Keynesian uncertainty
from Lars Syll
In “modern” macroeconomics — Dynamic Stochastic General Equilibrium, New Synthesis, New Classical and New ‘Keynesian’ — variables are treated as if drawn from a known “data-generating process” that unfolds over time and on which we therefore have access to heaps of historical time-series. If we do not assume that we know the “data-generating process” – if we do not have the “true” model – the whole edifice collapses. And of course, it has to. Who really honestly believes that we have access to this mythical Holy Grail, the data-generating process?
“Modern” macroeconomics obviously did not anticipate the enormity of the problems that unregulated “efficient” financial markets created. Why? Because it builds on the myth of us knowing the “data-generating process” and that we can describe the variables of our evolving economies as drawn from an urn containing stochastic probability functions with known means and variances.
This is like saying that you are going on a holiday-trip and that you know that the chance the weather being sunny is at least 30% and that this is enough for you to decide on bringing along your sunglasses or not. You are supposed to be able to calculate the expected utility based on the given probability of sunny weather and make a simple decision of either-or. Uncertainty is reduced to risk.
But as Keynes convincingly argued in his monumental Treatise on Probability (1921), this is not always possible. Often we simply do not know. According to one model the chance of sunny weather is perhaps somewhere around 10% and according to another – equally good – model the chance is perhaps somewhere around 40%. We cannot put exact numbers on these assessments. We cannot calculate means and variances. There are no given probability distributions that we can appeal to.
In the end, this is what it all boils down to. We all know that many activities, relations, processes and events are of the Keynesian uncertainty-type. The data do not unequivocally single out one decision as the only “rational” one. Neither the economist, nor the deciding individual, can fully pre-specify how people will decide when facing uncertainties and ambiguities that are ontological facts of the way the world works.
Some macroeconomists, however, still want to be able to use their hammer. So they decide to pretend that the world looks like a nail, and pretend that uncertainty can be reduced to risk. So they construct their mathematical models on that assumption. The result: financial crises and economic havoc.
How much better – how much bigger chance that we do not lull us into the comforting thought that we know everything and that everything is measurable and we have everything under control – if instead, we could just admit that we often simply do not know, and that we have to live with that uncertainty as well as it goes.
Fooling people into believing that one can cope with an unknown economic future in a way similar to playing at the roulette wheels, is a sure recipe for only one thing – economic catastrophe!
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Real-World Economics Review Blog 
Hi, Lars, as I was raised in Silicon Valley, lived in Europe 16 years & also teach in China, my Golden Rules for avoiding catastrope:
1. Avoid war.
2. Massive R&D investments.
3. Massive investments to follow R&D & to maintain education/health/infrastructure.
4. Support everyone to join the productivity bandwagon & support them adequately at the bottom–it was some of these less economically successful plus those who are unhappy with social change, excited by renegade press & politicians who want to take personal advantage, who gave us clown acts in America & the UK.
While an active professor, most of my income arises from contact with business firms. Oh, how they ridicule the politicians–and not just due to short-term personal benefits.
It is almost useless, at least on this blog, to repeat and repeat again how the mainstream economics are wrong. Majority of readers of this blog are convinced of its being wrong. I believe Lars Syll should more often reflect and talk about the strategy how to reconstruct economics. There are many things on which to reflect. Lars Syll as a philosopher of economics has an important role to play in it.
The question we should ask in face of fundamental uncertainty or ignorance is to know how the real people are behaving in such a situation. Without understanding this point, no economics is possible, because economic process is generated by the acts of individuals (including those in an organization). This is not methodological individualism. Behaviors of individuals are conditioned by the total process of the economy. There is a micro-macro loop between individual behaviors and the total economic process.
To emphasize uncertainty too much is also dangerous. We are living in a world where almost everything repeats as it happened in the past. Without this constancy (with fluctuations) no human behavior is possible. The error of mainstream economics is it assumes that humans are acting solely by the aid of rational reasoning. As Herbert A. Simon made clear, our rationality is quite limited. It is the repetitive nature of the objective world (including economic processes) that permit human and other creatures to behave effectively (not efficiently as it is understood in neoclassical economics). In brief, we find a sign in the world and react in a fixed pattern. There are no big differences between animals and humans on this point. Only we have much bigger stock of behavior patterns and the capacity to create new patterns.
See my paper (still in a draft stager: Microfoundations of evolutionary economics
https://www.researchgate.net/publication/301766363_Microfoundations_of_Evolutionary_Economics
Too many comments here by me, but Yoshinori you’ve got it! May you be read by many!
Dear Prof Beckman,
thank you for the kind words. Comments count to date 44. As a discussion page, this was a good success. I hope many people have understood that a simple emphasis on “true” uncertainty is not only misleading but disruptive to re-building economics.
