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Bashing crises predictions

from Lars Syll

Noah Smith has a post up on his blog questioning that people like Dean Baker, Dirk Bezemer, Nouriel Roubini, Barkley Rosser and in particular Steve Keen really – in any essential meaning of the word – “predicted” the latest financial-economic crisis, the one that we are still living through (that mainstream economists didn’t, we know). It makes me come to think of (wonder why …) what James K. Galbraith wrote a couple of years ago in The NEA Higher Education Journal:

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Leading active members of today’s economics profession… have formed themselves into a kind of Politburo for correct economic thinking. As a general rule—as one might generally expect from a gentleman’s club—this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. … They oppose the most basic, decent and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs. And when finally they sense that some position cannot be sustained, they do not reexamine their ideas. They do not consider the possibility of a flaw in logic or theory. Rather, they simply change the subject. No one loses face, in this club, for having been wrong. No one is disinvited from presenting papers at later annual meetings. And still less is anyone from the outside invited in.

This remains the essential problem. As I have documented—and only in part— there is a considerable, rich, promising body of economics, theory and evidence, entirely suited to the study of the real economy and its enormous problems. This work is significant in ways in which the entire corpus of mainstream economics—including recent fashions like the new “behavioral economics”— simply is not. But where is it inside the economics profession? Essentially, nowhere. It is therefore pointless to continue with conversations centered on the conventional economics. The urgent need is instead to expand the academic space and the public visibility of ongoing work that is of actual value when faced with the many deep problems of economic life in our time. It is to make possible careers in those areas, and for people with those perspectives, that have been proven wor- thy by events. This is—obviously—not a matter to be entrusted to the economics departments themselves. It is an imperative, instead, for university administrators, for funding agencies, for foundations, and for students and perhaps their parents. The point is not to argue endlessly with Tweedledum and Tweedledee. The point is to move past them toward the garden that must be out there, that in fact is out there, somewhere.

  1. June 4, 2013 at 7:16 pm

    Prediction is hard, especially about the future. What isn’t as hard is documenting the sources for one’s arguments and attributing ideas to people who actually hold them. A profession that doesn’t care a whit about endemic violations of the most fundamental rules of scholarship is not a gentleman’s club, it’s a thieves’ den.

    • June 5, 2013 at 6:43 pm

      Bravo! Spot on SM. You’ve elegantly if bluntly nailed The Problem (if not the cause).

  2. June 4, 2013 at 7:33 pm

    Excellent post!
    Personally (and as «labour sociologist» by training – apart from a long technical and managerial career in a computer company), I like to consider mainstream economists as akin to an imaginay geographer that knows everything that is to be known about human setlements, roads, railways, ports, rivers, mountains and valleys, oceans currents, predominant winds and what have you that is discernible to a trained observer.
    But, imagine that this same geographer got his/her PhD in «Geography» without ever studying geology, tectonic plates and the continental drift. Just imagine. Then there comes an earthquake…
    Prediction also has to do with the degree of detail or accuracy of what exactly is being predicted. The details and «time span» in weather forecasts seem to be a good example of this.
    As far as economics (and my own personal experience) goes, I did NOT predict this current crisis. But, that notwithstanding, in 1983 (if memory serves…) I did present to the 5th Congress of the Portuguese Informatics Association, a communication where I showed (through an algorithm that I had developed to demonstrate how Karl Marx and Nobuo Okishio could both be right – even if they seemed to say the exact opposite of each other) that in some 20-25 years’ time there would occur an exponential growh in unemployment.
    Do I need to point out that «unemployment» is perhap the best «gross» indicator of any economic crisis»?…
    Try this for a current – even if rough – version of that algorithm.
    http://93aff163536444a69b2fc23bfb3184.appspot.com/

  3. Ed
    June 4, 2013 at 7:47 pm

    Lars, The use of the term ‘crisis’, and giving it a specific date, aids the concealing of reality. Gross imbalances were the reality for a long time — see first two charts here.
    http://www.showrealhist.com/RD_RJShomes_PSav.html
    Little-shown were these imbalances then, AND little-shown are these imbalances now. The con goes on. Conpersons-in-control continues.
    Look again at the real price histories in the first chart — keeping these away from the people’s attention is intellectual savagery.

    • Ed
      June 4, 2013 at 8:15 pm

      Also, I’m reminded of the mid-1980s trend breaks seen in the second chart here
      http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html
      which match the effective end of the Fairness Doctrine, and the 1985-6
      sales of all the big three TV networks, with news portions cut.

  4. Herb Wiseman
    June 4, 2013 at 8:00 pm

    Regarding predictions. I personally prefer to examine the entrails of chickens.

  5. paul davidson
    June 4, 2013 at 8:33 pm

    As someone who has been arguing for a half century that the old Keynesian analysis of Samuelson MIT, Harvard was not Keynes –[ and my mentor Sidney Weintraub had been arguing this even 10 years before me– I think it is impossible to break the hold that the Establishment Politboro or gentlemen’s club that Jamie Galbraith mentions..

    Let me point out when I convinced John Hicks that his ISLM model was not Keynes and he published his retraction in the Journal of Post Keynesian Economics, I went to Paul Samuelson and Bob Solow — both of whom I knew personally– and showed them Hicks repudiation of the IS LM model and asked them if they wanted to publish something defending their idea of “Keynesian” analysis — they responded NO. They then answered gratuitously that I was able to convince Hicks because he was in his dotage!! But thery were not.

    • Ed
      June 4, 2013 at 11:05 pm

      Paul, I note your abundance of experience! I think that these deceptions by omission are central to malfunction of our system/nation.
      http://patrick.net/forum/?p=1223928
      Might you have any advice re. effectively informing the people.

