Monday, December 08, 2008

Can Science Help Solve the Economic Crisis?

The Edge features a brilliant and timely essay

by Mike Brown, Stuart Kauffman, Zoe-Vonna Palmrose and Lee Smolin.

Having had the privilege to read a draft of this essay some weeks ago, I am thoroughly unsurprised to see my comments were completely ignored. To begin with, I must have repeated several times it is Jeffrey Sachs, Sachs, Sachs - not Sacks. Btw, his quotation used in section 4 you first read here. I doubt anybody else was stupid enough to rewind the recording two hundred times to do the transcript.

But that's what writing a blog is good for I guess, so I can now publish my comments here.

I largely agree with the overall scope of the essay, to the extend that my knowledge about economy is limited and some details escape me. The main statement however comes across very clearly: we need a scientific approach to modeling our economy, a necessity that have referred to as “Finishing the Scientific Revolution”. Given that our social, political, and economic systems affect the lives of billions of people this is in our responsibility as scientists. In their essay the authors make this point very aptly, pointing out especially the interdisciplinary nature of this endeavor:
“When physicists made the atomic bomb they realized what they had conceived and immediately felt a sober responsibility to help make the world safe from their invention. At this time there is a responsibility for those with the knowledge and skills to understand the financial instruments involved in this crisis to help first to resolve this crisis and to next turn their attention to the design and regulation of a stable market system. This will involve economists, mathematicians, physicists, biologists, computer scientists and others working together to make a more stable economic system.”

The authors first summarize common assumptions of neoclassical economics and then proceed “to ask if there are alternative ideas, principles and methods of modeling economic systems which might also provide the basis for wise advice and policy.” My social democratic heart was very pleased to see they explicitly acknowledge the necessity to regulate a system so it can properly fulfill its function, and especially that it can do so without running into instabilities:
“[E]conomies, financial institutions and markets cannot function without a context of rules and laws, which regulate them. In a market, each participant tries to do the best they can for themselves. In a properly architected and regulated market this contributes to the public good. There is simply no place for an ideological discussion about regulation. Stable systems in nature such as individual organisms and ecosystems are regulated. So must ours be. The only relevant question is do the regulations work or not, where work means that stable markets allow an orderly flow of capital to and from the goods and services economy and the people who comprise it.”

I previously wrote about the need to set up systems appropriately so they work towards their primary goal in my recent post The Best of All Possible Worlds.

Overall, the essay is for a bunch of Americans very well balanced and - in contrast to many other pamphlets on the topic that I have come across - notes that there is a plurality of what nations will consider optimal solutions depending on their citizens' preferences:

“An economy involves finding balance between long- and short-term objectives, acceptable distributions of wealth, and rewards for innovation and risk taking. Different governments may embrace different social philosophies and may seek to establish economic and financial regulations to obtain somewhat different desired results. The role of an independent, non-partisan scientific conceptualization of economics should be to provide these policy makers with a notion as to the likelihood that new economic and financial regulations they are considering will have the results they desire and that these will not involve unintended consequences to others.”

They finish with an appeal to scientists from different areas to join forces to increase our conceptual understanding of the systems that govern out lives with the aim to provide advice on their organization and regulation. Such an approach must be scientific, “should not be a matter of opinion or ideology” and “has to be carried out in an interdisciplinary and open spirit”. Or, as I put it in my post This is your Economy on Drugs

“[T]he central issue is trust in our ability to detect and correct shortcomings of the system. A detection that should not be hindered by faith-based argumentation, should not be tampered with by rhetoric, should not be driven by psychological effects. It requires a solid data base, shared knowledge, objective evaluation, and validation of models and predictions. In short, it requires a scientific method to reestablish trust in the working of our political and economical systems.

The Scientific Revolution, which has lead to a stunning progress in the natural sciences four centuries ago, has not yet been extended to the applications of social sciences. To a large extend, developments in these areas are still made in a process of trial and error, experiments with the well-being of billions of people. It is a slow learning process often plagued by a lacking ability to learn from past mistakes. Given that trial and error has worked for a long time, and that the computational prerequisits to deal with large amounts of data are only available since recently, it is not surprising this revolution did not take place earlier. But it is about time we upgrade to the 21st Century.”

Indeed, one should fund an institute to carry out such research to extend the scientific method to the applications of social science. Doesn't that sound like a great idea? It certainly does to me! Though I am not exclusively concerned with the economic system, the more general goal of combining insights from the social, the natural and the computer sciences to better understand and manage the complex systems that shape our living together on this planet is the idea behind The Lightcone Institute (see also this post). If you happen not to have lost all your billions of dollars in the last months, I would greatly appreciate some start-up support.

Okay, before you throw up because I'm praising this essay too much, let me mention what I think the authors did not sufficiently emphasize. Throughout, the economic system is treated as being coupled to the political system only in the sense that the latter acts as a provider of regulations. The idea seems to be that scientists will gather, analyze and model the economy, and provide some advice for proper regulations.

That is a well meant, but very short-sighted attempt and bound to fail. You can't understand and update the economic system and improve its functioning without simultaneously understand and update the political system that is supposed to balance and regulate it. The cause of the problems we have is a severe mismatch in timescales on which the global economic system evolves and reacts, and the timescales on which our global political system evolves and reacts - the latter is lagging severely behind. To fix that problem the political system too needs a scientific investigation and advise on how to set up flexible institutions that are able to learn in a timely manner - instead of reacting with panic meetings only when things have already gone disastrously wrong.

Besides this, it might seem like a redundant point to mention, but the essay completely fails to at least address the central question what it actually is our economic system is supposed to work towards and who decides that - again the connection to the political system is missing. The primary purposes they mention (provide capital, provide a stable repository for our collective savings, provide credit to individuals) sounds perfectly reasonably, but are actually what I referred to not as primary, but secondary goals. I have no reason to question their desirability, but they are only relevant because of the benefit they bring in increasing the well-being of the people. That really should be the primary goal. And yes, scientists can help in achieving it.

244 comments:

1 – 200 of 244   Newer›   Newest»
Peter Turney said...

What we need is more Experimental Economics and Experimental Politics. What amazes me, in this survey of experimental research in politics, is how very little there is.

Bee said...

Totally agree. Controlled experiments are part of the scientific method, no? Thanks for the link, will have a look.

Anonymous said...

So the quants (physicists, mathematicians, etc working on Wall Street and elsewhere in the financial system) get off scott free then. Interesting change from getting blamed for helping create the mess. Plus, not a bad gig, they got paid a lot and get to keep it.

Economists, as a group, will probably be pissed to see another not-really-veiled statement that economics is not a science. Good luck getting them to cooperate.

The economist said...

What short memories people have. They tried that once, you know, to control the economy on a 'scientific basis'. It was called the Soviet Union.

Phil Warnell said...

Hi Bee,

Thank you for pointing out this most interesting and timely essay and for the critique you have offered. After reading it and what you have said there are a few things that bother me about it as in regards to addressing the current situation which of which I would point out a few. The first is that what you allude to is that we are not looking at some one celled organism’s growth in a petri dish or a climate change model yet rather the lives and futures of billions of people, which I feel needs to be addressed with science that somewhat exceeds the study of complex adaptive systems. It leaves one the impression of having some greater power above twisting the knobs to find tune some variables and there you have it, utopia achieved. It almost totally disregards that much of the world including its economy is shaped and driven by the ambitions and goals of thinking individuals that have wide differences as to what those are or what consequences they will have when viewed in the longer term.

Another problem I have with it also relates to people for what they are proposing is more study and research which I support yet it will do nothing for us in the near term or now. That is to say as it has been recognized that what has taken years to manifest has had its impact felt over the space of mere months or even days. So are they suggesting the world leaders are to go to the people and say don’t worry all will be fine for we have a crack team of scientist and academics working on it. I think we all realize that this will have little effect in the real world with the current faith, knowledge and attitudes of such things. I would say that for most of the people in the street believe (mostly wrongly of course0 it was these sort who has brought them to this precipice.

The truth is that what ever is recommended and undertaken now and into the immediate future will have to be based largely on what we currently know and believe. That direction and recognition is in the building and expansion of much needed and neglected infrastructure. Let’s hope this infrastructure will include what is seen not only as required in the past or today, but more so in the future. That would include the academic/scientific element.

Most important however I find it necessary that we first think/study more about the future as to what we want and if that can be practically achieved and be stable. I say that with anything that is achieved to be acted upon it has to be believed to hold promise. This can be done on faith or knowledge. This essay has demonstrated in the past with what is referred to as neoclassical economics this was largely based on faith (your invisible hand), which is now failing. This I agree should be reason enough for all to now turn to knowledge which they as individuals will not only simply believe in yet more importantly they to a greater degree understand themselves. In the end however, although I hate to admit it I don’t see how we will be permitted the time not so much the desire,need or money.

Best,

Phil

Uncle Al said...

Physics theorists directly caused global economic collapse by providing unfathomable frameworks for massive recursive leverage of uncollectable debts.

One presumes they were string theorists doing landscaping. String theory now boasts 10^(10^5) acceptable vacuum solutions (Michael Douglas/Stony Brook). One wonders if the silliness will stop at aleph(null) or simply arrive at the number of functions that can be drawn through a point.

No complex endeavor can be both centrally controlled and succeed if it requires compromise,

http://www.mazepath.com/uncleal/comprom.htm

Bee said...

Hi Economist,

Your comment is exactly the kind of ideological misinformed believe that caused the present problems to begin with. At the very least, you should read what I write before you comment on it. I wrote about the problems with planned economy here. Best,

B.

Bee said...

Hi Anonymous,

Maybe you should read the article before you judge on it. They have made very clear that economics is a science ("Does science, including economics, offer an alternative basis for conceptualizing a theory of economic markets?"), they are just saying it would benefit from a more interdisciplinary approach and we would all benefit if applied economics would actually take into account results of scientific studies. Best,

B.

The economist said...

B., I did read your article. It reminded me that [optimization] ... "should be regarded as a tool of conceptualization and analysis rather than as a principle yielding the philosophically correct solution." (Luenberger, Linear and Nonlinear Programming, 1984, p. vii). Best,
Economist

Bee said...

Ah. And what does this have to do with the Soviet Union?

The economist said...

Well, nothing really, but it also reminded me of the works of L. Kantorovich and I. Siroyezhin, who tried to formulate welfare maximization in non-monetary terms. Admittedly, their applications of optimization at the macroeconomic level were not accepted by the Soviet leadership. I stand corrected :-)

Bee said...

Hi Phil,

I agree with you that science of complex adaptive systems might not suffice to be the solution. It just seems to be the concrete field that people are currently putting their hopes into. And though I think this area might serve as a starting point, we will need to constantly have to create new models, tools, and methods, that nobody yet might even have thought about.

Most important however I find it necessary that we first think/study more about the future as to what we want

I just don't think this is ever going to happen. The future just comes, whether we think about it or not. This is why I am trying to emphasize, the point is not to predict the future and plan our path into it, but to configure the system such that we have a large flexibility to react and change the path we are on. It remains then the problem of incorporating long-term and large-scale goals, for which one needs a political system to determine and include them.

As far as time is concerned: There are definitely problems that need to be dealt with urgently, better yesterday than today. I hope that more people will come to realize this urgency. I agree with you though that time is of concern, for there are problems which will are just impossible to solve if one ignores them for too long. Best,

B.

Plato said...

GEORGE DYSON
Science Historian; Author, Darwin Among the Machines


Brown, Kauffman, Palmrose, and Smolin have hit the nail on the head. But is it the right nail? Is modeling the economy the means to a solution—or the root of the problem?

To me this is a very important distinction.

While rejecting idealogical opinion as fruitless to the conversation, it seems it is okay to look at the "existing economy" and just say it is a "complex adaptive system?"

There is a "fundamental issue" here and it is not an ideological one, but one of asking, whether we can create "something out of nothing" and use science to call this a work in progress?

I do believe something has to be done and I look forward to the proposals that will come out of this. :) I guess not being proved, like any young scientist one's opinion is not worth salt in this regard Bee.

Best,

Tkk said...

Science is a method to discover knowledge. It is the most powerful way yet devised to find reliable knowledge. But it is no more than that. It has almost nothing to do with economy. Economy is sum total of human, material and energy activities according to vary complicated and unquantifiable processes. Any honest economist will confirm that economics is not a science. Not even a little bit. No matter how dismal.

For fun, take a look at how science can view the current state of the US economy:

http://suddendebt.blogspot.com/2008/12/economy-as-schrodingers-cat.html

Phil Warnell said...

Hi Bee,

I must agree when you insist that planning is obviously much better then resigning our fates to blind trust. Yet whatever else this logical approach would give it must most of all be believed as to be wanted. As dor instance I heard over the radio while driving this morning that so far with this economic melt down we have seen 30 trillion dollars vanish from the global books. This made me stop to wonder, where did it go? Then I was reminded what was lost is what was believed things were formally worth and so the difference is bound between the balance of past expectations and the present reality that for now they were nothing more. So the science must bring with it the trust that things can once again be both worthwhile and of worth; for when it comes to economy’s perception is what most of all serves as being truth.

Best,

Phil

Plato said...

Stuart A. Kauffmann:"I believe there is no lowest level, basement language of a set of simple functionalities from which all higher functionalities that ever might be useful in the evolving economy can be derived logically."Reinventing the Sacred, by Stuart A. Kauffman, Pg 153, Chapter 11.

The Application of Interest

When the government borrows money from the Fed, and when a person borrows money from the bank it always has to be paid back with accrued interest. IN other words, every single dollar that exists must eventually be returned with interest. But if all money is borrowed form the central bank and is expanded by commercial banks through loans only what would be referred to as the principal,"The principal is the money supply," so where is all the interest for the money that is being charged?

No where. It doesn't exist.
Creating "something" out of nothing?

This was hand written into the equation. You are playing musical chairs to see who is going to get the short end of the stick.

It's not "about faith" but a reconfiguring of the applications based on the "Functionality of Money" in the economy, that we need to have a better look.

As long as the intentions are good from a scientific point of view, you can a least acknowledge what it is that you need to deal with. If you don't, you are only reliving the "current economy" with a different language?

Best,

Plato said...

Oh and this applies to politicians as well.:)

So consider then, the physics and it's relevance(?) and relation to the economy.

The analysis of the harmonic oscillator exhibits the paradox that there is almost no ideal, or perfect, harmonic oscillator in nature or by manufacture, yet it is a system of profound importance in mathematics, physics and applied science. See: Harmonic oscillator

IN the interest :) of "stimulation of the economy," the first rule of thumb should be, not to allow interest to be charged on the money allocated to the banks for distribution?

That's a question.:)

We are all not perfect either, yet, we can strive toward a understanding of what pervades "all of society," and what it entails in the most likely case of a "chaotic theory" based on the fundamentals of "using money as a force."

Of course we would like to encourage innovation and creativity when it comes to making life better for everyone. What is the reward here? Seniors who having given there life to the economical basis of society, what value to assign this money to ensuring that the pension is funded and also the sort given to the future, for the rest of their lives a security.

MOney to build and create a infrastructure that does not discriminate between the homeless and those that have, when there is a viable recognition that everyone on this planet can be housed and feed.

That money can now be given to ensure new energy resources to create electricity which can be attached to every home while recognizing the infrastructure to producing electricity is not just a corporate description to profit, but one which will provide for, and allow some resemblance of cost to be averted to the detriment of living a comfortable life, using what is available and will provide comfort what ever the conditions of temperature variation.

YOu cannot allow "scientists or politicians" to be used to reinforce what is "currently wrong" with this economic situation.

Best,

Andrei Kirilyuk said...

In the above discussion between Bee and The economist, I think the latter is basically right, provided one understands/replaces “Soviet” in his remark by a more general notion of “dirigisme (administrative) economy/society”, which doesn't need to be particularly “proletarian” but does live in a regime of “they (on top) decide and we (ordinary citizens) follow”. It doesn’t need to be any explicit dictatorship (although minority-controlled, imposed rules are always there!). What is essential is the distance between (basically passive) “masses” and (uniquely active) “top decision makers”. It clearly exists in any unitary system version, its most “democratic” cases including. But it's precisely this kind of structure that creates problems known in all previous societies but becoming critically high, globally destructive only today, in our apocalyptic epoch.

In that situation, instead of proposing any provably consistent problem solution (that's what is needed, nothing else!), our best “intellectuals”, after having heavily contributed to this very “economic crisis” and yet more destructive “end of science” (they were there all the time of their clearly seen emergence, at their elitist positions!), find nothing better than to propose but another, yet more dirigiste approach where now they, the “truly very best” ones will decide and others will follow their “advanced-study” solutions (where are they, by the way, apart from banal appeals to everybody to be better than they are borrowed from the most populist political speeches?)! Don't even try your “easy” argument of “democratic discussions”: if they're not efficient even in the current “developed” political-economic-media-science system (yes, all your top “think tanks”, both dependent and independent, with practically unlimited support, as well as internet-open “democratic discussions” were there all the time, and the result?!), then why should they be efficient for a much more “intellectually closed”, “professionally sophisticated” version of the same administrative system? Not having enough of “Calabi-Yau manifolds” and other “transformative hermeneutics of quantum gravity” that continue to kill any development possibility in physics and related technology? Now, after having definitely buried fundamental physics, it's of course just the right moment to try it all on the global scale, with the same key participants, to end up definitely with that civilisation threatening the health of the planet!

Put it basically, when you say “social” with such pathetic emphasis, does it occur to you, with your “social-democratic heart”, that it directly means just interactive, creative activity in those poor, multiply abused “masses” in the first place, rather than elitist games of yet another “advanced-study institute” (never enough of them, with all their widely announced “inter-disciplinarity”!) proposing no problem solution at all but just slightly modified verbal exercises?

Conclusion: these new old “intellectual forces” (where “intellectual” is their own estimate) do not propose any consistent, provably efficient problem solution (and they can't, according to their long-period destructive results, with maximum practical possibilities they had) and moreover, even any kind of such “elitist dirigisme” kind of activity can not be efficient in the current, really critical situation (much deeper crisis than usually acknowledged!), as it only amplifies, rather than eliminates, the key deficiency of the dominating unitary system, in both economy-politics and science itself. Taking the latter alone as a relatively independent subsystem, why not to recall the ancient “physician [and physicist!], heal thyself!”? Intelligence is proven exclusively by real (practical or fundamental) problem solutions (i.e. the resulting real progress), not by “nicely packed” promises and pretentious speculations about “possible” solutions (the dominating practices of today's “officially great” science).

Sorry for it sounding “negatively” but everybody apparently agrees that the situation is at least “truly serious” (no time for complacency), while what is most important, the genuine problem solution does exist but can hardly be realised just because of that self-killing property of the unitary system operation which is at the origin of its current ultimate “jam”: it's only those who are “already on top” (and thus can't solve the appearing problems par excellence) that have the real, exclusive power to act, giving the repeating case of “ambitions over abilities”. Such a system is always catastrophically unstable, irrespective of details (I hope it's clear why). The special feature of today's situation is that this typical instability acquires global and ultimately deep character, leaving no “outside” possibilities to have a “natural” issue from crisis (“conjuncture will change by itself and in the meanwhile we'll grab our 'intellectual-help' profits”). Only the true, respectively deep change can solve the problem (all of them!), which is far from anything “economical”, or “political”, or “technical”, or even “interdisciplinary”. We have a serious problem, friends, and the problem is you :). Very basic human attitudes and dimensions should change (one can specify how exactly!), without which any “scientific initiatives” will only deepen the crisis they contributed to, very “professionally”. Why not to start e.g. by trying an honest, merit-based selection of ideas, instead of non-stop reproduction of corrupt, profit-driven “peer-review” fuss? Who can properly realise it remains the same, “cursed” question... Some basic motivations should probably stay unexplained, after all.

Bee said...

Sure, Andrei, we know by now that we are all dumb and have no clue, and you have the solution to all our problems. Thanks for the reassurance.

Andrei Kirilyuk said...

Yes, Bee, this is one of the things that should change: what really matters is to have a solution, rather than sticking upon who proposed it (and thus whose "private property" it is, the true basis of today's "intellectual" activity, alas). I thought I did properly emphasise it: the problem in question is not that somebody is "dumb" but that a way to have problem solution is effectively blocked (the result would be the same - but more sad actually - if we consider those who block it to be very intelligent). If you want to put it "rough" and "personal", here you are: even if you're dumb now, the real problem solution, whoever proposes it, opens a (unique!) real way for everybody to become more intelligent, to progress, in various aspects, by participating in that genuine, provably winning solution realisation. I would add that being "intellectually limited" should normally be taken easy, on the "self-esteem" side, because one is always limited already with respect to oneself but understanding essentially more (e.g. after genuine problem solution is recognised). In other words, progress is more important than any its fixed, however "high" level and one should rather be open to its possibility. In a way, even today's Western civilisation problems on the whole can be formulated in terms of it being too fixed at its attained level (relatively high indeed) and "arrogantly" neglecting the necessity of further, qualitative progress, especially when it comes "from the outside" of its "golden", self-choosing and self-praising "elites". Move on or disappear, want you?

LoboGris de Lothlórien said...

You should read Human Action, by Ludwig von Mises.

He explains that economics can't be approached from scientific method. And it is easy to demonstrate this point and why socialism has failed. The economist is right, they want to reinvent marxism. And this is not an ideological comment. This is determined from a deep thinking about human action.

So, economics depends on human action, that is, the individual searching, development and implementation of means to reach the own interests, and not from mathematical equations and equilibrium models.

The solution to solve the crisis is to avoid state intervention and central planning. Crisis is originated on central planification of monetary politics, that is, the central banking system, and protectionism of bad market practices. Without intervention, non profitable actions dont survive. But the crisis is signed by protectionism of practices that lead to losses. This mechanism multiplicates and inflates these practices and at some moment the bubble explodes, and the crisis takes place.

Read Murray N. Rothbard's The Mistery of Banking, which is a good introductory study on the problem of central banking.

Also, there is a misunderstanding about regulation. Market is based on regulations. But the problem is not «regulate vs not regulate». The problem is «monopolic regulation vs regulation subject to free competition». That is, again, central planning versus free competition.

I think these people in the article are not aware that there is already a theoric stream that demonstrates that their effort will be useless, or worst, will lead to a kind of new socialism.

Cheers

Bee said...

Hi LoboGris,

The solution to solve the crisis is to avoid state intervention and central planning. Crisis is originated on central planification of monetary politics, that is, the central banking system, and protectionism of bad market practices.

Unfortunately, this thinking is exactly what got us into the current crisis. There has not been any independent governmental risk rating. Instead, this rating has been left over to "deregularized" agencies, who had incentives to give good ratings because the banks paid for it. Yes, you see, that is what happens if people work towards the secondary instead of primary goals. And once and again, it has been state intervention that saved the day, as has been the case dozens of times before. I highly recommend you read this before you spread comments like this.

On the heart of Marxism is putting the means of production into the hands of the collective. This has absolutely nothing to do with what was said in this essay. Neither did anybody speak of 'central planning' except you. Best,

B.

LoboGris de Lothlórien said...

A punctual article explaining this crisis phenomena by Jesus Huerta de Soto

Finnancial Crisis and Recession

Bee said...

Hi Tkk,

Any honest economist will confirm that economics is not a science. Not even a little bit.

Well, maybe you should go and ask some, because that is definitely not the impression that I got.