I am in total agreement with the necessity to move away from merely complaining about main stream economics. It is important to present what is undeniably valid analysis and come to some conclusion of what is actually correct. As an example of this. I would like to draw attention to Zambelli (2018) in which he conducts a study as to whether the neoclassical postulates are demonstrated by the empirical data. He concludes that the empirical evidence conclusively demonstrates behaviour incompatible with the neoclassical postulates.
On page 46, of the paper Yoshinori Shiozawa refers to, he states “there are economists who believe that we loose all analytical tools if we oust equilibrium and maximization.” As economic cycles have been continually present since the industrial revolution, this demonstrates that the economists to whom he refers need to be taught that a single counter example to a so called theory invalidates that theory for ever! Why is this not taught forcefully in undergraduate economics courses?
In his paper (pp.1−2), Yoshinori Shiozawa states “This explains why evolutionary economics is the unique method to understand economic processes that are going on everyday.” He also makes several references to differential equation describing economic performance. In science, changes occurring over time are referred to as transient behaviour and are suitable for both analytical and numerical solution. When the differential equations have no analytical solution — which is the case for most practical situations in science and engineering — only numerical solutions are applied. In his working papers and book chapters, no corresponding author’s e-mail address is given and so it is very difficult to discuss specific points of common interest, such as this, with him.
If quantitative economic analyses are to be developed, it will only be by solving the appropriate differential equations. When a body of these solutions have been developed, economics will be transformed into an accurate portrayal of the real world.
Reference
Zambelli, Stefano (2018). “The aggregate production function is NOT neoclassical”. In: Cambridge Journal of Economics 42, pp. 383–426. doi: 10.1093/cje/bex011.
Frank,
It is not so simple. A causal mechanism may be true in one context, time or place, and not another. For example, purely hypothetically, it may indeed be the case that in some circumstances minimum wage rules generate unemployment, and not in others. So a theory or argument that works well at some time may not at others. A macro example would be the important of capital flows in driving current accounts. 50 years ago this would have sounded silly. Now there is certainly something to it.
I agree with the point you are making. However, this is exactly the reason why I talk about differential equations and the necessity of solving them. The same causal mechanism can produce apparently opposite effects at different points in the region of interest. An example of this is neoclassical assumption that dy/dk is positive. My solution of the productivity differential equation shows that at different values of the division of labour into tool makers (producing capital) and tool users (labour) the first derivative demonstrates negative, zero and positive vales. The complexity you describe arises naturally from within the solution not from a guess attempting to impose some empirical observations onto the relationships, which is the norm in current economic theorising.
Dear Frank Michael Salter,
(1) You may not be old and cunning enough to predict what happens after Zambelli’s counter example. There are many counter examples that refute neoclassical economics, but no great thing happened by those events. A typical example was Leontief’s paradox. This is related to Heckscher-Ohlin-Samuelson (HOS) theory. It predicted that the United States of America are an exporter of capital intensive commodities. Based on his Input Output table, Leontief found that the USA were in fact an exporter of labor intensive products. You know HOS model is based on neoclassical production functions. However, you may easily find economists who still believe the utility of HOS model.
I had once posed (almost two years ago) the following question in the RG:
Who still supports Heckscher-Ohlin model?
https://www.researchgate.net/post/Who_still_supports_Heckscher-Ohlin_model
The discussion produced no positive results, but you can see how HOS theory or model was defended by an economist.
Science philosopher Karl Popper argued that sciences progress by falsifications. But, at least in economics, his thesis is rejected by the fact that many counter examples do not change a theory. It is a big irony that the falsification thesis was falsified by falsifications themselves.
(3) It is important to know the range in which mathematics is usefully applicable. It is also important to know that there is a huge class of problems on which mathematics is quite helpless. I have argued this point in my paper above cited: A Guided Tour of the Backside of Agent-Based Simulation.
(4) I am sorry to have mistaken your name. When I searched your name among RG participants, the RG produced Frank Slater and I mistook it was Frank Salter. Have you found someone who invite you to the RG?
Agreed. I am a “working” (ie non academic) macroeconomist, and I accept, deep down, most of the arguments about underlying problems in modern macro. But ultimately one does not get very far selling nihilism. One has to construct viable methods and approaches.
I did ask Lars in a previous post for a list of modern papers he might consider exemplary models of how to “do” macro and make proper use of data, without falling foul of his philosophical critique. Don’t think there was any direct response.
Thank you, Frank, for having read my paper attentively. I have given a quick look in Zambelli (2018). Here are four points of my reflection inspired by your comment.