  6. Steve
    June 4, 2013 at 9:07 pm

    Orthodoxy blinds. Orthodoxy is self reinforcing. Orthodoxy is tyrannical almost the moment of its acceptance. What the hell are we tolerating orthodoxy for anyway? How about a thoroughgoing ethic of BOTH openmindedness AND integration of BOTH orthodoxy AND heterodoxy. The BOTH/AND perspective and the BOTH/AND experience are fruitful areas of investigation for Both economics And personal development. Exclusionary thinking and experiencing as we see…have their problems.

  7. June 5, 2013 at 7:19 am

    The really accurate prediction was that made by Fred Harrison, following the “discredited” theories of Henry George. Harrison just worked on the empirical evidence that the cycle has a period of 18 years, due to the interaction between the land market and the system of banking credit. The principle is sound, though the reason why it is 18 years remains to be explained.

  8. Paul Schächterle
    June 5, 2013 at 8:28 am

    Paul Krugman has a good sentence in his blog post on the topic: “[…] it’s the model, not the man you should watch.” That is exactly right. It is not important if someone “predicted the crisis” if there is no plausible model on which the prediction is based.

    Noah Smith particularly picks on Steve Keen. Now, one reason neoclassical economist obviously hate Steve Keen is, that Keen points out over and over again that neoclassical economist have no plausible models for the real world at all. Neoclassical economics is based upon such absurd assumptions and flawed logic that you could compare them to someone holding an M.C. Escher drawing for a blueprint. It is actually really that crazy.

    And now Keen is not the little boy that can be chosen to ignored any longer, they have to diminish his effort and successes. It is easy: if Keen is right, more people may understand that neoclassical economics is rubbish. So Keen must not be right.

    Now, if we look at Keen’s assertions, they are quite clear. Keen says basically: debt plays a very important role in effective demand. He found surprisingly strong data correlations to back that claim. The overall level of debt rises almost exponentially and that can’t go on forever. Hence his “prediction” of a crisis at some time. He did not say when, because he just pointed out the reason.

    Keen also built a dynamic math model to prove the mechanism. And that model exhibits some interesting patterns that resemble the real world experience (“Great moderation”). Obviously the model is only a theoretical model. There are no default, debt rescheduling, bank rescuing, social welfare, food stamps or other crisis managing mechanisms in the model, so if Noah Smith discards the model because “total and permanent cessations of economic activity – haven’t yet been seen in the real world” this show the low standards of the “debate” (if you’d like to call neoclassical economists trying to get rid of pesky heretics a debate).

    • June 5, 2013 at 9:41 am

      That debt is normally secured on real estate. This means, in effect, that the lender makes an advance to the borrower, and becomes, for the time being, the owner of the real estate, whilst the borrower becomes the lender’s tenant. All this is done on the assumption that the PRICE of land will go on rising. It does for a while as people buy into the market and bid the price up on the basis of easy credit. The process reaches a point of instability when the rent/price ratio drops below a certain level, probably in the region of 3%. At that stage, rental values will not service the debt. It only takes a minor perturbation in the economy to pop the bubble.

      In the meantime, the debt has been sold on by unscrupulous sellers to ignorant buyers. Hey presto, when the reality dawns, all hell breaks loose. It seems to have a periodicity of around 18 years. The only thing that really needs an explanation is why it this figure?

      The preventative measure needed is the right sort of land value taxation. Regulation will not work because there will always be channels of credit and people willing to pile into the marking on the boom phase of the cycle.

    • Robert Locke
      June 5, 2013 at 10:59 am

      This is just something “economists” want. Intelligent people living through the last two decades of the last century saw the crisis coming. They saw the mal distribution in wealth, with the middle class incomes suffering, they saw people borrowing money who shouldn’t in order to buy real-estate (subprime mortgages), and everyday they saw a new credit card offer in the mailbox that went along with exploding private debt. I knew that it couldn’t continue; a crisis was in the works. That’s just common sense. Only a economists with a model building definition of truth would need a model to make predictions true.

      • Paul Schächterle
        June 5, 2013 at 12:47 pm

        Re: model building definition of truth:

        I absolutely agree that you should keep common sense and good judgement. But I would not underestimate the power of good model building. Just because neoclassical economists have such horrible models, that does not mean there can’t be any good model.

        A good model helps you to understand reality. It shows you by way of deduction the implications of the assumptions on which the model rests.

        To be a good model it must be based on sound assumptions, i.e. assumptions that are not counter-factual and that can be seen (viewed with common sense and good judgement) as a simplification or approximation of a real world phenomenon. Those assumptions should be constantly questioned and checked. A model is at most as valid as its assumptions. (The good thing is: you can check your assumptions by checking your model’s predictions.)

        Unfortunately all of this is not the case in neoclassical economics. Even the basic assumptions are clearly counterfactual. You don’t even need to test the models (which of course is also almost never done) to know they are bad models.

