Duopolie

November 2, 2017 1 comment

from Asad Zaman

Varian start his intermediate micro text by stating the maximization and equilbrium are the core principles of micro. Krugman recently stated that I am a “maximization and equilibrium” kind of guy. The goal of this lecture is to show that these two principles fail completely to help us understand behavior is a very simple model of a duopoly.

In last lecture (AM03), we introduced a simple duopoly model. Two ice-cream vendors buy ice-cream wholesale and can sell at any chosen price in the park. If they have matching prices, they split customers. Under Perfect Competition assumptions, with Full Information and Zero Transaction Costs, if they have different prices, then all customers go to the lower price vendor. Straightforward analysis of this duopoly model leads to the following conclusions:

  1. There is a huge amount of genuine uncertainty – probability calculations required for expected utility cannot be made. We cannot know how many people will come to the park on any given day. We cannot forecast the weather conditions, which influence the demand for ice-cream, with any degree of reliability. This means that vendors will adopt rules-of-thumb to make decisions, rather than maximize anything. This leads to the use of evolutionary Agent Based Models as the preferred modeling technique.  read more

Pure game theory — an irrelevant tautology

October 31, 2017 11 comments

from Lars Syll

Applied game theory is a theory of real-world facts, where we use game theoretical definitions, axioms, theorems and (try to) test if real-world phenomena ‘satisfy’ the axioms and the inferences made from them. When confronted with the real world we can (hopefully) judge if game theory really tells us if things are as postulated by theory.

like-all-of-mathematics-game-theory-is-a-tautology-whose-conclusions-are-true-because-they-are-quote-1But there is also an influential group of game theoreticians that think that game theory is nothing but pure theory, an axiomatic-mathematical scientific theory that presents a set of axioms that people have to ‘satisfy’ by definition to count as ‘rational.’ Instead of confronting the theory with real-world phenomena it becomes a simple matter of definition if real-world phenomena are to count as signs of ‘rationality.’

This makes for ‘rigorous’ and ‘precise’ conclusions — but never about the real world. Pure game theory does not give us any information at all about the real world. It gives us absolutely irrefutable knowledge — but only since the knowledge is purely definitional.

Mathematical theorems are tautologies. They cannot be false because they do not say anything substantive. They merely spell out the implications of how things have been​ defined. The basic propositions of game theory have precisely the same character.

Ken Binmore 

Read more…

Reconcile this!

October 31, 2017 Leave a comment

from David Ruccio

SAfr

The world joined most South Africans in cheering when Nelson Mandela was finally released from prison, the apartheid regime was largely dismantled, and multiracial elections were eventually held.

Read more…

The Golden “Diwali Gift”

October 30, 2017 Leave a comment

from Jayati Ghosh

The Modi government made its supposed determination to end corruption in India its signature theme. The massive damage done by demonetisation as well as the continuing chaos produced by the flawed introduction of the Goods and Services Tax have all been justified on the grounds of reducing possibilities of corruption and tax avoidance. Similarly, the imposition of Aadhaar requirements on the population for access to all manner of publicly provided goods and services is regularly justified on the grounds of reducing “leakages” and misappropriation of benefits. The Prime Minister has sought to burnish his image of anti-corruption crusader through emotional appeals and dramatic public claims that he is willing to be sacrificed for the larger good of “cleaning up” the country.

Yet, like so many other policy initiatives of this government, the heavily publicised anti-corruption moves also were mostly about optics and hype rather than substantive change, since the quiet, careful and systematic measures that could have dented various types of corrupt practices at different levels were rarely undertaken. This is a government that has sought to push many more aspects of government policy and implementation under a shroud of secrecy, regularly denying requests under the Right to Information Act. It has aggressively gone after dissenters and NGOs that seek to bring some accountability into official functioning, denying them space and seeking to dry up their sources of funding. More than three and a half years into its tenure, it has yet to appoint a Lok Pal. And so on. Nevertheless, through all this, the drama being enacted of a government determined to end corruption has been given prime billing in all public statements. Read more…

Chicago economists — people who have their heads fuddled with nonsense

October 29, 2017 20 comments

from Lars Syll

joblossMainstream macroeconomics has always had problems with the notion of involuntary unemployment. According to New Classical übereconomist Robert Lucas, an unemployed worker can always instantaneously find some job. No matter how miserable the work options are, “one can always choose to accept them,” according to Lucas:

KLAMER: My taxi driver here is driving a taxi, even though he is an accountant, because he can’t find a job …

LUCAS: I would describe him as a taxi driver [laughing], if what he is doing is driving a taxi.

