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Keynes on mathematical economics

from Lars Syll

But I am unfamiliar with the methods involved and it may be that my impression that nothing emerges at the end which has not been introduced expressly or tacitly at the beginning is quite wrong … It seems to me essential in an article of this sort to put in the fullest and most explicit manner at the beginning the assumptions which are made and the methods by which the price indexes are derived; and then to state at the end what substantially novel conclusions has been arrived at … I cannot persuade myself that this sort of treatment of economic theory has anything significant to contribute. I suspect it of being nothing better than a contraption proceeding from premises which are not stated with precision to conclusions which have no clear application … [This creates] a mass of symbolism which covers up all kinds of unstated special assumptions.

Keynes to Frisch 28 November 1935

  1. Paul Schächterle
    February 25, 2013 at 4:43 pm

    In other words: garbage in—garbage out.
    It is a great quote though.

  2. February 25, 2013 at 7:24 pm

    A better quote from the great book (Ch 21, section III) concludes, “Too large a proportion of recent ‘mathematical’ economics are merely concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols”.

    Since 1936 things have only gotten worse, largely because most economists who refereed such articles are too incompetent mathematically to do their jobs. My most succinct, insightful and simply written mathematical papers usually get rejected, whereas my most verbose, tedious, clumsily written articles get accepted, typically without much comment. The criterion seems to be: only difficult to understand mathematics are good enough.

    Krugman doesn’t know what he was talking when he apologized for bad economics theory by saying economists are too preoccupied by the beauty of mathematics. Quite frankly, most mathematics in economics are downright ugly. Beauty is when you express the deepest truths in the simplest terms. Such beauty does not exist in economics.

    • February 28, 2013 at 5:48 pm

      “Beauty is when you express the deepest truths in the simplest terms”.

      Money is created as DEBT 1 (loan FROM a bank) and deposited (loaned TO a bank) as DEBT 2 of the same debt.

      Principal created = 1/2 of Principal Debt.

      Unless the deposit is spent so that the borrower can earn it, this equation will remain an INEQUALITY and mathematically caused default of the borrower is inevitable.

      Could it be any simpler?


      • March 2, 2013 at 10:47 am

        Your understanding is simpler than simple, it is misleading because it misses the point. The mechanics of debt creation is not the problem, it is regulation of the purpose of debt creation that is at issue.

        In the traditional banking system, deposits created from lending is always spent to finance real economic activities, creating earnings to self-liquidate the debt. It is speculative borrowing for casino gambling which produces no net earnings (zero-sum game) to liquidate the debt (with interest).

        If widespread default is to be avoided, the rate of debt creation cannot be allowed to run much higher than the rate of nominal economic growth. The excess debt creation fuels speculation which does not create wealth to liquidate the cost of debt (i.e. compounding interest).

      • March 2, 2013 at 4:50 pm

        Sorry but your response does not pass the simple test either. You do not define how “…deposits created from lending is always spent to finance real economic activities.” I do not believe that is true. Since you want simple, when one company buys another, no new product is created but a huge debt is now owed so to pay that down the company is broken up, people are laid off and product lines are shut down. Maybe one could make an argument for efficiency, but that is dubious. Sure it is economic activity but it is not productive. It also belies the possibility that the economic activity may be both “real” and harmful (more fast foods, fewer organic, huge transportation costs without including environmental costs, etc.). Hurricane Katrina and the Tsunami in Japan generated huge new debt money creation and economic activity. Maybe not such a positive way to do it!?

        Also nobody is looking at who creates the debt because that matters. In the case of central banks (e.g. the Bank of Canada), they could hold a larger portion of governments’ debt and then the interest paid by the governments would be rebated thus freeing up governments’ revenues for needed infrastructure expenditures which would be productive and often helpful or beneficial. It would also decrease the pressure to increase taxes for those items or the P3 endeavours. But this is not allowed by governments (even though permitted under legislation) now because for some bizarre reason a dollar created by a central bank is believed to be inflationary but a dollar created by private bank is not. I would argue the reverse is true. In any case that is probably not the real reason.