    • June 11, 2013 at 6:01 pm

      Try examining this chart: http://moneyasdebt.net/M2-M1.htm

  9. nadir
    June 5, 2013 at 9:42 am

    Hello ,
    Im a french doctoral student,
    All my apologies for this awful written english,
    Let me follow the topic of critical realism by drawing your attention toward the very concept of critical realism wich is hysteresis.
    Hysteresis is a concept wich can be traced back from physics: hysteresis designs merely what is resisting or persisting unless the process of change.
    The hysteresis process is the Real (Hegel, Marx, Lacan) , Derrida’s concept of trace and spectre, Badiou’s notions of Event and Truth, Zizek’s ticklish subject, Sartre’s Nothingness (existentialism, freedom) , Adorno’s negative dialectic etc…..
    Also in sociology, hysteresis can be found in Bourdieu’s “hysteresis of the habitus”, Marx’s “Real”(and spectre), Goffman stigma and Alfred Schutz “Don Quichotte effect”
    Hysteresis is the very meaning for “antisociology”(critical sociology) “antiphilosophy” (antiontology).
    My claim is that “hysteresis” could be the central concept for an “anti-epistemology”.
    Accordingly, hysteresis defines the idea of what is escaping from determination and any process of ontologization as the alienating “dialectical materialism” that is to say social constructivism.
    In other terms , hysteresis is what is escaping from any ontological process of re-presentation (or re-cognition): hysteresis is the very definition of what Marx called the “Real” opposed the “formal reality” (realism or the alienating ontological process of the dialectical materialism: the loop of materialist dialectic).
    Subsequently, “the real” is “the exces”s (transcendantal immanence) wich is resisting and persisting: “the real”(as opposed to the formal ) is critical.
    The “real ” is “ineffable” or “untranslatable”.
    Therefore the “real” is the “pure”(not in the sense of mainstream economics wich is without any transcendant temporality) absolute and radical reality .
    Thus, in the light of the concept of hysteresis as the real against realism we should examine the concept of truth: hysteresis expresses the pure and absolute truth against “the verisimilarity” from Popper’s realism.
    Also , “hysteresis” would be of great help for “ideology critique” thanks to “the zombie concept”(Ulrich Beck) wich is the persistance of a theory or a concept toward the change of reality .
    Besides, we could examine critically Popper’s loop of the situational analysis or historical materialism where the explanandum retroactively constitutes the explanans: the “real” expalnation is escaping from this ontological process of explanation.
    More than ever , the very question of “critical realism ” could be turn into a question of ontology.
    Thanks to Hysteresis (The “real”) critical realism should be termed “critical ontology” or “antiepistemology”.
    Thank you.
    Nadir.

    • Steve
      June 5, 2013 at 2:21 pm

      Yes, this is what I refer to as the Both/And perspective. It is the continual integration of seeming opposites.

      • June 7, 2013 at 12:47 pm

        In the good old days that perspective used to be called «dialectics»… 8-)

      • BFWR
        June 7, 2013 at 3:30 pm

        Yes, that is exactly what it is. However, the dialectic needs to be an actual evolution rather than merely either a reaction against something or a mistaken synthesis/integration.

  10. June 6, 2013 at 10:46 am

    Keen’s analysis is in my opinion mostly correct. I am also into mathematical modeling of debt dynamics (and, disclaimer: Steve has been one of my best friends since 1996 and we cooperate. He is coming to Trondheim for a one-month visit here at my uni in late August).

    I think that the best way to understand why the private* Debt/GDP ratio, or perhaps the Debt service/GDP ratio, should be kept below some maximum level — is the follwing explanation:

    Debt service is a non-discretionary flow (you can’t decide the size of the payment flow, it is decided by the loan contract and you are obliged by it) while the consumption and investment flows are discretionary, at least within some fairly wide bounds (you have to eat, but you may postpone the purchase of a new TV or holiday, or – if you run a firm – you may choose to not hire more peple or even sack some).

    When non-discretionary flows become too dominating, the economy as a whole becomes less resilient and more fragile. The frequency of insolvencies increases. Agents then hold back in their spending (increased liquidity preference) which impacts negatively on other agents. We have an accelerating death spiral.

    An economic system with lenders recycling financial income as new loans will as a rule become polarised betwen lenders and borrowers, as warned against since ancient times. For all financial investors (lenders) strive to accumulate. To the degree they succeed, we get increased asset/debt polarisation. Such polarisation occurs since only successful accumulators survive through the market’s Darwinian selection process. Thus slow motion exponetial growth debt explosions will be the rule and not the exception — debt crises will therefore occur in the real world. During the last thirty years debt has persistently increased more than GDP’s worldwide.

    This is possibly the most fundamental (more basic than the US housing bubble and new complicated financial instruments) cause of today’s global financial crisis. At least this is my view.
    _________
    * But govt debt in a countries’ own currency is no problem, I agree with MMT there. I am only considering private debt.

    • June 6, 2013 at 11:47 am

      Most of this recycling of financial income as new loans takes place in the land market – part of the reason why the land market is so dysfuntional.

      Why is it, for instance, that we have a permanent housing crisis? You don’t buy a secondhand car and expect it to sell for more than you paid ten years later. Land is part of the real economy and affects the lives of ordinary families every day.

      I went to John Kay’s lecture on the Future of Capitalism at LSE on Tuesday and he told me, in Q&A session, that the ownership of land is not important (neither it appears is the ownership of capital).

      Is land invisible to the eyes of economists?

      • June 6, 2013 at 11:59 am

        Kay is something to do with the Oxford Business School. Head of it, I think. If that is his idea of business then the average street market trader could do a better job.

      • June 6, 2013 at 12:11 pm

        Come to think of it, Kay is right. It is the TERMS OF OWNERSHIP of land which are important.

      • June 6, 2013 at 3:47 pm

        The only reason to own land (like capital IMO) should be for personal use (housing or leisure) or, in joint ownership, for production. In that way there is no leakage to rent-seekers.

      • June 6, 2013 at 3:51 pm

        “John [Kay] resigned as Director of Oxford University’s Said Business School in July 2000.”

    • rddulin
      June 6, 2013 at 4:55 pm

      You can’t limit debt. It creates money for the economy. What do you want,to much debt or too much austerity. It really does not matter what you chose you eventually get both.

