Leftists are not “anti-market”

from Peter Radford

I have been reminded by Tyler Cowen of Bryan Caplan’s simplistic theory of left and right.  It’s short and to the point.  Leftists are, he says, “anti-market”.

He is wrong.

Leftists are anti-market obsession.  They are anti-market fanaticism.  They are anti-market worship.  Specifically, they are opposed to the form of idealization used to articulate “the market” in economics.

There’s a difference.  And I assume Bryan Caplan knows as much.

There has been a recent attempt amongst mainstream economists of various nuanced differences to soften their discipline’s unhealthy attachment to markets.  This seems to be a recognition of the absurdly monotonous application of market-this or market-that to whatever problem falls within the purview of economics.  The discipline has become trivialized by its inability to think a bit more broadly about economic problems.  We all understand the urgency of the need felt by the mainstream to denigrate any form of intervention onto the hallowed ground by the sullied hands and minds of government technocrats.  That ideological urgency is well known to all.  Having erected its intellectual defenses around the logic of the idealized market and all the munificence derived therefrom, economics has a great difficulty in going beyond.  

A problem flowing naturally, and frequently, from this homogeneity of focus, is that economists have become casual in their language.

Silicon Valley Blues

from Peter Radford

The circumstances of Silicon Valley Bank are well rehearsed by now.   The bank sat at the epicenter of the tech-bro start-up ecosystem and played a pivotal role in the collection and disbursement of all the cash that flows through that system.  It was an extremely odd bank.  Unlike the everyday banks most of us deal with it had very few deposits that originated from regular customers.  Most of its deposit base consisted of the chunky piles of cash belonging to start-ups and their various hangers-on.  That meant the average size of each deposit account was well in excess of the limit the FDIC insures.

This odd customer base added to the strain on the bank during recent years when the combination of low interest rates and excess cash slopping about the economy led to a surge in start-up activity.  The bank benefitted from that activity — if benefit is the right word — and saw its deposits grow rapidly.

This presented the bank with a problem.  What to do with all those incoming deposits?   Because the bank had so few ordinary customers, and generated so few regular assets, it had few options.  Unwisely it chose the riskiest:  it

Wolf knows better. I know he knows

from Peter Radford

What am I supposed to make of this?

Martin Wolf, someone whose work I always pay attention to, flubs it and leaves us with a partial picture.  That’s unlike him.  Perhaps it was the editing?

In any case the notion that the UK needs to generate more savings, which is what Wolf is arguing in his recent Financial Times article, needs a slight augmentation in his basic analysis.

The problem begins when he says that “Investment is financed by savings”.  This is a very un-Wolf like statement.  He is as aware as we are that savings do not cause investment.  This is simply one of those accounting identities that sometimes confuses people into imagining causation where there is none.  This unfortunate sentence then opens the door for the avoidance of the sort of deeper thinking we associate with Wolf.

For instance, whilst the causation does not run savings-to-investment, we could argue that there is causation in the other direction.  Investment in productive projects creates flows within the economy that do, or rather can, create savings.

What’s missing in the article is the relationship between consumption and the availability of productive projects worthy of investment.  Strong levels of consumption provide profitable investment opportunities.  That’s how investment decisions are made.  Banks are willing to provide financing for such projects.  Their credit risk assessment tells them they will get repaid from the profits of projects based on solid consumption prospects.  Banks will create the cash to fund such projects.  That’s the happy advantage of our banking system.  We can invest without having any savings.

State of play at year end

from Peter Radford

Is it just me?

Or is the realm of punditry in a state of confusion?

There seems to be an emerging consensus that something big is happening.  It’s just that we don’t quite know what.  The problem is that the template we are all applying is frayed if not shattered.  Consequently we are searching for the safety of explanations but finding that our questions do not elicit comfortable answers.  This is not a place we like to inhabit.  What are we to do?

Let’s speculate.

Stagflation?  Growth seems to have slowed dramatically over the last decade if not longer.  There’s talk of malaise.  There’s talk of a post-growth economy.  Some folks even applaud the idea that the days of vertiginous growth are behind us.  Now, we are told, we can focus on the environment and pivot to a less material way of life.  We can manage with less stuff after all.  How many homes, cars, and trinkets do we really need?

