Home > Uncategorized > Edward Prescott, Finn Kydland and the flooding of Fukushima

Edward Prescott, Finn Kydland and the flooding of Fukushima

How did this ever pass the peer-review procedure… In an article in the Journal of Political Economy Edward Prescott and Finn Kydland argue in favor of (undemocratic) rules instead of (democratic) economic policies. One of the methods they use to push their idea is the using examples. One particular famous one is the one about floodplains. But the example is wrong. Government policies are not as benevolent, rational and effective as Prescott and Kydland think they are. And people are not as rational. Here’s the example:


This is not what happens. What happens (and it happened after 1570 and 1717 and 1825 and 1916 and 1953 in the Netherlands and in Germany (around Hamburg) in 1962 and in the USA in New Orleans after 2005) is the next thing:

  • People build houses, farms, factories
  • The government does build dams and levees but these are woefully inadequate
  • A storm comes, the floodplain is flooded, scores of people die
  • The government and/or the people change the way dams and levees are financed as well as the design of the dams and levees and builds much better dams and levee

So, the outcome is the same. But only after the rational agent which built a house in the floodplain had drowned. As people nowadays also build nuclear reactors in flood plains the problems associated with post hoc policies are even larger than in the past. Time to panic: another flood will come.

  1. October 12, 2018 at 5:58 pm

    The last link to Nuclear Reactors in Flood Plains is is directed to German site.
    English cite is here:

    • October 12, 2018 at 11:43 pm

      Thank you for this peak into reality. Yes; the Japanese emergency generators were under water. What would have failed next had the generators been high and dry? Would engine mounts have survived an upper level structural whiplash? Just for starters.

      And news has been forgetting recent era epic floods already actually threatened central north American reactors. The dikes held! Imagine Fukushima somewhere on a line between Saint Louis and Atlanta. Or Berlin and Paris. Or Beijing and New Delhi.

    • October 13, 2018 at 4:25 am

      Dear Garret Cunnerlly

      I am not a specialist on Fukushima Disaster. What I can say on this topic does note extend beyond newspaper information. However, I can add that Fukushima Nuclear Power Plant is a part of Tokyo Electric Power Company and engineers and managers were (and are) among the best and brightest of the Japanese. Even though, they could not prepare for a high Tsunami which has been observed several years earlier off Sumatra island.

      What is more ridiculous for me is that the designers of the Power Plant put the reserve electric generators at the seaside side of the main building (which encase the Nuclear Generators). They had to be used at the time of the Power Plant breakdown. When Tsunami came, they were drowned under the water and were unable to be used as reserve power generators. Humans are so silly being.

      • Econoclast
        October 15, 2018 at 4:13 pm

        Brunswick reactors (near Wilmington, North Carolina, and of the same type as Fukushimas) were “overbuilt for safety” with 22-foot seawalls. During Hurricane Florence one of the scientific weather reports stated the possibility that the surge at Brunswick could be as high as 65 feet. Whoops! Dodged that bullet!

        In the 70s four of us challenged two proposed nukes in a siting hearing. We won on the evidence, keeping my state nuke-free. As we were leaving the hearing room, the one of the power companies’ chief witnesses thanked us for challenging them! Why did this highly intelligent, well-dressed, most articulate and presentable man with a stately bearing thank us? Because, he said, we had saved them from a really bad investment.

  2. jvinmont
    October 12, 2018 at 7:12 pm

    Besides that, both Kydland & Prescott got the Nobel Prize specially for the main theme of *temporal consistency* – base of their 1977 text in the JPE. Jorge Vianna Monteiro

  3. October 21, 2018 at 10:56 am

    I take it from the body of the article that rational refers to anyone who refuses to take foolish risks with their health or life. From that perspective, all armed services personnel serving in combat are not rational. Many workers in dangerous areas of work (e.g., off-shore drilling, underwater welding, police, firefighters) vacillate between being rational and non-rational. In this sense, who is rational? More importantly, how does this all fit with the needs of societal or community welfare? Cultures always define some roles that are more dangerous for those who fill them than other roles. If some members of society (subcultures, for example) insist on taking on such roles, society’s welfare is improved. If members of society refuse such roles, society is harmed. That’s why the welfare of society supersedes that of members in such risky roles. It is no longer a question of role-risk but rather societal risk. Members can be and are sacrificed for society, even contrary to the preferences of the members. A further complication arises when some members deliberately increase societal risk by performing risky actions from which society may be expected or forced to save them. Difficult balancing acts. Don’t economists even give a moment’s consideration to the fact that economic interactions are complex while the schemes economists come up with to explain and tinker with those interactions are not?