(1) Zambelli’s trial is precious effort in view of the current trend to use aggregate production function widely. The usage is not restricted to convinced neoclassicals but spreads over many heterodox economists. It is true that this kind of criticism is necessary as long as there are many economists who use aggregate production function without serious reflections on its theoretical status. They continues to employ it because it is “convenient” (or easy way) to get some results. However, I believe Zambelli’s trial is still a rather negative effort than a positive one. Before establishing a new theory, it will be hard to abolish aggregate production function simply by detecting its defects. Similar trials were already done for this 50 years in many ways including Shaik and Simon’s criticism and capital controversy. The form of production function itself ( Y = f(L, K) ) is also quite doubtful, because it assumes that a certain amount of product is produced by any combination of inputs. It may well represent a “bricolage” in the Stone Age but is completely misleading as a production relationship of a modern industry.
(2) The example of aggregate production function is a good example of the famous dictum: It takes a theory to beat a theory. If we do not succeed to construct a new theory by which to replace the neoclassical economics, it is impossible to bring down the neoclassical economics. This is the main reason that I often complain about Lars Syll in that he is only repeating criticism on the foundations of the neoclassical economics. Pedagogically it may be useful but it does not change the economics situation very much. I hope he pays more attentions on the strategy to reconstruct economics.
(3) As for your point on differential equations, I cannot agree with you. It does not mean that I deny the quantitative analysis. But you should know that what can be described by a set of differential equations is too restricted to be admitted as a general method of economic analysis. Instead, I propose to use agent-based simulation. Although there are many underdeveloped features in ABS, I believe it is more hopeful than differential equations. See my paper:
A Guided Tour of the Backside of Agent-Based Simulation
https://www.researchgate.net/publication/279177719_A_Guided_Tour_of_the_Backside_of_Agent-Based_Simulation
(4) As for your proposal to continue the discussion on specific points, let me hint using the ResearchGate question page. This blog site (Real-world Economics Review Blog) is not well suited to a detailed discussion, because all discussions fade away in a lapse of two or three weeks. I find a name Frank Slater (of University of Sydney) in the RG. Is that you?
If I can deal with your comments in order:
(1) As you imply the neoclassical assumptions have been accepted far more widely than they should have been. But even Solow doubted the existence of an aggregate production function. The problem is the apparent inability of economists, who use aggregate production functions, to distinguish the difference between an equation, fitted to some data, which is suitable for interpolating smoothed values and the totally unacceptable interpretation of the fitted equation as representing some form of theory. Dimensional analysis precludes each and every production function from having any theoretical significance whatsoever. This is a matter of scientific fact not of opinion. This will need to be reiterated many times before its message is heard by the proponents of conventional analysis.
I feel Zambelli’s paper, in demonstrating that the neoclassical assumptions do not correspond to the empirical evidence is significant. It is a counter example invalidating such theorising.
(2) I agree with you completely but it is here I run into the difficulty of representing my own work. My analysis is, at present, the only theory of production which can not be invalidated, but it is not sufficient to be the lone voice asserting this. It is necessary for its theoretical predictions to be judged by competent academics and for them to report on this. I think you will find that this is the theory you wish to see.
(3) On this point, perhaps I have been too abstract in the words I have used. In actual fact, I am in total agreement with what you are saying, but I would take a more nuanced position.
When I use the term, differential equation, I had intended to imply all of their approximations such as difference equations.
Analytical and numerical solutions are the set of techniques which are available to solve the differential equations.
I understand agent-based simulations as belonging to the set of numerical solutions.
When I started my research I began with extensive agent-based simulations in an attempt to determine the development of a model economy. I had accepted the view that the economy was sufficiently complex to requires such numerical methods to be used. However, on examining the results of very many simulations, I noticed that there were significant patterns present which implied that an analytical solution for production was indicated. So I looked for that analytical solution. I report on it in “Transient Development” RWER-81, 2017.
The problem of all numerical solutions is that the examination and analysis of the results presents a Herculean task, even with advanced data presentation tools.
(4) I will follow your hint.
I am Frank Michael Salter not Slater. I graduated in chemical engineering.
(Sorry! I have posted this in a wrong place.)
Dear Frank Michael Salter,
(1) You may not be old and cunning enough to predict what happens after Zambelli’s counter example. There are many counter examples that refute neoclassical economics, but no great thing happened by those events. A typical example was Leontief’s paradox. This is related to Heckscher-Ohlin-Samuelson (HOS) theory. It predicted that the United States of America are an exporter of capital intensive commodities. Based on his Input Output table, Leontief found that the USA were in fact an exporter of labor intensive products. You know HOS model is based on neoclassical production functions. However, you may easily find economists who still believe the utility of HOS model.
I had once posed (almost two years ago) the following question in the RG:
Who still supports Heckscher-Ohlin model?
https://www.researchgate.net/post/Who_still_supports_Heckscher-Ohlin_model
The discussion produced no positive results, but you can see how HOS theory or model was defended by an economist.