Possibly you have a different understanding of what science is. According to what you wrote, there is simply no such thing as the 'social sciences'. Let me give you a very simple example how we benefit from knowledge in the social sciences. PI's building has been designed to encourage interactions to foster interdisciplinary exchange. There are people studying which spatial designs are useful for different working environments. I once heard a talk about this. It is a very straight forward model building, trying to identify the relevant parameters (like the line of sight, dead ends etc) and making recommendations. As far as I can tell, it works very well in our building. Maybe a bit too well, but nothing will ever be perfect, especially not when humans are involved. Similarly, one can ask what decision making system works best for certain purposes, or what economic system works best towards certain goals under certain conditions.

The scientific method in economy or politics can very well work. Surely not to such an accuracy as in the hard sciences, but surely better than is now the case. Consider that a lot of argumentation is lead in a vague sense on the basis of "what we did then" and "worked" or "didn't work". It would be useful if this was not a matter of rhetoric and believe, but backed up by some scientific standard, keeping track of the assumptions and the limitations of such claims.

Best,

B.

LoboGris de Lothlórien said...

Hi Bee,

«This PERI Working Paper argues that the ultimate cause of the current global financial crisis is to be found in the deeply flawed institutions and practices of what is often referred to as the New Financial Architecture (NFA)»

about this comment in the abstract of the article you refer to. I will take the time to read it all so i can answer to punctual arguments, but if all the article can be resumed in this first sentence then the article is a loose of time.

It is not necesary a problem of regulation versus deregulation, as i said in my first comment. A complete system can be completely deregulated, but can be very protected instead.

When the federal reserve lowers its rates, it is protecting this finnancial activities with fiduciary money, that is, new emmited money, at very low interests, which feeds speculations and saves practices that without this help would colapse much early, when it can't be so dangerous.

If they are bad practices, then, ¿why protect them? ¿why don't left them to colapse as early as possible?

If this activities are naturally profitable, why the federal reserve need to rescue them with hugh fiscal resources and low interest rates? Again, why don't left them to colapse?

In an unhampered market, any economic activity that is not profitable quickly dissapears. But this financial practices are being feeded since the existence of central banking.

And protecting them, as the government always does, it is the origin of the next finnancial crisis.

Bee said...

Hi LoboGris,

It is not necesary a problem of regulation versus deregulation, as i said in my first comment. A complete system can be completely deregulated, but can be very protected instead.

I agree.

Best,

B.

LoboGris de Lothlórien said...

«PI's building has been designed to encourage interactions to foster interdisciplinary exchange. There are people studying which spatial designs are useful for different working environments.»

But we can develop controlled experiments with this system and isolate factors. This is not the case of an economic system.

You can call this class of experiment a "social science" experiment, but this is not relevant. We can't deduce that economics can be subject to empiric method just because you call it a "social science" and because you call this experiment a "social science experiment".

Indeed, you can't apply the same method you apply to this experiment, to an economic system.

Give me an example of an economic law and how you can test it empirically, and we can discuss this point

LoboGris de Lothlórien said...

It is not necesary a problem of regulation versus deregulation, as i said in my first comment. A complete system can be completely deregulated, but can be very protected instead.

«I agree.»

And this is the case of the finnancial system, as i described above.

Then, why regulate and give government more power? ¿why not better unprotect and this way cut government powers?

Market has proven all the time very efficient to depurate unprofitable practices. So, don't make these bad practices profitable.

Bee said...

Hi LoboGris,

But we can develop controlled experiments with this system and isolate factors. This is not the case of an economic system.

Unproofed claim. Also, as I said above, no social science will ever be as 'controlled' as, say, physics. That doesn't mean it is impossible to approach an arising question scientifically.

you can't apply the same method you apply to this experiment, to an economic system.

Our economy is a real world system. Its working has results that can be observed and tracked. Changes in its structure might lead to changes in its working. This can be observed and tracked. Circumstances under which data has been recorded can be tracked similarly. As I wrote in the post, I am not an economist, and don't know what the relevant factors are. Maybe nobody knows. Maybe we're totally poking in the dark - and if that is the case, even worse that the well-being of billions of people depends on a badly understood system. What I am just saying it is possible, at the very least, one should try.

As I have expressed many times, I do not think that the aim can be to predict the system's evolution, but to understand the feedback process.

And this is the case of the finnancial system, as i described above.

I don't think anybody can presently exactly tell what the origin is of the crisis and what the way is to fix it. I expressed my opinion above. Apparently you have a different opinion. I'm not an economist and my opinion is not well backed up, so let me just summarize that there are different opinions. This only proves my point that the question needs a scientific examination.

Market has proven all the time very efficient to depurate unprofitable practices.

And we feel presently the consequences of that.

Best,

B.

LoboGris de Lothlórien said...

«Unproofed claim.»

Wrong, It is prooved by logical means. This is a complete theory that social scientist had ignored for political and ideological reasons (see for example, Mises, Epistemological problems of economics ). Remember that the scientific method has also been developed only by logical considerations, and not other way. And remember that nothing can be proofed by means of scientific method.

I expect you won't say that scientific method can be prooved by itself...

Scientific method is a contrastation method, not a formal one (See Karl Popper, The logic of scientific discovery). That means that scientific method contrasts the experience, the theory under questioning and the theoretical backend, in a context that an experiment that can find an inconsistence between all them can be at least developed by means of reason. If this is not posible, then it is not science, and can't be. And this is the case of economics. This is called the demarcation criteria.

«Also, as I said above, no social science will ever be as 'controlled' as, say, physics. That doesn't mean it is impossible to approach an arising question scientifically.»

Again, you can't deduce that, because certain social phenomena are suitable for scientific method, all the social phenomena are.

What defines the suitability of scientific method is not the label "social science", which, by the way, includes a very heterogeneous set of phenomena, not defined by the methodology but by the arbitrariety of social scientists. What defines the suitability of scientific method is the demarcation criteria mentioned above.

«Our economy is a real world system. Its working has results that can be observed and tracked. Changes in its structure might lead to changes in its working. This can be observed and tracked.»

Observable does not mean that scientific method can be applied. We can always observe a fact A and a fact B, but we can't observe a causal relation between A and B. Never, even in physics. Causal relations are mental tools --theory-- that works or not in the context of the given experience and theoretical backend.

«Maybe we're totally poking in the dark - and if that is the case, even worse that the well-being of billions of people depends on a badly understood system. What I am just saying it is possible, at the very least, one should try.
As I have expressed many times, I do not think that the aim can be to predict the system's evolution, but to understand the feedback process.»

Indeed, it is possible to understand economics, but not by means of scientific method. This issue has been logically proved.

«I don't think anybody can presently exactly tell what the origin is of the crisis and what the way is to fix it»

Yes, it is.

«This only proves my point that the question needs a scientific examination. »

This does not prove anything. You first has to prove that your object of study is suitable for scientific examination or not.

"Market has proven all the time very efficient to depurate unprofitable practices."

«And we feel presently the consequences of that.»

Please proove by scientific means and give me a way to develop an experiment that could show that those consequences you are talking about are originated in the market and not in the interventionism.

This is the first step. If such an experiment can't be conceived, then there are no means to apply scientific examination for this problem.

Anonymous said...

I'm sorry, but its really a terrible essay which misportrays the field and misunderstands its core principles.

Two statements are glaring examples: Regulation is limited or unnecessary because markets find and stay close to stable equilibrium where they operate most efficiently, leading to maximally stable economic growth, whereas regulation only leads to slower growth...

ii. Everything has a value or price, at all times, that can be uniquely determined by some definite objective process.


Each of those is a misrepresentation of core economic theory, and neither is (as claimed in the article) a precept of neoclassicism.

The ideas misrepresented are these:

First, the value of a thing is a consequence of (a) the cost of production, and (b) the sums of each person's willingness to purchase the thing at a given price.

Second, the value of a thing cannot be determined objectively absent a consensual (i.e., market in the absence of price controls etc.) transaction.

And third, no attempt to displace markets can ever consistently result in a superior allocation of either goods or capital than the market would achieve on its own.

Each of these ideas is straightforwardly demonstrable from first principles (the second two are a consequence of the subjectiveness of individual preferences), and are supported by a century's worth of uncontradicted empirical evidence. Moreover, all of this has been known since the 1930s.

Some more examples: Prices are set by a deterministic process of joint maximization of the preferences of all involved in a trade. It is neither an assumption of neoclassical economics, nor economics in general, that markets are deterministic. Rather, the conclusion of economics generally (including neoclassical economics) is that markets always reach short-term equilibrium absent regulation and always move toward long-term equilibrium (which is constantly changing in any event).

Participants in markets act rationally to maximize fixed and known preferences described by definite and time independent utility functions. Nonsense. The neoclassical assumption is that preferences are not known absent market behavior, and that they change over time. Market behavior reveals preferences which are not otherwise determinable. This is sometimes simplified in entry-level textbooks, which seems to be as far as the authors' study went.

Everything has a value or price, at all times, that can be uniquely determined by some definite objective process. This includes contracts that refer to prices of fluctuating variables at future times. This is completely false, in every respect. Economics tells us that values cannot be determined absent market behavior. To the extent the authors are attempting to refer to the Black-Scholes theory of options pricing, one of the components of that formula is volatility, which is not determinable in the present. The magic of Black-Scholes is that you can infer volatility from options prices and vice-versa, not that it allows you to calculate precise "true" values of contingent contracts.

More generally, the authors confuse the science of economics (and in particular the neoclassical school of microeconomics) with the more recent invention of quantitative financial engineering. This is a serious error because, among other reasons, the gist of financial engineering (i.e., the development of the derivative contracts at issue) is to maximize values in a market distorted by a pre-existing regulatory structure. (E.g., the value created by CMO's was by the conversion of poorly rated debt instruments into instruments which could earn investment grade ratings from the ratings agencies are therefore be legally sold to a wider group of investors).

I could go on, but the defects in the essay are so pervasive there would be no end to it.

It is difficult to put into words just to what serious extent the essay is garbage. I will try: It is not just garbage, it is precisely the same garbage argument that has been launched against economics since the classical era, and has been repeatedly rebutted in the same ways each time. The authors are attempting (again) to revive a debate that ended definitely in the 1930s. In that way, it demonstrates a disturbing frivolity -- the simplest research would have revealed to the authors that their arguments are not just wrong, but have been demonstrably wrong for more than 70 years.

Bee said...

Hi LoboGris,

Okay, I understand you are saying economy is not a science, which has been proved "by logical means" and that no scientific method will ever apply to anything that can be said about the economy. I guess any winner of the Nobel Prize in Economy will be unhappy about this.

Let me put it like this: I see the task of science to provide models that describe the world we observe. The only criterion for these models that matters is whether they are useful. What I consider a scientific method is an ordered way to keep track of the models and their usefulness, which implies understanding among other things the limitations of these models and the assumptions. Usefulness can mean different things in a different context, that might be useful for prediction, understanding or managing. Note that I didn't say anything about experiments. Experiments are great if possible, but a model can be useful even if no experiments can be designed. If that doesn't agree with Popper, my excuses. I am more with Feyerabend. Maybe we just disagree on the terminology of 'science' and 'scientific method'.

I further understand that you seem to be saying the cause of the present crisis is not lack of regulation, but overregulation. This is interesting given that even Alan Greenspan concluded he made a mistake assuming that deregulation and organizations following their self-interests would lead to desirable outcomes. You further seem to be saying that the markets regulate themselves so one should allow for this possibility. My reply to this remark of yours was supposed to say the markets might indeed regulate themselves eventually, just that this might have side-effects, which is what we are experiencing now, and I could very well do without it. I would not call that a stable operation, and I think I am not the only one who would very much appreciate one. You further seem to advocate then if the government is faced with such a lose-lose situation of an impending complete market failure that one should just let the market collapse and see what happens. That would certainly have been interesting, but honestly, I am glad you are not in a position to make such decisions.

Best,

B.

Bee said...

Hi Anonymous:

Thanks for the interesting comment. As I said previously, I don't know very much about economics, so let me just ask some questions for clarification.

First, you are saying the authors misrepresent neoclassical economics. That might very well be, I'm not in any position to tell. However, you conclude from this that the author's arguments are wrong and I don't quite see the connection. Could you maybe clarify which argument is wrong? It seems to me they have mostly advocated to take economy more seriously as a science - in an applied manner - and that an interdisciplinary attempt would be fruitful to gain new insights.

In particular you write "the conclusion of economics generally (including neoclassical economics) is that markets always reach short-term equilibrium absent regulation and always move toward long-term equilibrium (which is constantly changing in any event)" which I think is a point that the authors explicitly question as for whether it provides a good description of the actual economy. What do you think of this? Do you think the present economic theories do allow us to satisfactorily understand the economic and financial system and that an approach as the one suggested would be counterproductive?

Best,

B.

Tkk said...

Bee:

"According to what you wrote, there is simply no such thing as the 'social sciences'. "

You are of course right. I was just being 'dogmatic' in the spirit of fun.

There are all kinds of soft sciences - sociology, psychology, political, economics. Even western music can be studied as a science due to its intricate logical structures and their relationships to human psychology.

I should more accurately refer to the mechanics of economics as science. But, in the end, it is political decisions and social behavior of the mass that control it. These not subject to scientific analysis.

Bee said...

Hi Tkk,

in the end, it is political decisions and social behavior of the mass that control it. These not subject to scientific analysis.

One could argue about that "in principle" but I agree with you in practice. However, that does not mean it is not possible to describe the economical (political) system under certain assumptions. One of these assumptions certainly is that the people who set it up don't decide to work against it, which is always in their possibility. Like, we could decide from one day to the next to just ignore money altogether. Under certain circumstances that might indeed happen, but it is not generally in many people's interest and so doesn't happen as long as the system works reasonably well.

As I have said earlier many times, the task is not to constrain people's decisions, but to provide an environment in which the decisions can be made and executed most efficiently. It's like you can set up a management for a company, and you can either do it such that the company runs smoothly, or such that nobody never really knows what's going on and is in a state of constant confusion. That does by itself not affect the individual decisions people make about what is desirable and what isn't, but how well negotiation, organization, and administration allow to turn these decisions into reality.

Similarly for the economic system. You can set it up such that it works for us, or that it hinders progress. It is not a natural system, it is human made, and we should make sure that it serves our purposes in the best possible way. The first step towards this must be to understand the system and its feedback processes. Best,

B.

Anonymous said...

First, you are saying the authors misrepresent neoclassical economics. . . . you conclude from this that the author's arguments are wrong and I don't quite see the connection. Could you maybe clarify which argument is wrong?

All of it is wrong.

The authors take several concepts that are core to (non-Marxist) economics generally, misstate those concepts, mistakenly attribute them specifically to the neoclassical school, then erroneously link (their misunderstanding of) the science to financial practices they further misunderstand, etc. All of it is wrong.

I want to be very clear about this: The mischaracterization of economics here is not new. Someone makes the same arguments, based on the same misunderstandings, in every college Econ 101 class.

I gave some examples in my first post, so I'll address yours.

In particular you write "the conclusion of economics generally (including neoclassical economics) is that markets always reach short-term equilibrium absent regulation and always move toward long-term equilibrium (which is constantly changing in any event)" which I think is a point that the authors explicitly question as for whether it provides a good description of the actual economy. What do you think of this?

It provides an accurate description of what it is meant to describe, which is the operation of markets and, since our system is still principally capitalistic, yes, it is a good description of the actual economy.

I think the confusion here may be in the term "equilibrium", which has a subtly different meaning in economics than in other sciences. In economics we speak about short and long term equilibria. The theory of short term equilibrium (simplified) tells us that in a free market (no monopolies, price controls, etc.) the price of a good will be the price at which the amount of that good that people are willing to purchase equals the amount of that good that is available for sale. In other words, there are no (or few) shortages or surpluses.

In the long term, however, capital can be reallocated (factories can be built, etc.) so supply changes. If you held technology, and tastes, and a bunch of other things, constant, the economy would eventually reach a long-term equilibrium at which capital was allocated to generate the greatest possible value. (Putting aside more complex subjects such as the declining marginal utility of money.) But the economy never reaches long-term equilibrium, because tastes change, accidents happen, technology changes, governments change, no economy is perfectly free, etc. etc. The economy is always moving toward a long-term equilibrium but never reaches it because the equilibrium point is in a constant state of change.

Basic (non neo-classical) economics also tells us that, because tastes are subjective and cannot be determined absent market transactions, it is impossible to allocate capital in a more efficient manner than the market would absent intervention. This has also -- repeatedly, consistently -- been proven true empirically.

Do you think the present economic theories do allow us to satisfactorily understand the economic and financial system

Is our current understanding "satisfactory"? I'm not sure what that means. Economics is a difficult subject because the data is sparse and always lags. The core concepts of economic theory are solutions to this basic problem of inaccessible information.

Its kind of like the uncertainty principle -- you can't know exactly what's happening when its happening, you can only sort of part-way figure out what happened afterwards.

Actually, the problem for economics is much worse, because the missing information is inside human minds -- it is preferences the people themselves may not even know they have (until their actions on the market reveal those preferences), and decisions they may not even remember their reasons for, even if they were willing to be honest about it.

and that an approach as the one suggested would be counterproductive?

There is no approach suggested in the essay. "Let's use more math in economics and consider the complexity" is an insult to practicing economists who have been thinking about these issues in much greater depth than the essay authors for decades. How would you react if I walked into a particle accelerator control room and said "the reason you can't find the Higgs boson is that you haven't really thought about the human factor. Let's all get together and try to agree on what the Higgs boson means to each of us as people."?

As for the suggestion about regulating economic models... Private actors select their own economic models. And if there is one lesson of economics, it is this: Regulations are far more likely to be the source of economic problems than their solution. This has been demonstrated so consistently over so long a period that any proponent of new regulations bears an extraordinary burden of proving that their proposal will do less harm than good.

I remind you of one of the points in my post: CDO's were created because they solved a problem created by regulation, which is that many investors cannot legally invest in financial instruments that are not rated "investment grade" by the ratings agencies. (More accurately, the instruments can't be sold to most investors.) This is so even though a bundle of non-investment grade instruments, after accounting for defaults, will consistently produce higher returns than an equally priced bundle of investment grade instruments.

The regulation at issue created a discontinuity in the market. Because low rated investments were unavailable to a wide market, they sold at a price that was low relative to their risk. The market solved the discontinuity (this is another lesson of economics: the market always finds a way around any price or sale restriction) by packaging bundles of low-rated instruments together in new instruments that could obtain high ratings and be sold to a broader market.

None of this is to suggest that there was not widespread poor decision-making. But there is no reason to think that it takes any tool beyond those available to accepted mainstream economic science -- such as moral hazard -- to understand what happened.

Anonymous said...

Two more points while I'm sufficiently worked-up:

First, the calls for "regulation" are seriously misguided. Apart from credit default swaps (and a few other narrow classes), all of the derivatives implicated in the financial crisis are already pervasively regulated by the federal government.

Second, its really a mistake to say that what's lacking here are good economic theories. Our economic theories were good enough to tell us -- and did for years -- that the housing and stock markets were grossly overpriced. What they could not tell us (and this is crucial) is how that would turn out, or when.

The example of Long Term Capital Management given in the essay is excellent, because the authors so severely misunderstand it. LTCM's business was betting in favor of economic theory, which said that price discrepancies in the market were irrational and would disappear over time. LTCM was right. The bets that led to its downfall turned out in LTCM's favor. The problem was, in the months it took for that happen, LTCM was rendered insolvent when those price discrepancies expanded.

Another example: A well-known fund manager in the late 1990s repeatedly bet that telecom and internet was overpriced. Of course, he was right. But after years of sustained losses, he folded in early 1999.

And a third, to hammer home the point: Some journalists are now hailing as geniuses the many people who bet that the mortgage market was grossly overheated and that credit derivatives were overpriced. Those people made a lot of money. But there was no certainty they would have. They could have easily turned out like LTCM or the fund manager described above. And a lot of people in the meantime made a lot of money betting FOR credit derivatives. Those people weren't so dumb, even considering the crash.

What the authors seem to be asking for is an economic theory so precise that it doesn't just tell us when prices are wrong, but also what the "true" price is, when it will be reached, what will happen, etc. There can be no such theory, first because there is no "true" price; what you'd be trying to predict is precise human behavior. And second, because as soon as there was such a theory, human behavior would change to take account of it. (The arbitrage would close.) So the theory would be immediately rendered wrong.

The economist said...

"How would you react if I walked into a particle accelerator control room and said "the reason you can't find the Higgs boson is that you haven't really thought about the human factor. Let's all get together and try to agree on what the Higgs boson means to each of us as people."?"

that about sums it up nicely

LoboGris de Lothlórien said...

I'm agree with anonymous in practically everithing.

Also, bee, i'm not saying that economics is not a science. Science is more than that called "scientific method". Logics and mathematics are also called sciences, and its results are exact. But it does not use the scientific method, and can't be applied with them.

What i'm saying is that scientific method can't be applied to economics. Reasons: demarcation criteria can't be applied. ¿why?

I will use Anonymous words to explain this:

«There can be no such theory, first because there is no "true" price; what you'd be trying to predict is precise human behavior. And second, because as soon as there was such a theory, human behavior would change to take account of it. (The arbitrage would close.) So the theory would be immediately rendered wrong.»

About market as cause of present crisis, i think Anonymous gave much complet set of arguments against this, so i let you follow the discussion with him on this issue.

But i want to ask you something again, that hits directly to your perspective of the science (does not matter what popper or feyerabend says, i did not refer to Popper to give you an authoritative source, but instead to refer to an example of the logical bases of scientific method. Also, Feyerabend never abandoned the logical considerations to reach its perspective, neither the polemic feyerabend-popper has nothing to do with what i'm trying to explain to you)

You say that unregulated market is the cause of the crisis. And you say that scientific method is appropiate to understand an economic system because we have all elements you allege that are needed to do so: an observable system. So, then, show me on which scientific considerations, based on your own perspective of scientific method, you argüe that the actual crisis is a result of market unregulation. If you are so sure that market is the origin of the crisis, then you surely have prooved it scientifically, that is, with your own perspective of scientific method.

Lets discuss ourselves about this point and left away Popper and Feyerabend.untani

Bee said...

Hi Economist,

Though not without comic, your comment misses the point. Nobody ever said economy should be done by physicists (it would certainly be a disaster). Neither does it conceptually make sense what you are saying. While there are good reasons why for example the science of networks or complex systems should play a role for economy, I can't see no reason why psychology should play a role for elementary particle physics (though possibly for the process of discovery itself). Best,

B.

Bee said...

Hi Anonymous:

Is our current understanding "satisfactory"? I'm not sure what that means.

It means there is no need to improve it.

is no reason to think that it takes any tool beyond those available to accepted mainstream economic science [...] to understand what happened

To summarize what you are saying yes, economics is satisfactory and is not in need of any of the suggestions the authors make. Your analysis of the problem is there has been too much regulation on the market, you are saying this is backed up by the current state of science.

Now then let me ask you, how do you think the present crisis could have been avoided, and how do we avoid it in the future given that you think our knowledge is so complete and the outcome so undesirable. Or do you maybe think it is a desirable outcome? To make this really clear, I am *not* asking for an operational advice (like less or more regulations etc), but how to get the scientific knowledge - given that it exists - in the right place and to practically implement it. This is really the problem I am concerned with. The way I see to get there is, similarly to what the authors suggest, an interdisciplinary approach towards the questions we are facing and an active connection to policy making.

