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Radical uncertainty — a question of economic methodology

from Lars Syll

Between 1920 and 1950, a debate took place which defined the future of economics in the second half of the 20th century. On one side were John Maynard Keynes and Frank Knight; on the other, Frank Ramsey and Jimmie Savage.

UnknownKnight and Keynes believed in the ubiquity of “radical uncertainty”. Not only did we not know what was going to happen, we had a very limited ability to even describe the things that might happen. They distinguished risk, which could be described with the aid of probabilities, from real uncertainty—which could not. In Knight’s world, such uncertainties gave rise to the profit opportunities which were the dynamic of a capitalist economy. Keynes saw these uncertainties as at the root of the inevitable instability in such economies.

Their opponents insisted instead that all uncertainties could be described probabilistically. And their opponents won, not least because their probabilistic world was convenient: it could be described axiomatically and mathematically.

It is difficult to exaggerate the practical consequence of the outcome of that technical argument. To acknowledge the role of radical uncertainty is to knock away the foundations of finance theory and much modern macroeconomics. But the reigning consensus is beset with glaring weaknesses. Keynes and Knight were right, and their opponents wrong. And recognition of that is a necessary preliminary to the rebuilding of a more relevant economic theory.

John Kay

Many economists have over time tried to diagnose what’s the problem behind the ‘intellectual poverty’ that characterizes modern mainstream economics. Kay points to the questionable reduction of uncertainty into probabilistic risk. Rationality postulates, rational expectations, market fundamentalism, general equilibrium, atomism, and over-mathematisation, are some other things one have been pointing at. But although these assumptions/axioms/practices are deeply problematic, they are mainly reflections of a deeper and more fundamental problem.

c9dd533b1cb4e7a2e1d6569481907beeThe main problem with mainstream economics is its methodology.

The fixation on constructing models showing the certainty of logical entailment has been detrimental to the development of a relevant and realist economics. Insisting on formalistic (mathematical) modelling forces the economist to give upon on realism and substitute axiomatics for real-world relevance. The price for rigour and precision is far too high for anyone who is ultimately interested in using economics to pose and (hopefully) answer real-world questions and problems.

This deductivist orientation is the main reason behind the difficulty that mainstream economics has in terms of understanding, explaining and predicting what takes place in our societies. But it has also given mainstream economics much of its discursive power – at least as long as no one starts asking tough questions on the veracity of – and justification for – the assumptions on which the deductivist foundation is erected. Asking these questions is an important ingredient in a sustained critical effort at showing how nonsensical is the embellishing of a smorgasbord of models founded on wanting (often hidden) methodological foundations.

The mathematical-deductivist straitjacket used in mainstream economics presupposes atomistic closed-systems – i.e., something that we find very little of in the real world, a world significantly at odds with an (implicitly) assumed logic world where deductive entailment rules the roost. Ultimately then, the failings of modern mainstream economics have its root in a deficient ontology. The kind of formal-analytical and axiomatic-deductive mathematical modelling that makes up the core of mainstream economics is hard to make compatible with a real-world ontology. It is also the reason why so many critics find mainstream economic analysis patently and utterly unrealistic and irrelevant.

Continue Reading Radical uncertainty — a question of economic methodology…

  1. April 13, 2019 at 8:10 pm

    Don’t have a problem with most of your diagnosis but question whether Keynes’ comparative static answers are fitting to the problems of a dynamic economy. Excerpted paragraph of something I wrote (edited) recently: http://www.vcn.bc.ca/~vertegaa/ontology.pdf

    … Hence, although the uncertainty of a free market system may indeed be ontological, as for instance the Post-Keynesian posited “open economy” would have it, but about which nothing logical is conveyable and thus its followers are lacking the means to convince an opposition in debate; it can instead be said to logically follow from the apparent fact that economic agents are free to either determine the value of previously made investments, or keep a disequilibrium condition (i.e. a growth attempt through more investing) going for yet another round. Nothing is ambiguous or inscrutable at the level of to be resolved accounts. Concepts like multipliers, accelerators, or geometric progression inherently lack material identities there. So unless something crucial is missing, the only pertinent reality left is that once the investment jump is made, investors themselves are powerless to affect their outcomes and ultimately depend on non-investors behaving contrary-wise for their monetary returns. Rationality axioms of orthodoxy as determinate answers to facing risk thereby become internally self-contradictory. For, under the considerations as sketched out above, investing and its antonym consumption cannot both be rational endogenous determinants of utility. Not only that but Y=C+I is demonstrably false too, and with it all derivative Keynesian “rational” thought. This is a (theoretical time invoking) logical refutation of those axioms, and as such is subject to empirical confirmation later. The economy’s statically projected causal structure therefore becomes invalid in an essentially dynamic environment, and with it the crucial notion that investment is the indisputable cause of economic advancement. It still may be, at least until a more fundamental cause of economic growth becomes identifiable, but it isn’t necessarily so. Instead, all that can be said for the moment is that the achievement of a forward motion towards economic betterment, by its instigator, is undecided when its inauguration occurs; and any act of investment is thus a disequilibrium impulse, whose result is still of indeterminate value. How many burst bubbles with equity losses in the billions does it take anyway, for economists to realize that equilibrium modeling of the economy is nonsensical?