  11. June 6, 2013 at 6:29 pm

    If net money creation occurs via own-issued (sovereign) currency being spent into the economy by the government, instead of credit money being created through bank lending, net created money is all base money and not accompanied by interest-bearing debt. Base money is formally an IOU of the government, yes, but such debt is extinguished in the next round by the the public using the same IOUs to pay taxes for public services.

    And a government can create its own currency as needed by using its central bank, it doesn’t need to borrow by issuing bonds. Such as system is extremely robust against crisis, and since base money does not yield interest, there is no exponential debt growth mechanism.

    So, money can easily be created ex nihilo without a corresponding debt growth problem.

    • davetaylor1
      June 6, 2013 at 9:10 pm

      That’s as simple and compelling as I’ve seen the argument put. Perhaps the key point is that the government’s debt to the public is repaid by its doing its job and written off as accounted for by public paying for it through taxes.

      Adam Smith would have been pleased. On the circulation of money without so extinguishing the debt he wrote in WoN:

      “This payment, therefore [by the banks], was altogether fictitious. The stream, which, by means of these circulating bills of exchange, had once been made to run from the coffers of the banks, was never replaced by any stream which really ran into them”.

      • BFWR
        June 6, 2013 at 10:22 pm

        Trond,

        Well said, however, politics is really both poor theater and a side show because as Keen points out public debt is dwarfed by private/individual debt. I’m hoping that Keen is about to cognite on the fundamental fact that not only capitalism, but commerce/business itself is unstable. And if commerce itself is unstable….then you can’t play by its rules You’re going to have to come up with a truly stabilizing solution that avoids and/or goes around it. And that as I have continually posted here and various other places on the net for the last 7 years, is a new and additional paradigm of consumer finance also known as an individual dividend payment…GIVEN directly to individuals…instead of a loan injected into commerce first….which only re-initiates the problem inherent in commerce…which is total prices will always increase at a faster rate of flow than will total individual incomes. And that is why commerce is unstable.

        In the end economics is having its current problems because it is struggling with its own transcendence. This is not mysticism at all. It’s the most concrete of monetary policies, applied to the correct personages (everyone) in the correct ways (equally and directly..and as a gift…so that commerce [money and trade] actually functions in a stable fashion).

        Dave,

        Also well said. And points out that government could mostly if not completely be distributively instead of re-distributively funded. Thus avoiding most of the onerousness and idiocies of taxation. Of course understanding this is dependent upon recognizing and understanding the reality and truthfulness of what I posted above to Trond about why commerce/business itself is unstable.

    • rddulin
      June 6, 2013 at 10:59 pm

      Trond, I looked at your posted papers briefly and can tell that you have done a lot of good thinking about this subject. Let me add a few things that you may not have thought of yet. While it is true that the government usually spends its interest received there is another problem.
      There are two types of lenders: primary lenders who can create money (government and central bank) and secondary lenders who can create velocity.(pretty much every other kind of lender) Since money X velocity = total demand, increasing either increases total buying power.
      There is nothing special about fractional reserve bank lending, reserve requirements are meaningless in the long run. Banks are simply agents for the actual money holder lenders. Even a hermit with no banking affiliation can lend money that he keeps under his mattress and increase the velocity of money in the system. The borrower can lend what he borrowed from the hermit as long as he makes his payments on time and so on. It does not matter if it is gold money, paper money or iou’s that someone will accept as payment if it is lend and spent, it increases velocity. When repaid with the agreed upon interest a shortage of money in circulation is created until the next loan. When this is compounded or practiced by other people a severe shortage is created and buying power collapses. The economy has to be kept alive by more borrowing. The debt is not necessarily exponential but it is self perpetuating and out of the control of the individual borrower. What matters is whether the lenders spend ALL of their interest gains instead of compounding the debt.
      I agree that money should be created “ex-nilio” but not spent into the economy, but distributed equally among the members of that society.(probably over 18 years of age on a monthly basis)
      The math looks something like this in USA. 20t base money X 5% growth per annum ÷ 225m population over the age 18 ÷12 months = $370.00/month.
      We don’t have any money in circulation right now so to establish a 20t monetary base in 5 years an additional $1481.48 /month would be necessary for a total of $1852.48/month for 5 years. Inflation should be adjusted not by the shopping basket method but by the average hourly pay of workers. Most other prices will fall over the years as production becomes more efficient.

      There should then be a transaction tax of say 3% every time the money is spent or changes ownership on any and all transactions with no exceptions. This is what the government has to spend. This is called “feedback”. Without feedback any crazy spending idea the government has is like a shot of cocaine to the economy.
      There should be a 200% tax on interest to discourage lending.
      You are treating money as a flow not a method of measurement. Money has to be calibrated. Will you give someone in one of your classes an A+ before they have earned it for a payment to you. Of course not because even though it might work a time or two it will eventually ruin the grading system. Lending does not work with money either.

      • BFWR
        June 7, 2013 at 12:32 am

        rddulin,

        I like your thinking most especially the combination individual dividend/jubilee aspect. I would mention one thing. Remember that velocity takes place within the context of commerce/business/the economy itself and hence re-initiates a scarcity of individual incomes in ratio to prices which must be repaid in order for the economy to completely liquidate production and so balance.This latter is the most fundamental reason for our instability (amongst a host of lesser problems/symptoms)….because it is the nature of commerce…itself.

        The relationship of individual purchasing power to prices is the most significant one in economics because it describes commerce itself, and also exposes the fundamental bias in the relationship between both business and the individual and the entire system and the individual as well.