There is no approach suggested in the essay.

I think one could summarize what they are suggesting is roughly to "involve economists, mathematicians, physicists, biologists, computer scientists and others working together to make a more stable economic system". So let me ask you again whether you think such an approach would be counterproductive, or are you just saying it is in your opinion unnecessary?

Best,

B.

The economist said...

Hi B.,

to put things straight (and to avoid being accused of plagiarizing), I was merely quoting Anonymous.

As for that other thing, I think both physicists and economists could do with some psychological help. But that is only a joke, really. ;-)

Best

Bee said...

Hi Economist,

Yeah, I just noticed, sorry, I often read my emails in time-reversed order, should stop doing that.

I think both physicists and economists could do with some psychological help. But that is only a joke, really. ;-)

:-)

All irony aside, if you read this blog, you know I've been saying for several years that with the growth of the scientific community one has to pay close attention that sociological factors don't affect its processes. Needless to say, most of my colleagues think I'm the one suggesting we need to think about the human factor to understand the Higgs ;-) When what I am saying is actually a decades old topic of investigation in the sociology of sciences. It's just another case where knowledge is not integrated where it belongs. Best,

B.

Bee said...

Hi LoboGris:

If you are so sure that market is the origin of the crisis, then you surely have prooved it scientifically, that is, with your own perspective of scientific method.

Lets discuss ourselves about this point


You are grossly misrepresenting what I wrote. What I was saying in very contrast to what you state is that in my impression there is not currently a good explanation for what happened and why, or what to do now. It doesn't impress me much that there seem to be two people in this blog's comment section who believe otherwise.

show me on which scientific considerations, based on your own perspective of scientific method, you argüe that the actual crisis is a result of market unregulation

I never claimed I had done anything in this regard. I am just saying it should be done. Maybe you are right and regulation is the problem. Maybe deregulation is. I'd leave that up to scientists to figure out. The point is I think we would all benefit if we wouldn't be subject to politicians' guesswork about what might or might not result in what effects. It seems to me what you are basically saying is it's as good as it can get. Well, I disagree.

and left away Popper and Feyerabend

Well, you brought it up. I explained above in which sense I think the scientific method applies.

Best,

B.

LoboGris de Lothlórien said...

«You are grossly misrepresenting what I wrote. What I was saying in very contrast to what you state is that in my impression there is not currently a good explanation for what happened and why, or what to do now.»

So, bee, which is your criteria to get that impression?

«I am just saying it should be done. Maybe you are right and regulation is the problem. Maybe deregulation is. I'd leave that up to scientists to figure out.»

I'm just questioning that point. The question is, how do you imagine science as you see it can do anything? Now i'm talking about the problem of regulation vs deregulation not at the level to solve in this discussion what is the better, but something prior to that: how science, as you see it, can answer this question? If you say "I'd leave that up to scientists to figure out." then

1) it is because in someway you think that you have clear the methodological foundaments of science and in its basis can answer this question. So, how?

2) you are not aware that this problem has been solved before, and not by politic or ideological considerations, but by consistent methodological ones.

«The point is I think we would all benefit if we wouldn't be subject to politicians' guesswork about what might or might not result in what effects.»

That is not an argument to resort to scientific method. You have first determine and prove that scientific method is suitable for answering this question. Other way, the results you (or a group of scientist) claim to be scientific, are a sham. Science is not defined by "what a scientist does".

«It seems to me what you are basically saying is it's as good as it can get. Well, I disagree.»

No i don't. I'm not saying left the problem to politicians guesswork. I'm saying that

1) scientific method is not suitable for economics

2) methodological foundations of economics has been long stablished, including point 1.

3) the essay, the people involved in that investigation, and seems you too, ignores completelly these facts.

And to ignore this is not definitivelly a scientific proceeding.

To make science is not simply to present an investigation with results. Before any investigation, you must carefully proove the foundaments of your proceedings.

Prior to investigation, method has to be clearly exposed.

For example, i can present an investigation that results in the fact that the direct cause of global warming is the increment in CO2 in the atmosphere. In my investigation, i gathered information of both variables and i observed a big correlation in the historic variability of both variables. Is that enough in an investigation?

No. You must first expose your foundaments. The implicit foundaments are: if there is a correlation between both variables, then this proves the point.

But, this foundament really proves the causal relation? ¿what if the causal relation is the inverse? ¿what if, instead, the increment in C02 is the consequence of higher temperatures? ¿or what if both variables are really consequence of a third unknown variable? ¿how will you discard these alternatives in your investigation?

But if we guide by your criteria: it works, we can say, well, it works, my model predicts that more C02, more temperature, and these are effectively the observation results.

This work has to be performed previous to investigation. And we can't say simply "left them to scientists". A methodological approach about the problem has to be developed first. We can't say "scientific method works for this set of observable phenomena so it is also suitable for this problem because this also consists of observable phenomena".

That is a sham. You have first to demonstrate that scientific method can be applied to this kind of phenomena.
And i'm saying you that has already been demonstrated that this is not the case, and that this people ignores this.

Andrei Kirilyuk said...

Bee said: “I think one could summarize what they are suggesting is roughly to "involve economists, mathematicians, physicists, biologists, computer scientists and others working together to make a more stable economic system". So let me ask you again whether you think such an approach would be counterproductive, or are you just saying it is in your opinion unnecessary?”

Bee, why not to accept the evident, that Anonymous in his last two comments inflicted a total defeat on these “new old” attempts to make economy “more scientific” and thus essentially more efficient? I can only add that, moreover, such attempts (“to involve economists et al.”) have constituted an essential part of the super-ambitious Santa-Fe Institute efforts for more than two decades already (among so many other clones!), where they did try to put together “the best of the best”, practice “unlimited” interdisciplinarity (“psychology in elementary particle physics” would be its routine approach!) and had a “presidential” level of support and credentials. Note that Kauffman and Smolin, constituting the properly “scientific” and “interdisciplinary” part of this new attempt we discuss here, have been quite closely involved in the core of Santa-Fe activity. As a result, neither positive influence on economy, nor noticeable scientific progress (problem solution) is observed. Now, given the duration of such level of precisely the same kind of effort with same key participants, what can be any positive, not totally subjective (and frankly, abusive) sense in reproducing all of it once again, repeating the same arguments, etc.?! If instead of acknowledging the evident failure and taking their part of responsibility, “our best minds” full of their “best intentions” and “care of humanity” find nothing better than imposing their “service” to practically unaware public once again, with nothing more than the same general, now provably empty promises, then one should acknowledge that among various modern falls, the current economical crisis is far from being the deepest one...

However, there “should” be something less disappointing in “intellectual” efforts as such (beyond those which failed!) used to better understand it all and maybe see at least an objectively substantiated general development perspective, besides that largely empirical economy which can hardly be essentially updated as such. Indeed, an otherwise technically powerful and inter-connected, super-educated and quantitatively huge civilisation walking in complete darkness of its totally purposeless future (even the immediate one) is something strange and obviously self-destructive (evidence is not missing and even catastrophically accumulating). Bee's attitude in the above comments, actually reflecting quite well those of “officially advanced” new-old scientific priesthood, seem to actually deny such genuine knowledge progress possibility (because we can't, how anyone else can?!), despite the accompanying “general” motivations, and actually replace it with never-ending, practically useless but otherwise very “advanced” studies of (qualitatively deficient) “models”, Santa-Fe kind: “As I have expressed many times, I do not think that the aim can be to predict the system's evolution, but to understand the feedback process”, “I don't think anybody can presently exactly tell what the origin is of the crisis and what the way is to fix it”, etc. [If you can't, even don't try to, solve the main problem of interest, understanding of the system evolution and the origin of its major, vitally important states, then what's the sense in any other assumed “understanding”, apart from misleading student's exercises?!]

One could start from a “scientific” (but actually common-sense) expression of the difficulties of usual economy emphasized above: economy is a strongly open system, to many other (mostly human) dimensions with their usually unknown and very unpredictable influences. Under these conditions, it's even strange that one may have anything resembling a scientific discipline about it (which it's finally is not, of course). The only “scientifically rigorous” solution would be then to include all other essentially participating interaction components into consideration, with a chance to be able, at least in principle, to obtain an objective understanding of this larger, complete system (now at least well-defined as such). The next problem, however, is that usual science (including its allegedly “advanced” and “interdisciplinary” branches from SFI, PI, etc.) has strictly no solution for an arbitrary interaction problem, if the number of “simple” interaction participants is greater than two (for our problem this number practically diverges to infinity). After which they use their “models”, meaning absolutely arbitrary guesses about objectively unknown system behaviour and evolution but which are formally expressed with the help of mathematical symbols and ad hoc “postulates” (assumed to be “scientifically rigorous” only because of their “mathematical” form and irrespective of proven validity). And after that it's just a mechanistic play of “statistical” coincidences: if a “model” demonstrates more instances of formal agreement with observations, it's a “good science” (without any true understanding of the real “studied” dynamics!), and if it fails too often, then ... one just inserts additional “free parameters” and continues with their “suitable” adjustment to finally arrive at a “good science” (cf. standard interpolation procedures or “standard model” of particle physics). Actually, that usual, strongly criticised economical “science” is also of this kind, reproducing the same empirical adjustment as the one in “rigorous” and “successful” official physics at a higher-complexity level (where, however, it fails more obviously, as the number of necessary “parameters” becomes too great).

If I add that the unreduced, truly rigorous problem solution, as well as its practically meaningful application to our development problems, still exists, despite the advanced-scientist pessimism above, but demonstrates a qualitatively higher richness of content, specifying also the objective, irreducible origin of accumulating official science failures, would you be ready to look for (easily found) details?

Let me finally outline a rather common-sense idea why one should better try to look for something objectively problem-solving, starting from the current situation. Don't you have an impression that this current economical crisis is not only what it's superficially described to be, but rather only one manifestation of a much deeper civilisation impasse, in economy and elsewhere (especially elsewhere!), that can only be avoided as a result of respectively deep change (rather than mere “refinement of details”) of its major practices, way of thinking and kind of knowledge used? An impression that it happens in its full, inevitable and destructive strength only now, right now, after various previous “precursors”? Apart from crisis and other “pressures”, in presumably flourishing modern economy satisfying practically all realistic needs of active society members (for “advanced” scientists at least, it's something like that, for a long time already!), how can one have sufficiently strong, sustainable drivers for further, essential development of the whole society (in the absence of which it will evidently perish)? In other words, don’t you feel the ultimate saturation, i.e. practical, dynamical death, of this modern (“Western”) civilisation Bee and others want (but fail) to “repair”, with its imitative science and illusive pleasures?

Anonymous said...

To summarize what you are saying yes, economics is satisfactory and is not in need of any of the suggestions the authors make. Your analysis of the problem is there has been too much regulation on the market, you are saying this is backed up by the current state of science.

No. I am saying that economic science is a real science, and that it is correct. Is it a complete science? No, it is an actively developing field.

As for the author's suggestions, I am saying that they are dilletantish. They have as much place in an economics discussion as flat-earthers would in a geography department.

As for the cause of the current situation, I am saying it will be years before we have sufficient data to really understand what happened.

Example: The current low state of lending. Is this caused by (a) a lack of capital to loan, (b) a decline in borrower credit worthiness, or (c) a decline in demand for loans by creditworthy borrowers?

My hypothesis is that, at present, what is happening is that interest rates have gone up because of (a) and so creditworthy borrowers are delaying taking loans (c), which creates the appearance of (b).

To make this really clear, I am *not* asking for an operational advice (like less or more regulations etc), but how to get the scientific knowledge - given that it exists - in the right place and to practically implement it.

The scientific knowledge is already in the right place. There is, however, limited data and it will not be possible to understand what's happened for years. Even then, no economic model will ever be able to achieve the kind of precise predictive ability you are talking about.

Now then let me ask you, how do you think the present crisis could have been avoided, and how do we avoid it in the future given that you think our knowledge is so complete and the outcome so undesirable.

Huh? Who said the outcome is undesirable? Market corrections happen. So far all I see is that along with the elimination of paper wealth and the end of businesses that either should not have been started or should have closed down years ago. People who thought they were rich and deserved to be are finding out that they weren't and didn't. And even in the middle of this crisis, we are a far richer country and world, with a far higher standard of living, and far more jobs, than we were when the credit derivative run-up that led to it began 20+ years ago.

Plato said...

Hey, this is only a side line blog comment "in opinion" to the "real work" that needs to be done.:)

I think even the most qualified scientist likes the historical part of the development of their work? At the same time, recognizing the truth of the situation, as it is developing when it comes a knocking on one's door?

The market prices of commodities vary from day to day and often several times a day. This occurs when there is no radical difference in the proportion of the supply and the natural demand. This fact is conclusive proof that our system is controlled by manipulators and fundamentally wrong. I have sought to elucidate this problem within this volume and have suggested a plan which, if adopted, would make the people the master of the world, instead of the present master—THE MONEY TRUST.Banking and Currency and
The Money Trust
by CHARLES A. LINDBERGH IN bold was added by me to highlight a the question.

Who are the manipulators?

So it does not help to revive with "ole rhetoric" as some keep saying(?), and in the case of "new model perceptions and development," how is it that any change can come if one does not offer "some solution" that might be examined? Tested? Understand it's history? See "it" under a different light?

Scientists are offering an incentive to the creative ideal of exploring new functions of the economy( I don't think it has been dome their way) and quickly surmise, yes, it needs to be taken care of. It should also be recognized that it's fundamental makeup needs to looked at as well. They may say "yes a complex adaptive system and yet in Kauffmann's case, he has problems with the fundamental part, just as Lee Smolin does.:)Our Anonymous Economist hasn't really addressed it either.

So as long as this "mistrust of each other happens" how much faith can one apply to both in this case?

Best,

John G said...

You need more than the scientific method, you need the right goal. The goal unfortuneately is to make as much money for the top one percent as possible and they've been quite good at that.

The sad history of capitalism:

"About a fifth of the total acreage of England was enclosed between 1760 and 1840, and the old village community ... was broken up. Until that time, any man might hope, by his own labour, to acquire property and rise in his village. From that time, we inherit the most unhappy of beings, the landless farm labourer".[7] It is this landless labourer and his family, often then evicted as a further consequence of Enclosure, who became the factory workers of the Industrial Revolution, the men, women and children on whose immense suffering industrial capitalism was built."

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." Thomas Jefferson 3rd president of the US (1743-1826), Letter to the Secretary of the Treasury Albert Gallatin (1802)"

On November 21, 1933, President Franklin Roosevelt stated,

"The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the government of the United States since the days of Andrew Jackson."

President Woodrow Wilson wrote,

"There is a power so organized, so subtle, so watchful, so interlocked, so complete, so pervasive that prudent men better not speak above their breath when they speak in condemnation of it."

Later, Congressman Louis McFadden, Chairman of the House Committee on Banking and Currency, stated,

"The Federal Reserve is one of the most corrupt institutions the world has ever seen. There is not a man within the sound of my voice who does not know that this nation is run by international bankers."

Kennedy himself had already seen it and described it:
For we are opposed, around the world, by a monolithic and ruthless conspiracy...

Bee said...

Hi LoboGris,

So, bee, which is your criteria to get that impression?

I have the impression that there currently is no consensus among the experts for what the cause is or what the best way is to deal with the situation. It's not that I expect this given how little time has passed, but it is something that should be worked towards and I appreciate every attempt to encourage this, like for example Brown et al's essay. You might find these 5 essays by winners of the Nobel Prize in economy interesting and their views on what is the important next step to do. What I would like to see is a solid body of peer reviewed work that can be build upon, and that more importantly is build upon - practically, not academically.

You have first determine and prove that scientific method is suitable for answering this question

I still have the impression we are talking past each other. I have explained above in which sense I refer to science and scientific method. Let me just repeat that.

"Let me put it like this: I see the task of science to provide models that describe the world we observe. The only criterion for these models that matters is whether they are useful. What I consider a scientific method is an ordered way to keep track of the models and their usefulness, which implies understanding among other things the limitations of these models and the assumptions. Usefulness can mean different things in a different context, that might be useful for prediction, understanding or managing."

If that is not how you understand science or the scientific method, then this is a linguistic problem. As far as I am concerned economy is a science. So is mathematics, sociology, and physics.

I know what the difference is between a correlation and a causal relation, but thanks for the explanation.

You have first to demonstrate that scientific method can be applied to this kind of phenomena.

Actually, I would prefer to just use it, its usefulness will speak for itself. I have understood you believe it is proved it can not be applied, but luckily I am sure most economists could care less. Best,

B.

Bee said...

Hi Andrei:

You are hopelessly mixing up Brown et al's essay, with the Santa-Fe institute, with PI, and if you actually commented on something I said, I can't quite figure out what. As far as the Santa-Fe institute is concerned, I think it is an academically very interesting and future oriented endeavor, though as far as "Chaoplexity" is concerned I am very sympathetic to John Horgan's skepticism. For me, SFI is too academic and endeavor, a point that I tried to address with the Lightcone Institute. You are complaining that the SFI has been following its agenda "for more than two decades already" and it still hasn't revolutionized the world. Well, change takes time. Give it another decade or two. It's time will come.

Don't you have an impression that this current economical crisis is not only what it's superficially described to be, but rather only one manifestation of a much deeper civilisation impasse, in economy and elsewhere (especially elsewhere!), that can only be avoided as a result of respectively deep change (rather than mere “refinement of details”) of its major practices, way of thinking and kind of knowledge used?

Yes, I agree on this. It seems however we disagree on the level of radicalness required for improvement. I think it is for starters sufficiently radical trying to get people to realize politics and economy can't be continued in a trial and error process, because the more complex our decisions, the larger our mistakes, and the more people suffer from it. The way to avoid this is to apply the knowledge we have in the right places.

Best,

B.

Bee said...

Hi again LoboGris,

having had the time to look at the article Peter mentioned above, I think it might be of interest to you too:

The Growth and Development of Experimental Research
in Political Science


One example they mention I find particularly interesting:

"experimental studies gauging the effectiveness of campaign tactics have changed both scholarly understanding of electoral mobilization and the way in which campaigns allocate their resources."

which illuminates what I said in my previous comment. Those campaign managers who have profited from these insights don't care very much whether somebody claims it has been proved "by logical means" that there is no scientific method in this field of science (or whatever it is you are trying to say). They just use it. I would like to see more of that. Thing is that in areas where one doesn't make much money or becomes famous the incorporation of such knowledge can be very slow.

Best,

B.

Bee said...

Hi Anonymous:

I am saying that economic science is a real science, and that it is correct.

I can't make very much sense of this statement. It's like saying "physics is correct". You probably mean that some models in economy have proved to describe reality reasonably well? I wouldn't even disagree that this is the case.

Is it a complete science? No, it is an actively developing field.

Okay, so think of some of the areas where it is incomplete or there is disagreement on the right model. Do you think what the authors are suggesting will be useful to make progress there, or do you think it will be counter productive?

As for the author's suggestions, I am saying that they are dilletantish.

Possibly. Though I had the impression Mike Brown knows what he is talking about. Otoh, they didn't attempt to write a textbook. What they are presenting is a vision, and they are suggesting a direction towards progress. That's why I keep asking you not whether you have a problem with their summary of neoclassical economics, but with their overall aim.

As for the cause of the current situation, I am saying it will be years before we have sufficient data to really understand what happened.

That might be. So if you don't like the author's suggestions, what then are your suggestions to make the understanding and avoidance of further complications happen as fast and smoothly as possible?

The scientific knowledge is already in the right place [...] Huh? Who said the outcome is undesirable? Market corrections happen.

Okay. I think herein lies the difference between us. I certainly would prefer such abrupt 'market corrections' with their aftermath could be avoided, given how many people now have to be concerned about their retirement, their children's possibility to get a good college education etc, how many people are becoming unemployed and are struggling to make ends meet, and that doesn't even touch the problems in the poorer countries which can easily turn into existential struggles. I clearly think this is undesirable.

In this context, let me come back to something you wrote in an earlier comment

Basic (non neo-classical) economics also tells us that, because tastes are subjective and cannot be determined absent market transactions, it is impossible to allocate capital in a more efficient manner than the market would absent intervention.

Which is desirable only if you are aiming at what you here mean with 'efficiency,' do you mean the fastest way to working towards the distributing goods and capital best fitting the 'tastes' of people? It seems to me this does neither take into account that the 'tastes' of the people that reflect in spending or investing money is not the only thing that is relevant about their opinions, and further does not address the question of whether such efficiency comes with stability, which I would think is also a desirable feature, and certainly in more peoples 'taste' than only mine.

Best,

B.

Anonymous said...

That's why I keep asking you not whether you have a problem with their summary of neoclassical economics, but with their overall aim.

Their "overall aim" is to correct problems in neoclassical economics which do not exist, are not really about neoclassical economics, and are not problems!

I can't make very much sense of this statement. It's like saying "physics is correct". You probably mean that some models in economy have proved to describe reality reasonably well?

No, I mean "correct" in the way that a theorem can be proven in mathematics.

In a way, economics is the anti-physics: We know we have the fundamental underlying theory right, and we also know the theoretical limits on our ability to acquire data. Those limits necessarily limit the ability to make economic predictions with precision.

what then are your suggestions to make the understanding and avoidance of further complications happen as fast and smoothly as possible?

I'm not even convinced there is an economic "problem." Markets went down, unemployment went up... Does that mean that we've falled below our natural long-term equilibrium? Or maybe for years we were borrowing and investing in poor ideas, employing too many people and paying them too much to do it, running above equilibrium which we're not heading toward... Hmmm...

In all events, to the extent your question is about data collection, the problem is unsolveable. The alternatives are (a) simultaneously read the unconscious minds of every person on earth, (b) require people to record their activities electronically for central storage and analysis (likely to cost more than the benefit that could be obtained from the data anyway), etc. etc.

Okay. I think herein lies the difference between us. I certainly would prefer such abrupt 'market corrections' with their aftermath could be avoided, given how many people now have to be concerned about their retirement, their children's possibility to get a good college education etc, how many people are becoming unemployed and are struggling to make ends meet, and that doesn't even touch the problems in the poorer countries which can easily turn into existential struggles. I clearly think this is undesirable.

This is where you are erring because you do not understand the basic, fundamental lesson of economics. Why do you think it is possible for the world to be sustainably better than it is today? In all seriousness -- why do you think the employment rate should be higher than it is? Why do you think that people's savings were really worth what they were worth on paper two years ago, instead of what they're worth on paper now? The fundamental lesson of economics is that you can never -- never -- know these things, at least in the present.

Which is desirable only if you are aiming at what you here mean with 'efficiency,' do you mean the fastest way to working towards the distributing goods and capital best fitting the 'tastes' of people?

In economics, a transaction is "efficient" if it results in a net increase of total welfare. Any trade which is consensual -- both parties agree to do it -- is necessarily efficient. Capital is allocated more "efficiently" when it is allocated to produce greater total welfare.

In contrast to "efficiency," "optimality" is the state at which no futher efficient transactions are possible. In other words, equilibrium, in which (long term) capital has been alocated to its highest value generating use. Optimality tells us nothing about distribution. But it does tell is that there is no voluntary transaction that can take place which will make things better in the aggregate. Limited information about tastes tells us that there is no way to know that any forced transaction will make things better. And transaction cost theory tells us that the forcing a transaction (taxing, redistributing, etc.) has a cost, which will more likely than not (and you can never know which are the exceptions!) exceed the benefit sought.