  2. Rhonda Kovac
    April 13, 2019 at 9:59 pm

    Thank you for the link to the extended discussion on your page.

  3. April 13, 2019 at 10:38 pm

    Why does Kay think that Ramsey denied radical uncertainty?

    I have some extracts from him at https://djmarsay.wordpress.com/decisions/rationality-and-uncertainty/probability/probability-classics/ramseys-probability/ ,

    I also wonder about Savage. What we can take from him is that as long as economies are driven by expectation, they can be analysed conventionally. But if neglected factors (such as money, derivatives, high frequency trading … ) should happen to intrude then ‘all bets are off’.

  4. Paul Davidson
    April 14, 2019 at 8:41 pm

    Knight and Keynes have very different concepts of uncertainty. Knight believes that uncertainty is epistemological problem where humans do not have the mental ability to see the future even if it actually knowable currently. Keynes argued the future can not be derived from analyzing the past and current relationships.

    On page 210 of his book Knight writes that the future “universe may not be knowable ,,,[but] objective phenomenon… is certainly knowable to a degree so far beyond our actual powers….[and therefore] any limitation of knowledge due to a lack of real consistency [i.e., what I would call this lack a nonergodic system] in the cosmos may be ignored.”

    In other words, Knight’s view of uncertainty is a failure of human capability –and not a lack of consistent probabilistic relationships over time.

    Keynes, on the other hand in his paper on Mr. Tinbergen’s methodology stress his belief that past probabilities of relationships will not be unchanging in the future– and so there is no evidence available today that can be reliably used to predict the future

    • April 15, 2019 at 5:00 pm

      I haven’t paid much attention to Knight, but Paul highlights an important issue. To say that economies conform to some unknown probabilistic model acknowledges some additional uncertainty over the view that we can (and should) model economic uncertainty probabilistically, but Keynes was much more radical than that. Moreover, it seems to me that even if Knight’s view (as described by Paul) is in some sense ‘technically correct’ it is at best completely misleading, as we must be very far from having identified the relevant factors.

  5. Frank Salter
    April 15, 2019 at 8:13 am

    This blog reveals the confusions of economic theorising. However, the clue is in the title —methodology. Academic economists deliberately obfuscate. Scientific methodology calls for the application of the quantity calculus. To do this is sufficient to eliminate all but a handful of
    putative quantitative mathematical papers. At a stroke the “Gordian Knot” would be undone. I have said this on a number of occasions, quoting significant references. Why is this ignored? It is a critical question. I address it to all who contribute to these blogs. There is a simple method of clearing a prodigious quantity of invalid analysis by applying a single process. Can anyone answer this question. Why do you fail to apply rigorous analysis? I would appreciate any answer to this question.

    • April 15, 2019 at 5:09 pm

      Frank, I agree with you (who wouldn’t) that many ‘putative quantative’ papers can easily be seen to be in error from a quantity calculus perspective, but to fix them you would seem to need a quantitative theory of uncertainty. This seems to me very much an open issue.

      I, for one, would attempt to engage constructively with a quantity calculus view of financial crises. Can you suggest anything?

      • Frank Salter
        April 15, 2019 at 6:37 pm

        My understanding of the quantity calculus is this — it specifies what mathematical operations are allowable for theoretically valid quantitative equations — they are multiplication and division of all quantities and addition only of those which are measured in one specific unit of measurement. I am not well versed in financial crises. I therefore need to pass on that. I will reiterate that the quantity calculus disqualifies virtually all of conventional quantitative analysis. This should clear the decks for serious discussion of what remains. This is very little — only a handful of papers will remain. I am unable to understand why Lars Syll has not leapt upon this and lead discussion on what remains.

    • April 17, 2019 at 9:08 pm

      The underlying problem, I understand, really is an ontological one: what’s the fabric of our object of investigation like? Could we possibly describe it with ‘quantitative calculus’ at all? I doubt it because humans create the object economists investigate. If it was possible to find a mathematical description of this creation (ex-ante) what would be the point of being human? A computer would be just as ‘human’.

      • Paul Davidson
        April 18, 2019 at 12:37 am

        As I emphasize, uncertainty, in the Keynes sense, involves NONERGODIC STOCHASTIC PROCESS. This is the athematics that specifies that past evidence is not sufficient to make a relisble prediction regarding the future

      • Paul Davidson
        April 18, 2019 at 12:53 am

        The mathematical description of Keynes’ concept of uncertain is, as I continually have stated, –uncertainty is when there is a nonergodic stochastic process. Is this mathematical statistical description sufficient for you?