  4. October 21, 2018 at 9:31 pm

    Rational refers to people who think in numbers or (if innumerate) in sets defined in words (hence logic). Visual thinkers are not rational in that sense: they compare envisaged outcomes with aims and judge whether their thinking is going in the right direction. Sure directions can be ennumerated as angles, but the data is two-dimensional rather than linear and the outcomes lines of action rather than static points.

    Rationality, in other words, is not defined by whether one’s aim is one’s own health or life; it can be considering whether one can make more money building houses cheaply on a greenfields flood plain than on a hill with a view, without any thought (or even knowledge) prior to the event of the field being in a flood plain, so that drainage will increase the severity of flooding. And why should the developers care? They won’t be living there! It is easier to be rational after the event, but thereafter public ethics enters the picture.

    Rationality isn’t restricted to the present moment. Having solved a problem due to pursuit of money the rational thing is to make a note of the answer and ensure it is considered in future, as by making it illegal for developers to build on flood plains. However, that doesn’t eliminate the underlying problem: developers aiming to make money.

    The proclaimed aim of government is not to make money but to protect the health and lifestyles of others. Rationally, therefore, “The government and/or the people [should] change the way dams and levees are financed as well as the design of the dams and levees”.

    • October 22, 2018 at 6:31 am

      Dave, public (societal) ethics is what I’m talking about. These should not, and if society is to survive cannot be sacrificed for the welfare (e.g., profit) of any member of society. This has been screwed up by a culture that denies all of this. That places the welfare of members of society above the society. This culture is not only self-defeating and self-destructive but jeopardizes the continuation of Sapiens itself. Dave, you ask the correct question, is a culture that focuses first on members making money the main problem? If it is, I agree with your suggestions. But change is difficult and upsetting. Business gurus call it disruptive. So just how disruptive will new ways of making economic decisions and building society be?

    • October 22, 2018 at 11:25 am

      Ken, glad to see we agree the issue is one of societal ethics, even if I see that in ethical and you in moral terms (wanting to do good rather than not doing something social damaging). If (as re-enacted in the story of Christ) God blew himself up that we might live, the least we can do is be grateful, with imitation – as in giving way to others – being the sincerest expression of that. Still, that’s an ‘if’ to clarify my philosophy. Rationally, that involves my giving way to your ‘if’, though strictly speaking I was “suggesting” ANSWERS to the question YOU are asking!

      “Just how disruptive will new ways of making economic decisions and building society be?”

      I suggest first that we must put this in the context of sticking with the old ways: which will be worse? I suggest secondly that change of mind rationally accepted is a great deal less disruptive than enforcement of physical change, and business gurus (who are forever recommending incremental change) find it rational to minimise disruption by making their mistakes “off-line”, on paper, which costs very little in comparison with – say – producing a faulty car and having to physically withdraw them from users in order to modify them. So I am telling no-one how they should change the financial system. We are at the beginning of the
      process of agreeing on paper what will be the best/least disruptive way forward, and I am trying to get the discussion rolling by suggesting a simple switch from debit cards to credit cards, which people are already familiar with and for which the accounting technology already exists. People with different types of mind will be interested in the practical implications of this and the reasons for thinking it: the “Why?” of it. I’m one of relatively few people interested in this change process from both ends, though in real time “actions speak louder than words”.

      • October 23, 2018 at 1:01 pm

        Dave, God or Jesus is not my concern. I can certainly see how Christian believers would make this guide first to use in making these decisions. I don’t do that. I focus on something that is in my view more important. The moral guides or codes of conduct humans have created over the last 15,000 years, only a few of which are Christian. To oppose these is to oppose the entire history of our species. These codes are humans’ efforts to create a right and a wrong for human actions. To “keep humans on the straight and narrow.”

        When you say making mistakes on paper, off line, I assume you are referring to modeling. The imagining of possible futures based on different human actions and nonhuman events. Such models can be useful, and humans have created them for well over 10,000 years. But they are not infallible. They often fail. Both the failures and successes of these models help humans imagine and perform their future. But the proof of any model is in the pudding, so to speak. That is, the usefulness of any model only reveals itself after the fact, when events either fit the model or do not. Right now, there are three models vying to describe and then help create the economies of the 21st century. These are: 1) the state-capitalism of China; 2) cooperative model of developing major nations – Argentina, Brazil, China, Malaysia, Mexico, Nigeria, North Korea, Philippines, Qatar, and Russia, 3) The fascist capitalism now ascendant in the United States. Each seems capable winning. But which will, and what will be consequences of that win? (Note: humans are not neutral about such models and will work diligently to ensure the model they favor guides the future.)