It seems to me this does neither take into account that the 'tastes' of the people that reflect in spending or investing money is not the only thing that is relevant about their opinions,

Sooner or later, it always comes down to this argument... It's inevitable...

Given a market, which is to say the existence of a selection of available transactions (including not transacting at all), one's choice reveals one's tastes. That is the economic concept of taste. The fact of the consensual transaction demonstrates a net increase in total value (efficiency). Every decision that human beings make -- how to spend their time, whether to shoot up, whether to sell their children -- every single one is understandable in this way, and thus in terms of tastes, and thus in terms of comparable value. It is ugly in our society to say that everything is monetizable, but in fact that is exactly what this means.

(Shortly you will likely argue "but people never sell their children, some things aren't convertible into money..." That's always next... Like no-one ever thought of it before... Sigh...)

and further does not address the question of whether such efficiency comes with stability, which I would think is also a desirable feature, and certainly in more peoples 'taste' than only mine.

Stability at what cost in wealth? Would you prefer to live a $10,000/year lifestyle for the rest of your life guaranteed, or do you prefer how the market has treated you, risks and all?

Also, see above re: concept of "taste." To elaborate on a point I made in an earlier post but you didn't pick up on, people (including you) aren't honest about your tastes. No-one is, because no-one knows their actual preferences until they transact.

By the way: What we're doing right now (except that I'm also laying out some definitional stuff) is recreating something called the "Great Calculation Debate," which is foundational in economics. It took place in the 1930s. If the authors of the essay had bothered to do the slightest bit of research they would have known how it came out (their side lost). This is why I say that their arguments are dilletantish.

Neil' said...

Science can force economics to better acknowledge "physical economy" and the substantive constraints on economic rules and activity. Perhaps the best way to see the benefit of this is to observe the wretched results of ignoring physicality, as for example the absurd cornucopian fallacies of economist the late Julian Simon. He had no appreciation of resource limits.

Phil Warnell said...

Hi Bee,

I can’t help but notice that a lot of the comments are not much more then a call to arms, as to fight an enemy which seems to have presence of consequence yet not one of embodiment. I find it truly frustrating as to how much focus is given on attempting to identify these scoundrels, who are not in the main of actual substance yet are only wished they could be.

I can tell all who are so intent to know who these demons are, for they are Short Sightedness, Wishful Thinking and Non Diligence, who are all lead by as to aid the one we call Dismal Failure. Further if any would like to know where they can be found, as to be taken to task, all that must be done is look in any mirror and they will be clearly seen staring back. Now that we have found the perpetrators I would ask all then what we should do about them.

This might not be science yet it is the start, as for what is the first step in the process but to acknowledge those aspects of reality that we wish to understand.

Best,

Phil

LoboGris de Lothlórien said...

Hi Bee,

you are not understanding my point. And may be i'm not explaining correctly.

First of all, political sciences are different from economics. You can't deduce that scientific method is suitable for economics just because has results in political sciences. That is not an argument.

Also, in no time i said that has been prooved by logical means that scientific method is not suitable for political sciences. We are talking about economics, not political sciences. Its objects of study are completelly different.

I repeat, does not matter that because you consider both a branch of social sciences, means that both can be studied by the same methods. You have to demonstrate that economics object of study can be approachable by scientific method. That is, that a result from a scientific investigation about economics is valid.

You insist that an approach based on scientific method is suitable, if it prooves to be useful for prediction, understanding or managing. But that, at best, it is a naivety. And at worst, it is very dangerous.

Let me explain. Lets suppose a theologist pretends, based on exactly the same problems you try to justify the intervention of empirical scientists (i.e. the urge to understand economy, act from political system, avoid crisis and solve poverty, economic problems, etc) to understand an economic system by the mean of faith. ¿Would you accept it? ¿or would you instead say that faith has nothing to do with the problem and any results they pretend to be true, are instead false because faith is not a correct way to understand economics?

Well, with empirical sciences and economy, the context is the same. If a group of empirical scientists pretends to have results about economics, and say that they discovered a theory that explains economy, then, anyone familiarized with the epistemological problems of economy must say that those results are pure nonsense, independently of the results, simply because empirical method can't proove anything about an economic system, as like as faith can't proove anything about economics or even empirical sciences.

So, it is misleading to apply empirical methods in economics, because the conditions to apply it does not exists in an economic system: the objectivity of information (economics systems are tied by an enormous flux of hidden subjective information), and the constant changing of the subjective preferences and development of more efficient means. So, when i say that logic has prooved that empirical method is not appliable to economics, i'm saying that any justification to apply it has no sense (logic is the science of sense, if something has no sense, that is, if something says at same time, A and NOT A, then has no sense and says nothing about nothing)

So, if one says "i've developed an empirical model of economics", we can say, with no doubt, with any doubt, that he did not apply any empirical approach because economics is not suitable for empirical method. It is a complete sham, a deception, to build an economic model in an empirical basis.

That is why the methodological problem is prior to say, naively, "lets see what science can do for economics, and see if can reach a useful model". And that is why i say that, at worst, it is very dangerous. Because the label of science is commonly used to make people to believe things that are not true, to control people in some way, to satisfy the interest of other groups. And of course, there is plenty of usefulness in models for people that convince others of its validity and use them to manipulate other people. But that does not means that it is science. The criteria for science can't be, absolutelly, the usefulness of a model.

Another thing that must be clear to you is that science is not a kind of democratic meeting. Science is method, and it is completelly irrelevant, for the sake of determine the validity of a model, if there is or there is not a consensus between scientists. In fact, you must observe that science revolutions have been leaded by people that broke mainstream consensus.

Neil' said...

Phil, I think it is true that human failings are much more the issue than the theoretical structure of economics, etc. However, "look in the mirror" is blame-all mushy and detracts from the realistic notion that some actors in the mess are worse than others.

Bee said...

Hi Anonymous:

No, I mean "correct" in the way that a theorem can be proven in mathematics.

In a way, economics is the anti-physics: We know we have the fundamental underlying theory right, and we also know the theoretical limits on our ability to acquire data. Those limits necessarily limit the ability to make economic predictions with precision.


No theory about the real world can ever be proven to be right. A mathematical proof is only as good as its assumptions are, and the assumptions for a model include an identification of the modeled system with the real world.

I'm not even convinced there is an economic "problem."

I didn't say there is an economic problem, I'm not even sure what this means. I think there is a human problem in that our living together is strongly directed by a system whose evolution causes significant human problems as the ones that I outlined.

This is where you are erring because you do not understand the basic, fundamental lesson of economics. Why do you think it is possible for the world to be sustainably better than it is today?

Because there is always scope for improvement. You should instead ask yourself why are you convinced that there is no way to organize our economic system better than it is today? And with better I mean that more people will live happier.

It is ugly in our society to say that everything is monetizable

That for example is an assumption, and not a proven theorem.

Shortly you will likely argue "but people never sell their children, some things aren't convertible into money..." That's always next... Like no-one ever thought of it before... Sigh..

People do sell their children. If you convert anything into money the question is whether the conversion and its resulting effects are useful and desirable. There is a reason why in our democratic system one person has one vote, and the number of votes does not reflect the wealth of that person. It's our way to determine goals that can't be expressed in monetary value unless you have previously determined what the society values. Note, I am speaking about the society, not the single person. Once you have done that you can put into place (here it comes) regulations that reflect in monetary terms the decisions that have been reached democratically. It's a necessary ingredient to figure out in the first place what you mean with 'better'. Literally all modern societies have realized this necessity.

In all seriousness -- why do you think the employment rate should be higher than it is? Why do you think that people's savings were really worth what they were worth on paper two years ago, instead of what they're worth on paper now?

I'm not thinking in 'should' but in 'could'. You are very likely right that people's savings were never really worth what they thought they were. The problem is that this lack of knowledge turns out to be to a large personal damage since, face it, most of these people have not a very sophisticated 'taste'. But hey, that's just a market correction, it's unavoidable, really, one has to live with that, right? I think you should reconsider what you think contributes to the well-being of people who have to suffer from speculative bubbles they have little or no chance of understanding or avoiding personally. That's why we have regulations in our systems. So the system actually does what we want and not that we adapt our idea of what we want to what the system does. Like you do.

Best,

B.

Plato said...

Neil,

I happen to think the mirror is a apt comparison and who of us would deny that "such a reflection" does not take place in their lives?

While our aesthetic appearance is more then easy to recognize, it is the subtle virtues "of looks" that run much deeper and are held to a more "required scrutiny."

IN comparison, the economy "is apparent and self evident."

Looking at the mirror then asks that we also look much deeper, so to me, it is not at odds with what Phil is saying.

We are already way ahead if we speak of "restoring the markets to a stable, self-organized critical state."CAN SCIENCE HELP SOLVE THE ECONOMIC CRISIS?

Not a short time ago, who would have said such a thing,"financial crisis" and contributed to the larger "deflation of the look of the way things are," and thought by holding onto "rose coloured glasses?"

So while it might be thought certain contributors like myself might be thought less then a virtue "in opinion," it is in another way that I had pointed out what could have been thought of as the "self critical organized state." What is the substance of this? A Harmonic oscillator? I see see "no objects." I do not "see money" but "another form?"

While also thinking that a solution is being offered by Phil(?) it has been less then kind when it sees that the "linked article exchanged here" in conversation have not been dealing with the foundational aspect that we can all reflect on. "Money Mechanics?"

He admitted he wasn't a economist and so do I. So shall we say such an interest that is contained in the "wanabe" and "thought" that one can say "to be a physicist" while endearing this interest to a personal life less then acceptable??

I say, do not be discouraged by.

Continue to apply one's criticalness and self examination and ask, "is my moral compass not working?" Continue to look deeper into the subtleness of appearances, then also recognize people then, as this mirror "as being self evident." What is "our reflection" in their eyes?

Best,

Anonymous said...

No theory about the real world can ever be proven to be right. A mathematical proof is only as good as its assumptions are, and the assumptions for a model include an identification of the modeled system with the real world.

The assumptions underlying contemporary mathematical economics are so basic and sensible as to be essentially indisputable. Although as a theory-of-science matter your statement is literally true.

And I have to tell you -- it is the height of arrogance for you to say that someone else's field, which you have not taken the time to understand, is not mathematically rigorous.

there is always scope for improvement. You should instead ask yourself why are you convinced that there is no way to organize our economic system better than it is today? And with better I mean that more people will live happier.

Then we agree about "better." I have the beliefs I do because I have taken the time to understand fundamental modern economics, which is provably, mathematically, true from a simple set of assumptions about human behavior.

Well, let me take that back a step. I can prove that no regulation will ever perform better than the free market. Accepting that economic behavior takes place within a regime of law, one can ask what legal regime is preferrable to others. But those are complex questions neither you nor the essay authors are close to touching.

(Do you even know what SFAS 115 is and what it has to do with the financial crisis? How about the ISDA Agreement? Do you think Lee Smolin does? Why do you think you're able to participate in an intelligent discussion about the capital market regulatory regime?)

People do sell their children. If you convert anything into money the question is whether the conversion and its resulting effects are useful and desirable.

I'm glad you've given up the non-monetizability argument, because you're right, people do sell their children. But then you should concede the point in your prior post: all things have comparable values that can be treated in numerical (monetary) terms and, thus, the equations and concepts of economic science, including the limitations I've described, apply to all questions of taste and valuation.

It's a necessary ingredient to figure out in the first place what you mean with 'better'.

If what you mean by "better" is that the total welfare of society is increased -- that is, the wealth of society as a whole is increased -- then the science of economics tells us that fewer regulations are better, always.

If you mean something else, like "reducing inequality" or smoothing out economic risks, then that is a moral question not a scientific one. But the science of economics does tell us that whatever you in these areas do will be "wose" according to the definition of "better" I thought we agreed on.

I think you should reconsider what you think contributes to the well-being of people who have to suffer from speculative bubbles they have little or no chance of understanding or avoiding personally.

You are missing the point.

1. It is a mistake to think that things can (sustainably and in the aggregate) be any better than they are under the free market.

2. The same people who "suffer" from bubble bursting, benefit when the bubble is created. Some people lost their savings in the burst; others spent those savings at the height of the bubble.

That's why we have regulations in our systems. So the system actually does what we want and not that we adapt our idea of what we want to what the system does. Like you do.

The "system" will exist no matter what you do and what laws you pass, and it will always follow the basic rules of fundamental economics. This is an inevitable -- mathematical -- consequence of basic human nature. Even North Korea has a black market. The market always finds a way around inefficient regulations. Always. There's nothing you can do about it, and trying only imposes transaction costs that reduce people's welfare...

I think of regulations as the consequence of democracy, and thus the economic price we pay to not live under tyranny. But really, democratic governments tend toward fewer regulations than other forms (consider, e.g., the concept of a royal monopoly patent), so its all ok. Of course it would be better if people learned that the reflexive "i'm in pain the government should pass a new law to help me so things aren't bad anymore" only makes their lives worse in the long run.

John G said...

The economic concept of marginal utility goes beyond just the monetary wealth involved. It can definitely include things like no sweat shops, being green, no lead paint risk, great service, avoid monopolies, bubble risks, employee relations, community relations, etc. Unfortuneately the powers that be don't pay nearly enough attention to the marginal utility concerns of the people.

Bee said...

Hi Anonymous:

And I have to tell you -- it is the height of arrogance for you to say that someone else's field, which you have not taken the time to understand, is not mathematically rigorous.

Except that I never said that.

I'm glad you've given up the non-monetizability argument

Except that I never made that argument. It is trivially true that you can 'monetarize' anything in the sense that you can define a function from 'anything' to the real numbers. Whether that is good for something and has a desirable effect however is a very different question.

Then we agree about "better." I have the beliefs I do because I have taken the time to understand fundamental modern economics, which is provably, mathematically, true from a simple set of assumptions about human behavior.

Just out of curiousity, could you summarize these 'simple set of assumtions' about human behavior?

If you mean something else, like "reducing inequality" or smoothing out economic risks, then that is a moral question not a scientific one. But the science of economics does tell us that whatever you in these areas do will be "wose" according to the definition of "better" I thought we agreed on.

I doubt we agree on the 'better'. It seems to me you are not willing to understand the following difference between us. You define 'better' as where the neoclassical economy leads us, and deny there can be any other essential ingredient into the determination of what means 'better' than where it gets us. That sounds to me pretty much like the infallible invisible hand leading us towards increased happiness.

What I am saying instead is that it is presumptuous to tell people what 'better' means. I would think you should ask them for their opinion. Now you are going to say, the economy is the one and only way to find out their opinion. Whereas I am trying to say there is a reason why we have in modern societies a democratic system that weights opinions not according to a person's ability to spend or invest money. To me what you call 'something else' is not a 'moral question' as you put it, but the actually relevant question. As I have said and written a many times, you can not determine how well a system works without first finding out what its primary goal is. You define the goal as the result. That is very convenient.

Let me just give you a very simple example: Different people have different opinions about what makes them happy and about what makes their lives better. Now consider you have a country in which sudden 'market corrections' that result in a recession and a high unemployment rate leads to an incredible long-lasting increase of unhappiness of the broad population who might not have actually been (consciously) responsible for this correction becoming necessary. How do you set up the economic system such that the people in this country are as happy as possible? Note that I did not say they are happy with 'efficient markets' or something of that sort. Consider it a thought experiment.

Best,

B.

Bee said...

Hi Phil,

Thanks for your comment. I only have one thing to add:

"Always listen to experts. They'll tell you what can't be done and why. Then do it."
~ Robert Heinlein

;-p

Have a nice weekend,

B.

Plato said...

JohnG,

How vast indeed the events that are tied to this situation, that one can indeed ask where and what "this stone/coin cast, can have in such a wide rippling effect throughout society, and not have given it much more thought, then the aesthetics value.

But truthfully does this action care about the psychological effect being poor has on the psyche or how much creative time you have on your hands when you are trying to focus on the next job?:) How to keep a roof over you head? No, that's getting down right dirty?:)

Happy thoughts bring happy things, and if you didn't see this in a different light, you would have never recognized the colour that is given to coin that accents a life, or many lives.

But back to the more intricate information here to consider in the following.

A Theory is Born

This science is unusual in the breadth of its potential applications. Unlike physics or chemistry, which have a clearly defined and narrow scope, the precepts of game theory are useful in a whole range of activities, from everyday social interactions and sports to business and economics, politics, law, diplomacy and war. Biologists have recognized that the Darwinian struggle for survival involves strategic interactions, and modern evolutionary theory has close links with game theory.

Game theory got its start with the work of John von Neumann in the 1920s, which culminated in his book with Oskar Morgenstern. They studied "zero-sum" games where the interests of two players were strictly opposed. John Nash treated the more general and realistic case of a mixture of common interests and rivalry and any number of players. Other theorists, most notably Reinhard Selten and John Harsanyi who shared the 1994 Nobel Memorial Prize with Nash, studied even more complex games with sequences of moves, and games where one player has more information than others.
Game theory Explained

Also see "Inside the Mathematical Universe."

Best,

Anonymous said...

Just out of curiousity, could you summarize these 'simple set of assumtions' about human behavior?

Sure:

1. Human beings are rational in the sense that, given options, they will choose the one that they believe confers on them the greatest benefit (whatever it is they perceive as beneficial).

(This rationality assumption is often misunderstood, so I've tried to be precise about it rather than simplifying as I've been doing generally.)

2. Everybody is different, and no-one can read minds.

3. The more of a thing you have, the less valuable you will find one additional unit of that thing. (We haven't discussed this one, but its really important.)

There are some others but, for our purposes that is, basically, it.

From that, and some basic facts about the world (time moves in only one direction, things like that) it is possible to derive mathematically a panoply of important insights about the world, which are testable and verifiable through statistical analysis of empirical data.

That is the absolutely extraordinary accomplishment of economic science.

You define 'better' as where the neoclassical economy leads us . . .

No. I was using "better" to mean that aggregate wellfare -- the sum of the satisfactions of human beings' tastes -- is increased. Economics tells us that "better" comes from not interfering with the market. This is a research conclusion about "better," not an ideology or an assumption of the research project.

What I am saying instead is that it is presumptuous to tell people what 'better' means.

No, that's what you think you're saying. What you're really saying is that people should vote on what "better" will mean for everyone. What I -- and economics -- is saying is that the market reveals (and maximizes) what people decide for themselves is "better."

Be careful on this, because you're treading dangerously close (intellectually) to Pol Pot's mistake...

As I have said and written a many times, you can not determine how well a system works without first finding out what its primary goal is. You define the goal as the result.

I haven't said the goal is aggregate preference maximization (to be technical). That's a moral question.

In a society of two persons, you and me, would it be better for each of us to have $5 of goods, or for me to have $11 and you to have $0? What if the choice was 5/5 vs. 200/3?

These are moral questions, and they're non-obvious.

But as long as we're being neutral about distribution, then it does seem to me that a goal (maybe the "primary" one, whatever that means) of our economic system should be to maximize the total wealth of society.

We can at least all agree that greater aggregate social wealth is better than lower aggregate social wealth, which is probably as much moral agreement on these questions as one can hope for!

And even if everyone shared some other moral view, imposing a system to advance that view would be (a) impossible (because the market always finds a way, regulations are only transaction costs), and (b) render society, in the aggregate, less well-off than it would otherwise be.

This negative conclusion is key: What economics is telling us is not that some particular state of affairs is "good" or "the best," but rather that there's no way to do better and trying to through government will only make things worse. That is a research conclusion, by the way, not an ideology.

Different people have different opinions about what makes them happy and about what makes their lives better.

Correct. Why do you think it would be better to have them vote, pick the opinion that wins, and impose it on society as a whole?

Now consider you have a country in which sudden 'market corrections' that result in a recession and a high unemployment rate leads to an incredible long-lasting increase of unhappiness of the broad population who might not have actually been (consciously) responsible for this correction becoming necessary. How do you set up the economic system such that the people in this country are as happy as possible?

The question to ask is whether it is possible, through regulation, to make people happier than they are with the bubble and the collapse.

Note that I did not say they are happy with 'efficient markets' or something of that sort.

Because you've missed two points. First, definitionally, if an efficient transaction is taking place then people's happiness is, by definition, increasing.

A "market" (as opposed a transaction) is "efficient" if the cost of transacting is low so that more efficient transactions take place and more happiness results. If markets are "inefficient" than transaction that would otherwise create a net benefit do not take place, and the market moves more slowly toward optimality and equilibrium. (E.g., would you forego some purchases if $10 was tacked on every time you use your credit card. That is a transaction cost that creates a market inefficiency.)

Second, as a research conclusion, you can't do better when it comes to preference maximization (people getting what they want, in the aggregate) than markets.



P.S.: Bee, I do appreciate your intelligence and abilities. But you have no more hope of winning this argument than I would of winning one with you about general relativity. Economics is a real science, with more than a hundred years of research behind it by very, very, intelligent and hard working people -- all that work has not amounted to naught.

John G said...

Anonymous, Plato brought up game theory and I suspect if she wanted to, Bee could run circles around you in this area.

You don't understand, it's not a one solution end result of the economy thing, it's an us vs. them game theory thing and we are losing quite badly.

... It was later published under the name "So Long, Sucker." Nash and the gang created a complicated set of rules designed to force players to join forces with one another to advance, but ultimately to double-cross each other in order to win. The point of the game was to produce psychological mayhem, and apparently, it worked. Sylvia Nasar records that McCarthy remembers losing his temper after Nash cold-bloodedly dumped him on the second-to-last round and Nash was absolutely astonished that McCarthy could get so emotional. "But I didn't need you anymore," Nash kept saying over and over again.

Keep this game in mind because it is the essence of Nash's ideas: to force cooperation to advance, followed by a big double cross in which only one player is the winner.

Sounds a lot like the current day craze of "survival" shows, yes? Which of course, leads us to wonder what kind of "programming," or example such things are setting up as models for human behavior. More importantly: why?

Nash's game theory was all the buzz at RAND even before he arrived there under contract. RAND had been, prior to Nash's ideas, preoccupied with games of total conflict between two players, as defined by von Neumann, since that seemed to fit the problem of nuclear issues between two superpowers. However, as weapons got ever more destructive, the idea of all-out war was seen as a situation in which both players might have a common interest. Bombing the enemy back to the Stone Age no longer made any sense because it could lead to a war of complete extermination on both sides.

Von Neumann had long believed that RAND ought to focus on "cooperative games." That is, games ought to be played "sequentially." Games should involve "moves" based on information, such as in chess or tic-tac-toe. Players ought to communicate and discuss the situation and agree on rational, joint action. In such games, there is cooperation and collaboration, and an umpire around to enforce the agreement.

Economists, however, did not like Von Neumann's ideas. They said that it was like saying that our only hope for preventing a dangerous and wasteful arms race lay in appointing a world government with the power to enforce simultaneous disarmament. As it happens, a One World Government, composed of member nations, was a very popular idea among mathematicians and scientists at the time.

But the social scientists, the economists, were doubtful of the idea that any nation, much less the Russians, would cede sovereignty to such an organization. In other words, in cooperative game theory, who's going to force the other side to cooperate?

But Nash came along and solved the problem. He demonstrated that noncooperative games COULD have stable solutions. In short, one "player" could have a strategy in which they "force players to join forces with one another to advance, but ultimately to double-cross the other players in order to win."