      • April 18, 2019 at 6:14 am

        Paul, agreed, non-ergodicity is key. What is difficult to argue though is that there is a stochastic process underlying economic activity. Of course, looking at events ex-post always allows us to cook up a stochastic process that captures all main features that we observe. But ergodic or not , if we suppose that these features could be described statistically we would accept that humans are machines that generate stochastic outcomes implying that there are objective laws according to which we operate. Upon accepting that we accept that we could in principle replicate ourselves and then we are exactly where mainstream economics already is (non-ergodically , of course ).
        Sorry to be so unsophisticated with this: consider reading my book on the issue “Uncertainty and Economics : a paradigmatic perspective ” (Routledge, 2019).

      • April 23, 2019 at 9:10 am

        Christian, you raise an important technical point. The term ‘stochastic process’ is properly applied to a conception of a putative real process, not to any real process as such. There are similar (but less clear) distinctions to be made about different usages of the terms ‘random’ and ‘probability’. If Paul is saying that economic processes ‘as such’ correspond to some (albeit unknown, complicated) statistical model then he is clearly going well beyond anything that can be justified, but I fear he would not be alone in this. He might be thought to be pointing out that (conventional) theories are expressed in terms of (conventional) random processes, as if this were somehow inevitable. But maybe he is, like Keynes, trying to express the limitations of the conventional theories without getting too bogged down in a mess of misunderstandings (and maybe obsfucation).

        I’m trying to clarify things at my https://djmarsay.wordpress.com/ blog, but it isn’t easy! If anyone is aware of anything that seems to them to present a clear or ‘authoritative’ view of ‘radical uncertainty’, I’d be glad to learn of it, here or on my blog.

      • April 25, 2019 at 10:52 pm

        Dave, thanks for your comment.

        When I started to seriously think about writing it all up I immediately noticed that a canonical definition of uncertainty in technical terms was missing (or I am too ignorant). Keynes wasn’t really mathematically rigorous neither Knight nor anybody from the now mainstream branch (the latter often simply equate probability distributions with uncertainty). Therefore, the first thing I did in my book, was to provide concise and formal mathematical definitions for the various degrees of uncertainty. I cannot claim them to be “authoritative” but they offer a handy taxonomy and I can develop arguments in a consistent and exact way.

        Thanks also for pointing out your blog. I’ll have a look at it.

      • April 26, 2019 at 5:42 pm

        Christian, as a pedantic mathematician I am intrigued by the notion of “concise and formal mathematical definitions for the various degrees of uncertainty.” My reading of Keynes’ Treatise on probability is that you can only mean ‘degrees of subjective uncertainty’, which inevitably are misleading: possibly significantly so. But actually I would appreciate a link to your taxonomy as it has to be an improvement on the mainstream view.

        A part of my problem in blogging is that the gulf between mainstream perceptions and Keynes’ view is so huge that it seem impossible to bridge in any accessible way. Maybe you could provide some intermediate ground? (And maybe that would be ‘good enough’?)

      • May 24, 2019 at 3:26 pm

        Dear Dave, agreed, Keynes talks about degrees of subjective uncertainties. I am not. Unfortunately, I don’t have a link to the definitions except for the book itself: https://books.google.ch/books/about/Uncertainty_and_Economics.html?id=azeDDwAAQBAJ&redir_esc=y . There is an online version without formulae that indicates the direction, however: http://www.s-e-i.ch/archive/Masteridea.pdf

      • May 26, 2019 at 7:35 pm

        Thanks for the link. No time to read for the next few weeks, so please nag me if I don’t give a substantive response. Meanwhile I note you don’t refer to Keynes mathematical Treatise.

        My own work on the subject is rather hard to find, but here’s a sample: https://www.econstor.eu/bitstream/10419/125926/1/84573833X.pdf . It includes a link to an on-line version of Keynes’ Treatise, which still works for me. On brief glance, yours seems less turgid than mine, so I would like to do a comparision. I have a blog at djmarsay.wordpress.com where I usually make such comments. My own view is that Keynes’ understanding was far in excess of what is commonplace today, but he wasn’t much better than me at communicating!

        Power to all our elbows.

  6. Paul Davidson
    April 15, 2019 at 5:30 pm

    Please read chapter 7 of my booik WHO’S AFRAID OF JOHN MAYNARD KEYNES?. This chapter is entitled “The Role of Financial Markets and Liquidity” and it notes that for financial markets to provide liquidity there must always be an “orderly” movement in the market price of each financial asset. In order to maintain this orderliness , a “market maker” is required! When banks created mortgage backed derivatives , the market they created for these derivatives had no market maker! Thus when fear of default of mortgages took hold these derivative markets lost their liquidity. The result was to dramatically reduce the value of the asset side of the balance sheet of holders of these derivatives globally! See my chapter!!

    • April 15, 2019 at 6:39 pm

      I’m afraid your argument wouldn’t even hold any water if financial assets were real. Microsoft-Amazon-Google-Etc. are undoubtedly “market makers” in the real-goods economy. But there is nothing orderly about their sucking out money from the latter, never to be seen again and thereby suffocating the retail sector with its employment opportunities in general.