      • October 23, 2018 at 5:29 pm

        Ken, it is sad to see you so stuck in your groove. Right now, the world is in a mess, and some of us are looking for alternatives in other ways of thinking. However, perhaps you didn’t notice that, in distinguishing the ethical from the moral approach, I nevertheless accepted your preference. That is not “either/or” choice: anyone who has brought up kids will realise the need with them for the moral approach, though one hopes they will grow up to be ethical. Again, “off-line” is a phrase it is reasonable to assume computer users are familiar with, not being about modelling as such but about taking time out from “on-line” activity and debate to think issues through for oneself. You should try it sometime as an alternative to drowning other people’s arguments with “knee-jerk” reactions.

      • October 24, 2018 at 8:42 am

        Dave, we’re just it seems stuck in different groves. Yes, for some the world is a mess. For others (e.g., Trump, neo-Nazis) the world is getting better every day. As for alternatives, they’re all around us. What is lacking is the courage to push them, work for them, force them through. Especially against people who will not like our opposition. For example, submit a proposal to the AEA for a formal statement of non-support for any economic theory or research that directly or indirectly is a threat to democracy any place in the world. You won’t get it, but that’s were negotiations begin. I’m a member of Historians for Peace and Democracy. We’ve submitted such proposals to AHA regularly for over 10 years. So far, we’ve gotten three formal statements and a lot of new sessions dealing with these issues on the agendas of AHA meeting. There is also a boatload of books out now, reports, conferences, news articles, and blogs that provide details on alternatives open to the USA. My favorite book is “Viking Economics: How the Scandinavians Got It Right-and How We Can, Too.” “World Inequality Report 2018,” from the World Inequality Lab. News articles such as “Socialism is no longer a dirty word in the US,” Arwa Mahdawi, The Guardian. A meeting I’m attending in December, “‘Futures of finance and society’ conference, 2018” Edinburgh. The Scientific America Blog network includes some very interesting content on issues that mix economics, social science, and physical science in dealing with problems of reorganizing our nation. And hundreds of others.

      • October 24, 2018 at 9:59 am

        Good for you, Ken. I’d been playing with saying I wasn’t being entirely fair, because you so obviously have a lot to contribute, but I couldn’t quite see how to say it. The problem remains, your going off so strongly at a tangent (whatever I write) doesn’t exactly help others follow up what I have been trying to say. With so much going on in your life, that suggestion about going “off-line” a bit looks to be timely. In any case, as a matter of courtesy, may I ask you to give my contributions a bit more space so they have a chance of being developed? Respectfully, Dave.

      • October 25, 2018 at 6:27 am

        Dave, the abstract for the article reviewed in this posting reads as follows: “Even if there is an agreed-upon, fixed social objective function and policymakers know the timing and magnitude of the effects of their actions, discretionary policy, namely, the selection of that decision which is best, given the current situation and a correct evaluation of the end-of-period position, does not result in the social objective function being maximized. The reason for this apparent paradox is that economic planning is not a game against nature but, rather, a game against rational economic agents. We conclude that there is no way control theory can be made applicable to economic planning when expectations are rational.” And expectations are never rational (in any of the ways that term is used by economists). Consequently, how can it be the case that actions proposed by economists in this way can improve societal welfare? The current economic model is thus useless and harmful. There’s no reason to continue using it. But it’s still used. Humans replace models frequently. Why is this one so difficult to replace?

      • Craig
        October 25, 2018 at 7:01 am


        Suggested reason: The privately controlled paradigm of Debt Only is so integrated into the economy, adds so much additional costs to everything and so laughably makes financing for ecologically sane and sustainable research and policy “too expensive”.

        Consequently (and aside from a stably abundant economy for all via the policies I hawk here) what is needed is sovereign national control of the creation of credit and a publicly administered financial system that ends such suicidal thinking…until we can move most production off planet

      • October 25, 2018 at 7:40 am

        Craig, fully agree, except for the off-planet part. That’s still at least 100 years away.