To put this in practical terms: a One World Government might be advocated by a major player, promoted, setup, and all the other players might follow the rules - but that one player has every intention of BEING the One World Government and overthrowing the powers of all the other players at the last instant.

Now, just what government in the world today seems to be playing Nash's strategy? Take your time. There's no hurry.

Nash's theory inspired the most famous game of strategy of all social scientists called The Prisoner's Dilemma, which goes as follows: Imagine that the police arrest two suspects and interrogate them in separate rooms. Each one is given the choice of confessing, implicating the other, or keeping silent.

No matter what the other suspect does, each suspect's outcome - considered alone - would be better if he confessed. If one suspect confesses, the other ought to do the same and thereby avoid the harsher penalty for holding out. If one of them remains silent, the other one can confess, cut a deal for turning state's evidence, and the one who remains silent gets the whammy. Confession, or "cooperation," is the "dominant strategy." Since each is aware of the other's incentive to confess, it is "rational" for both to confess.

And here we come to the realization of the power of the psychopath and how Game Theory is being "used" against us. You see, the psychopath, having no conscience, does not have the ability to "imagine" the consequences of the noncooperation in terms of being able to "feel" it. Without this ability to imaginatively feel the consequences, he is virtually fearless, and can therefore direct his behavior according to his own fantasized outcome with no regard whatsoever to reality, remembered experiences, the imagined experiences of others, and so forth. That is to say, for the psychopath, rationality is determined by virtue of the idea that it is self-serving to the max. "Rationality" is the assumption that everyone else is looking out for number 1, and to hell with everybody else.

NEVER confessing, thus becomes the psychopath's "dominant strategy."

The reader will probably immediately see the dynamic of human relations involving a psychopathic personalities and a "normal" human. Psychopaths, having no conscience, always play their dominant strategy which is totally "rational" without the influence of emotions conjured up by imagination. They do not modify their behavior or choices based on emotion or consideration for the feelings or motivations of others. They will implicate the normal person in the "prisoner's dilemma," and will refuse to confess their own guilt, because they simply have no ability to perceive hurting another as morally reprehensible. This is the psychopath's "dominant strategy." They will never, in such a situation, consider cooperation.

Normal people, on the other hand, having conscience and emotion, will make choices based on imagination reinforced by emotion. In some cases, in the prisoner's dilemma, they will refuse to confess out of loyalty to the other, never realizing that the other might be a psychopath who has not only refused to confess his own guilt, has undertaken to make a deal for himself by implicating the other. Some people may even confess in order to "save" the other person from suffering pain, never realizing that they have been manipulated into this role by a psychopath who is all the while saying "Yes, he did it! I am innocent!" when, in fact, the truth is the exact opposite.

It's easy to see that in any interaction between a psychopath and a normal person with full range of emotions, the psychopath will always "win."

Two of the scientists at RAND set up some experiments using a couple of other scientist-contractors as "guinea pigs. They wondered if real people playing the game would be mysteriously drawn into the "equilibrium strategy. They ran the experiment 100 times. Nash's theory predicted that both players would play their "self-serving" strategies even though playing their "cooperative" strategies would have left both better off. As it turned out, the results of these trials did not turn out according to Nash's theory. Why? Because the two scientists tended to choose cooperation more often than cheating. Once they had realized that players ought to cooperate to maximize their winnings, that is the strategy they chose.

When Nash learned of the experiment he wrote:

The flaw in the experiment as a test of equilibrium point theory is that […] there is too much interaction. […] One would have thought them more rational. [Quoted by Nasar, op. cit.]

In short, the players had consciences and this contributed to their choice of maneuvers.

At RAND, Nash devised a model of negotiation between two parties whose interests neither coincide nor are exactly opposed. It is a classic example of what we see taking place in our world today:

Stage One: Each player chooses a threat and says "this is what I'll be forced to do if our demands are incompatible and we can't make a deal."
Stage Two: The players inform each other of the threats.
Stage Three: Each player chooses a demand that he thinks is worth agreeing for. If the deal doesn't guarantee him that, at least, no deal.
Stage: Four: If the deal is made (under threat, mind you), both players get what they want. If not, the threats must be executed. This means, don't threaten what you really can't deliver, and always deliver what you threaten.

Nash showed that each player has an "optimal threat," or the threat that ensures the deal no matter what the other player chooses.

Again, do we see this style of play in operation today? Either in terms of politics, or in terms of the relations between government and the people?

Now, coming back to psychopaths: it is fairly easy to see that they often manipulate others to join forces with them in order to help them to advance, but ultimately, when they don't "need them anymore," they double-cross the other in order to win. The result is deliberate psychological mayhem.

In short, it isn't even necessary for a grand and logistically complex government mind control program to be in operation in order to produce the conditions necessary to ultimately enforce total controls on humanity. It is only necessary to have strategically placed psychopaths in the population, to train and influence selected ones in particular ways through what would be seen on the surface as "ordinary means," and simply calculate the fact that they will always operate with their dominant strategy - serving self.

I expect that the reader is beginning to make all kinds of connections regarding how Game Theory may be being utilized to bring the world to heel.

In December of 1994, Vice-president Al Gore announced the opening of the "greatest auction ever." What was being auctioned was "thin air." Billions of dollars were bid for licenses to broadcast airwaves for things that employ wireless communications. (Think about Ma Bell and her connection to Morse Pinkham, Ira Einhorn, Uri Geller, and others.) When the auction finally closed in March of 1995, the winning bids totaled more than seven billion bux, making it the biggest sale in American History. And it was, in fact, the sale of public assets. By the late spring, another three billion dollars had been raised in Washington in similar auctions. The press and the politicians were ecstatic. The corporate giants had been able to protect themselves from competition, and they all called it a "triumph for Game Theory." Governments from Australia to Argentina have used Game Theory to sell scarce public reprocess to buyers "best able to develop them."

Enron.

Phil Warnell said...

HI Bee,

"Always listen to experts. They'll tell you what can't be done and why. Then do it."
~ Robert Heinlein

This is so true!!!! With my mirror analogy it has always presented one paradox for me that I could never solve and that is how can those who are so vain be so lacking of introspection?

I wish you also a good weekend and am looking forward to all those things you and Stefan give us to think about as Christmas approaches.

Best,

Phil

Bee said...

Hi Anonymous:

Bee, I do appreciate your intelligence and abilities. But you have no more hope of winning this argument than I would of winning one with you about general relativity. Economics is a real science

Well, thanks for the kind words, I on the other hand do appreciate your patience. I think however you are misunderstanding what the argument it is I am trying to make to begin with, I can't avoid having the impression we are somewhat talking past each other.

I am neither trying to tell you that economy is not a science which you seem to have understood (you might have confused that with LoboGris' opinion above) nor am I saying it is not mathematically rigorous (as you apparently thought I said earlier) or that some of the conclusions you are referring to is invalid (I have no particular reason to doubt what you are saying.)

What I am trying to say is simply that it is impossible to prove a model is the "right" description of the world. Neither is it possible to "prove" within that model that there can not be any better description of the real world, or more importantly, since we are not only talking about a model but its real world application, that there can be no improvement in this organization of our lives.

I think this is the actual point of disagreement, that you are through your definition of 'better' constraining what the people living within a system might indeed consider 'better'.

definitionally, if an efficient transaction is taking place then people's happiness is, by definition, increasing.

Right. That's the problem. You are "defining" what happiness means from the assumptions that people "will choose the [option] that they believe confers on them the greatest benefit (whatever it is they perceive as beneficial)" leaving aside that what people believe, being faced with different options, is to the greatest benefit might not actually be to the greatest benefit when one looks at the total result of all individual actions.

I understand you have defined 'rationality' in this particular way so I don't want to poke around on this word, but it is a well known effect that there is a tension between what people consider the greatest benefit when individually faced with different options, and when collectively asked what would be to their overall benefit.

The point I am trying to make is simply that there is a possibility that people do individually act to what they "believe" is their own benefit in such a way that the emerging trend is against their benefit. This is exactly the reason why we do need regulations, and do have regulations, to make sure the emergence of macroscopic trends from the individual decisions do match. Why do you think we do have political systems at all if what you said was true? Why do we pay taxes? Why do we have laws and fees and legal restrictions?

What you're really saying is that people should vote on what "better" will mean for everyone. What I -- and economics -- is saying is that the market reveals (and maximizes) what people decide for themselves is "better."

I was not quite saying they should vote on that, but let me leave aside this for a moment while you are getting closer to understanding what I am saying. Now we have two notions of "better". You have the one that you say "the market reveals" and then we have the one that people vote for. Who are you to tell anybody your notion is the "right" one? (Calling it "better" will only muddy the waters again.) You have two different ways to obtain people's opinions about what is "better" and they potentially don't match (tough the stunning success of the free market stems from the fact that over a long period of economic growth they seem to match astonishingly well). What I am saying is the task is to set the system up such that they *do* match as good as possible. You can either do that by changing people's opinions of what is "better". Or you do that by deviating from an unregulated free market because this would, as you say, lead towards a specific notion of "better".

Now to briefly come back to the issue of 'voting'

Why do you think it would be better to have them vote, pick the opinion that wins, and impose it on society as a whole?

A) because I apparently have a less simplistic understanding of what the purpose and working of the political system is, and

B) because as I have said repeatedly above, in a democratic system people's opinions are not weighted by the influence they can exert through spending or investing money. I believe this to be important. I don't think a wealthy man's notion of 'happiness' is more relevant than a poor man's notion of 'happiness'

To elaborate somewhat on A), unless in very simplified circumstances, modern democracies don't just take a nationwide majority vote on what to do and impose it on everybody. Not only there are many options to allow for plurality, there is also an (unfortunately very lengthy) process of negotiation between different camps to reach a decision that is most satisfactory for everybody and not just what the majority can push through. One can question though how well that actually works.

What you are saying is basically that this whole process is unnecessary and not good for anything, because you already know that "better" is always where the market gets you.

There are some others but, for our purposes that is, basically, it.

From that, and some basic facts about the world (time moves in only one direction, things like that) it is possible to derive mathematically a panoply of important insights about the world, which are testable and verifiable through statistical analysis of empirical data.


I think you have left out in your statement of relevant assumptions that you have a governmental power making sure people do not wildly cheat on each other, do what their contracts say, don't print their own money, do conform to standards and restrictions, do not spoil competition of the market, watch over trade being fair and so on and so forth. Are you really, honestly, trying to say you don't see the relevance of any of these regulating factors in setting up the system to begin with?

Best,

B.

LoboGris de Lothlórien said...

Bee, any regulation you even impose in a democratic fashion, will change behaviours and allocation of means by the indidivuals, in order to satisfy its interests, and not to satisfy the phylosophy of the imposed political model, even if they voted it.

To be concrete and finish the idea i explained you in my last comment about scientific method, economics is about individuals, not societies. That is why empirical methods are not able to raise any valid results with economics.

There is no regulation that can lead to the best for all. Any regulation will benefit some groups, and harm the interest of other groups. Even in completelly unpredictable ways from the naive "knowledge" of regulators and politicians.

For example, if you impose minimal wage, then the workers, instead of being benefited with more wages, which is the purpose of the law,

1) will loose because more costs of production means less profit margin, and less attractive for investments, so, less job oportunities in the white market for workers for which in a deregulated market would not find a wage above the minimal imposed.

2) More allocation of resources in the black market, which evades regulations.

If an investor considers that, for a given task, he won't pay more than a given wage, then he will not invest in that employee, or will invest it in the black market.

Any consideration about regulations on financial markets will lead to the same result.

The true is that no market regulation that are against the individuals considerations, choices and preferences, can have success. And any "regulation" that are agreed by all parts and both consider good, in a given market transaction, is also stablished by the parts in the contract terms.

Individuals wants to do bussiness each other in the best way they think to do it, and not by the phylosophy of the regulations.

That is why no exogenous regulation, what is properly and simply called "regulation" that is, no political system, can do better that market by itself can do.

The key concept here is that economics is about individuals interests, and not about colective interests.

Anonymous said...

I think however you are misunderstanding what the argument it is I am trying to make to begin with

No, I understand it perfectly. Its not a new argument!

it is impossible to prove a model is the "right" description of the world.

Well, you can have an interesting epistemological debate about that, but whatever your standard of "rightness" is (positivist, empiricist, etc.), economics satisfies it.

Neither is it possible to "prove" within that model that . . . . that there can be no improvement in this organization of our lives.

That isn't precisely what economics shows. It shows that (a) government regulation will almost always make things worse, and (b) there's no way to identify the exceptions. And yes, that is "proven." Sometimes what you can prove with science is the limits of what's possible. (E.g., the uncertainty principle.)

That's the problem. You are "defining" what happiness means from the assumptions that people "will choose the [option] that they believe confers on them the greatest benefit (whatever it is they perceive as beneficial)" leaving aside that what people believe, being faced with different options, is to the greatest benefit might not actually be to the greatest benefit when one looks at the total result of all individual actions.

Accept my definition of "better" arguendo. What economics has proven is that if you attempt to achieve any other goal through government intervention, then you will make things "worse." In other words, fewer people will have less of the things they want. That is a rigorously proven, and empirically verified result.

Regulating to pursue other goals necessarily means that people in the aggregate will be worse off. They will have fewer goods, less food, less housing, etc.

Put another way, regulating to smooth out the business cycle or promote equality makes people in the aggregate, society as a whole, poorer.

that there is a possibility that people do individually act to what they "believe" is their own benefit in such a way that the emerging trend is against their benefit.

The assumption is rationality not perfect intelligence or information or predictive ability. But regardless, the science of economics does, in fact, prove, rigorously and empirically, that people making transaction decisions on their own will do better than with government intervention.

Why do you think we do have political systems at all if what you said was true? Why do we pay taxes? Why do we have laws and fees and legal restrictions?

We live in democratic republics because they are superior to tyrannies.

To the extent our system of laws attempts to enforce property rights and consensual agreements, it produces a net benefit.

But our system of regulation, and the overwhelming majority of the taxes we pay, are there because politicians can get elected by promising to pass laws that benefit groups at the expense of other groups and, in the aggregate, reduce total well-being.

That is the price we pay to not live under tyranny.

Who are you to tell anybody your notion is the "right" one?

The only thing I'm telling anyone is that if you let people make transaction decisions for themselves then people on the whole will be better off.

This follows mathematically (and is empirically proven) from the assumptions I set forth. That is the accomplishment of economic science.

Well, you do need to clarify one assumption slightly. Where I said "everyone is different," add to that that people often do not know their own preferences until they act on them. This is not really an assumption, its empirically proven. If you ask people what choice they would make in a circumstance, and then test it by putting another group in that circumstance and seeing what choice they make, the results are different.

in a democratic system people's opinions are not weighted by the influence they can exert through spending or investing money.

How do you know this? Doesn't seem right to me.

What you are saying is basically that this whole process is unnecessary and not good for anything, because you already know that "better" is always where the market gets you.

To the extent that process is used to regulate markets, it will inevitably make people poorer in the aggregate. And yes, it would be better if the government just stayed out of it.

It's the price we pay to not live under tyranny.

Many people believe that the US Constitution was originally set up to prevent this kind of make-people-poorer regulation, but the legal boat has long since sailed.

you have left out in your statement of relevant assumptions that you have a governmental power making sure people do not wildly cheat on each other, do what their contracts say, don't print their own money,

I don't think of these things as "regulations," and they aren't what you were talking about. But to answer your question, it is a subject of active debate among theoretical economists whether any laws are actually beneficial at all, and if so which. I have not picked a side in that debate, but generally hold to the view that governments should protect property rights and enforce contracts.

do not spoil competition of the market,

Empirically, it appears that antitrust regulations are not actually necessary and only make people poorer. That's the majority view, but it isn't universal. I go back and forth about it; but generally hold with the view that anti-competition agreements should be barred, but I'm unconvinced that the benefit obtained by doing so outweighs the cost.

do conform to standards and restrictions,. . . watch over trade being fair and so on and so forth.

What does it mean for trade to be "fair"? Where do these "standards and restrictions" come from? Although you say something else, you seem to talk a lot about having people vote their morals and then having the government enforce them...

Let's be very blunt about this: What you are talking about when you say "fair trade" or "standards and restrictions," is that there are two people who want to do an efficient transaction (one that will make them both better off), but a man in a uniform with a gun tells them he doesn't care if they both want to and its consensual, he'll shoot if they do.

That's what a regulation is.

* * *

I should point out here that the kinds of regulations at issue here have nothing at all to do with the issues in the financial "crisis."

There, the regulations at stake are things like "thou shalt mark financial instruments to market when calculating your compliance with debt covenants even if you intend to hold the instrument to maturity." (SFAS 115.)

Or "thou shalt not sell an instrument to investors unless (a) the instrument is rated "investment grade" by a certified ratings agency, or (b) you can establish a record that the investor meets statutory qualifications." (The '33 Act.)

Or "contracts that call for payment only upon the occurrence of a contingency are gambling, and shall not be enforced by the Courts, unless the holder of the right to payment has a pre-existing interest in the contingency not occurring." (The insurable interest rule.)

* * *

I have stayed away from discussing those things because they're far too advanced, honestly.

I should point out, though, that the free market sometimes "regulates" itself. For example, the banks got together and set up rules for swap transactions called the ISDA Master Agreement. Those kinds of "regulations," which are really not regulations at all but rather long-term relational contracts, are economically efficient.

Moreover, they come into existence even without government intervention. Put another way, the market creates its own "regulations" which are beneficial, in contrast to the government type. So we don't seem to need governmental process for very much at all.

Plato said...

JohnG,

That was an amazing post to me.

I am going to expand that a bit by mentioning that Kauffman and others of that group are fully aware of this subject.

IT is amazing to me that few have recognized the struggling that has been placed before us all, in the form of the "emotive realizations."

Lacking empathy?

This use of Gore is reminiscent of something that is "occurring today" in terms of the WhiteSpace.

How does one "precede the action of the future" without acknowledging what the manipulators are doing today?

The evolving nature of the goods and services being represented in the growth of the web, is the attempt to develop new niches in regards to goods and services.

Now "to follow that example" you will understand the prospect of information and how it must be made available to all people and not just circumvented to the "ole way" of doing things.

If you don't understand the background then you will never understand what "that information can mean." I used money and coin to represent "the object of today" yet I would say the evolution of the web must be more the value in recognition of information.

This is the basis of the background and the energy with which we can work.

I have an example that I am working on that's already been posted and will be brought forward for consideration. It is based on the idea of a "Rural Community Library Model."

MY attempt here is to challenge the way we have been doing things. "To change" the evolution of the Web. I have supplied relevant information about that whitespace for people to read. If one understands that copyright had it's copy left then one will also need to understand that the technologies can be adapted as well by consensus for access to information. To circumvent the strategy of the ole ways.

Any good engineers out there who believe in freedom of information?:)Look into the example of google 's attempt to satisfy the FCC for usability of the frequencies that were put up for auction once this was satisfied. We'll see how willing Google is, as a provide for this type of assertion.

Best,

Anonymous said...

I should clarify something:

you have left out in your statement of relevant assumptions that you have a governmental power making sure people do not wildly cheat on each other, do what their contracts say, don't print their own money,

I didn't leave these out. They aren't necessary assumptions. It is true that deterring fraud, protecting property, enforcing contracts, and establishing a mandatory currency are all economically beneficial.

But it is not at all clear that people would not do all of these things--or agree to subject themselves to a regime for the enforcement of these things--by consensual agreement ("spontaneous social order," we call it) in the absence of government.

And assuming two systems, neither of which do these things, but one of which regulates transactions, the unregulated one will produce greater aggregate well-being.

Bee said...

Hi LoboGris,

Let me explain. Lets suppose a theologist pretends, based on exactly the same problems you try to justify the intervention of empirical scientists (i.e. the urge to understand economy, act from political system, avoid crisis and solve poverty, economic problems, etc) to understand an economic system by the mean of faith. ¿Would you accept it? ¿or would you instead say that faith has nothing to do with the problem and any results they pretend to be true, are instead false because faith is not a correct way to understand economics?

Actually, most of our social systems including the economic one are based on faith to a significant amount. People only save money, invest in the future, or obey laws because they have faith the system will continue to run reasonably smoothly. But that was probably not what you were aiming at.

I am sorry to bring up Feyerabend again, but I don't particularly care by which method a model comes along as long as it is useful. I think I said that previously. If some theologist says he deduces a good model for economy from the bible, I personally don't think he has good chances for success, but the outcome will have to speak for itself.

The reason why I am emphasizing the scientific method in the sense of consistent model building, testing against real world data, if possible in controlled experiments, and tracking the detailed assumptions and limitations of models, and integrating the so found knowledge into our daily lives, is that this procedure (in contrast to interpreting the bible) has been enormously successful in the natural sciences, so it seems like a good idea to try to extend it to other areas of science now that we have the possibility to gather, process and handle as large amounts of data as one needs for social systems.

discovered a theory that explains economy

I can't even make sense of that. The point is not to find a theory that 'explains economy' much like my job is not to find a theory that 'explains physics' - what would that mean? The point is, once again, to come up with a useful model that helps us understand what we observe, and that we can use to shape our future.

To be concrete and finish the idea i explained you in my last comment about scientific method, economics is about individuals, not societies. That is why empirical methods are not able to raise any valid results with economics.

Economy is about the macroscopic results of individual's actions. Both are 'real' and 'observable' and are subject to building models. In fact, that's what people have been doing for decades, with good success. I seriously have no clue what your problem is. I think you are having some philosophical issue here, while I am trying to be pragmatic.

There is no regulation that can lead to the best for all.

Depends on what you mean with 'best' and how you find out what it is. See discussion with Anonymous. For one, your claim is unproven, you might only be able to prove it within some specific model and then your conclusions depend on this model's assumptions. But second, yes, living together does necessitate compromises. Obviously, I can envision regulations that would be better for me (e.g. everybody with a PhD in physics should get a permanent position.) But I guess many other people would disapprove, so it wouldn't be the 'best' solution for them. Instead, the question is, how do you find the solution that is as good as can be for everybody?

Any regulation will benefit some groups, and harm the interest of other groups. Even in completelly unpredictable ways from the naive "knowledge" of regulators and politicians.

That is why the authors of this essay are correctly pointing out it is a very complex system in which elements can display interactions in unexpected and possibly so far ununderstood ways.

because empirical method can't proove anything about an economic system, as like as faith can't proove anything about economics or even empirical sciences

I never said I wanted to 'prove' anything about the real world, that's definitely not what the scientific method is about. You can however prove conclusions within the framework of a model.

Best,

B.

Bee said...

Hi Anonymous:

That isn't precisely what economics shows. It shows that (a) government regulation will almost always make things worse, and (b) there's no way to identify the exceptions. And yes, that is "proven." Sometimes what you can prove with science is the limits of what's possible. (E.g., the uncertainty principle.)

Again you are using "worse" in a constrained meaning, as that the outcome differs from that of an unregulated system. The Uncertainty Principle proves a limit of what is possible within the framework of quantum mechanics, much like your statement amounts to neoclassical economics proves what is the "best" solution within the model you are considering. There simply is no other notion of "best" than the one you have defined.

What economics has proven is that if you attempt to achieve any other goal through government intervention, then you will make things "worse." In other words, fewer people will have less of the things they want. That is a rigorously proven, and empirically verified result. Regulating to pursue other goals necessarily means that people in the aggregate will be worse off. They will have fewer goods, less food, less housing, etc.