Science philosopher Karl Popper argued that sciences progress by falsifications. But, at least in economics, his thesis is rejected by the fact that many counter examples do not change a theory. It is a big irony that the falsification thesis was falsified by falsifications themselves.
(3) It is important to know the range in which mathematics is usefully applicable. It is also important to know that there is a huge class of problems on which mathematics is quite helpless. I have argued this point in my paper above cited: A Guided Tour of the Backside of Agent-Based Simulation.
(4) I am sorry to have mistaken your name. When I searched your name among RG participants, the RG produced Frank Slater and I mistook it was Frank Salter. Have you found someone who invite you to the RG?
I have no problems with the confusion. In the UK, Slater is three times as common a surname as Salter. So this is a common mistake.
There is a well known saying: My mind is made up. Do not confuse me with the facts.
This appears to exemplify much of economic discourse.
Yoshinori, you make a lot of very sound points. You have certainly convinced I should find time to read your paper.
Money is a tool to convert a value into a price. Mathematical and other economic theories or trade in the real world, can not work without correct prices, no matter how complicated they get. If money creation and operation is to be left to the predators for personal profit, all that is left is to complain. Why not just fix the money?
Because first one must convince economists that deficit spending to fuel growth ruins as a store of value and destroys democracy for sociological reasons outside the purview of today’s economics.
In reality economists have so marginalized themselves by ignoring money I don’t think they can be much help. They see the damage that bad money creates and spend all of heir time trying to explain it away.
We probably need help from the engineering sciences who excel in accurately measure diverse quantities everyday.
Complaining is only the first step.
@ Garrett Connelly: Quite wrong. Deficit spending as an aim is of course silly and wrong. But it is a logical consequence of the existence of a money-using economy & certainly does not ruin money as a store of value. Money cannot exist without “deficit spending”, which is the source of all money that has ever existed or could exist. So if otherwise worthwhile goals lead to deficit spending, then nearly always, the answer is “who cares?” It’s a trivial matter, and the cures for it are far worse than the disease.
Absolutely true complaints. But again just complaints.
I don’t think this discussion is heading along the correct and logical lines. We need to stop thinking in terms of probability of the individual within a limited microeconomics field and begin to seriously consider the aggregate effects when all similar activities are taken within the Big Picture of a macroeconomics situation.
This reduces the amount of uncertainty but it does not eliminate it, because of the infidelity of nature and certain illogical actions by the decision-making of monopolists and dictators. Then our model (if we have it right as in SSRN 2865571 “Einsteins Criterion Applied to Logical Macroeconomics Modeling”) can allow us make a degree of correct forecasts and show how a number of what are not exactly chance happenings come true. Of course, with the passage of time, these forecasts which are initially accurate become less exact.
In these considerations money-flows and their reciprocal flows of goods, services, access rights, taxes, credit for investment, shares, etc. need to be considered as acting all together in the Big Picture, as shown in the model, referred to above. The place of mathematics here is to act as a short-hand device so that we can analyze relationships that in words alone are too hard to properly appreciate. Matrix maths is extremely useful here and it allows us to see both the wood and the trees.
This is certainly not main-stream economics, however it is more truthful not to claim that the main stream is wrong, but rather that it need simplification to show what about it is right! Firstly we must think in macro- not micro- terms because these two aspects behave like solid objects consisting of millions of atoms, and of single molecules respectively. Its like the discovery of the differences between traditional physics and quantum quantities.
How does any of this substitute for money not giving accurate prices?
David, I really appreciate this discussion. Because my early training included the Heissenberg Uncertainty Principle, I constantly return to the ability of the individual to evaluate both quality & price simultaneously. Quantum mechanics says, no. We also have learned that people affect each other, as in political rallies run by psychologically competent performers such as Mr Trump & perhaps a few of the current British political leaders.
Market researchers, whether in political or economic decision-making, know this. They know the visual Images & sound bites which are likely to trigger a quality over price or nation over others response in VARIOUS GROUPS. This is why the discussion over Cambridge Analytics & social media is so useful: people are analyzed according to their basic nature, cognitively & socially. The public generally fit broadly into wanting quality over price or the opposite, or nation over others, or not. Of course, other values enter into both, Good market researchers know this. This is far beyond the training of most economists, but it is part of micro & macro economic/political behavior.
In other words, economics is entwined with many disciplines, all of which have something to say about micro, Marco or their combination, it says to me.
Virtually everything problematic about the money system and the economy could be rectified if we’d simply think ECONOMICALLY about the money, pricing and accounting systems, and recognize the stupendous economic significance of the point of retail sale as the summing and ending point for costs, prices, the expression point of inflation and the ending point in the entire economic process for every item or service.