  5. October 25, 2018 at 6:05 pm

    Ken said (significantly, but without starting a new topic to leave mine space):

    “Dave, the abstract for the article reviewed in this posting reads as follows: “Even if there is an agreed-upon, fixed social objective function and policymakers know the timing and magnitude of the effects of their actions, discretionary policy, namely, the selection of that decision which is best, given the current situation and a correct evaluation of the end-of-period position, does not result in the social objective function being maximized. The reason for this apparent paradox is that economic planning is not a game against nature but, rather, a game against rational economic agents. We conclude that there is no way control theory can be made applicable to economic planning when expectations are rational.” And expectations are never rational (in any of the ways that term is used by economists). Consequently, how can it be the case that actions proposed by economists in this way can improve societal welfare? The current economic model is thus useless and harmful. There’s no reason to continue using it. But it’s still used. Humans replace models frequently. Why is this one so difficult to replace?”

    Thank you, Ken, for drawing our attention to the abstract. I hadn’t notice the link, only Merijn’s reaction, “How did this ever pass the peer-review procedure[?]”, suggesting the peers didn’t know what they were talking about either. I had concurred, but suggested it is only possible to be rational after the event. That is true of your questions about control theory.

    The problem is that most economists have a steam age “pressure-cooker safety valve” theory of the control of mass production; and even Keynes – who in 1930 was still seeing only Asad’s “old lady”) was by 1936 only glimpsing the “young lady” of PID control over time by “corrective information feedback”: not having that post-1948 language to express himself rationally in. So I agree, given the evidence our “expectations” are not rational “in any of the ways that term is used by economists”. Even “after the event” of Shannon’s information-theoretic version of cybernetic control theory, economists and people like yourself have understood neither PID control theory, nor its different types of control information, nor the facts that it can be more, less and wrongly understood, nor that it can be applied to ourselves as well as to national economies. We have both seen the consequences of steam-age control by price information Proportional to value dressed up as Market Forces, and with qualifications I agree with your answer to your first question: “They can’t, and that’s why: the current economic model[s are based on a paradigm which is inappropriate] and therefore harmful”.

    “Why is this [model] so difficult to replace”? Because the problem is not in the model but in the underlying paradigm: the new information science having transformed our lives as rapidly as Newton’s physics, but without its philosophical implications being understood and passed on to the rising generations by today’s specialised academics.

    Physical control is local, so it is being seen in terms of centralisation and the abstract’s “social objective function”. Control by information can be dispersed, not only by automation (building the same design of control mechanism into many machines) but by broadcasting to people who – given sufficient training and information – are able to control the timing and direction of complex interactions in their own business: not least by prioritising (P), timesharing (I) and giving way (D).

    Which, surely, is much more what economic life is even now all about, despite financial misinformation leading busy and trusting people to react irrationally, “as if” driven by physically non-existent market forces. In these terms the “social objective function” to be controlled is not that of a central planner but the failure to enable the members of society to have and to have the satisfaction of approaching their own social objectives.

    • October 26, 2018 at 11:41 am

      Dave, a paradigm isn’t anything special. It’s just a model. Cultures include hundreds of models (paradigms) used for all kinds of things. Food models, entertainment models, sex models, education models, etc. None are permanent. Some change quickly. Others may last for decades or even centuries. Human actions, and thus human models are broadly cybernetic. That is, humans act, assess the consequences of their actions, then choose other actions, and perform them. No economic or social science model to depict or assess these actions ever gets it right. There are multiple reasons for this, including that much of human motivation is hidden (like dark matter), consequences are not known in advance and sometimes never known, and simply that complex systems, like human actions are virtually impossible to depict with human tools. I suggest using multiple, overlapping, and not mutually reinforcing research models to examine and depict human actions and motivations. I find history, anthropology, and engineering do this for me.

      • October 26, 2018 at 3:08 pm

        Ken, this comment merely serves to show you have not read AND UNDERSTOOD Kuhn.

      • October 27, 2018 at 8:25 am

        Dave, first these comments aren’t based exclusively on the work of Kuhn. Second, still I’m interested to hear about any errors I’ve made in “understanding” Kuhn’s work.

  6. October 25, 2018 at 11:25 pm

    Apologies for coming back to this, but I had to go out and lost track of the argument. The key point is indeed about controlling errors, not specific aims. However, the most significant errors are those where misinformation leads to mistaken aims (which error correction will help confirm), and too much deviation giving way causes chaos (by making us uncertain which is the intended way). The conclusion my evolutionary argument reaches is that too much deviation control (as in insurance against monetary loss by portfolio management) – especially when this is loaded with misinformation – leaves the system in chaos, spawning uncontrolled control at a higher level with the aim reduced (in the case of economics) to survival of money making (chrematism) with a “power” (no feedback, hence undemocratic) control method (Fascism). Chaos theory comes to the same conclusion: chaos begins when the feedback exponent exceeds about 2.5 (the dimensions being P, I and about 1/2D).