      As I understand it your reasoning fully depends on the assumption that financial assets represent wealth in addition to what can be bought with it. But for that they’d need to be able to self-mortgage and as such provide an elevated standard of living. Instead they are totally dependent on the real-goods economy for the latter, let alone the cannibalizing of it carried out under their auspices.

    • Rob
      April 16, 2019 at 1:15 am

      [F]or financial markets to provide liquidity there must always be an “orderly” movement in the market price of each financial asset. In order to maintain this orderliness , a “market maker” is required! When banks created mortgage backed derivatives , the market they created for these derivatives had no market maker! ~ Paul Davidson

      Will read your chapter. When you say, “mortgage backed derivatives,” could you be more specific? Are you talking about CDOs and CDOs2 and CDOs3, and such exotic financial instruments?

      Goldman Sachs was one of the so-called “market makers” were they not?

      [F]or financial markets to provide liquidity there must always be an “orderly” movement in the market price of each financial asset. In order to maintain this orderliness, a “market maker” is required! When banks created mortgage backed derivatives, the market they created for these derivatives had no market maker! ~ Paul Davidson [emphasis added]

      The Chairman and CEO of Goldman Sachs Lloyd Blankfein made the following claims in his Congressional testimony:

      We are one of the largest client franchises in market making in these kinds of activities we’re talking about now and our client base is a pretty critical client base for us and they know our activities and they understand what market making is. (13:55_14:14)” (Listen Here)

      (….)

      We are principles. The act of selling something is what gives us the opposite position of what the client has. If the client asks us for a bid and we buy it from them, the next minute we own it, they don’t. If they ask to buy it from us, the next minute they own it and we don’t. We could cover that risk, but the nature of the principle business and market making is that we are the other side of what our clients want to do. [14:54_15:27]” (Listen Here)

    • Rob
      April 16, 2019 at 4:30 am

      “As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever”. Given the current experience of contagious failed and failing public financial markets, it would appear that the SEC has been lax in pursuing its stated mission of investor protection. (Davidson 2017, 91)

      This statement is misleading in that it fails to account for the manner in which the role and institution of the SEC has been undermined by the political agenda of the so-called “conservative” GOP and its repeated attacks and interventions and even outright [under]defunding leading to understaffing of the SEC which undermined its ability to perform the regulatory role expected of it, all under the sick and twisted ideology of mainstream capitalism that the “free market” will always yield the best outcome and therefore less regulation the better. And we are not even discussing regulatory capture that ensues when the fox is made guard over the henhouse, such as the case of Enron and the aiding and abetting by ilk like Newt Gingrich et. al. that willfully undermined the SEC and FASB to allow the Big Five accounting firms to continue in their cozy conflict of interest relationships with predatory firms like Enron. No, you miss the mark blaming the SEC and not looking deeper in my view.

    • Rob
      April 16, 2019 at 9:39 am

      [T]he market they created for these derivatives had no market maker! ~ Paul Davidson

      There was a “market maker,” and as the words of Lloyd Blankfein make clear, Goldman Sachs and predatory banks like them were “market making.” The shifting of blame to the SEC is an empty rhetorical evasion of the real underlying causes for the GFC.

      The SEC, like all institutions created to provide oversight over capitalism, can only be as effective as current culture — its ethics, its morals, its values — allows within the constraints of interest group politics and its consequences for “free market” capitalism. The overriding trend was deregulation under the ideology of mainstream economics despite the many past warnings from history:

      Arrangers as Market Makers

      It is easy to view investment banks and other arrangers as mechanics who simply operated the machinery that linked lenders to capital markets. In reality, arrangers orchestrated subprime lending behind the scenes. Drawing on his experience as a former derivatives trader, Frank Partnoy wrote, “The driving force behind the explosion of subprime mortgage lending in the U.S. was neither lenders nor borrowers. It was the arrangers of CDOs. They were the ones supplying the cocaine. The lenders and borrowers were just mice pushing the button.”

      Behind the scenes, arrangers were the real ones pulling the strings of subprime lending, but their role received scant attention. One explanation for this omission is that the relationships between arrangers and lenders were opaque and difficult to dissect. Furthermore, many of the lenders who could have “talked” went out of business. On the investment banking side, the threat of personal liability may well have discouraged people from coming forward with information.

      The evidence that does exist comes from public documents and the few people who chose to spill the beans. One of these is William Dallas, the founder and former chief executive officer of a lender, Ownit. According to the New York Times, Dallas said that investment banks pressured his firm to make questionable loans for packaging into securities. Merrill Lynch explicitly told Dallas to increase the number of stated-income loans Ownit was producing. The message, Dallas said, was obvious: “You are leaving money on the table—do more [low-doc loans].”