Thus if you implement a discount/rebate policy at the point of retail sale at the end of the economic process and the point of retail sale from one business model to the next throughout the economy you can transform the tendency of modern technologically advanced economic systems from erosively inflationary to beneficially deflationary for all agents, and as a kicker, break up the glaringly contradictory monopoly paradigm of Debt Only that private finance dominates everyone and everything with as well.
Direct and Reciprocal Monetary Gifting is the same conceptually oppositional inversion/transformation as the one from Nomadic Hunting and Gathering to Homesteading Agriculture and the inversion of position and primacy from earth centric Ptolemaic cosmology to Helio-centrism. It’s the apotheosis of economics and economic theory.
We have a lot of pieces we do know. We know total private debt is a controlling variable (given unemployment correlation with same) even though neoclassical school teaches the opposite. We know fiscal deficits don’t matter in the short run having demonstrably run up 20 $Trillion recently. Much more world wide.
I believe we will eventually learn what variables are important but the irony will be this will not let us escape our Faustian choices. We will learn e.g. that stable monetary purchasing power is important but there are sometimes more important goals, like lowering total debt and thus unemployment. I’d be happy if total debt could at least join the list of variables to consider. Right now it’s excluded by loanable funds.
The answer to the dominating paradigm of Debt Only, the coalescence of the financialization of the economy and their resultant enforced monetary austerity is Direct and Reciprocal Monetary Gifting strategically targeted at the various points of retail sale throughout the economy. The answer to parasitic financialization is the re-retailization of the economy as per above. Private finance/money creation is not a legitimate business model being post retail sale, and the only way to insure that public finance/money creation is benevolent is to mandate that it consider and empower the individual FIRST and consequently enterprise and the system right along with it. No more “hobby horse” tweaking, no more mere reforms and perturbations, no more continuous pain and stress all around, no more orthodox neo-liberal “Change you can believe in” or populist disguised conservative “Make America great again”
Paradigm changes are real and profound. Let’s have real and profound change.
Having a different understanding, I partly disagree with almost all the comments below, but to please Vladimir let me respond to Lars by being constructive. It is not necessary to decide on the basis of a future we can’t know, for we can act on the basis of what we do know: what people have already consumed and therefore need to regenerate. In complex systems, too, [taking electronics as an example] precise outcomes depend on compensating relationships and feedbacks rather than precisely specified components.
Briefly, then:
James’s “massive investment” needs qualification given global warming, ecological collapse and population explosion.
Yoshinori has still not grasped my argument for the MACRO foundations of evolutionary economics.
Frank still hankers after parameterised differential equations and “an accurate portrayal of the real world” rather than practical programming of what needs to be done. [Cf. the etymology of ‘parameter’ and ‘paradigm’: measuring vs. showing – in context].
Rddulin I largely agree with, but how would he “fix” the money? Not by accurate measurement!
Garrett I usually agree with, but he seems to be missing the point that deficit spending can only buy what is already available, and the deficit to be avoided is in the regeneration of that.
Calgacus is right on deficit spending but quite wrong on money being a store of value rather than a means of accounting for debt.
David’s graphic[4] model (lines interconnecting points) and his matrix methods are similar to mine, but descriptive of what we have and aimed at forecasting outcomes, not explanatory of where to look.
Craig as he expresses himself here I have to disagree with: he’s back with micro-economics missing out the people and institutions comprising the economy, and the fallacy of composition in summing up. His later “the only way to insure that public finance/money creation is benevolent is to mandate that it consider and empower the individual FIRST and consequently enterprise and the system right along with it” comes back to my credit card concept.
Peter is surely right on the significance of private debt and “our Faustian choices”. In my and many other people’s opinion, however, the issues are structural (concerned particularly with the methods of creating, holding, transmitting and writing off money), and not which variables are important.
The problem is aggregate Debt and its continual build up via the paradigm of Debt Only. As macro-economics is about aggregates and their significances that’s a macro-economic observation. The same with the insight that the moment to moment flow/reality of the macro-economy is the destabilizing scarcity ratio of TOTAL individual incomes to TOTAL costs and so prices. The new/newly re-discovered significances of the point of retail sale and the digital nature of the money, pricing and accounting systems are all perceived by looking directly at the day to day operations of the economy alright, but as retail sale occurs throughout the entire the economy and at its end, and the policies derived from such insights have general individual, commercial and systemic affects they are macro-economic as well.
The accounting system and its cost accounting convention that all costs must go into price are universally (and correctly) applied by all honest accountants and enterprises thus there is no fallacy of composition in what I am saying.
A credit card only enables you to borrow, i.e. become further indebted. That does not break up the monopoly paradigm of Debt Only. Only Monetary Gifting does that. A debit card that enables a universal dividend to be be gifted to the individual would be fine.