That is a much more useful definition of "better". Now let me ask my question again. What makes you believe that under all circumstances people will agree on this notion of "better"? Is what you are really saying is that the economic system will run less efficiently (as you defined) if you impose governmental regulations? Now please consider a situation in which this is not considered "worse" by all people.

Just consider for a moment that people might find things desirable that can only be achieved by imposing governmental regulations. You are simply denying people with such an opinion do exist, and you are constraining their options of what "better" means to the options that can be reached in a particularly set up economy. Whereas I am saying one should increase the space of options to allow other notions of "better". Note that my notion of "better" includes yours, for people could decide that no regulation is the best solution. The problem I am pointing towards is what if they don't?

The assumption is rationality not perfect intelligence or information or predictive ability. But regardless, the science of economics does, in fact, prove, rigorously and empirically, that people making transaction decisions on their own will do better than with government intervention.

"better" according to your definition of "better".

We live in democratic republics because they are superior to tyrannies. [...]

But our system of regulation, and the overwhelming majority of the taxes we pay, are there because politicians can get elected by promising to pass laws that benefit groups at the expense of other groups and, in the aggregate, reduce total well-being.

That is the price we pay to not live under tyranny.


The reason why we live in democracies is that not everybody agrees on your definition of "well-being". Instead, we put regulations in place so the system works towards what the majority of people (who you are saying don't exist because there can be no such mismatch) perceives as well-being.

However, the problem with this procedure is that it works too slowly and is too complicated to keep up with the economic system. That's why I keep saying our political systems need to be updated to better balance the economic one.

The only thing I'm telling anyone is that if you let people make transaction decisions for themselves then people on the whole will be better off.

I am kind of getting tired to point out that all your argumentation relies on the fact that you believe everybody agrees that the world an unregulated economy creates is indeed "better" according to their own opinion. Let me repeat however what I already said above, that for a long period of economic growth, both do seem indeed to agree with each other remarkably well. Nevertheless, you are declaring a secondary goal (your definition of "better") to a primary goal (my definition of "better") which gets you out of the problem to find out what "better" means if you can't read if off the results of economic transactions.

I don't know why you keep talking about 'moral problems'. Whether you like or don't like income equality in your country is not a question of moral, but as far as I am concerned also a matter of 'taste'. It seems to be however a sort of 'taste' for which there is no place in your sphere of thought.

Bee: in a democratic system people's opinions are not weighted by the influence they can exert through spending or investing money.

Anonymous: How do you know this? Doesn't seem right to me.


It doesn't seem right to you in the sense that it is not the case, or in the sense that it should not be the case? I would agree that unfortunately a person's influence on political decisions does indeed depend on his/her wealth, which is one of the reasons why many people are quite cynical about the functioning of this process. It is a mystery to me why this is tolerated as I think it is against the basic principles of democracy.

Let's be very blunt about this: What you are talking about when you say "fair trade" or "standards and restrictions," is that there are two people who want to do an efficient transaction (one that will make them both better off), but a man in a uniform with a gun tells them he doesn't care if they both want to and its consensual, he'll shoot if they do.

That's what a regulation is.


I am not for the death penalty, but in spirit that is indeed what I am saying. If there are two people who want to do a trade that will make them both better off but has the effect of working against a goal the society has decided is desirable, then the government should take means to avoid this, e.g. by raising fees or punishing them in some other way so there is no incentive for this. There are plenty of cases where you need this. Take all consumer rights for example. You are not generally allowed to lie to customers about a product so they 'believe' they will benefit from a transaction. That's a very simple example. You are also not allowed to freely trade goods that are dangerous of some sort, like weapons or drugs etc. All these are cases where the people have decided these regulations are in their benefit. I too do think these regulations are to our benefit. There are of course other cases where the situation is less clear, but decision making in large groups is generally a complicated process.

Another examples is e.g. environmental protection. And why do we need regulations for that? Because once you are at a stage where people will personally - given their limited knowledge and information (and time) - realize some transaction is not to their benefit, it might already be too late to fix a problem.

Best,

B.

LoboGris de Lothlórien said...

Hi, bee

«Actually, most of our social systems including the economic one are based on faith to a significant amount. People only save money, invest in the future, or obey laws because they have faith the system will continue to run reasonably smoothly. But that was probably not what you were aiming at.»

One thing is the faith of the different individuals and the actions they take based on that faith, and a completely different thing is the faith used by a religious group in order to understand economics. I'm talking about the last. Individuals does not acts according to the religious group believes about the best for an economic system. They act according to it's own believes about the effectivenes of the action they will take for his own purposes.

In the same manner, individuals in a market do not act according to the model a group of scientist can eventually develop according to what they think the best. They act according to its own believes and knowledge about the effectiveness of the actions they will take for his own purposes.

That is why there can't be such a thing that a scientific economic model.

«I am sorry to bring up Feyerabend again, but I don't particularly care by which method a model comes along as long as it is useful»

I insist. You are missing the point. I'm saying that it not posible to develop any useful empirical model of economy, except if "useful" means "a model that benefit the interest of an interest group provided they convince rest of people that this model is correct and deceive them to act according to the interests of that group and at expenses of that people". Socialism is a complete sham. A lie. But it is also useful... for the ruling classes that take the power in a socialist society.

Useful does not means true. Useful does not means better for all society.

«Depends on what you mean with 'best' and how you find out what it is. See discussion with Anonymous.»

i referred about the "best" just because i was following your discussion with anonymous and i was giving you an answer about that.

Best means whatever is considered best by each and all the parts. And that is just the point. I'm saying to you that any regulation that comes from outside market, will benefit some people at the expenses of other. Other way, this regulation would be taken spontaneously by the market agents in a given market exchange.

If you need to force from outside the market a given regulation, it is because at least one of the parts would not follow the prescription of that regulation by his own free will. Hence, at least one part consider that this regulation affects his interests.

In conclusion, there is no regulation that cames from outside the market, that is the best for all individuals in the market. And this conclusion does not depends on what we define as "best".

«Instead, the question is, how do you find the solution that is as good as can be for everybody?»

And i have prooven you that there is no such a solution in a government regulatory layout.

«That is why the authors of this essay are correctly pointing out it is a very complex system in which elements can display interactions in unexpected and possibly so far ununderstood ways.»

But that does not prooves the possibility of a solution, neither the validity of an empirical model.

«I never said I wanted to 'prove' anything about the real world, that's definitely not what the scientific method is about. You can however prove conclusions within the framework of a model.»

But the model you want to develope (i.e. an empirical model) includes methodological conditions that are not fulfilled by the problem of economics.

«Economy is about the macroscopic results of individual's actions. »

But the macroscopic results derive from individual actions. So, economics at last are about individual actions.

«Both are 'real' and 'observable' and are subject to building models.»

Not any model that cames from empirical science.

«In fact, that's what people have been doing for decades, with good success.»

Again, not empirical ones. Successful models on economics does not came from empirical scientists. Cames from praxaeological reflexion. And states that many process are esentially unpredictable.

«I seriously have no clue what your problem is.»

It is easy. I repeat:

individuals in a market do not act according to the model a group of scientist can eventually develop according to what they think the best. They act according to its own believes and knowledge about the effectiveness of the actions they will take for his own purposes.

That is why, as i explained above, neither empirical model of economics can be valid, nor any regulation from outside the market can be better than the self regulation.

Anonymous said...

The Uncertainty Principle proves a limit of what is possible within the framework of quantum mechanics, much like your statement amounts to neoclassical economics proves what is the "best" solution within the model you are considering.

I cannot state more clearly that I am not representing a neoclassical view, any more than someone defending special relativity is representing a string-theoretical view. What I am representing is a view common to all (non-Marxist) schools of economics over the last Century.

Again you are using "worse" in a constrained meaning, as that the outcome differs from that of an unregulated system.

I'm not using a constrained definition of worse, you're confusing assumption and conclusion. The assumption is that people generally want to have more of the things they want, which is tautologically true. The research result is that interfering with the market means they will have less.

Is what you are really saying is that the economic system will run less efficiently (as you defined) if you impose governmental regulations? Now please consider a situation in which this is not considered "worse" by all people.

Everyone agrees that it is better for more people to have more of the things they want to have. I think what you are hypothesizing is the existence of some social order that would confer an intangible benefit that people would prefer to the things they would have to give up in order to achieve that social order.

How do you know people really would find that social order preferrable to what they gave up? I mean, seriously -- how do you believe that anyone can properly evaluate and express their own preference in this regard? And why do you think it is fair on the people with different social order preferences that they have less of the things they want because they are forced to live in a social order that other people prefer?

You've also bumped into a new problem: Another research conclusion of economics is that you can't beat the market. If you ban something, you only create a black market, which creates a new transaction cost, which acts as a drag on aggregate wealth.

It's like thermodynamics. You can't win, you can't break even, and you can't quit the game.

An example of this is the growth of credit derivatives. For some time, it was hoped that the business cycle could be smoothed out through non-regulatory intervention. The government would offer a benefit to the banks (low interest loans) in exchange for which the government (by its control over those loans) could increase and decrease the money supply by adjusting short-term overnight interest rates to banks.

What happened? Well, even though the government imposed a uniform currency system, the market found a way to create a larger money supply beyond the control of the government. That is credit derivatives. Pretty soon, the government's interest rate changes had no effect on the commercial rates of interest charged in the private market.

The market always wins in the end--the only question is how much we lose to regulation on the way.

we put regulations in place so the system works towards what the majority of people (who you are saying don't exist because there can be no such mismatch) perceives as well-being.

No, the majority of people agree with me about well-being, but somehow believe they can "beat the system" through regulation, as though it were the nefarious doings of ill-wishers that were the problem.

However, the problem with this procedure is that it works too slowly and is too complicated to keep up with the economic system. That's why I keep saying our political systems need to be updated to better balance the economic one.

So are you suggesting that the Fed is insufficiently independent? That FASA is? I don't get it... I don't think you understand how the economic regulation and intervention system interfaces with the political system at present.

Just consider for a moment that people might find things desirable that can only be achieved by imposing governmental regulations. You are simply denying people with such an opinion do exist, and you are constraining their options of what "better" means to the options that can be reached in a particularly set up economy.

You seem to be focusing on this word "better" in a strange way, so from now on I'll try to be more precise.

There are lots of people who believe (rightly or wrongly) that they will benefit from government regulation. But it will always -- always -- be the case that the benefit to those people will come at the cost of a detriment to other people, the detriment will almost always exceed the benefit (in the aggregate), and there's no way to tell the exceptions.

"better" according to your definition of "better".

Do you believe it is better for people to have less of what they want, or more of what they want? If its the latter, then you agree with me.

I am kind of getting tired to point out that all your argumentation relies on the fact that you believe everybody agrees that the world an unregulated economy creates is indeed "better" according to their own opinion.

That is not my opinion, and has never been. You keep repeating it because you seem to have missed the explanation I have now repeatedly had to give:

I have used "better" to mean that people, in the aggregate, have more of the things they want. "Things" including all that is monetizable, including time, children, etc. as we discussed earlier.

It is the RESEARCH CONCLUSION that people have more of what they want in an unregulated market. That is the SCIENTIFIC RESULT. The consequence of an unregulated market IS NOT AN ASSUMPTION OR AN ELEMENT OF THE DEFINITION OF "BETTER" THAT I AM USING.

Whether you like or don't like income equality in your country is not a question of moral, but as far as I am concerned also a matter of 'taste'. It seems to be however a sort of 'taste' for which there is no place in your sphere of thought.

People whose "taste" it is to have more fiscal equality are always welcome to donate their money to the less fortunate. FORCING people to donate their money to others creates a net benefit for one person, and imposes a cost on the other.

Whether one feels that the benefit outweighs the cost -- that is the moral decision.

And yes, that "taste" for equality is, in fact, one that is included when I say that an unreglated market give people, in the aggregate, more of what they want.

You are not generally allowed to lie to customers about a product so they 'believe' they will benefit from a transaction.

That's a fraud, not a consensual or efficient transaction.

You are also not allowed to freely trade goods that are dangerous of some sort, like weapons or drugs etc.

Right, so instead we create black markets for these things.

On the most basic level, we ban these things because we associate them with invasions of property rights (violence). This is consistent with the protection of property rights, and is not a "regulation" of the type we have been speaking about, or the essay authors were.

Another examples is e.g. environmental protection. And why do we need regulations for that? Because once you are at a stage where people will personally - given their limited knowledge and information (and time) - realize some transaction is not to their benefit, it might already be too late to fix a problem.

No, not really. Its because there are some transactions in which the costs and benefits are not felt entirely by the transaction participants. (They are externalized, to be technical.) In the very rare circumstance that (a) costs and benefits are externalized, and (b) the transaction costs of entering into a voluntary internalization are prohibitive, then (c) you can obtain a net economic benefit through a legal system that, as a matter of default rules (not regulations, but default rules that can be contracted around) re-allocates those costs to the least-cost avoider.

As I hope that explanation made clear, this topic (environmental regulation) requires a host of new economic tools (transaction cost economics, externalization, the Coase theorem, etc. etc.) that are substantially more advanced than the discussion we're having so far.

This is why economists have had things to do for the last Century!

I'm happy to take you through that stuff, but you have to get a grasp on the fundamentals first.

Neil' said...

Anonymous said, backed by supporters: It is the RESEARCH CONCLUSION that people have more of what they want in an unregulated market. That is the SCIENTIFIC RESULT. The consequence of an unregulated market IS NOT AN ASSUMPTION OR AN ELEMENT OF THE DEFINITION OF "BETTER" THAT I AM USING.

That is false in several ways. First, I don't know how this can be a "research conclusion/scientific result [empirical as opposed to presumed from faith in theory or ideological] if you don't have a developed economy that exemplifies an "unregulated market." You can say that the semi-regulated markets of all developed first world nations do better than ultra-regulated markets like communist ones, but where is there a place with an unregulated economy where people are richer than US/EU/Japan and are satisfied with the "side effects" of that as well. Where is the meat behind your boasts - I don’t mean the presumption it “has to be true,” I mean the showing that it *is* true by actually asking people how much they like the circumstances in such an economy. Hey, if you really believe in freedom of choice then that applies to the higher-order freedom to decide if you like the overall circumstances, not just specific items you purchase. I suspect they would say they didn’t, see below for more.

Second, you must have and do have a particular definition of better in order to even present it as a qualifier. Your definition already given before is that “we” have more of what we want. Well, first of all that “we” is ironically ambiguous and collectivized. Do you mean, more on average (highest per capita), or that each and every person has more than they otherwise would? (The term “greatest good for the greatest number” is a bit ambiguous.) The latter universal claim would be a stretch, not that you have or could prove it anyway (how?) Suppose that 90% of the population thinks it would be better off by having a more regulated economy, even though the reduction for the top 10% would bring the average down. Well, they might vote to make it so. And isn’t voting for that a “choice” that they make? Indeed, the fact that most people all over the world did vote for some economic regulation proves that they did want that – so it is their “choice” after all. Really, you don’t “socialists” dictating to people what they can buy, so you can’t dictate to them what they can vote for.

Another point: you talk of “most” but economic cycles are harder and more “bubbles” with no regulation, and unevenness has its own effective costs which you are ignoring (following the general pattern of looking at very simplistic immediate transactions and nearly ignoring externalized costs, pretending without merit that they are minor. No, to the contrary, our high consumption of oil has an enormous externalized cost building up over decades that immediate-gratification-based, simplistic economics like yours doesn’t really deal with. It is ironic, that you decry the fallacies of “Econ 101” – which is indeed fallacious, but your economic theory is wrong in the very same simplistic, absolutist way as Econ 101. you are like a classical physicists who doesn't’ understand or believe in quantum mechanics.

Also, the existence of a modern fiat money supply makes a free market impossible. With a real hard currency, I have to trade money for goods and no one can have “money” raining down like pennies from heaven. But we don’t. In order to have adequate credit, the government has to have an expanding money supply. That can only be done by an intrusion into the market, involving winners and losers, of how to do it monetization of debt, a rather wretched scheme that lets banks in effect have free money.) Even if you say, people make

Now here you might say, the government is a special outside force “interfering” with private business decisions. Is it really? Suppose I owned lots of real estate, and rented out to businesses. I would charge rent, and I could impose rules on what they did as condition for renting. You might say, oh, that’s just “part of the free market.” But let’s unpack that and compare to “the government.” It is hard to prove who really owns or should control what, given the original state of nature and people having to agree on power sharing etc. So, you aren’t going to have much better luck proving that a “property” really was rightly passed down since antiquity of first Lockean mixing versus a “government” formed anciently by a tribe deciding to hold a land in common, etc. By now both are conventions of agreement, unless you can prove either property or government boundaries with magnetism etc. (like a “real” scientist ;-) So the so-called “regulation” is really more like the government acting as a “landlord” and imposing rules that its own equivalent of owners/shareholders want to such as better pay for themselves – just like the real estate owner could in principle. Really, what’s the big difference? BTW, it costs businesses more to pay all that rent, why aren’t you complaining about that? “If taxation is theft, then so is rent.” It is no coincidence that forced advantages are called “rent” in economics, since common “rent” is an example once you cut through the pretense of the supposed natural prerogatives.

No, it is not the distinction that the government exerts “force” and the owner doesn’t but asks for “choice” instead – that’s a standard libertarian fallacy. Of course the owner has to exert “force” or else squatters or renters would do as they please, stay after refusing to pay, etc. Oh, the renters didn’t have to rent there, you say? But you didn’t have to follow this government’s rules either if you travel to another country (it’s like moving to a new apartment building.)

Finally, we already had a rather unregulated environment in the USA (the Gilded Age)) and citizens (the nation’s inherent shareholders) voted to change that – so that means they didn’t like it after all, no matter what you say about picking and choosing this or that merely to buy. How can that be, if they “always get what they want” when they buy something (in the broad sense)? Easy – such market choices are really the deepest choices anyway. When you “choose” in a market, you are taking say H over V, but that doesn’t mean you really want H it means you like H better than V and maybe would like W even better. IOW, picking from a menu isn’t the same as deciding what’s on the menu to start with. So a person picks to work for $10/hr. rather than not at all, but would rather get $12. Now maybe the result of “forcing” them to pay more is “worse” but who gets to decide that anyway? The same people who decided to put it on the menu.

Bee: See, you are on to something quite reasonable. If you need more support, read Krugman (someone who really did deserve the Noble Prize in Econ) or Brad DeLong.

tyrannogenius

John G said...

"I think what you are hypothesizing is the existence of some social order that would confer an intangible benefit that people would prefer to the things they would have to give up in order to achieve that social order... As I hope that explanation made clear, this topic (environmental regulation) requires a host of new economic tools (transaction cost economics, externalization, the Coase theorem, etc. etc.) that are substantially more advanced than the discussion we're having so far.
"

It's called having a conscience and yes there are prices to be paid like a black market full of people without one... when too many people stab people in the back cause it's only business it's bad (I worked 18 years at IBM, I know this). This badness is called Ponerology.

http://en.wikipedia.org/wiki/Ponerology

Neil' said...

The following intended paragraph was so mangle by rapid typing/on-fly editing that I need to repost it:

Also, the existence of a modern fiat money supply makes a free market impossible. With a real hard currency, I have to trade money for goods and no one can have “money” raining down like pennies from heaven. But we don’t. In order to have adequate credit, the government has to have an expanding money supply. That can only be done by an intrusion into the market, involving winners and losers, of how to do it (such as monetization of debt, a rather wretched scheme that lets banks in effect have free money.) Even if you say, people make their own choices like buying bonds, that being the way it happens was imposed by the government.

Neil' said...

At the risk of over-posting, but I forgot a very crucial point: "corporations" have been granted special legal rights (such as right to earn and be owed money, but the members don't owe the corp. debts in turn) and a degree of legal personhood. Well, first, this shows the error of economics pretending to only be about "individuals" as such - corporations have to be treated as "an entity" or else the fungibility and collectivization of the specific owners, etc. can't be represented. Second, it is a useful privilege that society does not have to grant, hence we have the right to demand a price for offering it - yet more justification for our imposing rules on corporations. If you say, that's "imposing" on the market, I say it is just redefining who the rightful shareholder/owners are in the first place. After all, the company acts "in the market" anyway despite being subject to control by whoever is legally alleged to have the right - must the composition of the "shareholders" follow a certain stereotype of typical investors? Why not the public itself? This isn't an issue of "economics", it is an issue of law and politics.

Anonymous said...

I want to briefly address two of the other commentators:

Also, the existence of a modern fiat money supply makes a free market impossible. With a real hard currency, I have to trade money for goods and no one can have “money” raining down like pennies from heaven. But we don’t. In order to have adequate credit, the government has to have an expanding money supply.

That's factually and historically wrong. Money is a good like any other for which there is a supply, a demand, and in the long-term a larger amount can be created by the market. New techniques for lending, making additional capital available for lending, etc., all expand the money supply. Other techniques let people borrow against assets, etc.

corporations have been granted special legal rights . . . and a degree of legal personhood. Well, first, this shows the error of economics pretending to only be about "individuals" as such

Actually, in economics we recognize the corporate form as a fiction.

Crackpottery...

That is false in several ways. First, I don't know how this can be a "research conclusion/scientific result [empirical as opposed to presumed from faith in theory or ideological] if you don't have a developed economy that exemplifies an "unregulated market."

We use statistical methods to make up for our inability to conduct repeated controlled experiments. Its a difficult technique and it limits what we can and can't do, but it is empirically rigorous.

Your definition already given before is that “we” have more of what we want. Well, first of all that “we” is ironically ambiguous and collectivized. Do you mean, more on average (highest per capita), or that each and every person has more than they otherwise would?

I didn't use "we" much except to simplify, but your question is apt: What I was using "better" to mean was greater total satisfaction of individual preference functions. I do not mean each and every person has more than they otherwise would, but that people as a whole do. I am saying nothing about distribution.

economic cycles are harder and more “bubbles” with no regulation, and unevenness has its own effective costs which you are ignoring

I'm not ignoring them at all, and I've addressed this issue in several posts.

It is hard to prove who really owns or should control what, given the original state of nature and people having to agree on power sharing etc.

It doesn't matter. As long as people can transact freely and property rights are established at a given moment in time, the distribution of those property rights is irrelevant and the conclusions I've described stand.

it is a useful privilege that society does not have to grant, hence we have the right to demand a price for offering it

We do charge a price. It costs about $150 in most states, last time I checked, and the corporation may become subject to additional taxation.

If you need more support, read Krugman (someone who really did deserve the Noble Prize in Econ) or Brad DeLong.

Krugman won the prize for work done a very long time ago. Many economists were quite ashamed that he won it, considering how much he has done since that work to discredit himself.

Plato said...

Anonymous:....and in the long-term a larger amount can be created by the market

I think it's important here to recognize the timeline on the "creation of the money?"

To others who are invoking God or string theory.

"Raining down from heaven," "the bible as a model"...what the heck here.:)Does no one recognize the potential for an exponential growth from a new market created based on a "competing figure" that is non-profit?

New market potentials for google or second life? I have a whole list of new companies that can be formed that are non profit:)

Best,

John G said...

"That's factually and historically wrong. Money is a good like any other for which there is a supply, a demand, and in the long-term a larger amount can be created by the market. New techniques for lending, making additional capital available for lending, etc., all expand the money supply. Other techniques let people borrow against assets, etc."