KLAMER: But a frustrated taxi driver.

LUCAS: Well, we draw these things out of urns, and sometimes we get good draws, sometimes we get bad draws.

Arjo Klamer

In New Classical Economics Read more…

Explicit and tacit explanations of French economic stagnation

October 29, 2017 5 comments

from Robert Locke

In my October 24 posting, Sapiential Economics, I plug for the inclusion of tacit as well as explicit analysis in the treatment of economics.  This posting illustrates my case through example.

French Revisionism, explicit knowledge and the stagnation thesis

In 1976 Explorations in Economic History published Richard Roehl’s article using statistics to refute the view of French economic stagnation.

“The conventional picture,” he states,

“Is roughly as follows. The French economy in the early modern period, until, say, the late 17th century, is relatively strong and healthy; but by the 18th it is troubled and stagnant. Though the chronology of the transition from 17th century wealth and power to 18th century retarded industrialization is rather imprecise, nevertheless the 18th century usually appears as the period during which those roots of subsequent problems are implanted. I wish instead to maintain here the proposition that something different is occurring in 18th century France-specifically, that modern economic growth has its beginnings there. The 18th century then ceases to be paradoxical and becomes fully explicable: It represents the continuation of a long-term trend of economic growth.” (Locke, 1984, 6)   Read more…

Growing old unequally

October 28, 2017 2 comments

from David Ruccio

fig1-18

Social Security may have decreased the rate of poverty among retirees in the United States.* But it certainly hasn’t solved the problem of inequality.

As is clear from the chart above, from a recent report from the Organisation for Economic Co-operation and Development, old-age inequality among current retirees in the United States is higher than in all other OECD countries, except Chile and Mexico.

But wait, it’s probably going to get worse. That’s because, within each generation of workers, inequality has been rising. For example, researchers tracked U.S. income inequality for four different generations—people born in 1920, 1940, 1960, and 1980. For each group, inequality has been more extreme than the previous generation.

Read more…

On Spain, Catalunya and former Yugoslavia

October 28, 2017 10 comments

Update 29-10-2017: in 2014 this important Voxeu post from Andrés Rodríguez-Pose and Marko Stermšek about the countries formerly called Yugoslavia was published. The data fully endorse the view I express: secession is economic folly but trajectories matter a lot. Their conclusions are, considering the data, imo too positive. In 2011 only one country, Slovenia, had significantly surpassed the 1985 level of production. But even Slovenia, which had a relatively very peaceful transition, experienced a 25% drop of GDP during the years of secession (others had drops of about 50% or even more). Many others in 2011 still had levels of production way below what was reached in 1985: 25 years of stagnation (and remember: economic growth is also better healthcare, better housing and more years of education).

  1. What I did not expect: In my lifetime I’ve seem countries in and around Europe disintegrate. The Soviet Union. Yugoslavia. Czechoslovakia. Iraq. Syria. And, work in progress, the UK. Spain seems to be next in line. In many fo these countries this process was accompanied by war.
  2. Vaclav Havel was the last president of Czechoslovakia and strongly opposed splitting up. Being a wise man, he resigned instead of using violence when he saw that it had become inevitable. Thanks to him we know that splitting up a country can be a relatively orderly and, especially, peaceful process.
  3. Spain and Catalunya are heading the other way.
  4. At this moment, provoking the opponent is a winning strategy for radicals at both sides which means that the radicals have all reasons to ‘cooperate’ with the other side when it comes to this.
  5. Many Catalunyan companies have already moved their headquarters out of Catalunya
  6. Soon, the despised tourists will tay away. Yes, the number of overnight stays of tourists in hotels in Barcelona quadrupled in a few decades and such increases do change cities into theme parks. Not funny. But what if they stay away? Even despite Multi year double-digit growth of tourism, unemployment in Catalunya is still high.
  7. Foreign companies will move away, too.
  8. Don’t forget that in an economic sense, Catalunya is a city-state, centered on Barcelona! Romantic ideas about small scale organic family farms and grocery shops which will save the day are wacky – these won’t buy you modern healthcare, let alone a Volkswagen and can’t sustain a city economy.
  9. Spain, backed by the EU and the USA, has every incentive to increase such economic havoc, for instance by reducing flows of government money. Catalunya may be a net contributor to the Spanish government but that does not mean that there are no gross flows which can be halted. Brussels will follow suite.
  10. Mind that as Catalunya won’t be a member of the EU its citizens will not have free rights of entree into the EU labor market.
  11. Even if Catalunya is a net contributor, it still profits from the 4,5% budget deficit of Madrid.
  12. Mind that after Yugoslavia split up its constituent parts experienced rates of inflation of 30, 40 and even almost 50% (Kosovo). Brussels did not come to the rescue (and citizens of these states are basically not allowed to work inside the EU). If companies move away, tourists stay away and money from Brussels and Madrid is halted such rates of unemployment are not inconceivable. Brussels won’t come to the rescue.
  13. Catalunya will, for a time, probably still use the Euro. But its banks will be cut short from the Target2 system which enables international payments. International payments will be, ahem, difficult. It does not have to be this way, but Rajoy does hold all the cards. All of them. Catalunya is at his mercy.