Lots.  Lots say the pro-growth crowd.  Just look at the cornucopia we call contemporary America.  It is stashed full of goodies.  Our poor ancestors would be green with envy at all the gadgets, the health care, the cozy homes, and the relative lack of physical exertion needed to provide it all.  Why would we not want more?

Ah.  Some others say.  We might be knee deep in goodies overall, but there appears to a problem with the distribution of those goodies.  Too many end up in too few hands.  That’s not good.  It eats away at social cohesion.  It isn’t, as the elitists inevitably say, that the poor are envious.  Not at all.  It’s that the concentration of goodies leaks into a concentration of power.  And the elitists use that power to preserve what they have.  They reject the very nostrums of the liberalism they espouse.  They abhor competition.  And they absolutely don’t want to partake of anything social.  Except for the exotic parties and trips they enjoy.  They prefer their society over our society.

Inflation? 

Reflections on the US election results

from Peter Radford

Let the dust settle.

Absorb the information embedded in the results.

Take a deep breath and avoid partisan primping.

First: this election was insanely expensive.  Candidates seeking election to Federal office spent an estimated $8.9 billion.  Their state level counterparts spent a further $7.8 billion.  

Second:  all that expenditure had little effect.  Sure, the House changed hands, but by the slimmest of margins, and for all the pre-election talk of various color waves the reality is that only 40 House seats were truly competitive — if by competitive we mean that the victory margin was  5% or less.  That means 90% of the election was decided before the starting gun.

Third: elections have thus become a major industry that produces little change.  America is, as one or two observers are now saying, is ossified.  It’s ability to produce major shifts in policy is, for the present, non-existent.  Trench warfare dominates a more mobile and responsive version of politics. 

We need our Hutton

from Peter Radford

– the question is how does economics get its much needed revamp?

This caught my eye:

“Debreu noted in his Nobel Prize lecture that the success of the mathematization of economic theory depended “on the fact that the commodity space has the structure of a real vector space”. We have shown that this is incorrect. The “price vector” is not a vector, and GET [General Equilibrium Theory] is therefore false. But we may go further and assert that not only was the proof incorrect, what was set out to be proved was not true in the first place. The real economy cannot be brought into equilibrium by adjusting prices. And indeed, the real economy is never in equilibrium.”

That’s the concluding paragraph in Philip George’s paper in the recently published Real World Economics Review #101.

The emperor, apparently, has no clothes.

But, then, we all knew that, didn’t we?

I wrote earlier this week about the difficulty we have in determining the efficacy of a supposed body of knowledge.  The arbiters of knowledge have a vested interest in maintaining the outward appearance of whatever it is they study.  They act like a priesthood intoning in ancient languages and using secret signs to distinguish themselves from the ordinary folk whom they intend to control or influence.  The problem is that we, those of us on the outside, can only rely on those arbiters for assurance that the efficacy they proclaim for themselves is actually, well, efficacious.  Worse, within a wide discipline such as economics, or applied mathematics as it has now become, the various sub-specialities are so specialized and the knowledge so arcane that anyone not within close proximity to it is unable to offer an opinion as to its validity.

This has become a fundamental and defining issue within economics.  The discipline needs good jolt of reality.  It needs a new direction.  It needs to shake off the errors of its past and begin anew.

The price of economics

from Peter Radford

Thank you Mariano Torras.

You said the following in a letter to the Financial Times:

“I would venture that there is a professional motive for perpetuating — through the use of elegant and abstract models — the fantasy that economics is a science.  The prestige, the stature and influence that such a myth permits is undeniable.  Yet, far more perniciously, the ostensible neutrality of “economic science” provides seemingly unshakeable ideological cover against critics who (more realistically) accentuate power, inequality, and politics.”

That about sums it up.

Economists do not study economies.  They study economics.  They study their own models and other stylized facts in ever more detail and abstraction.  They have substituted technical wizardry for contemplation.  They privilege mathematics over other kinds of analysis.  And they scrupulously avoid entanglement with history which might drag them into a conversation about just how they arrived atop Mount Economics far above the plains of reality below.

Professor Torras inspired me to dig out the following:

“More generally, how does a scholarly community determine that a proof is valid, especially when the proof is highly complex and when there are few people in the community with the technical skill to understand the proof? And what might “understanding a proof” entail?”