      Publicly available documents echo this depiction. An annual report from Fremont General portrayed how Fremont changed its mix of loan products to satisfy demand from Wall Street:

      The company [sought] to maximize the premiums on whole loan sales and securitizations by closely monitoring the requirements of the various institutional purchasers, investors and rating agencies, and focusing on originating the types of loans that met their criteria and for which higher premiums were more likely to be realized.

      (The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps by Kathleen C. Engel, Patricia A. McCoy, http://a.co/3OgD9AX)

      There was not only a “market maker” but the so-called “market maker” helped perpetrate the fraud upon the entire world economy and anyone who bought into the ponzi scheme they were running.

      • Paul Davidson
        April 16, 2019 at 4:41 pm

        Goldman Sachs created a market for their securitized derivatives but they did not function as a market maker is required — namely to assure market price of the security changes in an ORDERLY manner. Goldman can claim it was a market maker but it did not maintain orderliness which is a required property of a market maker!

      • Rob
        April 17, 2019 at 4:00 am

        Reality bites and trumps theory in the end. Your idealized version of a market maker has never existed, at least not in todays form of predatory finance as exemplfied by Goldman Sachs and its role in not only making the market but engaging in fraud, deception, and manipulation of the very market it made along with the collusion of the ratings agencies, mortagage brokers, and a host of other players right on up to Greenspan and the Fed.

        The way markets are made doesn’t evidently match the way they are theorized about in your theorizing Paul. And no amount of exclamation points makes the idealization any more real.

        Before the subprime driven GFC my wife and I were daily barraged with mortgage brokers seeking to move us from a 30 year fixed into one of Wall Streets new subprime adjustible rate loans that Greenspan crowed so glowingly about. I knew this was a shell game and ponzi scheme even then. We finally invited one of the poor ignorant salespersons into our home so we could witness their BS selling points for ourselves (never once intending to fall for this short-sighted ponzi scheme being waged against middle class Americans with little financial education). She sat there flipping pretty pie and bar charts reciting her sales mantra (“You will save $600 a month on payments”) never once discussing the downside — when interest rates change so does your payment, or interest only payments don’t decrease the principle, or when balloon payments kick and you can’t refinance as promissed was so easy, you are essentially screwed. She even thought it important to tell us she herself had one of these exotic little financial monstrosities birthed on Wall Street. I bet she lost her home (and skirt) with the rest of the fools who bought into this Ponzi scheme.

        Without a major social and political revolution in thinking about economics and business the few worthwhile remedies you suggest in your Chapter 7 will never happen (in fact the regulations are being loosened to allow another GFC to happen) because they require Congress to act and given the current state that is a pipe dream.

        Ismael Hossein-zedah in his book Beyond Mainstream Explanations of the Financial Crisis: Parasitic Finance Capital exposes the fallacy at the core of the idea that QE is good when all it does is reward the predatory banks and reinflate the bubble or that we should bail out the predatory banks, like you suggest in Chapter 7. In fact, he notes another alternative, the case of Iceland, where they told the predatory banks and shareholders to take a hike as they were “too big to be rescued” whereas you (wrongly I believe) argue the “to big to be jailed” should be bailed out, which is little more than predatory capitalisms socializing the losses while privatizing the gains. Nothing like socialism for the rich and predatory capitalism and austerity and stagnation for eveyone else, eh?

  7. Paul Davidson
    April 15, 2019 at 7:51 pm

    NO! Amazon, Microsoft, etc are NOT market makers in the sense they maintain orderliness in the market price so that a buyer of a “real” asset [your term] can know he/she can immediately resell it at any time at a price not very different from the last market transaction price!
    liquidity means the asset i sreadily RESALABLE– BECAUSE IF NOT ONE FROM THE PUBLIC IS READY TO STEP UP AND BUY AT AN ORDERLY CHANGE FROM THE LAST PRICE — THE MARKET MAKER WILL PROVIDE THE RESaLE OPPORTUNITY. tHIS IS WHAT GIVES MOST FINANCIAL ASSETS THE PROPERTY OF LIQUIDITY — WHICH REAL ASSETS DO NOT HAVE.

    I BUY SHARES OF STOCK ON THE STOCK MARKET BECAUSE ALL TRADED SHARES HAVE A MARKET MAKER TO ASSURE ORDERLY PRICE MOVEMENTS. i AM USING THESE SHARES AS A LIQUIDITY BASIN — TO BE ABLE TO HAVE MONEY VIA RESALE WHEN i WANT MONEY.

    If I buy a book from Amazon, Amazon does not assure me that I can resell it in their market place at a price that is orderly moving from market transaction to market transaction

    • April 15, 2019 at 9:12 pm

      You’re right, they’re not market makers in that sense. But by setting a take-it or leave-it price, and while depending on their monopoly power, they make the market that way. My point was, relevant or not, that the results are far from beneficial.

      I question whether a market-restricted analysis of liquidity is at all helpful in getting to the bottom of how an uncertain economy works. An analysis of the coming into existence of production, exchange, distribution, and why adequate consumption is lacking requires the understanding of credit and its redemption possibilities. As indicated before, relying on an ephemeral liquidity only gets one into the black hole of non-wealth.