  12. charlie
    June 6, 2013 at 10:09 pm

    since prediction is of interest i recommend Nate Silver’s the signal and the noise … economists can do better than their record …

  13. davetaylor1
    June 7, 2013 at 10:50 am

    So RDDulin (like me) wants to give credit money to the governed rather than the government: ” I agree that money should be created “ex-nilio” but not spent into the economy, but distributed equally among the members of that society … “. He’s missing Trond’s point (answering Adam Smith’s objections to circulation and Paul Grignon’s to “twice lent money”) that money needs to be “extinguished” so it can’t be lent: in my words, written off when properly spent.

    Having admired Trond’s lucidity, I found a bit of crisis bashing which even my wife understood in J M Greer’s pre-crisis “The Long Descent” (2008, New Society Publications. For lively follow-up see http://thearchdruidreport.blogspot.com). It addresses the root issue of “Hallucinated Wealth”.

    “I’ve no idea if kids still do this, but in my elementary school in the late 1960s it was common practice to write IOUs for “a billion trillion dollars” or some equally precise sum, and use those as the stakes in card games like Old Maid and Go Fish. Some of those IOUs passed from hand to hand dozens of times before they were accidentally left in a pocket and met their fate in the wash. Kids who were good card players amassed portfolios with very impressive face values, specially compared to the 25 cents a week that was the standard allowance in my neighborhood then. If I recall correctly, though, nobody ever tried to convert IOU holdings into anything more substantial than cookies from a classmate’s lunchbox. Apparently that’s the one thing that kept me and my friends from becoming pioneers of modem finance.

    “It surprises me how many people still seem to think that the main business of a modern economy is the production and distribution of goods and services. Far and away the majority of economic activity nowadays consists of the production and exchange of IOUs. The United States has the world’s largest economy not because it produces more goods and services than anyone else – it hasn’t done that for decades – but because it produces more IOUs than anyone else, and it sells those 10Us to the rest of the world in exchange for goods and services.

    “An IOU, after all, is simply a promise to pay a given amount at some future time. That describes nearly every instrument of exchange in today’s economy, from bonds and treasury bills through bank deposits and government issued currency to credit swap and derivatives. All these share three things in common with the IOUs my schoolmates staked on card games. First, they cost almost nothing to issue. Second, their face value needn’t have an¬y relationship to the issuer’s ability to pay up. Third, they can be exchanged for goods and services – like the cookies in my example – but their main role is in exchanges where nothing passes from hand to hand except IOUs.

    “It’s harsh but not, I think, unfair to call the result an economy of hallucinated wealth. Like the face value of those schoolroom I0Us, most “wealth” nowadays exists only because everyone agrees it does. Outside the social game of the market economy, financial instruments have no value at all, and the game continues only because the players – all of them, from the very rich to the ones with scarcely a million billion trillion dollars to their name – keep playing. They have to keep playing, because access to goods services, not to mention privilege, perks, and power, depend participation in the game.

    “The resulting IOU economy is highly unstable because hallucinated wealth has value only as long as people believe it does. The history of modern economics is thus a chronicle of booms and busts, as tidal shifts in opinion send various classes of IOUs zooming up in value and then crashing back down to Earth. Crashes, far from being signs of breakdown, are a necessary and normal part of the process. They serve the same role as laundry day did in the schoolroom IOU economy: by paring down the total number of IOUs, they maintain the fiction that the ones left still have value.

    “All this leaves us in a historically unprecedented situation. Economies based purely on hallucinated wealth existed before the 20th century, but only for brief periods in the midst of speculative frenzies – the Dutch tulip mania, the South Sea bubble, and so on. Today’s hallucinated wealth, by contrast, has maintained its place as the mainspring of the global economy for more than half a century. Social critics who point to the housing bubble, the derivatives bubble, or the like and predict imminent disaster when these bubbles pop, are missing the wider picture: the great majority of the global economy rests on the same foundations of empty air”.

  14. June 7, 2013 at 5:40 pm

    On the issue of economic predictions.
    Point number one – The economic system is only part of a wider set of «systems», which are all interconnected and that make up what could be termed an «hypercomplex», overall, global «human society “system”» (the cultural, the political, the institutional…)
    Point number two: Each and everyone of theses “systems” has a temporality of its own, with each one of these “systems” having its own «feed back loops», appropriate (or applicable) to its own temporality.
    The «DNA» of the capitalist “system” has two basic and interconnected «motivators»: the maximization of profit (or the “self utility” of each individual agent) and the maximization of accummulation.
    One basic and fundamental difference between «marxian» and «keynesian» analysis (on the one side) and «neoclassical» approaches, on the other, is the historical perspective. Both Marx and Keynes looked upon the “economic system” as an «historical system». Hence subject to a permanent evolution and transformation.
    I believe it was Keynes that once quipped that he would prefer to be vaguely rigth, rather than exactly wrong. Neoclassical economics, on the other hand enthusiastically embraced the a-temporal models of Physics. To the point that nowadays we can witness a number of physicists trying to «come to th rescue».
    I can testify of at least one professor of quantum mechanics – during a seminar on «complexity sciences» – stating something to the effect that «in quantum mechanics, time is reversible». We entered into quite a «philosophical argument» as I tried to suggest that «time is irrelevant» might have been a better way of saying it… In the meantime, and as a result, some physicists (and other «non social» scientists) seem to be jumping into the wrong carriage of a train that departed from the wrong station.
    See this for a mere example.
    http://edge.org/conversation/can-science-help-solve-the-economic-crisis