That’s Roy Weintraub speaking in his excellent book ”How Economics Became a Mathematical Science”.  Go read the book.  It’s highly instructive.

But it isn’t my intention to poke too much at the mathematicians we now call economists.  It isn’t for me to say whether economics has progressed as a consequence of restricting itself to the confines of applied mathematics.  The profession seems comfortable to be so restricted.  It wallows in its arcane nook and appears content to portray itself as a repository of analytical capability rather than of economic insight.  That’s all we need to know.

A broader question is worth delving into though.

How do people outside of the profession know that what economists state as knowledge is actually worth knowing?  How does anyone not within the hallowed halls and not grounded in the accepted or iconic modeling know that the knowledge professed to be possessed by economists is actually worth anything?  Anything at all?

Share buybacks — again?

from Peter Radford

What isn’t said is often more telling than what is.  The silence denotes either a disrespect for thorough analysis or an ignorance of issues beyond the ken of the speaker.  Then, of course, a third option arises: that those issues are an embarrassment to the point being made and are thus best left unmentioned.

For some reason stock buybacks appear to fall into such a zone of silence.  There is some controversy currently about the topic because of the recent proposal to impose a very modest tax on stock buybacks here in the U.S.

The usual arguments have been put forward to defend buybacks.

Michael Mauboussin, who is head of something called consilient research in an arm of Morgan Stanley, recently wrote this in an op-ed for the Financial Times:

“An essential role of an efficient economic system is the reallocation of capital away from businesses with limited prospects to those with more potential. Buybacks facilitate this process, and nearly all of the proceeds are reinvested in the shares of other companies.”

All you need to know about the oddity of the topic is contained within these two sentences.

Tax stock buybacks?

from Peter Radford

Taking a short break from my crusade to get information taken more seriously in economics …

Yesterday’s Financial Times includes, on page 9 of the print edition, one of its regular “Market Insights” columns.  This is the space the FT allocates to sundry financial market types to opine on subjects of general interest to other financial market types.  It’s always a good read if you want to gain insight into how our magnificent financiers talk to themselves whilst allocating capital appropriately around the economy.  Well that’s what they see themselves doing, so let’s not nitpick.

The column yesterday was written by a luminary of the investment community, someone who sat on the board of a popular retirement fund, and who has written extensively on subjects related to finance, investing and so on through the years.  The subject was the possibility of eliminating the new tax that Congress just established on stock buybacks.  The new tax, all of 1% and thus hardly onerous, has stirred up a ton of ire in the corporate world where stock buybacks are viewed as a centerpiece of good “stewardship”.  That is if you consider stewardship to be centered purely on making shareholders happy.

Say it ain’t so

from Peter Radford

re-visiting economics’ basic concepts

I am nothing if not annoying.  Allow me to elaborate.

Let’s be basic.

I mean really really basic.

Our model world initially consists of two people, Adam and Eve.  I know, it’s been done before.  But we are economists.  What are we interested in?  What problems that Adam and Eve face do we want to study?

Well, they need energy.  Human bodies, like all ordered structures, need flows of energy to maintain that structure.  The Second Law of Thermodynamics is the damndest thing.  It gets in the way.  But that’s life.  So what do Adam and Eve do?  They go look for energy, which in our speak we call food.  They avert death by searching for, finding, and consuming food.  Problem solved.

What do we make of this?

Demand — the need for a supply of energy — precedes its supply.  And that the search for, location of and ultimately the consumption of that energy requires more energy.  We are stuck in a loop.  We can summarize the search and location parts of the process as work.  And work requires its own source of energy.  

One thing leads to another as they say.  But cut to its absolute minimalist core, work is about sources of energy.  It is the application of energy to a task, which in a primitive sense is simply survival.  And the sum of all the work being done is the sum of all the energy gathered and processed to satisfy the demand for — energy.

I know.  This is absurd reduction.  But that’s where we need to go in order to clarify what an economy actually is.  It is the sum of work being done.  It is an energy flow.

Machine age musings on algorithmic growth theory

from Peter Radford

Don’t mind me.  I am just thinking out aloud…

That we live in a Machine Age is indisputable.  Our lifestyles depend entirely upon the mediation of machines.  Without them modernity collapses back to whatever existed in the prior ages and we surrender most of what we currently cherish.