      • Paul Davidson
        April 15, 2019 at 9:48 pm

        No. Even the wealthy require liquidity from much of their wealth held as assets.

        Liquidity is necessary in a world of uncertainty when one can never be sure when cash inflows or outflows in the future may go berserk! In a Walrasian General Equilibrium framework, at the initial instant, each decision maker knows exactly what he/she will need in the future and what income will becoming in , in each future period. Therefore they can enter into forward contracts for every date in the future without having to worry about meeting a future contractual obligation! With uncertainty, liquidity is necessary if a contractual obligation comes p which cannot be met out of current income,.

      • April 16, 2019 at 3:08 am

        It seems to me you’re answering a macroeconomic problem with a micro answer. What is your analysis as to how (aggregate) liquidity comes about? Are liquid assets determinable in a quantity over and above contractual obligations and current income? Cash supposedly is the most liquid asset around. How did it escape the waxing and waning of the money supply allegedly conforming with the taking up and repaying of loans?

        Don’t think Keynes has answers to these questions, but I’m always ready to learn and revise my own theory; which in a nutshell, regarding the query at hand, is: all _net_ wealth exists outside the economy in the form of non-monetary use-values, and when it enters or returns (in the form of monetary exchange-values) becomes a to be resolved debt.

  8. Paul Davidson
    April 16, 2019 at 4:45 pm

    Don’t you believe that nacroeconomic theory must be based on some microeconomic assumptions regarding the behavior of decision makers in the market place? Or is macroeconomics determined by the action of the Gods?

    • April 16, 2019 at 6:30 pm

      Given that the economy is essentially a dynamic structure that is fully human-made for a purpose, meaning the latter by necessity is located outside of its make up, its set of first principles must reflect that reality’s determination. Gods or my belief don’t enter into it; but neither do microeconomic “decision makers”, nor does the static identity Y=C+I. A deduction from those macroeconomic premises will still be an incomplete reality, in that the premises themselves are induced. Hence the opening line. There are no absolutes for us mortals. The closest we can come, having to deal with “radical uncertainty”, is by implementing dialectical reasoning. See my paper.

  9. April 19, 2019 at 6:19 pm

    I am not exactly encouraged by my hospitalisation raising the rate of new bloggers here substantially: as I’ve long suspected, no-one here wants to learn, only to teach or undermine. That of course includes myself, so the issue is whether what is being taught is justifiable and whether to undermine or openly challenge self-justifying vanity and malicious or hear-say opinion. Not getting a hearing certainly does not breed vanity, leaving me sympathetically challenging rather than dismissive of those who have been misled.

    One of those is Lars, bewailing “deductivist orientation” rather than the taking of generalisations rather than word definitions as axiomatic. Another is Rob, bewailing consequences but not the causes which need to be addressed. Before this, Paul misrepresents both macroeconomics and the ‘God’ argument, and John – from his paper, familiar with Marx’s but not John Ruskin’s economics, nor with C S Pierce’s logical process of retroduction – gets as close as anyone has to the cybernetic logic of steering a course “by implementing dialectical reasoning”. Navigation is however more complex than mere steering, and being a human process, involves communication not only of force but of information, which gives rise to radical uncertainty by becoming distorted, or taking time during which relationships change.

    So today is Good Friday, when such evidence as there is testifies to Christ, a man described in the preface to St John’s good news (i.e. Gospel) as the Word of God, re-enacting in his life and death the message that God his Father (creator of the universe) loves us so much that he was prepared to die that we might live. How the Word could be God can be likened to water, where energy can transform ice into running water and powerful steam. Anyone who understands the Big Bang theory can understand a living God blowing himself up that we might (after a due evolutionary gestation period) live.

    Anyone who understands words realises that the same meaning can be conveyed in different languages, so love can be expressed in that of God, Man or Economics as feeding each other, as John Vertegaal put it “fully humanly made”, yet to fulfil that God-intended instrumental purpose. A father’s actual purpose is not that he should “steer” his children but that they should become independent, able to love freely and steer themselves; likewise macroeconomics is not a tool to enable governments to steer us, it is a method – taking account of the past and the future as well as the present – which applies as much to paddling one’s own canoe as to steering a ship of state. Hence the principle of subsidiarity.

    Anyone who has been a father knows of the high hopes one has for one’s children, how much one has to put oneself out to feed them and the “radical uncertainty” as to how they will turn out. How often, sadly, they are ungrateful for the love and care they have received. Future generations may include bastards, who by denying their protogeny see no reason to be grateful and to give others cause in turn to be grateful. So began anti-Catholic capitalism [to usurp James II] justified by a Humean democracy representative of the powerful, which agreed on enslavement and self-love rather than the love of all.