    Going back to the «DNA» of capitalism, the «rules of the game» (the set of variables and analytical categories) used by both Marx and Keynes in their analysis of the system were not merely (or grossly) «postulated». They corresponded to easily observable empirical realities.
    When I speak of an algorithm to demonstrate the falling tendency of the rate of profit and claim that this algorithm shows why both Marx and Nobuo Okishio were right even if they stated exactly the opposite, I was also considering the fact of a clearly visible historical evolution. On the other hand, I refer not to the «profit» as usualy perceived by economists but to the ratio between the «rate of “value added”» (in each production cycle) and the «sum total of “value used”» (again, in each production cycle). This last «sum total of «value used» being divided between «machinery» (technology, physical structures and what have you of inherited «capital»…).
    This algorithm was based on an original idea by Ronald Meek and clearly shows an initial growth in the rate of “profit” (as demonstrated by Nobuo Okishio), followed by a «phase transition» and a falling tendency (as demonstrated – albeit unsatisfactorily – by Marx). It also shows the growing employment followed by a drastic growth of unemployment.
    Since that rate of “profit” is continually operating «behind the scenes» (or «bellow the radar»…), most economists tend to ignore its action. It’s a bit like the force of gravity… We only truly feel it when we fall off a cliff, for example.
    It was by the use of such an algorithm that I was able to «demonstrated», some 30 years ago, that this crisis was unavoidable. And that it will continue unless…

    • rddulin
      June 7, 2013 at 8:37 pm

      Dave, Thanks for the comments. I do like your observation that most of the business of the economy is in fact financial transactions and maneuvering.
      I see no reason to extinguish money. It should be issued and managed for the benefit and convenience of every member of the economy. Above all it should be reliable. Money buried in a coffee can in the back yard should buy the same number of hours labor as when it was buried even if 100 years pass.
      There is no way to manage lending in an economy without hurting someone. Bad price discovery means someone gets something for nothing and someone else gets screwed.
      The only scheme that is fair to everyone is that NO money be lent. It is not even the interest that is the main problem. it is the lending itself that distorts price discovery.
      This understanding that lending itself distorts prices is what escapes all of the great economic thinkers like Keynes, Adam Smith and all of the others that I can find. If you can’t even propose a market that exchanges products accurately, most of the subsequent theory is garbage.
      Wouldn’t it be great if all participants in this blog would post a short description of what they think the problem is with the worlds economies. (short 200 words or less) and exactly how it could be fixed.

      • davetaylor1
        June 7, 2013 at 10:26 pm

        “I see no reason to extinguish money”? Here are three. If it no longer exists it can’t be lent out. If it has already been spent it shouldn’t be spent again. When it is needed again it costs virtually nothing to recreate. The point, though, that it shouldn’t be treated as if it could be lent out, because even workers and savers are in debt to others in their society (just rather less so than non-working spenders), and it is they (rather than banks) who lend us REAL credit. As the credit-card way of operating shows, all the banks do is account for our credit limit, purchases and repayments.

        What I think is the root problem is people mistaking things (e.g. coins and pieces of paper) for what they are supposed to represent (e.g. the value of already existing people and products); and similarly, trusting con-men (bankers and politicians) not to deceive us, rather than each other to do what needs doing (including teaching our kids to do just that). The answer has to involve making bankers and politicians servants again by decentralisation and limitation of authority: not only “chopping up the onion” but separating its skins so international, national and local government departments become separate businesses with their own credit and responsibilities, working together like instruments in an orchestra rather than a prize fight between political parties refereed by Treasury bankers.

      • davetaylor1
        June 7, 2013 at 10:44 pm

        A bit which got lost in the editing: “The answer has to involve making bankers and politicians servants again PAID LIKE THE REST OF US”. On reflection, are property-collecting rentiers perhaps a type of banker, and business directors politicians?

  15. BFWR
    June 7, 2013 at 6:03 pm

    Economists have recently discovered the importance of double entry bookkeeping. That’s a good start. Now they need to look a little bit closer at a subset of that, namely cost accounting. The data there will provide them with the ability to understand what they are missing in their calculus.

    • rddulin
      June 7, 2013 at 8:53 pm

      BFWR, Thanks for your comments. I believe the instability and the markets not clearing comes from the fact that a third party (the lender/money creator) has worked its way in between the buyer and the seller and receives part of the sellers pay. This cost is not a true factor of production and hence causes a deadweight loss. What I am saying it is not part of the commerce system but due to the predatory money systems in place everywhere.

    • June 8, 2013 at 11:37 am

      The possibility that until recently economists may have ignored the importance of double entry bookkeeping.is simply amazing…
      Was that some kind of «reserved academic area», specific to chartered accountants?…
      And, by the way, you are absolutely right: «dialectic needs to be (the study/consideration of) an actual (historical) evolution rather than (most importantly) merely either a reaction against something or a mistaken synthesis/integration.»

  16. davetaylor1
    June 8, 2013 at 10:06 am

    RDDulin: “Wouldn’t it be great if all participants in this blog would post a short description of what they think the problem is with the world’s economies, (short 200 words or less) and exactly how it could be fixed.”

    Robert, I should have thanked you for your challenge. I do hope others here will rise to it, and I’m sorry if my excited but “ready-for-bed” response was a bit obscure. Let me try using 200 words!

    Perhaps the root problem is naive people mistaking what they see (money, prices, “what it says on the label”) for what it is supposed to represent (e.g. the value of already existing people and products); and similarly, our trusting con-men (bankers, politicians and rent/profit/power seeking business equivalents) not to deceive us, rather than trusting even rough-looking workers to do what needs doing (which includes building trust by teaching our kids to be trustworthy).