And it is important to use the phrase “machine age” because other phrases such as Industrial Age and so on limit us.  Some say we are now entering a Digital Age, but this too is a mistake.  All that is changing is the nature of our machines.  The Machine Age lives on.

So what is a machine?

It is a piece of information that allows us to channel energy and concentrate it such that we amplify the output we expect from that application of energy.  In this case the information is embodied in a plan, design, or layout of a particular physical structure through which we harness the energy.  The nature of that information has changed mightily throughout the Machine Age, ranging from the design of steam engines at one end to the design of supercomputers at the other.  At its core, though, the notion remains the same.  The application of information to the harnessing of energy is the basis of economic activity.  We might even say that we don’t simply harness energy through the use of machines: we also harvest it.  Or, at least, we use that aspect of energy available to do work.  And an economy is simply the totality of work we need to do to provide whatever it is we feel we want — whether those “wants” are essential or luxurious is irrelevant to this discussion.  That’s a moral not a machinery question.

Thinking like an Economist?

from Peter Radford

Thinking like an economist.

What a horrible thought.  Can you imagine anything more restrictive and less imaginative?  It requires you to disengage from reality and enter a world constrained by absurd assumptions, odd definitions, and a lack of foundation.  The entire edifice of economics sits, in all its glory, suspended in mid-air and relying on what the philosopher Daniel Dennett describes as “sky hooks” to hold it up.  Beneath it is only vapor and foggy notions of the phenomena it purports to describe and explain.  Just ask an economist to describe a market in detail and you will understand how vague the enterprise is.  

Perhaps I am wrong.  It takes a lot of imagination to conceive of what passes as economics as being a study of actual economies.  You need a really vivid imagination, for instance, to think that businesses actually calculate or apply marginal productivity on payday.  Or that the dense ignorance of total factor productivity is an actual thing and not simply a definition of how little economists know about how economies grow.  Or that there is something called an equilibrium calling out and pulling us all into a perfect quiet calm stasis devoid of the roughness or hurry-burly that makes theorizing reality so stressful.  Or … well you get the picture.

How about this: did you hear the joke about the economist?

Free to trade efficiency?

from Peter Radford

Fascinating.

The war in Europe is messing with some major preconceptions and exposing some as illusions that, perhaps, we would be better off without.

Take, for instance, The Economist magazine’s leader article entitled “Trading with the enemy.”  Here’s the key question the article poses:

“Is it prudent for open societies to conduct normal economic relations with autocratic ones, such as Russia and China, that abuse human rights, endanger security and grow more threatening the richer they get?”

You and I might answer in the negative with a certain ease, but for the Economist and its ilk the question is more nuanced.  After all aren’t freedom and free trade one and the same?  If you stop trading freely aren’t you surrendering your freedom?

The Economist goes on to present its case, which inevitably decries any diminution of free trade, and ends thus:

“Liberal governments need to find a new path that combines openness and security, and prevents the dream of globalization turning sour.”

All well and good.  And predictable.  We must not get in the way of free trade.  Must we?

A note on Furet

from Peter Radford

Intellectual vanities abound in a technocratic society.  It seems inevitable that as we push the boundaries of knowledge further and further into the space of potential beyond our current state that the division of labor presses down on us.  We become, each of us, more distant from any sense of self-sufficiency.  Such a state is an absurdity in our technologically infused and dependent world.  We have become enmeshed in the very supplementary support system we developed to drive ourselves out of the Malthusian trap we lived in for millennia.  As the complexity of our society rose, as the interdependence implied by the ever increasing network of specialities grew, and as we left behind the visceral ways of life we were prepared for by our evolutionary trajectory, we became attached to, and eventually, inseparable from, our technology.

The implications abound.

Our social organization has had to adapt to the complex realities.  We have had to create softer social technologies to foster and manage the harder technologies of production.  We had to organize.  We had to specialize.  We had to delegate.  We had to invent various forms of political arrangement to rein in the very freedoms that we unleashed in order to set ourselves beyond the deprivations of yore.  