    So, it is not scientific in the Humean sense to believe in a Creator one cannot recreate; but nor is it scientific to discount the only historic evidence available because it is inconvenient to a contrary belief. In the end one has, as John puts it somewhat obscurely, to choose “a set of first principles [which] reflect reality’s determination. And given the testimony to Christ’s resurrection, to live in hope that that the Big Bang was not the end of the God story.

    Kant’s answer to Hume was the need to make a “synthetic a priori judgement”, for one must have the concept of a cause as the measure of one. The “a priori” phrase is however misleading: one abstracts to what was there “before the beginning” using Pierce’s logic of retroduction rather than inductive generalisation. As a scientist I have chosen the God theory because it explains the Big Bang. Given the resultant energy, one’s God concept need not enter into economic determination, yet it defines its ethics.

    G K Chesterton captured the three-dimensional rather than “either-or” nature of the problem when he visualised what I call Carpenter’s Truth: an upright post at right angles to a plane. “It is always simple to fall; there are an infinity of angles at which one fall, only one at which one stands”. So yes, John; dialectical reasoning is an important first approximation to keeping the post upright. However, in addition to correcting for leaning right or left one must correct for after and before: the past and the approaching future. I can only repeat again: get one’s head round PID logic by seeing what happens in the navigational paradigm, then consider how problem-avoidance in financial investment causes chaos if pushed too far.

    During the Hitler war, a priest volunteered to take the place of a family man condemned to death by torture. His death was grotesque but his kindness and courage admirable. The death of Christ was likewise grotesque, but Good Friday is all about his dying for us.

    • April 20, 2019 at 6:18 pm

      Sorry Dave, while wishing you a speedy recovery, your pseudo-sophisticated and religious-laden drivel about the mechanics of the journey sorely misses the aptness of producing determinants of the destination’s overall purpose. Steering, navigation, PID, what-have-you, are distinctions without a difference from the perspective of purpose. From the former you can’t get to the latter, as they’re all unconnected (indeterminate) values. We’ve had this discussion before and more than once too. You’re just as loath to let go of your hobby horse as economists are of their math and related false micro determinants. My paper is about showing why those determinants are erroneous and the economic structure as a whole is ongoingly indeterminate, right until its purpose gets achieved bit by bit at the time. Sure, its all inherent in the premises. But until a contradiction or _irrelevance_ to the real world can be pointed out, it seems to me doing a hell of a lot better in its explanatory power than followers of Keynes can manage with theirs.

      • April 20, 2019 at 10:19 pm

        John, Keynes was theorising about thirty years prior to the articulation of PID control theory, but what he was saying can be interpreted as anticipating it, i.e. as taking account not only of prices but of the long-term effect on unemployment of the systematic shortfall necessary to generate enough error to drive the system. Your dialectic is likewise interpretable as correcting a course, but doing no better than steering a ship.

        The nonsense you talk about economics having one purpose is evident when one sees an economy not as one ship but an ocean full of them all serving their own particular purpose, even though in language their function can be generalised as the distribution of goods. The nonsense is not evident when you don’t see that the meaning of the word ‘economy’ has been deliberately changed (financialised), so that it now referred to what Aristotle called chrematism, which has the one purpose and therefore function of making money. Your paper is flogging the already dead horse of micro determination of the macro, but what I’ve not found you doing is recognising that economic structure is made up of communications channels, including language, technological design and tooling.

        Be an idiot, then, John. Look a gift horse in the mouth. Confirm what “I’ve long suspected, no-one here wants to learn, only to teach or undermine”.

        Or open your eyes. See what I’ve seen today: a kindly neighbour buying fish and chips for a young family just evicted from its home. News about social self-destruction and fire-sales of firms made bankrupt by financial speculators and the ongoing destruction of the planet for lack of politicians willing to rewrite the rules of the present economic game and create the communications channels necessary to lead a war on global deforestation and irresponsibly fraudulent finance. Why? Because Hume’s morality is what politicians agree on, and what they agree on is that they want nothing to change. Do you really want to play the fiddle while Titanic sinks? Better to man the lifeboats of “Small is Beautiful”, guided by Subsidiarity and “Women and children first”.

      • April 21, 2019 at 6:11 pm

        You’re hopefully confused Dave. An “ocean full of [ships] all serving their own particular purpose” is a micro-aggregated “macro economy”. You’re the one who’s “flogging the already dead horse of micro determination of the macro”. In my paper reciprocity of the aggregate means, gathered on the journey, determines the single purpose of living standard at its destination . You either didn’t read it, or you couldn’t escape from your own ideas occupying every corner of your mind. A reminder of Keynes who died 73 years ago on Easter Sunday. Time for some new ideas, no?

      • April 21, 2019 at 10:42 pm

        John, the “ocean full of ships” is “micro” but not aggregated. What true of each (the method of navigation) is true of all, but for you to suppose they are all aiming for the same destination means that you are not talking about economics but – as I asserted – chrematism. That’s the way it is. The navigational method is being used to control the diversity of the economy in an attempt to “make money”. Let me add that the confusion is not mine even if I cannot express in a few words a complex picture you haven’t seen, hence my use of analogies I had hoped you could understand, like navigation.