    Philosophical theory doesn’t predict outcomes, it only offers a handle on where to look. It becomes a Fundamental theory when one looks everywhere and indisputably finds not what one expects but what in more abstract terms one was looking for. “After the event” it becomes an Applicable theory when its fuller and more coherent explanations suggest rational solutions to previously intractible problems, as in the abolition of money so that its appeal and the rogue control systems protecting it become redundant. That solution may sound incredible, but it is now rational and with a credit card type system, entirely feasible.

    I do need to comment on the sentence which lends credence to the Prescott/Kidland dismissal of rational control: “The reason for this apparent paradox is that economic planning is not a game against nature but, rather, a game against rational economic agents”. This is arguing that economics is a game, which my analysis of evolution shows to be mistaken. It is not Economics that is a game. It is the Chrematism its monetary control system has spawned in which financiers bet on other people’s credit worthiness.

    • October 26, 2018 at 11:42 am

      Dave, if you’re looking to eliminate misinformation and chaos from human culture, your cause is lost before you begin. Human cultures are complex (chaotic) which, in my view is a way of saying they are reversible and nonlinear. Reversible simply refers to human action changing or being changed to get different results; sometimes even from small differences in initial positions. Nonlinear refers to results not predictable from beginning positions. Rationality as used by social scientists and economists is neither chaotic nor complex. Rationality always leads to the same conclusion – rational results. So, humans aren’t rational, but they construct models that define rational action and expect other humans to act accordingly. Which, of course they don’t.

  7. October 26, 2018 at 3:23 pm

    Ken, of course you know best about mathematical terminology, having closed your mind to the definitions and discoveries of mathematicians.

    • October 27, 2018 at 8:01 am

      Dave, the math I reference is widely accepted chaos mathematics. If you have other versions, please share them. NOVA (PBS) produced a great show on chaos in 1989. It’s on YouTube if you want to view it.

      • October 27, 2018 at 3:49 pm

        Ken, I did do here some years ago. The issue is not the mathematics but the lack of causal reference and economist Brian Arthur advocating pursuit of increasing returns by use of positive feedback (the D in PID control). Incidentally, digging out my Santa Fe books, the first abstract in Cowan, Pines and Meltzer, eds, “Complexity: Metaphors, Models and Reality”, 1994, Santa Fe Proceedings Vol XIX, has Philip W Anderson saying of Information Theory: “This theory of limits is still often ignored at our peril”. After Brian Arthur and what happened in 2008, too true!

      • October 28, 2018 at 6:21 am

        Dave, Arthur is according to his bio, an authority on economics in relation to complexity theory, technology and financial markets. His approach to increasing returns is based in complexity theory. Of which he says, in a 1999 interview, the movement that started complexity looks in the other direction. It’s asking, how do things assemble themselves? How do patterns emerge from these interacting elements? Complexity is looking at interacting elements and asking how they form patterns and how the patterns unfold. It’s important to point out that the patterns may never be finished. They’re open-ended. In standard science this hits some things that most scientists have a negative reaction to. Science doesn’t like perpetual novelty.” You’re correct that the 2007-2008 financial crisis, along with most other capitalist bubbles are the result of uncontrolled positive feedback loops. Some economists give the roots of this process the name irrational exuberance. Or as Keynes might point out, it is animal spirits that move most investors and thus most markets.

  8. Craig
    October 28, 2018 at 10:00 pm

    Complexity/chaos theory is really just an extension of the best guesses of quantum physics that physicists have been trying to square with temporal reality for the last 100 years….and that Wisdom traditions in their scientifically rigorous discipline and study of consciousness intuited probably well over 10,000 years ago. Self organization/the patterns that emerge from seeming chaos point at a deeper thrust/tendency in physical matter and natural systems themselves. There’s obviously randomness in the physical temporal universe also, but the perception of that deeper thrust/tendency IN NATURE/THE COSMOS enables one to see that order is the real driver not the Maya of the the supposedly random physical universe…and in fact taking the superior integrative perspective of wisdom it enables one to scientifically combine and square the two.

  9. Helen Sakho
    November 4, 2018 at 12:18 am

    In addition to earlier comments just now, let us hope that one day these economists will meet their exact particles and vanish from the face of the earth that has already exploded due to all the factors we have repeatedly mentioned here.

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