This contradiction between the freedom necessary to defeat perpetual poverty and that needed to restrain the concentration of wealth that threatens to disintegrate the cohesion needed to maintain prosperity once achieved, is an ongoing and insoluble aspect of modernity.  

All wet like a river

from Peter Radford

I am still stuck wondering about Diane Coyle’s defense of economics.

Heraclitus exists only in fragments.  That’s unfortunate because aphorisms are not the best way to tackle the hubris of the technocrat.  He was on to something though.  We all know his well-worn saying about stepping into rivers.  He tells us that they’re never the same twice.  And yet they stay the same.  Beware, then, the analyst that thinks she sees a regularity in our economy.  It may look the same as before, but it isn’t.  Not in detail.

Yes, I am still stuck wondering about Diane Coyle’s defense of economics.  It has, she says, changed a great deal since it was exposed as somewhat vapid back during the Great Financial Crisis.  I am trying to be gentle.  In truth it was exposed as being a lot worse than vapid. 

The problem I have is that the resurrection of economics, in the eyes of Coyle, is in its contribution as a technocratic bulwark against the visceral or uneducated emotions of democracy.  As a center of empirical wisdom economics can, apparently, regain its luster and provide a counterweight to the fogginess of ideas that emerge, not from dogged adherence to statistical analysis, but from the vague good intentions of the people’s representatives.  The economist-as-technocrat thus replaces the economist-as-theorist at the epicenter of modern policy and decision making.  Technocrats can do what mere politicians might not.  They can stand aloof and make the hard choices.  They can point out the opportunity cost of a choice.  They can hammer out the alternative values within an array of choices.  They can sort the costs from the benefits and weigh them objectively so as to ensure that society reaches the peak of its potential.  They can, in short, make us all efficient.

Whatever that means. 

Democracy? Surely not!

from Peter Radford

Let’s stir things up for the New Year by continuing with one of my recent themes.

A quote from an opinion piece in the NYT this morning [January 3rd]:

“James Madison boasted that the Constitution achieved “the total exclusion of the people, in their collective capacity.” Its elaborate political mechanics reflect the elite dislike and mistrust of majority rule that Madison voiced when he wrote, “Had every Athenian citizen been a Socrates, every Athenian assembly would still have been a mob.” Madison’s condescension has never gone away. Walter Lippmann, perhaps the most prominent intellectual of the short American Century, reckoned that citizens were ignorant, confused and emotional. Democracy brought “an intensification of feeling and a degradation of significance” to whatever it touched.” 

I love that phrase: “the total exclusion of the people, in their collective capacity”.  What other capacity can the people have, other than collective?  Madison was hedging.  He wanted to be aristocratic with a popular twist.  And there was that awful reference to “we the people” in the background that needed proper definition.  So the people were invited in.  Just not collectively.  They were let in selectively instead.

To this day the threat of democracy is a real and present danger in America.  The bedrock of the constitution remains firmly anti-democratic.  Various bolt-ons have attempted to bring it into the democratic era, but they have failed.  America is not a democracy.  So there is no existential threat to it.  You can’t lose something you don’t have.  Our project for the New Year ought not to be dedicated to fixing the governance system.  It ought to be dedicated to reforming it.  Making it democratic would be a good start.  Just think: had America been a democracy Trump would not have been elected.  He lost the 2016 election by three million votes.  He lost in 2020 by seven million.  Due to the undemocratic nature of the constitution, switching a mere 46,000 of those seven million — in the right states — would have secured a win for Trump and his attempted coup would have been unnecessary.  No wonder he’s upset.

Confusion reigns

from Peter Radford

What on earth were they doing?

Rocked but undaunted by the great financial crisis the orthodoxy of our central banks survived to fight another day.  The system had been saved.  That no one saw the onrushing crisis is still being debated.  Of course some people saw it coming.  Anyone with a scintilla of understanding of Minsky for instance.  But those folk are hard to find in the top seats of central banks.

The objective of the so-called independent central bank is to preserve the system.  To make it safe for markets to continue undisturbed by the intrusions of political whims.  To save, that is, capitalism from the depraved intrusions of democracy.  The idea is to separate as firmly as possible the political and the economic realms.  After all as economists seem to believe: people are astonishingly rational when they participate as market members, but are hopelessly self-indulgent and irrational when they participate as voters.  We all suffer from split personalities in economic orthodoxy.  Rational one minute, mindlessly mixed up the next.  It’s an interesting view of human behavior.  It undergirds, in rather more formal guise, orthodoxy and its resolute defense of central bank independence.