        Indeed, if you were to view Paul’s first movie Money as Debt I, you would see how money creation creates both economic activity and destroys the environment.

        Back to the entrails of chickens.

      • March 3, 2013 at 12:02 am

        By REAL economic activity, I mean economic production. One company buying another company is a financial transaction, which may or may not lead to more or less production.

      • March 3, 2013 at 6:45 am

        This is too simple too. One company doesn’t buy another, it buys control of it, and it is quite disgusting that that control legally includes disposal of assets on which other people (e.g. workers and customers) are relying. If it didn’t, foreign companies would not be able to take over long established businesses, transfer their work elsewhere and close ther factories down, as happened with the British firm HP [houses of parliament] Sauce. Representative government is plainly neither infallible nor incorruptible, and company law is an area where it is both a sham and wrong.

        Lars, the “Keynes to Frisch” link doesn’t work.

  3. February 26, 2013 at 4:00 pm

    nahh—beauty exists in econometrica 1937, called the slutsky-yule theorem. all you need to no. proof left to the readers.

  4. February 26, 2013 at 10:57 pm

    Much of econometrics has no economic content, but is mathematical statistics. The Slutsky-Yule theorem is not a theorem about economics, but about time series. It is used to discount the empirical evidence of business cycles as merely statistical fluctuations.

  5. February 27, 2013 at 4:11 am

    I prefer to read the entrails of chickens!

  6. March 2, 2013 at 11:24 pm

    Perhaps,”Sorry but your response does not pass the simple test either. ”

    Perhaps because Loans=Asset=borrowers liability=deposit is false.
    Let’s use as an example :
    “How The Private For Profit Banks (PFPB) have been able to ‘suck the wealth out of the economy and create the massive gaps in equality.”
    Please check to see if this passes “Keep it simple” Einstein test.
    The PFPB use what Soddy calls “fictitious lending, which is called “horizontal money” by MMTers, they use that money to make gains of double,yes even quadruple amounts of REAL MONEY.
    The PFPB are legally allowed to TAX this temporary money by charging compound interest on that created out of thin air money thereby raising revenue (profits) for themselves and their group.
    If the TBTF banks had $100 trillion of loans on the books in 2005, loans just on real estate,residential and commercial, and the average percentage were 6% for an average of 30 years, what would be the end result of the distribution of real money (Money that is issued by the FEDS or US Treasury) ?
    Answer: It would be for the PFPB ,”Heads we win, Tails you lose”.
    Here’s why.
    Of the $100 trillion in loans based upon 2005 regulation the PFPB need only $10 trillion in deposits to be at a pure 10% reserve.
    I’m being nice and not even using the fact that they as quoted by Paulson and Bernanke in 2005 “may be leverage at 30 times or more” (This would be like saying that at a leverage of 10 the PFPB have only $1 trillion in deposits.
    But ,Friends,what does that really matter? It isn’t even their money needed. They do not OWN their deposits. Deposits are ‘ Other Peoples Money’ put in trust for storage and future usage.
    Bottom line: The PFPB in 2005 had $100 trillion worth of loans (assets)on their books backed by maybe $1 trillion of other peoples money.
    Why do the PFPB say “Heads we win”?
    $100 trillion in loans becomes an asset of over $500 trillion if it is at an average of 6% for 30 years.
    They have taken $100 trillion of “horizontal money”(Fictitious money)(temporary money created out of thin air) into $500 trillion. IF THE NOTES ARE PAID, they must subtract the $100 trillion from their books because they must erase the original asset, since it is now reduced to zero.
    “HEADS WE WIN”, the PFPB get to keep the suckers payments of real money, not the phoney money used, yes the real base currency of $400 trillion.
    How long would it take for inequality to go to such an extreme as to have 1% of the people to own “all the riches of the planet and still be owed more?
    Please, challenge, improve.
    Why the PFPB say, “Tails you lose”
    Andrew Jackson answered (Feb. 1834) the question:
    “Gentlemen! I too have been a close observer of the doing of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits, and when you lost, you charged it to the bank.”