I can go on. Nothing good will come of this. Rajoy will have to ponder about the wisdom of Vaclav Havel. Catalunyans will however have to ponder about the possibilitiy of 40% unemployment. And the relative merit of being a paid guardian of a themepark instead of an unemployed citizen of Catalunya.

Twenty years ago

October 27, 2017 4 comments

from Lars Syll

Modern economics has become increasingly irrelevant to the understanding of the real world. In his seminal book Economics and Reality(1997) Tony Lawson traced this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject.

It is — sad to say — as relevant today as it was twenty years ago.

It is still a fact that within mainstream economics internal validity is what really counts and external validity is only rarely discussed. Why anyone should be interested in that kind of theories and models is beyond imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science, but autism!

Using mathematics and logic is interesting and fun. It sharpens the mind. In pure mathematics and logic, we do not have to worry about external validity. But economics is not pure mathematics or logic. It’s about society. The real world. Forgetting that, economics becomes irrelevant pseudo-science.  Read more…

Speculation

October 27, 2017 8 comments

from Peter Radford

Robert Locke’s excellent discussion of the different perspective presented by a tacit-knowledge rather than explicit-driven driven enquiry into economic matters prompts me to reprise my understanding of the purpose of a business firm.

Put briefly: a business firm exists to translate what is often called tacit knowledge in to what is called explicit knowledge. An alternative wording would be that firms take the ad hoc and various and make them into the codified and uniform. In my own thought I use the words “secondary knowledge” to refer to the kind of knowledge that tackles ad hoc or unexpected circumstances. I use the words “primary knowledge” to refer to the codified knowledge that allows us to tackle the usual and/or repetitive circumstances. It is phraseology I borrowed from evolutionary psychology.

Why do firms do this?

Because that’s how they extract value.

Firms succeed when they control a process in order to produce something. Such processes are constructed from a variety of roles and routines whereby knowledge is combined with energy and physical resources, with the outcome being something for sale. Since establishing a process is a risky proposition — it takes up both space and time and so is susceptible to uncertainty on two fronts — control becomes the key component. And, in order to make the process most profitable, firms want to establish maximum control over the outcome: products must be both qualitatively and quantitatively predictable. How best to do that? By eliminating the ad hoc and various and limiting production to the codified and uniform.   Read more…

Balance this!

October 27, 2017 4 comments

from David Ruccio

MFG

Both Donald Trump and Eduardo Porter would have us believe the U.S. trade deficit is a serious problem—and that, if it can brought back into balance, jobs for American workers will be restored.

Nonsense!   Read more…

The ECB’s “well past”, but by how much?

October 26, 2017 1 comment

From: Erwan Mahé

26 October 2017

I had no intention of writing before the ECB meeting today or, for that matter, afterward, given the already abundance of published opinion on the event. However, in light of the varied quality of the studies undertaken so far, I could not resist the temptation to return to my favourite topic, which is the study of the reaction function of central banks, especially, given the particular context faced by the European Central Bank. The only question we need ask today is:

What does the ECB’s Governing Council want to do?

In reality, that breaks down to two goals. Read more…

Do unrealistic economic models explain real-world phenomena?

