (“justaluckyfool”)

        —RWER, open the floodgates to truth and knowledge !

  14. August 9, 2012 at 7:26 am

    The following is a response to Paul Schächterle’s comments (#s 11 and 12) [preceding comments were #3, #6, and #10].

    Paul Schächterle reiterated my statement–

    “But marginal-utility theory (this time completed) is the empirically-based foundation on which to build.”

    After this he commented, followed by my indented responses:

    The whole topic critique of neoclassical micro is probably too complex to be discussed in a forum conversation.

    ****I agree.

    What I actually wanted to state is that my view of neoclassical economics seems much more critical that yours.

    ****I’m quite critical of mainstream economic theory, but I recognize the
    ****serious studies of very many mainstream (microeconomics) scholars
    ****over the decades and centuries— to name a few: Gossen, Jevons,
    ****Menger, Walras, Marshall, Bohm-Bawerk, Ehrenfels, Clark, Shackle,
    ****Strotz and Georgescu-Roegen.

    I would say that marginal utility theory is not “incomplete” but on the whole a misleading model with false assumptions and flawed logic even on an individual basis.

    ****”Misleading model with false assumptions and flawed logic”?
    ****I think it is historically and theoretically significant that the nearly
    ****equivalent Gossenian and neoclassical mathematical systems were
    ****formulated in absolute independence from each other. Even the
    ****neoclassical Jevons, Menger, and Walras were totally unaware of
    ****each other’s work until after completion. Think of it–four scholars
    ****independently coming to substantially the same marginal-utility theory.
    ****This is truly remarkable, and has to be given some weight.

    ****And regarding “marginal utility theory is not ‘incomplete’ “, this has
    ****to be considered a matter of record inasmuch as consumption-duration
    ****has been almost entirely absent in (neoclassical) marginal utility
    ****theory since its inception in the 1870s.

    And as far as I am aware it is not at all based on empirical evidence.

    ****True–if we set aside the multi-decade work of Lachmann and numerous
    ****other heterodox scholars, at least some of whom haven’t rejected the
    ****marginal-utility foundation of neoclassical economics. But it is true
    ****that orthodox economists have been lax—not surprising inasmuch as
    ****real-world economics is temporal while orthodox theory is seriously
    ****timeless due to the 1870s oversight. …In this regard, laboratory
    ****(empirical) studies of neuro-cognitive function while the subject was
    ****engaged in thought (economics-relevant in some cases) have been
    ****going on for years. Corresponding theory to accommodate this
    ****prominent research has been absent.

    …So my approach is: Don’t try to extend neoclassical theory, rather examine it thoroughly to see what’s so wrong about it, and try to rethink the very foundation of economic modelling.

    ****Exactly—at the foundation: this is what we need to do.

    Addendum: Funnily, the one thing in neoclassical theory I don’t have a problem with, is the concept of ordinal utility.

    ****Well, for the historical record, Hick’s in his 1939 “Value and Capital”
    ****wrote that “The quantitative concept of utility is not necessary to explain
    **** market phenomena. Therefore, on the principle of Occam’s
    ****razor, it is better to do without.” But uncertainty, which he overlooked,
    ****is of course a profound dimension of market phenomenon, and we
    ****know that this requires utility cardinality. Additionally, we know utility
    ****is by definition cardinal.

  15. August 9, 2012 at 3:14 pm

    “I also suggest “Wealth, Virtual Wealth and Debt,” by Frederick Soddy. Frederick was a young Nobel prize winner in physics who one bright day looked up from his new fame and noticed that economics did not conform to the laws of physics. He educated himself in economics and set out to explain “The Solution Of The Economic Paradox.”
    Bankers and economists attacked him as a mere mortal who’s idea of value was the same as any common housewife shopping for deals at the grocery store. Frederick, being the guy who had figured out the age old wizard’s quest of transformation of elements simply smiled; knowing how bankers scheme while others sleep and the immense yet child-like egos of politicians who believe they understand the game, he kept at his chosen task knowing it would be a century or so before people figured out that a fully functional democracy includes the economy.
    It is no small mistaken oversight that money was not included in the metric system.
    *********To Garrett Connelly,Thank you, and again Thanks to Gerson P Lima for your aattempts at disclosure to enable understanding.
    Justaluckyfool

  16. Allen
    August 14, 2012 at 2:01 am

    Reading the theoretical contributions to this blog, I perceive a frequent decoupling of theory from observation. It is not uncommon for economists to proudly pronounce themselves of the Austrian School, the Chicago School, the Post Keynesian School,etc. I don’t notice this sort of thing at a gathering of scientists. There, the discussion is usually about recent experimental results and their meaning. The beautiful ideal gas equation PV=nRT is easily derived. However good agreement with its predictions is limited to two gases under very special conditions. Clearly the assumptions in the derivation are too strict for general application. No chemical engineer would dare design a plant based on the ideal gas equation. Contrast that with economics. Countless central bankers and teachers stubbornly support models which are plainly at odds with observation. I’ve come to the conclusion that prolonged study of economics has the potential to cause permanent brain damage. Heterodox economists are not excluded.

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