    As Frederick Soddy (The Role of Money) said in 1926,1933, about the banks,”Heads the banks win, Tails you lose to the banks”.


    • March 3, 2013 at 6:15 am

      Yes, Lucky, absolutely. I cannot challenge what I agree with, but challenges to the world such as yours help me see honest alternatives.

      There is no honest ground for charging interest on money made out of thin air for investments like house purchase. However, if one contracts to repay the loan over twenty years and fails to make a monthly repayment on time, then it is in the community’s interest that it apply a penalty charge to the amount cumulatively OVERDUE, as against the total amount due. But (neglecting percentage commissions) isn’t that how credit cards work?

      • March 3, 2013 at 8:58 am

        Sorry about the broken link to the Keynes-Frisch letter (it is cited in footnote xxxvii in http://www.sv.uio.no/econ/om/tall-og-fakta/nobelprisvinnere/ragnar-frisch/biografi.html#_ednref37

      • March 4, 2013 at 12:32 am

        Davetaylor1, “There is no honest ground for charging interest on money made out of thin air…” PERIOD !
        Here’s a great read 2 years old but just found:
        Excerpt:” On September 30, 2009, in Research & Articles, by AMI
        (To Read this page in French, please click here)
        Monetary reform is the critical missing element needed to move humanity back from the brink of economic destruction and nuclear disaster, away from a future dominated by fraud, ugliness and warfare, toward a world of justice and beauty.
        The power to create money is an awesome power – at times stronger than the Executive, Legislative and Judicial powers combined. It’s like having a “magic checkbook,” where checks can’t bounce. When controlled privately it can be used to gain riches, but much more importantly it determines the direction of our society by deciding where the money goes – what gets funded and what does not. Will it be used to build and repair vital infrastructure such as the New Orleans levees and Minneapolis bridges to protect major cities? Or will it go into warfare and real estate loans creating the real estate bubble – leading to a crash and depression.
        Thus the money issuing power should never be alienated from democratically elected government and placed ambiguously into private hands as it is in America in the Federal Reserve System today. Indeed, most people would be surprised to learn that the bulk of our money supply is not created by our government, but by private banks when they make loans. Through the Fed’s fractional reserve process the system creates “money” when banks make loans into accounts; so most of our money is issued as interest-bearing debt (see page 14 below).
        Under the Constitution, Article I, Sec. 8, our government has the sovereign power to issue money and spend it into circulation to promote the general welfare, for example, through the creation and repair of infrastructure, including human infrastructure – health and education – rather than misusing the money system for speculation as banking has historically done; periodically causing one crisis after another. Our lawmakers must now reclaim that power!
        Why I believe “QE 4 The People” could take back the power of money and use that power for the betterment of mankind.
        “Taxation on issuance can produce equality and prosperity”, Justaluckyfool.

  7. March 3, 2013 at 10:46 pm

    Thanks for the link, Lars. In the paper itself, this introductory quote provides a very helpful definition of the purpose of econometrics, which has not been obvious to me from practice.

    “‘Intermediate between mathematics, statistics, and economics, we find a new discipline which for lack of a better name, may be called econometrics. Econometrics has as its aim to subject abstract laws of theoretical political economy or ‘pure’ economics to experimental and numerical verification, and thus to turn pure economics, as far as possible, into a science in the strict sense of the word’ (RF1971d, p.386)”.

    • March 4, 2013 at 11:49 am

      Ragnar Frisch was absolutely right about the aim of econometrics, which has failed dismally and unfortunately in its aim. Hence economics is not a science.

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