October 26, 2017 16 comments

from Lars Syll

When applying deductivist thinking to economics, neoclassical economists usually set up ‘as if’ models based on a set of tight axiomatic assumptions from which consistent and precise inferences are made. The beauty of this procedure is, of course, that if the axiomatic premises are true, the conclusions necessarily follow. idealization-in-cognitive-and-generative-linguistics-6-728The snag is that if the models are to be relevant, we also have to argue that their precision and rigour still holds when they are applied to real-world situations. They often don’t. When addressing real economies, the idealizations and abstractions necessary for the deductivist machinery to work simply don’t hold.

If the real world is fuzzy, vague and indeterminate, then why should our models build upon a desire to describe it as precise and predictable? The logic of idealization is a marvellous tool in mathematics and axiomatic-deductivist systems, but a poor guide for action in real-world systems, in which concepts and entities are without clear boundaries and continually interact and overlap.

As Hans Albert has it:  Read more…

My evening with Joan Robinson and the Tractatus

October 25, 2017 10 comments

from Edward Fullbrook

The General Theory of Employment, Interest and Money was the first book I ever read with pleasure.  I was 22.

From age five to sixteen the school system had me classified as borderline mentally retarded.  My luck changed in my penultimate year of high school when a non-conformist English teacher gave me the chance to pretend I was not mentally deficient.  She also taught me how to write a sentence, after which, inflated with fantasises of normality, I taught myself how to read textbooks and take exams, and soon became academically proficient and for a long time thereafter very neurotic.

As an undergraduate I cut classes as often as I attended them and waited till the night before an exam to open the textbook.  Sometimes I only managed a C but in economics it was always an A and that was the only reason I had for becoming an economics graduate student.

Till then mine had been an all-American, all-textbook education.  The textbook genre requires its authors to pretend to know it all and talk down to their readers.  Reading The General Theory, I encountered for the first time an author who was openly struggling to understand what he was writing about.  I too was struggling and so I – and what could have been more preposterous – immediately identified on an existential level with John Maynard Keynes.  It meant that for the first time ever while reading a book my resentments and fears from my educational past receded to the background.  And when they did the most astonishing thing happened.  My brain started giving me an intensity of pleasure that, except for sex, I hadn’t thought possible.  So it was that an intellectual was born.  Read more…

Sapiential Economics

October 24, 2017 12 comments

from Robert Locke

Neoclassical economists insist that the formal system of knowledge they create takes precedence over what we learn through experience, on the grounds, as Erich Schneider wrote, “that the sea of facts is dumb and can only be forced to reveal interconnections when properly queried.  Intelligent [sinnvoll] questions can only be derived from theoretical formal analysis.” (Bomback and Tacke, 37)  But what if it were the other way around that formal knowledge systems are dumb if they have no connection with the sea of facts, to experiential knowledge.

In Britain, the first modern industrial country, most skilled craftsmen behind the development of the productive force c. 1846 were not formally educated in science or engineering, but self-trained, or, rather, trained in apprenticeship or in a firm on the job.  Know-how was acquired primarily through tacit learning, intuitive and inarticulate, only through individual experience in the relevant context, where the knowing subject is involved, as opposed to explicit knowledge, codefiable, generated often through logical deduction, capable of being aggregated at a single location, stored in objective forms without the knowing subject being involved in the aggregation.  Legions of obscure engineers were trained this way.  Whitworth’s son noted that in his machine tool company,   Read more…

The real costs of making (and using) money – the bitcoin waste

October 24, 2017 14 comments

energy

Bitcoins are a total waste. On this blog, I’ve written some posts on ‘the real costs of making money’ (a summary here). Producing money takes resources: labor, capital, land. One of the ’land’ aspects used to be silver and gold. Digging for gold and silver a social setting: the slaves in the silver mines of Larium (Athens), the native workers which perished in the high altitude silver mines of Cerro Ricco, Peru (the Spanish empire). Or ‘apartheid’, which guaranteed a steady flow of cheap ‘free’ labor to the gold mines, in South-Africa (British empire). Fortunately, we have fiat money now – the value money does not have to be backed anymore by forced labor.