Craig, Could you direct me to, or give a more complete explanation of the monetary gifting proposal?
rddulin,
You could get Oliver Heydorn’s book Social Credit Economics for background on the original theory of C. H. Douglas. The moniker of Monetary Gifting is my own innovative extension of Social Credit policies that goes beyond some of the subtle DSGE thinking that remained undetected in the theory among its few remaining adherents, and that aligns with present heterodox thinkers like Steve Keen and Michael Hudson. It (Monetary Gifting) is also my paradigmatic perception derived from Social Credit, my wisdom tradition and philosophical studies and from my investigations into the nature and signatures of paradigm changes themselves that in turn lead to my recognition that for Social Credit policies to attain paradigm changing character its concept of “the Gap” must not merely be filled, but become dynamically over flowing.
For what its worth I’m working on three books I’m presently titling
Monetary Gifting: The New Paradigm In Economics and Money Systems
Grace: The Natural Philosophical Concept and Its Practical Applications To Economics
and The Cosmic Code: A Thoroughly Integrated Duality Within An Integrative Trinity Unity
Thanks, I will.
Dave,The way you fix the money is to stop favored people from creating buying power by making loans and debt and more loans to pay the previous loans ad finitum. Money should be issued and distributed on a per ca-pita basis to every person of legal age in a given economy. Including legal non-citizen workers. No forcing of the poorer people to borrow and pay interest to lenders to create buying power in the economy. Money is simply a measurement tool to price and document value. not a tool of perpetual bondage. The issuance should be pegged to maintain the average hourly wage. There are other finer points of course.
Mr Dulin (first name?), yes but … . The question is, how?
In a credit card system, banks don’t make loans (merely issuing credit limits), and we are all favoured customers. We ask Craig’s retailer’s not for a loan from him of something specific (like money) but for credit to buy whatever it is we need and society has made available. We indebt ourselves, but only insofar as we spend our credit, indebting ourselves to society and writing this off our supplier’s debts. Thus credit as needed but not money to burn is issued on a per capita basis, see my response to Craig below. I think a small amount of money needs to be retained for non-automated trading, with cash withdrawal setting up dummy entries to be filled in from suppliers’ accounts when they pay in their takings.
Due to a computer glitch I’ve had to reconstruct this answer. I’m sorry it is not as good as it was.
Yes Mr. Taylor, Mr. Dulin is correct, Thank You.
Money has to be created and distributed by the government. Not spent into circulation by the government but distributed directly to each and every person of legal age in the society.
Lending of money should be discouraged by onerous taxes.
Why waste time with credit schemes and their hidden expenses?
Everyone can spend their own money. Accounts can be kept continuously straight and correct at the minimum of expense.
If someone wants to sell a house or similar large item they may of course agree upon a payment scheme.
And the primary problem is not debt in itself but who pays the debt.
Historically this has been labor.
This uncertainty of what price the debt is included in creates inaccurate prices.
Different prices for different people is in my view unacceptable.
Actually, the way to fix money which is virtually monopolized by Finance and its paradigm of Debt Only is to implement three policies and one structural change:
1) A 10% discount/rebate policy at the point of sale of each business model’s product or service throughout the entire economic/productive process that is rebated back to them by a separate monetary authority. If any business arbitrarily inflates their prices for any reason other than legitimate ADDITIONAL costs, say 5%, then that percentage is subtracted from their 10% rebate. This will encourage the micro-economic virtues of frugality and competition and discourage the economic vice of price inflation.
2) A 50% discount rebate at the point of retail sale which is the terminal expression point for all cost and price inflation
3) A $1000/mo universal dividend distributed to everyone 18 years of age and older.
Structural change: Private money creation is abolished and a publicly administered US Bank is created with full arms length separation from the three branches of government and from the monetary authority mandated to distribute the dividend and rebate monies. Private finance will survive as a business model that advises savers and borrowers of already created and saved money.
Benefits:
Policy one as stated prevents garden variety intra-systemic inflation which is never of high percentage because price competition still lives between commercial agents and where it doesn’t taxation, forfeiture of discount/rebate privileges and monopoly break up could be followed through on.
Policy two implements beneficial price deflation into profit making systems by its discount to the terminal expression point for all price inflation while also keeping businesses whole on their overheads and profit margins. It doubles everyone’s potential purchasing power including any unemployed whose dividend becomes potentially $24,000/yr. Thus all transfer taxes for welfare, unemployment insurance immediately become redundant and able to be eliminated. Taxes for social security could also be rather rapidly phased out as well. Their bureaucracies could also be eliminated. (Paradigm changes benefit all parties because they integrate the best/truthful aspects of agendas of apparently opposing sides like economic democracy and thrift for instance)
Policy three terminally ends the naive idiocy of believing that a private monopoly on the paradigm and product of the tool that is necessary for commercial and individual survival in a MONETARY economy….is understandable in any way. As policy one and two are unmistakably gracious monetary gifts there is no way that even economic libertarians can misconstrue them as tyrannical.