Yes and here's the real beauty of this for people without a conscience:

Going far back, lending money at interest, usury, or fractional reserve lending, would seem to lead inexorably to where we're at now. Ran Prieur explains:
You might have heard the thought experiment where we're all on an island using a fixed number of coconuts for money, and if we start lending coconuts at interest, we create imaginary coconuts so it's impossible for all the debts to be repaid. To make the simplest possible example, if there's only one coconut, and I lend it to you on the condition that you pay me back two, we now have two imaginary coconuts and only one real coconut. You can't pay me back two, so instead you pay me back one and become my slave. Now, I could give you the coconut as wages and you could give it back to me, but it's much better for me if I loan it to you again and create more debt, and that's what happens in the real world.

Multiply that by billions, and it's still not as bad as the real situation, because once we have a system where someone can make money merely by lending, we get predatory institutions that don't just lend the money they have, but money they don't have. The really big fake money is not created as interest, but as fake principal to enable the creation of more debt/slavery. Inevitably, the lending institutions grow like cancers to consume the whole economy, and the supply of real stuff cannot match the exponential growth of money/debt, and the system collapses. And the foundation of the whole nightmare is the rule that if you loan someone money, they have to pay you back more...

I came up with another island-coconut story that makes the point better: Imagine an island with three people, Morgan, Chase, and you. Each of you has ten coconuts. Morgan and Chase agree to hold each other's coconuts and pay interest to each other, and you think that's silly and just keep your coconuts under your bed. Eventually, through compound interest, they have accounts worth hundreds of coconuts, while you still have only ten. Of course, if they try to withdraw their coconuts, the system collapses, so to make it more stable, they use pieces of paper that represent coconuts, and later they don't even use paper, but just keep a ledger of how many coconuts everyone supposedly owns. They agree to rules where they can lend each other even more coconuts than they have in paper money, so they can grow their money faster, until there are tens of thousands of symbolic coconuts. Meanwhile you still have only ten, and now if you want to buy stuff, it's going to cost more than it did before. Probably you will have to sell your actual coconuts to Morgan and Chase to afford to eat.
The origins of this collapse of the global system, for collapse it is, has it's origins in the very nature of the fiat money and fractional reserve banking system combined with Reaganomics and Thatcherite deregulation of the 1980's; an inevitable consequence of the "free market".

Bee said...

Hi Anonymous:

I'm not using a constrained definition of worse, you're confusing assumption and conclusion. The assumption is that people generally want to have more of the things they want, which is tautologically true. The research result is that interfering with the market means they will have less.

I think I must really be totally unable to express myself. It seems to be completely beyond you, but I am indeed saying exactly your 'tautologically true' assumption is nothing but an assumption. Whether it is true or not is something that needs to be examined. How do you examine it? Well, you ask people what they want. How do you do that? Well, you use your political system, one voice per person. What do you ask them? You ask them whether they might perhaps prefer to have a little bit 'less' in exchange for something else they desire, as for example avoiding unwanted side-effects of sudden market corrections or better air quality. And yes, this means they will have 'less stuff' but gain the possibility to reach states of the social system that are not within the realm of an unregulated free market.

Everyone agrees that it is better for more people to have more of the things they want to have.

Since I just disagreed with you, this statement is wrong. Now you can dismiss my opinion, but please keep in mind that we *do* have market regulations that are a result of a democratic process, meaning a majority of people have disagreed on what you said. You are simply denying their decision on what they want does express what they want so you don't have to face they disagree with you.

I think what you are hypothesizing is the existence of some social order that would confer an intangible benefit that people would prefer to the things they would have to give up in order to achieve that social order.

Correct except for the word 'intangible'.

How do you know people really would find that social order preferrable to what they gave up?

I don't. But I believe in democracy and therefore I think the closest you can get is to offer them a possibility to voice their opinion, ie vote. If they don't find a change is for improvement, well, they can change their mind and try something different next time. We have been running this process for quite a while now, and the outcome is that, yes, people do want to have regulations, that's why we have them. The amount changes over time and from country to country, indicating different preferences that lead to different results. What I am saying is if people really don't want any regulations, as long as they live in a democracy, they can turn that preference into reality. You instead want to tell them they are not capable of making any decision of that sort and dictate them what they want is not allowed to include any opinions on the running of the economic system.

I mean, seriously -- how do you believe that anyone can properly evaluate and express their own preference in this regard?

That's why we have a representative democracy and not a grassroot's democracy, and that's why I am saying there needs to be more of a scientific method in that process to achieve a more flexible evaluation and more direct feedback. Yes, similar to that of the economic system. Its success lies in the fact that it is easy, and it is direct at the individual level.

And why do you think it is fair on the people with different social order preferences that they have less of the things they want because they are forced to live in a social order that other people prefer?

A) Living together in a society always requires compromises. Why do you think it is fair to impose your idea of 'well-being' on other people?

B) As I said previously, modern democracies don't simply impose a majority opinion on everybody but try to find a solution that is most beneficial for everybody. I also emphasized that this process unfortunately doesn't actually work as good as it should.

You've also bumped into a new problem: Another research conclusion of economics is that you can't beat the market. If you ban something, you only create a black market, which creates a new transaction cost, which acts as a drag on aggregate wealth.

It is hardly a new problem. People always try to push the boundaries and break the rules when it is to their individual advantage. Yes, this is a drag, but the solution is definitely not generally to just let them do what they want. You have to weight the benefit of banning something against the drawback of the necessary effort. It's a question that is constantly asked in political decision making. Again you are imposing a universal answer according to your own opinion of what is good or what isn't, notwithstanding the fact that others might disagree.

People whose "taste" it is to have more fiscal equality are always welcome to donate their money to the less fortunate. FORCING people to donate their money to others creates a net benefit for one person, and imposes a cost on the other.

Just that the first results in an individual disadvantage, whereas the second doesn't. That's the reason why people decide, democratically, to tax everybody to work towards goals that would not be achievable if pursued on the individual level (as you suggest). What you are saying is for example all the people who can't afford medical care should go and beg in the streets in the hope that somebody will donate money. You are further saying that a single mom with three children who doesn't have enough income to feed their kids should hope for donations, and if the donations don't come, well, maybe let some of the kids starve to death to solve the problem? You are also saying that instead of providing a good education for everybody through tax money, we should hope that the rich donate to educate the poor. Unfortunately, it is much more likely they will get stuck in their poverty trap. And so on and so forth go the consequences of your conviction that people don't know what they want when they decide against a free and unregulated market.

Luckily, most people disagree with you on what kind of social environment contributes to their happiness.

Best,

B.

Andrei Kirilyuk said...

Bee said (in response to Anonymous, our preferred economic guru): “You are further saying that a single mom with three children who doesn't have enough income to feed their kids should hope for donations, and if the donations don't come, well, maybe let some of the kids starve to death to solve the problem? You are also saying that instead of providing a good education for everybody through tax money, we should hope that the rich donate to educate the poor. Unfortunately, it is much more likely they will get stuck in their poverty trap. And so on and so forth go the consequences of your conviction that people don't know what they want when they decide against a free and unregulated market.”

Oh là-là, Bee, you are really unfair to Anonymous in this argument. He multiply repeated the idea about “a (necessary) price to pay for having democracy instead of tyranny”, despite its formally “anti-market” origin. It is thus included in his attitude: he is not against paying taxes to save those “poor children”. It was easy to see it, after his multiple repetitions. His position is rather that this “price to pay” should remain close to its “inevitable”, really necessary minimum (for example, sufficient to maintain a general social order and comfort, without any sheer suffering of anybody), while you insist, apparently, on its value not being so rigidly fixed at that necessary minimum, but being made variable (and properly structured) according to quasi-scientific work of our best intellectuals (us, of course, who else?!).

It has nothing to do with “good feelings” of saving the “poor children”, which everybody agrees upon (you more emotionally and Anonymous more rationally, to avoid riots and resulting tyranny). It has nothing to do with the purpose of “more fair society” either (to which you're alluding all the time, as if it's your original idea inaccessible to understanding of other, market-oriented tax-payers, such as Anonymous) because that “poor” single woman with three children still has permitted herself to have them (with absent husband, according to the assumption), while many other women from the same society equally loving children (theirs especially) have restricted their natural desires as they were not sure that they would be able to sustain all the children properly. So why should society be “fair” with respect to the first one and therefore inevitably unfair with respect to those other ones, while knowing in addition that it's actually strong over-population (and especially already too big population of high-consumption countries) that is the real and really changeable origin of all “ecological” problems (among others)? Of course, a particular nation may decide that supporting more children in a particular moment is a practically needed, market-oriented solution (but then again, it's practically impossible to calculate the net advantage or disadvantage of such a solution).

Therefore, the only remaining true difference between your opinions would still be rather of “economic” origin: if we try to advance beyond the “natural” minimum regulation defended by Anonymous, can we progress more in that basic, eventually always “material” development? For example, the first solution Bee would propose being given the power to make government advice is to provide all Ph.D. holders with a permanent position (it's her current, “slightly personal” best wish expressed here). Why not indeed, if science brings progress? But on the other hand, if all of them are as efficient as PI adherents in real problem solution (having nothing to do with their evidently unrealistic “models”), then maybe it's better to invest in a more practical, e.g. engineering knowledge, or else in totally unpractical but still practically attractive art, or else in fundamental but different, provably problem-solving kind of knowledge? It is in the middle of arising huge complexity of a huge number of such possibilities and their uncertainties that Anonymous intervenes with the superior elegance of his economic science that has (allegedly) proved and confirmed experimentally that irrespective of all those details (inaccessible to most advanced science, let alone its really dominating branches), society should basically give freedom to free-market investors, all their species, knowing, of course, that they know all that we know (usefulness or otherwise of science, beauty of art and suffering of a poor mother whose poor children may become dangerous criminals). The market development results, including inevitable mistakes, will decide better, with minimum losses. I would say, it's quite in the spirit of “emergent”-structure science, so much popular today just in those “advanced-study institutes” (generally useless as such).

To save space and time, we regret to inform you, Bee, that you have lost the current dispute in favour of Anonymous. But don't be upset, it's only this particular dispute and it doesn't mean that Anonymous' position is right in general! It's only right with respect to your particular position in this dispute. [Lesson: avoid being subjective and generalising your even best, but temporal hopes to objective problems of society as a whole.] In order to compensate your loss, I'll try to show, in a next comment, why the vision of Anonymous is strongly deficient itself, within a yet harder task and deeper problem we actually face today. It will be our revenge, from the part of all Ph.D.s desperately seeking for a good, permanent position, while all those so-called “economists”, with their guaranteed incomes, lead the world deeper down in the economic (and other) crises! We'll show them who the true winner is, believe me! We'll make them share their profits with us!

Another reason why he's a winner here (but also why he is not the absolute winner) is that all those disputed versions of weaker or stronger (free) market regulation have already been realised and now coexist peacefully on this planet. If you (anyone) prefer stronger regulated and “fair” (according to you), “socially protective” market system, why not to opt for a Scandinavian way and life style: with their taxes attaining something like 70 %, in full (and very strong) democracy, they are (apparently successfully) realising what you're trying to defend so fervently “in theory”. And if you don't find so easily a suitable scientific position for you either there or in the more “regulated” Europe in general (which is the dominating tendency for our Ph.D. brothers and sisters), then it's another, very “experimentally confirmed” sign of your failure showing that essentially more “liberal” (non-regulated) North-American market is able to provide much more much better paid positions, even in such apparently “non-business” activity as fundamental science. (After which it would be suicidal for you and all of us to push those objectively more efficient - in everything - USA/Canadian “capitalists” to a formally “safer” but in reality much more restricted, if ever practically accessible, system.)

And the very last clarification about what is “best for people” and who will decide it (should say it before, in view of your reproduced confusion about it). Anonymous is talking about objective, eventual, practical (and average) benefit for people, while you tend to mix it with subjective people's ideas about it and related social “wishes”. Anonymous is talking about a (final) “supermarket”, consumer position/benefit, which is rather well-defined, after all (like buying better quality/price ratio, etc.), while you want to add various “psychological” and “emotional” estimates of one's quality of life, socially and intellectually influenced, changing, etc., where people tend to be extremely subjective and make a lot of rough mistakes. Note that it doesn't imply only “rough material values” from his side: a consumer can be interested in very fine, intellectual and even “spiritual” product qualities (e.g. for books, art works, computers, education), while remaining within that basically objective market reasoning. However, those “other” desires you tend (but fail) to involve may still have something to do with further progress, but beyond straightforward “regulation” criteria logic you tried to propose.

Bee said...

Hi Andrei:

you insist, apparently, on its value not being so rigidly fixed at that necessary minimum, but being made variable (and properly structured) according to quasi-scientific work of our best intellectuals (us, of course, who else?!).

I never said anything of that sort and it does not express my opinion. I do even agree that this deviation from a free market should be kept to a necessary minimum. I am just saying that different people might have different opinions on what that necessary minimum is, and that opinion might change over time, thus there can be no universal answer. To come as close as possible to the best solution it requires sufficient flexibility and evaluation.

you are really unfair to Anonymous in this argument. He multiply repeated the idea about “a (necessary) price to pay for having democracy instead of tyranny”,

Except that it is you who put in the word "necessary" which changes the statement considerably. I could even make sense of that.

“more fair society” either (to which you're alluding all the time, as if it's your original idea inaccessible to understanding of other, market-oriented tax-payers, such as Anonymous)

I am reasonably sure I never said anything about 'fairness'. The rest of your comment is (as usual as I unfortunately have to add) a further confusion of what I said. It is really a mystery to me why you either deliberately or accidentally misconstrue almost every opinion I try to express into something utterly bizarre.

Best,

B.

Amos said...

I think I must really be totally unable to express myself. It seems to be completely beyond you, but I am indeed saying exactly your 'tautologically true' assumption is nothing but an assumption.

The assumption is that people want to have more of the things they want. “Things” includes everything whose value can be compared to other “things” including free time, family, living in an equitable society, etc.

I’m not sure why you disagree with the assumption, and I don't think you really do.

Everyone agrees that it is better for more people to have more of the things they want to have. Since I just disagreed with you, this statement is wrong.

I really have trouble with this… Maybe it is a language issue but, are you really saying what you are saying? Are you really saying that you – if you made a list of all the things in the world you like, your family, your home, your clothes, your loved ones, free time, walking in the park – that you would prefer if you had LESS of those things?

Remember, it isn’t less in exchange for something else, because everything fits within the definition of “THING” above. It’s just LESS of everything you like.
That cannot be what you are saying.

How do you examine it? Well, you ask people what they want. How do you do that?

Empirically, how people answer the “what do you want” question is different than what they actually do when given the choice. People do not know their own preferences.

Example: Bee, if you had ten apples and only one orange, how many apples would you be willing to give me for an additional orange? What if you had 5 oranges? 20 apples?

Its pretty hard to answer that and be sure of your answer, right?

I think what you are hypothesizing is the existence of some social order that would confer an intangible benefit that people would prefer to the things they would have to give up in order to achieve that social order. Correct except for the word 'intangible'.

We established earlier that all preferences within a person are comparable and monetizable, including things like “the way we’d feel in a different social order.”

How do you know people really would find that social order preferrable to what they gave up? I don't. But I believe in democracy and therefore I think the closest you can get is to offer them a possibility to voice their opinion, ie vote.

Ahhh… but when the government imposes a social order, it imposes it on everyone, including the people who voted ‘no.’ Assume a society of 100 people, 51 of whom voted for a change in the social order. How do you know that the strength of their preference is not outweighed by the more deeply held opposition of the other 49?

But we’re not talking about expressed political views anyway. We’re talking about net total preference satisfaction – total happiness. So the question is: How do you know that the benefit to those 51 exceeds the cost that imposed on the other 49?

Voting cannot answer that question.

I mean, seriously -- how do you believe that anyone can properly evaluate and express their own preference in this regard? That's why we have a representative democracy and not a grassroot's democracy, and that's why I am saying there needs to be more of a scientific method in that process to achieve a more flexible evaluation and more direct feedback.

Then you are making precisely the argument I thought you were making, which is the argument that took place in the 1930s, the Great Calculation Debate!

The problem you are trying to solve—how do you know that the cost to some is outweighted by the benefit to others—cannot be solved by external measurement. There is no way to read minds.

You have to weight the benefit of banning something against the drawback of the necessary effort.

Yes, you do. And what economics teaches us (as a conclusion, not an assumption) is that (a) the cost imposed will almost always exceed the benefit, and (b) it is impossible to tell the exceptions to (a).

People whose "taste" it is to have more fiscal equality are always welcome to donate their money to the less fortunate. FORCING people to donate their money to others creates a net benefit for one person, and imposes a cost on the other. Just that the first results in an individual disadvantage, whereas the second doesn't. That's the reason why people decide, democratically, to tax everybody to work towards goals that would not be achievable if pursued on the individual level (as you suggest). What you are saying is for example all the people who can't afford medical care should go and beg in the streets in the hope that somebody will donate money.

I’m not saying that at all. I’m saying that when you regulate or tax, you are always --always -- imposing a cost on some group of people. In the case of a regulation, the cost is (a) the cost of enforcement, plus (b) the value that would have been gained from the transaction that does not take place because of the regulation.

You have to take that cost into account.

But, because interpersonal utility comparisons are impossible – you can’t read minds, you can’t compare your pleasure to someone else’s pain – there’s no way for you to know that the regulation will produce a net benefit.

Let me try an example.

To simplify, I’m going to just talk about you, me, Mr. Policeman and money. That's all there is in the universe.

Imagine a regulation under which Mr. Policeman takes $10 from my pocket and gives it to you. Is the world better off or worse off in total? It depends on which of us wants the $10 more – to whom its more valuable. But there’s no way to tell that, because no-one can read yours or my mind. There’s no way to compare one person’s pleasure to another’s pain. Technically – interpersonal utility comparisons are impossible.

That regulation was unrealistic, because no-one paid the cop. Let’s make it better: You and I each pay $1 for Mr. Policeman to take the $10 out of my pocket and give it to you. We’re still in the same bucket we were in before – we have no idea if the pleasure you obtain by this is outweighed by the pain I experience. But now we’re out $2 in the aggregate.

In the real world, what this means is that we devoted resources to government – with no way of knowing whether a net gain was achieved. That $2 and Mr. Policeman's time will therefore not be spent on making stuff, building factories, raising children, inventing new things, etc. etc.

Now lets make the example slightly more complex. You have some apples. I have $10. I want to buy your apples for that $10, because the apples are worth more than $10 to me. You want to sell them to me because you have so many apples the $10 is worth more to you than the apples. If we trade, you and I have both obtained a net benefit. Unlike the previous example we KNOW – to a certainty – that the total aggregate preference satisfaction in the world has gone up.

But now let’s add back Mr. Policeman. You pay 1 apple, and I pay $1, to Mr. Policeman, in exchange for which he prevents me from giving you the $10 you want and you from giving me those apples.

Society is now out 1 apple, $1, whatever benefit would have been obtained by the trade that did not take place, and whatever Mr. Policeman would have achieved had he been employed by the market. This is, again, a CERTAINTY.

Did Mr. Policeman create in someone else a net benefit that exceeds those costs? Now we’re back to the first example – there’s no way to tell, because we'd have to read that person's mind, and yours, and mine!

And so on and so forth go the consequences of your conviction that people don't know what they want when they decide against a free and unregulated market.

People know EXACTLY what they want when they vote for regulation. The orange growers want to ban (or increase the cost of) apples, and vice versa! Everyone wants to raise taxes on someone else, shift risks onto someone else, etc. etc.

That's all its about.

f/k/a anonymous

Giotis said...

The problem is not technical. I get the feeling that there is a deeper issue of lack of orientation and this crisis is just a symptom. We were thrown into the new millennium without guidance and without our beloved delusions. On the way man has become cynical, he lost his fundamental myths and together his path. He became too clever, too cunning. The illusion of the linear evolution and of everlasting progress (scientific, economical) which was so vital for the development and stability of the western societies after the age of enlightenment, doesn't seem to work anymore. It looks like we go around circles now. We are saturated by ourselves. We are fed up looking our own ego in the mirror. To keep the world turning we need new myths, together with a new vision; we need new Gods to believe in.

Andrei Kirilyuk said...

OK, Anonymous, that was an easy pray for you, that neo-Marxist “regulation” illusion. Now let's try some harder stuff, the real world problems.

Let's start with some local problems in “your” theory (let me call it so). It's main, first postulate, in its complete form,

“1. Human beings are rational in the sense that, given options, they will choose the one that they believe confers on them the greatest benefit (whatever it is they perceive as beneficial).”,

may not be as universal as you seem to imply. There are huge, maybe even geographically and demographically dominating parts of the planet, where people just practically (and massively) act against their evident benefits, i.e. totally irrationally (with “better” options properly given, information about their interests provided, etc.). Such regions exist even within (geographical) Europe, in post-Soviet “Slavic” spaces, combining stably irrational choices with extremely high education level (!), nuclear technologies (weapons including), aerospace industry, etc. Note that the effect is not “transient” and only deepens with time. Let me omit the details (that would merit a special story), while noting only the obvious irrationality impression: it looks extremely strange and counter-intuitive indeed! Strange but true, so to say. And to summarise possible discussion: this is the reason why, as we know, there is such a huge and deepening (otherwise incomprehensible) difference in economic development (former communist solution including) of these and other “European-style” nations.

So, being based on non-universal assumptions, your resulting theory cannot be universal. And given big and always growing population migration in our desperately “globalised” world, we cannot even state that the theory will remain universally applicable to “developed” industrial economies.

Or take this statement of the theory: “I do not mean each and every person has more than they otherwise would, but that people as a whole do. I am saying nothing about distribution.” Good, but it's yet another, implicit assumption, meaning that “distribution” is basically less important than “average” level of well-being. Even theoretically, however, it's evident that it may easily stop being true if the effective “width” of essential distribution components becomes comparable with respective average values. In fact, it's a “mathematical” expression of usual “social” worries (hello, Bee!) about those “other” (“non-market”) values: if (average) deviations from average, even sufficiently high, level of life become as big as an essential part of that average level, then the distribution intervenes as another, equally important factor you cannot ignore in any economic estimates. And many things in today's situation everywhere would tell us that distribution becomes dangerously skewed indeed... Recall that strange, well-known effect of formally ever richer but simultaneously less happy (economically) Western middle class, up to it becoming absolutely (and strangely) “nervous” in many places and professions (take Ph.D. holders :)). [It's e.g. “Easterlin Paradox”, where you can also find a topical previous discussion of ability of Santa-Fe-like science to solve economic problems.]

But problems with your theory become really hard when you realise that it has a basically limited range of validity because of another implicit but hardly deniable assumption that physical range of human demands is not limited from above, while in reality it is and, specifically, modern technology already can and does satisfy average demands (reasonable and more) for a great majority of (and in principle, all) citizens. And then, in agreement with a generally understood postulate 3 (“The more of a thing you have, the less valuable you will find one additional unit of that thing.”), such society inevitably touches a “horizontal development asymptote”, so that development doesn't totally disappear but becomes ever slower and finally its occasional variations (such as the current crisis) easily exceed its perceivable progress (with the easily guessed resulting impression).

It shows that your “classical” economics may be good indeed but only for respective, intrinsically “rational” parts of the world, and what is much more important, only within epochs of “naturally big”, apparently unlimited growth possibilities (though unevenly realised), which are now finished, within this kind of growth depending crucially on new “physical” dimensions being discovered empirically in both physical world (giving rise to “new technologies”) and human abilities (giving rise to “new pleasures/motivations”). But now both “physical forces” (and “particles”, etc.) and human biology/psychology have been exhaustively explored and used (again within this particular kind of approach), which finally gives rise to that “ceiling” of development and limits the validity of its economic laws (even apart from separately important ecological limitations).