Bitcoins are a recent new kind of money (though it really seems to be more a store of wealth than a means of exchange). Unfortunately, Read more…

Monopolies

October 24, 2017 2 comments

from Asad Zaman

Building on the analysis of Supply and Demand in Chapter 3 of Hill and Myatt’s Anti-Textbook, this lecture constructs a very simple model of monopoly and duopoly, to show that policy implications in these cases differ dramatically from what conventional textbooks teach. The higher level goal is to teach students Meta-Theoretical thinking. This goes beyond the binary logic which lies behind conventional textbooks, which teach student to think in terms of whether theories are true or false, or even instrumental – enabling you to formulate policy and welfare questions. In Meta-Theory, we try to step back and ask questions about who created this theory, in what historical context, which groups did it help, and which did it hurt, and what will the effects be upon us and upon the world, if we decide to affirm these theories for use in our personal lives, and to shape our societies?

The Hill and Myatt Anti-Text is ideally suited to this goal, since it is directly a meta-analysis of the message contained in conventional textbooks, and brings out the implications hidden beneath the surface of the analysis. In particular, the Anti-Text helps us to understand the rhetorical strategy used by conventional textbooks to convince students of theories which are overwhelmingly contradicted by empirical evidence.

BTW, it is worth pausing here to admire the efficiency with which economists succeed in creating such deep brainwashing that mountains of empirical evidence fail to move the faith of the true believers. For Real-World economists, it is very important to study these rhetorical strategies, as exposing this framework is an important component of the De-Programming techniques which are required to reverse the effects of this brainwashing.  read more

Laughter is the best medicine

October 23, 2017 5 comments

from David Ruccio

Sometimes we just have to sit back and laugh. Or, we would, if the consequences were not so serious.

I’ve been reading and watching the presentations (and ensuing discussions) at the Rethinking Macroeconomic Policy conference recently organized by the Peterson Institute for International Economics.

Quite a spectacle it appears to have been, with an opening paper by famous mainstream macroeconomists Olivier Blanchard and Larry Summers and a closing session—a “fireside chat” without the fire—with the very same doyens of the field.

The basic question of the conference was: does contemporary macroeconomics, in the wake of the Second Great Depression, require a few reforms or does it need a wholesale revolution? Blanchard lined up in the reform camp, with Summers calling for a revolution—with the added spice of Adam Posen referring to himself as Trotsky to Summers’s Lenin.

Most people would think it’s about time. They know that mainstream macroeconomics failed spectacularly in recent years: It wasn’t able to predict the onset of the crash of 2007-08. It didn’t even include the possibility of such a crash occurring. And it certainly hasn’t been a reliable guide to getting out of the crisis, the worst since the Great Depression of the 1930s.   Read more…

Joan Robinson and the inadequacies of revealed preference theory

October 22, 2017 5 comments

from Lars Syll

We are told nowadays that since utility cannot be measured it is not an operational concept, and that ‘revealed preference’ should be put in its place. Observable market behaviour will show what an individual chooses …

joanIt is just not true that market behaviour can reveal preferences. It is not only that the experiment of offering an individual alternative bundles of goods, or changing his income just to see what he will buy, could never be carried out in practice. The objection is logical, not only practical …

We can observe the reaction of an individual to two different sets of prices only at two different times. How can we tell what part of the difference in his purchases is due to the difference in prices and what part to the change in his preferences that has taken place meanwhile? There is certainly no presumption that his character has not changed, for soap and whisky are not the only goods whose use affects tastes. Practically everything develops either an inertia of habit or a desire for change.

We have got one equation for two unknowns. Unless we can get some independent evidence about preferences the experiment is no good. But it was the experiment that we were supposed to rely on to observe the preferences.

As so often, Robinson hits the nail on the head.   Read more…

Whatever happened to ₹-money (and credit) in India?

October 22, 2017 2 comments

Aside: I didn’t know, but the ₹-sign is the official sign for the rupee

Why did the Indian economy not succumb under the weight of the sudden demonetization of 8 November 2016? The answer: to an extent because the government and the commercial sector kept borrowing from banks and spent this money.

India8

There is overwhelming evidence that at the grassroots level the dearth of cash caused by the financial folly disproportionately hurt the poor and unbanked as rebuilding took time and converting old notes to new ones did led to a short but crippling decline in the amount of available cash. This despite the fact that a much larger proportion of outstanding ‘old’ cash was converted to new money than expected. In spite of this, the official economy grew. How come? Credit growth rapidly rebounded… (see below). Read more…