There are many “knock on” social, psychological, political and economic benefits from these policies, and as is historically verifiable, all legitimate factors in the area of human endeavor that a new paradigm occurs in….adapt to its obviously deep, broad, transformation and beneficial changes….not the other way around.
Craig, you have an economic revolution in mind, don’t you?. Do you have any candidate nations as a marketing test?
James,
It could be tested in any advanced economy because they are all monetary and the digital nature of double entry bookkeeping is practiced in them.
Actually I have monetary and economic evolution in mind, and the place it actually needs to take place in is the US because it’s still the dominant power economically and militarily. If it happened in the EU or any lesser sized and important economy it would probably be destroyed by Finance.
Craig, I agree “The problem is aggregate Debt and its continual build up via the paradigm of Debt Only.”
What you are NOT seeing is your seeing the Debt as symbolic money and my seeing it in real terms as failure to regenerate or recycle what we use.
It follows that you don’t see my seeing your Monetary Gifting being performed by writing off our personal contributions to the real debt (as accounted for in our credit card accounts).
This is appropriate insofar as we are earning our keep – which in real terms does not mean just the usual working for employers but includes caring for ourselves and our families, study, art, experimentation etc. As a pensioner I still try to earn my keep, e.g. by contributing thought here. I have never paid any interest on my credit card because (a) I minimise my real debt by buying only what I need, and (b) the resultant bill is always less than my income and paid on the contractual timescale. Banks likewise need never receive interest if their bills are paid for with credit and their debts written off insofar as they do their job. Governments need a new job, in which the old institution of Labour Exchange (see J S Mill) is prominent.
Once living in California, I saw the effects of personal/business debt write-offs through bankruptcy. We also know well about debt write-downs in real terms through Inflation or currency translation. We also realize from the work of Reinhart & Rogoff that “This Time it is (not) Different” as large-scale personal/business/government bankruptcies have become a fixture of global civilization.. We can hardly wait for the next–for analytic purposes–can we not?
James, you have seen the effects of the monetary system as it is at present. That is surely good enough reason to evaluate imaginatively an alternative system in which limited personal credit and cooperative ownership of enterprises undermines renting of money, concentration of ownership and liens on property, hence those predator-induced and socially damaging bankruptcies. Once a project has failed it is water under the bridge, but before then a lot of people will have earned a livelihood and learned a lot. Today’s industry can provide tomorrow’s education.
rddulin on April 13, 2018 at 9:31 pm
Ok, Mr Dulin. For myself, I’m from a scientific rather than academic community where the ethos was friendly teamwork rather than hierarchy. Let me take your comments as challenging rather than simply rejecting mine.
I was inviting you to reflect on the effect of re-interpreting money honestly as credit instead of debt, but as a matter of fact government does not now create and distribute money, so that cannot be necessary. If you are proposing it as an alternative to bank credit, I can go with you by seeing credit limits (and rules for varying them) set by government rather than banks.
So no loans requiring onerous taxation? Let us be clear that, like private taxation in the form of interest, that would have penalised the borrower and enriched the financiers, generating far more hidden bureaucratic expenses than our automated international credit management.
If money really is credit and not the pieces of paper which say it is, then why account for them separately? (I have both a debit card and a credit card, with separate accounting for each). Why not use just credit cards in the way I do? I would argue the payment scheme for large purchases like houses should not be subject to interest payments, which generate inflation, but should simply write off the debt at an agreed rate by keeping up commitments to an agreed level of work.
We agree, different prices for different people is indeed unacceptable, but that is what we have got. In particular, most of the cost of a house purchase as things are is interest, and those already asset rich get lower rates of interest than the poor, while the very poor are forced to pay rates of interest on small short-term loans which are sufficient to leave them permanently in debt. Ok, the price of a house should not depend on who is buying it (unless the seller is giving a discount to a prefered buyer, eg a family member), but the rate at which the debt is paid off should be adjusted to the circumstances of the buyer. If, for example, he is sick and can’t pay, the debt should simply remain on his account that much longer.
Mr Taylor,
I am sorry if in my attempt to be brief I have in any way offended. Let me assure you that was not my intention. Science is the occupation of establishing the certainty of truth by demonstration. Academia specifically the misnamed “social sciences” establish truth through consensus. Consensus is a wonderful tool for creating and validating any truth desired, without the constraints of reality. Consensus that unifies and benefits the particular group thru this process becomes reality. The question is not what do you believe but whose side are you on?