    The answer has to involve making bankers, politicians, landlords and business men servants again (i.e. paying them in the same ways as the rest of us). In John Ruskin’s pay scheme, we all get an adequate living so we can work as necessary, plus scaled honorary prizes for work well done (implying decentralisation limiting government and business authority to workloads actually feasible: not only “chopping up the onion” but separating its skins so the outer layer, though larger than those inside, cannot be mistaken for the whole). Ideally, the diverse “ministries” of international, national and local businesses and governments will become cooperating businesses with limited credit and responsibilities, working together like instruments in an orchestra rather than a prize fight between political parties – refereed by Treasury bankers.

    • RDDUlin
      June 8, 2013 at 12:10 pm

      Dave, I think that you and I agree on just about everything. I think many other people do also,but when it translates into “econospeak” the meaning of the words are twisted. I think this is the purpose of :econospeak” which causes it to be a curse.
      It will be later today before I can post a well thought out comment.

    • Robert Locke
      June 8, 2013 at 2:33 pm

      Dave, here is my statement in less than 200 words. The basis problem is malnutrition whose cause is the mal-distribution of wealth that results from a legal and police system embodied in a firm governance that concentrates power and control, including the distribution of emoluments and salaries, in the hands of top management, i.e., director primacy. The solution is not state regulation of incomes but a legal reform of civil society, which sets up employee participant compensation committees within economic units. In order for this to happen a political revolution is needed within the institutional frameworks (business schools, law schools, court systems, legislatures, and the constitution of the firm) that demotes the ideology (the cult of the CEO) and the fact of director primacy.

      • davetaylor1
        June 9, 2013 at 7:07 am

        Your chicken to my egg, Robert? We have both, and it good to have your means fleshing out my ends. As to semantics, surely the malnutrition etc are what make human immaturity and the misconceptions and lies in economic practice a problem?

    • Ed
      June 8, 2013 at 3:11 pm

      davetaylor1,
      Show people these deceptions by omission:
      http://patrick.net/forum/?p=1223928

      • henry1941
        June 8, 2013 at 7:03 pm

        Economies go wrong when the rental value of land, which is created and sustained by the presence and activities of the community, is privately appropriated instead of being used as the main source of public revenue. The problem is compounded when public revenue is collected through taxation of the wages of labour.

      • Ed
        June 8, 2013 at 9:43 pm

        henry1941 :
        Economies go wrong when the rental value of land, which is created and sustained by the presence and activities of the community, is privately appropriated instead of being used as the main source of public revenue. The problem is compounded when public revenue is collected through taxation of the wages of labour.

        Is that Georgism that you assert?

        In my link, my main point is that VERY instructive histories are kept out of sight BECAUSE they are VERY instructive — and the ‘establishment’ are conpersons first. Freedom of the press has evolved to “Fool ’em if you can”.

      • Steve
        June 8, 2013 at 10:20 pm

        I have a tremendous respect for Henry George, and I think Georgist thinking will be a part of the ongoing reforms that will help counter some negative tendencies, but IMO we still need to look just a little closer at the system and make the exquisitely concrete monetary changes that will actually transform it. Applying the monetary equivalent of a transformative idea…would indeed BE a transformative ACTION.

      • henry1941
        June 9, 2013 at 5:52 am

        Ed :

        henry1941 :
        Economies go wrong when the rental value of land, which is created and sustained by the presence and activities of the community, is privately appropriated instead of being used as the main source of public revenue. The problem is compounded when public revenue is collected through taxation of the wages of labour.

        Is that Georgism that you assert?
        In my link, my main point is that VERY instructive histories are kept out of sight BECAUSE they are VERY instructive — and the ‘establishment’ are conpersons first. Freedom of the press has evolved to “Fool ‘em if you can”.

        Amongst other things, it is “Georgism”, but according to Edward Luttwak, the Byzantine Empire used the system for over 1000 years so it must have worked.

    • Steve
      June 8, 2013 at 6:05 pm

      The problem is a scarcity of individual incomes in ratio to total prices needing to be extinguished created AT BOTH THE MOMENT AND EACH CONTINUING MOMENT OF PRODUCTION. And the solution to this is the APPLICATION OF monetary Grace to the individual so as to continuously create the zero balance that double entry bookkeeping otherwise demands businesses and individuals maintain. This would transform the nature and psychology of the entire system with a minimum of actual structural change, which is the hallmark of a true paradigm change, and being the resolution of the deepest problem of economics and finance themselves, would undoubtedly enable many lesser problems to dissipate, the phenomenon of which is readily observable in individual psychology. This does not mean we can or should dispense with regulation. There is no end to history, and there is no present perfection of humanity and likely not one forthcoming, which only heightens our awareness of the fact that we must all “chop wood and carry water” if we are to develop into more adult, responsible and ethical individuals. None of this however invalidates the necessity of following the correct temporal course of: transformation first, regulation afterwards. This is seeking SYSTEMIC solutions, not palliatives, and gives expression to the necessity of applying wisdom SYMMETRICALLY to our organic affairs. After all “…seek ye first the kingdom of God, and his righteousness; and all these things shall be added unto you.” …applies to both humans…and human systems.

      • henry1941
        June 8, 2013 at 9:35 pm

        Would you like to clarify that for the benefit of those of us who are not so good at English – thanks.

      • Steve
        June 10, 2013 at 8:12 pm

        henry1941,

        Money systems and the factor of time ARE a little tricky, but if you read the following while keeping in mind the dual nature of time (it consists of the moment….and every other subsequent moment) you will be able to understand what I am saying.