This independence is supposed to maintain a wall between these two halves of our personalities.  Making the system safe for markets means guarding vigilantly against the inevitable weaknesses of politicians who might fall victim to the democratic urge to look after the majority of voters.

Domain shift

from Peter Radford

Brian Arthur tells us that technology most often advances in the form of domain shifts.  In his narrative technologies cluster in related groups he calls domains.  So individual technologies might advance through a tweak here or there, but the economy advances through a shift from one cluster of technologies to another.

I like this idea.  Especially when we then broaden the topic to use technology as a background against which we view a particular slice of history.  Thus we can think, legitimately about the “steam era” and such.  Adding insight to this, Arthur situates all technologies as extensions of natural phenomena.  So he characterizes a technology as a phenomenon being “captured and put to use”.

All good.  This gives us a practical definition of technology and helps map its evolution onto the changes of society itself as it became more and more infused by technology.

Arthur also tries to make us embrace a very broad notion of technology.  He insists that a great number of social structures can also be defined as technologies.  So a modern business organization is a technology, as is any other institution.  I agree.  When we go further and identify that most, if not all, technologies can be segmented into sub-technologies we start to see commonalities that might elude us in a more holistic analysis.  This does not imply we can predict the higher level organization from the sum of the component parts, but it does allow us to see common ancestors to many of our contemporary technologies: they are rooted in lineages in the same way that the natural world is.

Let’s stay with this.

More is different: a redux

from Peter Radford

“Formation is the vanishing of being into nothing, and the vanishing of nothing into being”

Hegel loved his dialectics.  But it isn’t just contrasts that illuminate reality.  It is connections also. Connections matter.  Single things are interesting.  Perhaps even intriguing.  But it is the way in which things connect that leads us to the better understanding of our surroundings and of ourselves.

Our modern world rests largely on a web of technology that mediates our existence and removes us from our primitive origins.  We pride ourselves on this web.  Our ability to render nature compliant and exploit both our context and our intellect to produce comfortable lifestyles is the essence of modernity.  Any brief study of the past two hundred years will astonish us at the gulf in everyday existence between now and then.  We really do seem to have broken the Malthusian grip that nature held us within for so long.

A great part of that ability to break free consists in our imposition of reasoning on the problems previously preventing us from escape.  We learned to abstract.  We learned practical problem solving.  We learned both to reduce problems to solvable sizes and then to reconstitute solutions from those now-known component parts.  We created, to borrow from Brian Arthur, a reliance on modularity: we learned to build technologies from various parts.  And each part itself was itself modular.  The implied reductionism in this prompted the illusion that the method for superior knowledge was always through breaking things apart and re-assembling them once we knew what each part did.  

Economics took heed of this method and ran with it as if the economy was a technology comprised of parts easily assembled back into a whole.  Economics is justifiably proud of its internal logic.  But is it something that matches reality well?

Is there a “policy”?

from Peter Radford

I read this morning that the Federal Reserve had bought, at the peak of the recent crisis, about 40% of all US government bonds being issued.

This may, to some of you, be something of no concern.

Think again

The illusion that there are separate spaces for monetary and fiscal policy is belied by this fact.  Which one was it?  Was it the Fed flooding the economy with money?  Or was it the government issuing debt to finance economic support? I suppose it was both.  But it wasn’t fiscal policy.  The effect of all that money was simply to support asset prices.  Whether that was the intention is irrelevant.  The flood found its way into the financial system and relatively little found its way into the economy in the form of an expansion of productive activity.  We could go further: a great deal of what expansion of capacity actually occurred went abroad to build fragile supply chains and take advantage of low wages in distant parts.

What also happened was that households sat on the portion of the flood that they received as a hedge against further economic mayhem.  And when, as now, they began to feel more confident they started to spend the money on goods rather than services.  Remember that the economy is heavily skewed towards consumption, and within that, towards services.  The problem with services is that they tend to be in-person.  And being in-person is something a lot of people are avoiding right now.  So they decided to switch and buy goods instead.