What is so great about this blog is that people have the platform, if they have the courage, to question the consensus, the status quo so to speak. To me, it is frustrating to see these courageous people talking past each other using paradigms created by diverse consensus groups that are created to benefit the group rather than foster understanding. The tower of Babel comes to mind.
My background is in manufacturing, tool making and product development. My job has been to discover the actual cause of problems, fix the problem and make the system work.I have long thought that there is a fundamental problem with money that causes many problems.
I am sure that you will agree that accurate measurement is a fundamental tool of science.
Measurement is the comparison of something to a standard to establish a numerical quantity for mathematical operations. In the measurement of length, a rule of standard and reliable length is compared to and unknown length and a numerical ratio established. This numerical data can be put thru various mathematical operations to predict other relationships.
If the measurements are wrong, so are the predictions.
What if one had a ruler made from rubber so that it’s length could be changed at will?
Even if consensus deemed it a good ruler, it’s prediction power would be erratic, not repeatable.
People have things that are of value to them. It is very useful to have an item of standard and reliable value, to compare these personal things of value to, in order to obtain a numerical expression of value, a price. This tool of course, is money. Prices greatly increase the efficiency in trading and comparing things of value.
Value is more complicated than length to measure but their are many parallels.
A good money value standard should be stable, predictable, not subject to special interest manipulation, convenient and available for all to use at nominal cost but also transparent so that all people may understand it’s operation. In short all of the benefits that current measurement standards exhibit.
Value has an unusual component in the matter of rarity. Twice as much of something makes it half as rare and half as valuable. Money times how many times it is traded in a time period determines it’s buying power in that time period.
Manipulation of velocity of money by lending is comparable to the aforementioned “rubber ruler” being stretched to fit as needed. Both the rulers value as a standard length and the money’s buying power is changed. The standards are corrupted. The interest charged is of course a problem, but lending money even at no interest causes problems.
I hope this helps explain my decision that all money lending causes harm to someone.
Money lending is not to be confused with the long established practice of “Trade Credit” where the buyer and seller have an established relationship of trust and the seller allows the buyer to take the product now and pay at the end of the month, 30 days or other agreed time.
Debit cards are fine. just an electronic transfer of money. Credit cards are a simple way for lenders to generate higher interest loans.
Debt is deadly but it is purposely made necessary by no source of money understanding, creation and distribution in society.
I think you and I would agree on a lot of things if we were talking the same language.
Hi, rddulin, PERFORMANCE (system fit) is indeed not very important to many in the social sciences, as we see when we try to apply some academic hypotheses to our everyday world of manufacturing, commerce & government:
In addition, with bankruptcy easy & carrying little negativity in the US, money is not really an issue as high-cost lenders/investors are easy to find. Obviously, some direct costs when combined with apparent risks make lots of borrowing deals inappropriate.
Am I correct in guessing that few of our discussants consider the US approach viable?
Thanks, in advance.
It was Schumpeter (a banker) who realized the true genius of bank credit. The banks have tow roles: they run the payment system where funds are transferred from the demand (e.g. savings) account of the buyer to that of the seller, and they extend credit by posting a piece of paper (a note) as a bank asset and funding the demand account of the borrower thus creating new money in the payment system. Before this invention new capital formation was almost impossible because without credit the payment system is closed. Every dollar of income must flow from some other employers demand account. There is no way to create new money in such a system. Building a barn for example required family labor resources and materials taken from family land. The invention of credit Schumpeter viewed as a forced savings by society because a failure of the credit system to lend wisely would hurt the demand accounts and the payment system used by everyone. I agree with this view and our problem is largely a failure of our banks to lend for wise purposes. This is Hyman Minsky and Mark Werner and Steve Keen and Michael Hudson and Ann Pettifor in a nutshell.
Peter, thanks for that insight on Schumpeter. I studied with Minsky, but at that time I was innocent of the profit-seeking machinations of some bankers.
Indeed with Finance’s current enforced paradigm of Credit-Debt Only the only way enterprise in a high tech multi-staged production process is possible…is continuous borrowing….unless you make the economy a truly monetary one….as Steve Keen has shown it is.
So given that MMT shows us that taxation is not necessary in fiat monetary systems, and that the policy of a 50% discount/rebate at the point of retail sale eliminates any possibility of price inflation because retail sale is the terminal point of the expression of all cost and price inflation…..then within these two truths why is there any need for income tax to fund government, and why do we not immediately double everyone’s purchasing power and double the possibility of sales for any enterprise with the 50% discount/rebate policy…and so create a prosperous and stable economy like we’ve never seen before??????
There is but one reason: The continued enforced economic tyranny of Finance’s current dominating and monopolistic paradigm of Credit-Debt Only due to unconsciousness of it and/or mistaken defense of same by economists and politicians on both sides of the aisle.