        Cost accounting identifies individual costs. From this data one can draw conclusions from the ratio of certain costs both to each other AND to over all costs. Since labor costs (wages, salaries and dividends) are not and cannot be the totality of costs EVEN AT THE MOMENT OF A PRODUCT OR SERVICE’S INITIAL CREATION WHICH IS ITS LOWEST POSSIBLE COST…then the incomes produced cannot possibly liquidate the cost/price of production even at its initial creation…and certainly not subsequent to that because further costs are inevitable. The only way to equate the two (incomes and prices) is to supplement individual incomes without initiating or re-initiating that initial and inherent scarcity. And the only way to do that is to GIVE a direct payment to the individual sufficient to sustain his/her ability to liquidate prices both BEFORE it becomes a part of the productive process and ON THROUGH TO RETAIL SALE to and by the individual(s) over a prescribed period of time (say monthly).

        Velocity of money THEORY is not so much non-factual as it is irrelevant. The reason for this is that ANY money ACTUALLY IN the economy is subject to the reality of the productive process…which is the individual monetary scarcity identified above.

      • henry1941
        June 10, 2013 at 9:47 pm

        How about forgetting money and looking at the underlying physical processes? Human labour is applied, at particular locations on the surface of the earth, to natural products obtained from the earth, to produce wealth ie man made products which are the subject of human desire. Those products are then exchanged. Because there is no longer free access to the surface of the earth, those in control of that access can claim some of the wealth for themselves. This is rent. What is left to the producers is their wages ie wages are a share of the production – not a cost of production.

      • Steve
        June 11, 2013 at 12:42 pm

        henry1941,

        First disposing with money is what the currently invalidated neo-classical theorists did….to everyone’s detriment. Money is actually and excellent tool that has quite a ways to go….if we are smart enough to evolve profit making systems.

        Second what your otherwise excellent analysis misses is “the unearned increment of association”. By that I mean the incredible increase in productive capacity and value simply of individuals working with each other, or in examples related to land, the increase in value of land adjoining a railroad and housing values rising according to association with other more luxurious housing or other real estate. This incredibly valuable but “unearned” increase is prevalent all over the place and inherent in modern technological production…and could and should be a part of the calculus of remuneration…..to everyone. Hence, the citizen’s dividend.

      • davetaylor1
        June 9, 2013 at 8:04 am

        If you look at Ed’s graph of the relation of consumptions to production you may wonder if, not distinguishing the money economy from the real one, you haven’t got the problem back to front, Steve. From my technical viewpoint I would say you are both right and wrong: even though overall we are consuming too much the problem is relational or distributional in that some have too little and others way too much; what I would also say is that human production doesn’t take enough account of God’s Providence, i.e. natural regeneration. Likewise, as a Christian I see the Grace and Wisdom as God’s, and our proper response Gratitude, from which flow both grace and trust. As the proverb puts it, “Imitation is the sincerest from of flattery”. On Systemic solutions not doing away with the need for continuing regulation I agree with you, so long as the emphasis is developing an understanding of the value of good habits, not force. There is the curious phenomenon that kids will do the washing up if their turns are written down, but otherwise disappear before they can be reminded it’s their turn.

      • Steve
        June 9, 2013 at 8:50 am

        Ed’s graphs actually show the run up in asset prices in the recent bubble that popped in 2007, not necessarily to be confused with an excess consumption. Not that there isn’t incredible waste and an ability to actually have as much as we have now while actually utilizing less resources, that is the tendency of technological progress, which we should by all means foster. However, my contention that the formula of cost accounting and hence commerce/economics itself is In < Pr (total Individual incomes are less than total prices) still stands because what dollar, if it s actually in the economy, is ever not subject to cost accounting?

  17. Ed
    June 10, 2013 at 3:36 pm

    This chart was in the WSJ 3-30-1999:

    Very instructive? (You bet!)
    Something to watch with care? (You bet!)
    Whereabouts? Nearly nowhere!
    http://www.showrealhist.com/RHandRD.html

    This chart was in the NYT 8-27-2006:
    http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html
    Very instructive? (You bet!)
    Something to watch with care? (You bet!)
    Whereabouts? Nearly nowhere!
    http://www.showrealhist.com/RHandRD.html

    I am certain that it is a far, far better thing for our nation if the people have their heads OUT of their fuming darknesses.

    • Steve
      June 10, 2013 at 8:27 pm

      Ed,

      I’m not disputing your graphs actually. I’m only saying that price inflation is inevitably “cooked into the books” of commerce/the economy….unless and until we supplement individual incomes with a gift of money before it enters commerce/the economy…because issuing loans is a vain attempt to equate total individual incomes with total prices….considering the empirical facts of cost accounting and stubborn persistence….of the necessity of commerce….itself.

  18. Ed
    June 10, 2013 at 10:17 pm

    Steve, I am addressing merely the price histories of two assets commonly thought to be ‘investments’. I do real prices, which is the meaningful way. Both histories are dominated by the coming and going of irrationality — which is unattractive for a long term investment, which is why the financial sector seldom shows them to the people. “The public be suckered.”

    • Steve
      June 10, 2013 at 11:43 pm

      Ed, Yes I see that. It is my contention though that the system itself enforces inflation so that there doesn’t even have to a suckering of the public for there to be a problem….not that there isn’t a suckering of them anyway, there undoubtedly is :) , but again, inflation is baked into the cake. Actually what I’m saying is that free market theory…isn’t actually free, and we need to make alterations to that theory for it to be so.

      • Ed
        June 11, 2013 at 3:43 pm

        Steve, Obviously, so people can do their own informed thinking, the real price histories should be well-apparent. BUT THEY ARE NOT!
        BECAUSE “Freedom of the press” has evolved to “Fool ’em if you can”.

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