        As for your paper, I was worn out by the time I had read a third of it, so I skipped to your conclusions, but found nothing to alter the judgement I had been forming.

      • April 21, 2019 at 11:30 pm

        Your habit of constructing straw-men in order to knock them down is most tiresome, Dave. Chrematism, or the love of money, functions as a faux determinant of an economic structure. My paradigm, if anything, is its very opposite. You don’t know what you’re talking about. Over and out.

  10. April 21, 2019 at 6:16 pm

    Sorry, that should be hopelessly. I must be getting dotty I think…

  11. Ken Zimmerman
    April 22, 2019 at 9:17 am

    Excellent work, Lars. You get the struggle for economics’ soul correct. “In Knight’s world, such uncertainties gave rise to the profit opportunities which were the dynamic of a capitalist economy. Keynes saw these uncertainties as at the root of the inevitable instability in such economies.” So, the choice is clear. An economics designed for and serving the interests of gamblers, who know and recognize radical uncertainty. Gamblers working to keep others from recognizing it so they can use that advantage to accumulate wealth. Sophisticated theft. On the other hand, an economics designed for and serving the interests of all of society by helping societies prepare for and minimize the negative impacts of the social crises that result from radical uncertainty. We need to make a judgement and then a choice.

    Regarding certain aspects of this argument, we shouldn’t push our attack too far. “As if” modeling is not incorrect unless it goes too far. Physical scientists use such modeling frequently. It’s what comes next that makes it acceptable or not. Models in physics, for example are merely a beginning point. Then observation and data take over, leading scientists to support, change, or reject the beginning model. Economists take the opposite route. Idolizing the model and subjugating observations and data to it. Physical phenomenon is from all appearances notably less uncertain than social phenomenon. But physical scientists never assume this in their work.

    Now, let’s talk about this “real-world.” Use of this term is not only misleading but confusing for anyone attempting to create a scientific economics. If we want a scientific economics, then we must base it on observations and comparison of observations. Observations that seem to show similar results should be tested again and then used to create new observations to extend our understanding. Eventually, seeking to find patterns in the observations and from the patterns to create theories to guide further observations. The term “real-world” is superfluous. It may be a great rhetorical device to make a point. But that value is negated by the confusion it creates.

  12. April 23, 2019 at 8:49 am

    To pick up on Ken’s point but using Savage’s terms, (almost) all our theories and models are in terms of ‘small worlds’. We know that ‘reality’ as a whole can not be a small world, so our (small world) theories and models cannot actually ‘correspond to reality’. But small world models can nethertheless be very useful (e.g. in the hard sciences), just so long as we dont forget they are only small world models.
    Actually, in many domains it seems okay if most practictioners most of the time proceed ‘as if’ they were dealing with a small world. Even with social processes, which are manifestly not ‘small’, western civilization seems to have got by in its own terms without seeming to face up to the limitations of its own world-view. But we may need to take a larger view of contemporary economics if we are to make substantive progress.

    In Keynes’ terms, in most domains most practictioners most of the time seem to get by in their own terms without comprehending his distinction between what he called pseudomathematics and ‘the real deal’. This seems to me still an important technical distrinction, but maybe Savage’s (or Ken’s) way of putting it is more accessible. I attempt my own way of putting it in my blog at https://djmarsay.wordpress.com/2019/04/16/the-limits-of-pragmatism/.

    • Ken Zimmerman
      April 23, 2019 at 9:48 am

      Dave, “…western civilization seems to have got by in its own terms without seeming to face up to the limitations of its own world-view. But we may need to take a larger view of contemporary economics if we are to make substantive progress.” A physics friend tried to explain to me how physicists do their work. He began the explanation with this, “Assume a universe with uni-directional scalars.” That’s about as big as you can get. And uni-directional scalars match up to no known observations of the universe. He then explained what I’ve put in my posts about physical science. I’ve confirmed this understanding many times over the years. As Richard Feynman said, science can begin anywhere. Just so, we don’t get hung up in either no observations or no theorizing. As to the social sciences, they’re incomplete and not fully scientific but they do reveal that for the last 5,000 years Sapiens has not gotten by on its own terms. The tribalism of Sapiens, something it invented over 30,000 years ago is now near to extinguishing our species. Economists are prime mover in our extinctions. And that’s just one tribe helping us to the end.

      • May 26, 2019 at 7:41 pm

        My latest professional journal has an article which seeks to update Bacon’s ‘idols of the tribe’. I hope to review it over the next few weeks. Feel free to nag me at djmarsay.wordpress.com if I dont.

  13. Craig
    April 23, 2019 at 7:34 pm

    99.99% of the uncertainty of economics could be eliminated if we realized that private for profit finance was not a legitimate business model and that the new monetary and financial paradigm was Direct and Reciprocal Monetary Gifting. That would leave just enough uncertainty to enable the graceful interactive and integrative flow of the economy instead of static delusion.

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