Other kind of development may be not impossible, but it is separated from those previous (all known!) epochs by a qualitatively big “gap/barrier” and will certainly imply quite different “postulates” and respective laws (which one wouldn't even call “economic” laws because economics itself, in its modern sense, may cease to exist at that level, if it will be attained).

Today we are thus within a “bifurcation” (or “last-judgement”) period at the very end of “(physically) unlimited-growth epochs”, which is characterised by the corresponding “last-judgement” economic bifurcation (with strong chaoticity, “strange” limitations, emerging “irrational” behaviour, etc.) necessarily and essentially different from your “classical” economics good for unlimited-growth (all previous) epochs but now showing the more and more its “inexplicable” (from inside) deviations from reality (take, for example, those strangely accumulating cases of absolutely “irrational” behaviour of “top” market professionals, with respect to their global and even personal interests, in the most developed-market places).

Therefore, in the same way that your “classical” market economy definitely supersedes those “naïve” post-Marxist regulation illusions (Bee, hello again and take it easy!:)), it is superseded in its turn, and without big delay, by the “bifurcational” (i.e. largely disorganised) economics that may even be the last one that can still be described in terms of economics as we know it. See here, if you're interested in what may follow after that and practical implications (based on rigorous, unreduced-problem solution, rather than fruitless “study” promises or deficient “models” with arbitrary deviations from reality).

So, ready to share profits, or shall we continue demolition of establishment economics? :)

P.S. The last comment by Giotis here having appeared while I was compiling this one, provides an excellent and independent confirmation to my last statements, while I provide a rigorously specified filling and problem solution to the “general” sentiment so precisely described in his message. Need a “new myth”? Here you are, Sir! Gods will follow...

Bee said...

Hi Amos:

I see a slight chance that we might actually be getting somewhere.

The assumption is that people want to have more of the things they want. “Things” includes everything whose value can be compared to other “things” including free time, family, living in an equitable society, etc.

I’m not sure why you disagree with the assumption, and I don't think you really do.


Which is quite a strange statement given your excursion about how no-one can read yours or my mind. There are in fact things I value but I wouldn't value more of. Believe it or not, but though I like my family, I certainly don't want to have more of them. Likewise with my friends, I'm fine with those I have, but wouldn't know what do to with more of them. Free time too is a bad example (if you are talking about the ratio of free time vs work time) since you seem to be assuming nobody actually likes his work. I also doubt everybody who likes his children would always want to have more of them. Etc. There are plenty examples in which the satisfaction is not monotonically increasing with the amount of "things" you have, whatever you call your "thing" (I don't want to know how you call it.)

However, having said that, I don't think this is a relevant distinction, it is probably possible to construct a derived quantity that again would be increasing. You earlier said you considered worse as "fewer goods, less food, less housing, etc." so I probably took that too literally.

Thus, let me instead ask you whether in the "things" that you are talking about you include macroscopic and long-term "things" like e.g. universal medical care, environmental protection etc, the desirability of which is usually determined, though imperfectly, through a political process?

Empirically, how people answer the “what do you want” question is different than what they actually do when given the choice. People do not know their own preferences.

Right, that is exactly the point. Just that you are saying their "true preferences" are revealed in economic transaction, whereas I am saying their preferences are also revealed in democratic "transactions". Please note, these have very real consequences, there is nothing intangible about saying I am willing to pay more taxes so these potholes will get fixed. Why do you think expressing opinions the one way instead of the other is a more 'true' expression of preferences? There are plenty of examples of human actions where people do act *against* their own benefit in short-term decisions, even though they *know* it (if you can take it, read this if you don't know what I mean, more pseudo-economics of the physicists who doesn't understand how the world runs).

This is exactly the kind of tension that I am talking about, where the micro-interests are not resulting in a macro-trend that would be considered disirable. Now it seems to me what you are saying is this tension can not exist.

Example: Bee, if you had ten apples and only one orange, how many apples would you be willing to give me for an additional orange? What if you had 5 oranges? 20 apples?

Its pretty hard to answer that and be sure of your answer, right?


It's not a question that falls into the realm of politic decision making. A question that would fall into the realm would be e.g. Do I want anybody in the society I live in to be completely without apples on the danger that he starves if on the whole (including me) we are wealthy enough to avoid this. I am perfectly able to answer this question.

We established earlier that all preferences within a person are comparable and monetizable, including things like “the way we’d feel in a different social order.”

For one, the fact that they can be monetarized doesn't mean they are. But further I said already then that the question whether this is good for something is a different one.

Ahhh… but when the government imposes a social order, it imposes it on everyone, including the people who voted ‘no.’ Assume a society of 100 people, 51 of whom voted for a change in the social order. How do you know that the strength of their preference is not outweighed by the more deeply held opposition of the other 49?

But we’re not talking about expressed political views anyway. We’re talking about net total preference satisfaction – total happiness. So the question is: How do you know that the benefit to those 51 exceeds the cost that imposed on the other 49?

Voting cannot answer that question.


Well, I already said several times above that your view on politics is overly simplistic and explained how so, but let me elaborate.

For one, I spoke about plurality, which means there might be cases where you can realize two different options A and B in such a way that they don't interfere much with each other. Take for example restrictions on drug sale. As we know in the Netherlands they are fairly open minded in this regard, in Germany there are more restrictions. Does that necessitate both countries need to have the same laws. No, it doesn't. There will be some amount of flux through the border but as long as it is on a tolerable level this is still better than imposing one overall solution on both.

Second, you are neglecting the fact that the possibility alone to have a right to influence such decisions increases people's happiness.

Further, and most importantly, you are right that voting alone can not answer this question, this is why I am talking about evaluation and feedback. The current procedure is you start with a first guess following on a vote and after that try to find out if there are better configurations that might neither be option A nor option B, but somewhere in the middle such that the total number of people who are fine with that solution increases. This process is constantly taking place, but unfortunately very lengthy and inefficient.

But we’re not talking about expressed political views anyway.

I was talking about expressed political views. The difficulty to convert individual happiness into such a political view is exactly the problem I was mentioning earlier that makes the political system so lame and inflexible. Now you can argue that this expression can never be done perfectly due to the difficulty of making any predictions and I would agree, but for one this difficulty hangs crucially on the long time-scales involved, and it still seems better to me to at least try than to just not take into account these political views at all.

The problem you are trying to solve—how do you know that the cost to some is outweighted by the benefit to others—cannot be solved by external measurement. There is no way to read minds

Right. That's why people need better, easier, and more flexible options to express themselves, their preferences, and the strength of their preferences, in political views.

I’m saying that when you regulate or tax, you are always --always -- imposing a cost on some group of people.

I understand that and I never disagreed on it.

Best,

B.

Phil Warnell said...

Hi Glotis,

“To keep the world turning we need new myths, together with a new vision; we need new Gods to believe in.”

I’m sorry to disappoint but this methodology has not only been thought of but promoted and currently the holy grail of business. It’s was most clearly defined by James C. Collins and Jerry I. Porras in a paper they entitled “Building your Company's Vision” published in the Harvard Business Review in 1996.

It has two main components being Core Idealogy” and “Envisioned Future”. The former is subdivided further in two parts with the first being to discover the company’s “Core Values”, which should reflect honestly those values of the company which they maintain and need not be moral in regards to society in general, only that they be sincere of self. Second there is “Core Purpose” which is to discover what a companies actual reason for being is which also need not be altruistic in nature.

This then is complimented and offset (ying and yang) with the second aspect called “Envisioned Future” which is in turn is subdivided into a “BHAI “(Big Hairy Audacious Idea) which is a long term over the top but thought doable goal for the company which again has no traditional moral focus as necessary and what is called the “
Vivid Description
” which is the way the company captures this vision for it’s leaders and employees (both promise and dogma).

What you might find as being interesting is the stated “core purpose” of Fannie Mae is:

“To strengthen the social fabric by continually democratizing home ownership”.

I don’t think anyone could dispute this was clearly a noble purpose and yet without the necessitated forethought followed up with the proper checks and balances I think it’s clear that “vision” born of “myths” and “gods” of blind faith or wishful thinking are not enough in the face of such obvious and relentlessly increasing complexity of today’s global economy.


Best,


Phil

changcho said...

"I never said anything of that sort and it does not express my opinion. I do even agree that this deviation from a free market should be kept to a necessary minimum. I am just saying that different people might have different opinions on what that necessary minimum is, and that opinion might change over time, thus there can be no universal answer. To come as close as possible to the best solution it requires sufficient flexibility and evaluation."

Interesting discussion, but Bee you've got the core of your arguments in that little paragraph - the 'law's of economics are not fundamental laws, these are man-made laws and not laws of nature, but the free-market fundamentalists (starting with M. Friedman) have been been trying to convince people otherwise.

Best.

Amos said...

Which is quite a strange statement given your excursion about how no-one can read yours or my mind. There are in fact things I value but I wouldn't value more of.

Yes, that’s the concept of declining marginal utility I averred to earlier. How much of a thing one wants depends on how many of that thing one already has. Graphing (on the x axis) quantity possessed, and (on the y axis) how much one is willing to pay for one additional unit of the thing, you get a curve. (Unless the thing is entirely undesirable and you don’t even want one.) The shape of the curve varies from person to person, and there’s no way to tell its shape – that’s the part of the mind we can’t read.
Of course, its really an infinite-dimensional curve because how much we want a thing depends also on how much we have of other things that are full or partial substitutes (you’d want that apple more if you had no food at all), etc. But that’s not important right now!

it is probably possible to construct a derived quantity that again would be increasing.

We call it, generally, “utility,” and I’ve been calling it “preference satisfaction” here.

Thus, let me instead ask you whether in the "things" that you are talking about you include macroscopic and long-term "things" like e.g. universal medical care, environmental protection etc, the desirability of which is usually determined, though imperfectly, through a political process?

Yes, all of those things behave like the simple good described above.

People do not know their own preferences. Right, that is exactly the point. Just that you are saying their "true preferences" are revealed in economic transaction, whereas I am saying their preferences are also revealed in democratic "transactions". . . . Why do you think expressing opinions the one way instead of the other is a more 'true' expression of preferences?

Well, we know this empirically. But for our present scope, the logical reason is that preferences aren’t binary, they’re curved.

The question is “how much universal health care are you willing to pay what price for.”
You can also try the simple thought experiment I gave before, about apples and oranges. You recognized that you couldn’t answer the question. You said It's not a question that falls into the realm of politic decision making.

But it is exactly like the questions that fall into political decision making. Political decision making just cannot elicit accurate answers because, among other resons, the demand curve is curved (and infinite dimensional to boot)!

the micro-interests are not resulting in a macro-trend that would be considered disirable. Now it seems to me what you are saying is this tension can not exist.

There are rare circumstances in which that tension can exist. But you have to understand horses before you can study zebras. The reason is that while we know that these rare circumstances logically can exist, empirically we can’t find them. (Well, they’re very rare.) The temptation is to think many circumstances fall into the exceptions (game theoretical problems, path dependence, externalization, monopolization) but the reality is that few, if any, do, and market solutions are invariably superior to non-market ones.

the fact that they [preferences] can be monetarized doesn't mean they are. But further I said already then that the question whether this is good for something is a different one.
Its good for one thing: Allowing us to use mathematics to study human behavior, which is the science of economics. Doing so allows us to make certain predictions, one of which is that aggregate preference satisfaction is almost always reduced by regulation, and that it is impossible to identify the exceptions.

Well, I already said several times above that your view on politics is overly simplistic and explained how so, but let me elaborate. . . . Does that necessitate both countries need to have the same laws. No, it doesn't. There will be some amount of flux through the border but as long as it is on a tolerable level this is still better than imposing one overall solution on both.

Actually, what you’ve done is show that there is a market for legal systems. That’s true. You haven’t taken into account the transaction cost of moving from one country to another, though. Nor have you taken into account border restrictions. Indeed, the more a country’s selected social order deviates from spontaneous social order, the more likely the country is to restrict emmigration of persons and property.

And, further, if people “vote with their feet,” which they do, although more so with their dollars, then the continuing desirability of living and investing in the United States demonstrates that fewer regulations are, in fact, viewed as superior by people as a whole, even though they consistently vote the opposite way.

It is no accident, I think, that the places it costs the most to move away from – economic centers like New York, Tokyo, etc. – which have the most “captive” citizens, have the most regulation and taxation.

It is important to recognize that the natural tendency of government is to expand, because people in government (politicians, bureaucrats) are value-maximizers just like everyone else. They always want more money, more power, more control, more interference. And it is always possible for someone to get elected by offering some conglomeration of groups a regulation that is to their benefit at the expense of others and of the aggregate.

Once you open the regulation “box” its hard or impossible to shut it again. And it always – always – means that people have less of the things they want.

Further, and most importantly, you are right that voting alone can not answer this question, this is why I am talking about evaluation and feedback. The current procedure is you start with a first guess following on a vote and after that try to find out if there are better configurations that might neither be option A nor option B, but somewhere in the middle such that the total number of people who are fine with that solution increases.

Doesn’t sound like any government or political process I know of.

In all events, your position has shifted substantially from your start, and you don’t seem to be defending the essay’s critique of economics or its proposals any longer. I’m not sure what, if anything, you’re advocating for at this point.

I suspect that is because you’ve recognized my original point – that economics is already a real, rigorous science that uses real mathematics, sensible (indisputable, really) assumptions, and empirical testing, and has produced genuine research results.

John G said...

"Once you open the regulation “box” its hard or impossible to shut it again."

Hope so, it would be a pain to get universal health care and then lose it again.

From the Guardian (UK):

One of the main problems faced by the US, says the report, is that one in six Americans, or about 47 million people, are not covered by health insurance and so have limited access to healthcare.

As a result, the US is ranked 42nd in global life expectancy and 34th in terms of infants surviving to age one. The US infant mortality rate is on a par with that of Croatia, Cuba, Estonia and Poland. If the US could match top-ranked Sweden, about 20,000 more American babies a year would live to their first birthday.

"Human development is concerned with what I take to be the basic development idea: namely, advancing the richness of human life, rather than the richness of the economy in which human beings live, which is only a part of it," said the Nobel laureate economist Amartya Sen, who developed the HDI in 1990.

I suspect one problem you and Bee are having with being on the same page is that you are narrowly focusing on the richness of the economy and Bee is trying to merge the science of economics with the richness of human life thus seeing the bigger picture.

Bee said...

Hi Amos:

In all events, your position has shifted substantially from your start, and you don't seem to be defending the essay's critique of economics or its proposals any longer.

Actually no, my position has not shifted. Maybe your perception of it has. I haven't been defending the essay because we've been talking about other things, and actually I agreed on some of your criticism from the very beginning. I still think that their proposal is good but, as I wrote in my post, short sighted, as they don't take into account the political system.

That brings me to your above statement:

Thus, let me instead ask you whether in the "things" that you are talking about you include macroscopic and long-term "things" like e.g. universal medical care, environmental protection etc, the desirability of which is usually determined, though imperfectly, through a political process?

Yes, all of those things behave like the simple good described above.


This seems to me like with your notion of 'economic system' you are trying to absorb the 'political system'. I find this very confusing, but I'm not interested in fighting about terminology. I don't see however how this can work.

What I have been saying above repeatedly is that the economic system needs to be balanced by a system that does take into account the long-term and macroscopic aspects, and for this to actually function well this system should be as flexible and effective as the economic one is. I have repeated several times that this unfortuately is not the case.

Now if you just want to join both to one and call them economic system that seems to me like a move similar to certain people stating whatever the fundamental theory looks like, we just call it M-theory.

The issue then however is whether these factors are indeed, as you seem to imply, most satisfactorily addressed and implemented through the free market economy in which these politcal issues too are, as you say, some kind of good. I doubt this for two reasons. For one, as I expressed earlier that there are cases in which one has a tension between the micro-interests and the desirability of the macroscopic trend.

There are rare circumstances in which that tension can exist. But you have to understand horses before you can study zebras.

Just that these are the only case in which I am interested. If there is no such tension, then there is no problem, and no need to do anything because the system just optimizes our primary goals anyway.

The reason is that while we know that these rare circumstances logically can exist, empirically we can't find them. (Well, they're very rare.) The temptation is to think many circumstances fall into the exceptions (game theoretical problems, path dependence, externalization, monopolization) but the reality is that few, if any, do, and market solutions are invariably superior to non-market ones.

Then please tell me, how does it happen, by a market solution, that for example the points I suggested like environmental protection or providing a minimum of education and medical aid for everybody if this is in the wish of the people are implemented? Will you again be hoping for donations? Is that
your solution? Please explain me, what do you do if by the time the market reacts to changes in the environment, irreversible damage has already been done, which could have been avoided through a change of incentives earlier? What do you do then, shrug shoulders and say, well that was a Zebra? It doesn't seem to me that these Zebras are all that rare.

Second, I still don't see how you do avoid the problem that as long as your system runs by expressing opinions through monetary value people's opinions are inevitably weighted by their wealth. I have said repeatedly that this is in conflict with my understanding of democracy.

Third, this elegantly dismisses the option of changing the economic system itself,
which is, so I guess, a consequence of your conviction that we have the one true
theory that explains everything (despite the fact that you acknowledge it is not complete and an actively developing field, which means in essence the obvious, namely you can't know how well your theory describes the world tomorrow or in five years).

What you are saying with that is what I already pointed out above:
you tell all people in the world what the 'best' way is towards happiness, and if they disagree with you you tell them they don't know what they want, notwithstanding the fact that you have not addressed the previous two points that I regard crucial problems in your proposed ultimate way towards happiness.

Yes, I was about to just say "voting with the feet" but then I thought I better be explicit.

But it is exactly like the questions that fall into political decision making. Political decision making just cannot elicit accurate answers because, among other resons, the demand curve is curved (and infinite dimensional to boot)! [...]

It is important to recognize that the natural tendency of government is to expand, because people in government (politicians, bureaucrats) are value-maximizers just like everyone else. They always want more money, more power, more control, more interference. And it is always possible for someone to get elected by offering some conglomeration of groups a regulation that is to their benefit at the expense of others and of the aggregate.


I never said it does yield accurate answers. And I know very well, the polical system has unfortunately a lot of problems. That is exactly the issue I am concerned about. What I have said repeatedly is that the consequence of that can certainly not be to just dismiss political decision making altogether as you seem to suggest, but to find a solution to these problems - for example by the suggestion the authors made in that essay. Certainly the input of somebody like you would be highly welcome - it would however require that you acknowledge people do indeed express preferences through the political system to begin with, and that the political decision making addresses important points that are not already satisfactorily included in a free market economy.

Best,

B.

Bee said...

Hi Changcho,

Yes, this is one way to put it, the economical system is a man-made tool that we use to our benefit. Nations have tried around with different options, and the outcome is pretty clearly is not a completely unregulated free-market economy. It is a mystery to me how anybody can just simply dismiss this whole process of trying to find an optimal solution as being the result of people who don't know what they 'really' want or something of that sort.

Though, one could arguably say that since humans are part of nature everything we do is qua definition 'natural' and so is the economic system. This would then in one blow also render all social sciences natural sciences. Unification through terminology ;-p

Best,

B.

Neil' said...

Anonymous, you really dropped on the notion that money is like other goods etc. No, valid money is a legal entity not a market-produced good in itself (it can approach the latter but only to the extent that the legal structure allows.) The government makes the rules for how that works, as I said. Banks etc. can only create more according to the rules the government sets up. We could have decided on a different system than monetization of debt. We could have said, lend money and you are lucky if you get it back but we won't recognize the credit as legal money no matter what people want or informally assume among themselves.

Here's a way to know it isn't just from people's own market presumption - if I lend you money, I don't get to assume having more legal money since I'm not a chartered bank. I can't go out and pay more to other people or buy more than I could before from my saying you're going to pay me back with interest, I wasn't given the legal right to "expand currency" by monetization of debt.
http://ingrimayne.com/econ/Banking/Overview10ma.html


The government might e.g. have decided instead not to use monetization of debt, but just print money directly by fiat ("literally") to pay its own bills. That may have not worked well, but the important thing is the matter of principle: it's a legal/administrative definition not a market choice (the market only chooses among the options of that system, but the system itslef is imposed.)

Furthermore, we have someone hovering over the US economy, running the Federal Reserve and making decisions week to week on what interest rate the Fed will offer, which has enormous impact on all of us. The implication is, that if they didn't twiddle like that, the economy would collapse.

The further implication is, our economy is not anything that would or could really run naturally - it is like one of those unstable aircraft, like the X-29 forward-swept wing, or Shuttle in the lower atmosphere, that would swing out of control and crash if not constantly corrected second by second with computers. That is "regulation" from the very top down that has massive consequences for employers and employees, and therefore we can ask what compensatory adjustments we get for being the "losers" in the latest fiddling of interest rates.

As for corporations, you toss off that they are recognized as artificial in economics and then dismiss my mentioning it, but my point was - our legal right to control them directly as a society, as if we were part owners. The issue you and others keep dodging is not so much the "economic theory" but rather, the rights issue of who has the rightful power to decide what is done by corporations, the money supply, etc. If "the public" has those rights (by being grantors of corporate legitimacy, and by being "owners" in some sense of the land on which the activity happens) then they get a hand in picking company policy along with conventional shareholders.

You can say what you want about the "economics" of what happens, but with new (or old, but newly insighted) prerogatives other elements of society will make different decisions based on their interests directly, not just as "customers" of goods providers.

Neil' said...

BTW, as far as voting with their feet etc - yes the USA is less regulated than Europe, but it still is not LF and so people must not really want that. Libertarians don't get many votes. Looks like people chose to not have the sort of choice that market fundamentalists think is best, isn't that ironic? But it isn't at all surprising, since most people learned from bitter experience in the Gilded Age etc. they'd get lower pay, unsafe working conditions, dirty food, etc. if they didn't exert direct control - and not merely the petty choice of the goods picker and seller - on the owner/producer class.

Not only that, but the very fact that they formed unions etc. shows that they weren't happy with the choices offered directly to them by employers. As I said, much ignored, what's it for U to be better than V if I'd rather have W? Remember, a meta-choice about the nature of the choice structure is a choice too, who are you to criticize that then? (Note: in logical use "meta" means higher-order, like "meta-statements" are statements aobut other statements - it doesn't have a "derogatory" insinuation of mystical, "metaphysical" concerns.)

Amos said...

Yes, all of those things behave like the simple good described above. This seems to me like with your notion of 'economic system' you are trying to absorb the 'political system'. I find this very confusing, but I'm not interested in fighting about terminology. I don't see however how this can work. . . . Now if you just want to join both to one and call them economic system that seems to me like a move similar to certain people stating whatever the fundamental theory looks like,

Well, its not hard at all, because the “political system” and “economic science” are about two different things. The political system is a method for decision-making. Economic science is a way of studying human behavior. As political preferences are tastes of the type economics can handle, they can be studied with the tools of economics, and their existence does not imply a gap in the taste-maximizing logic of economics.

The market is also a method of decision-making. I do not contend that the political system is the same as the market, but the tools of economics do apply to political actors as to all other human decisionmaking.

Just that these [cases where the “microtrend” contradicts “macro preferences”] are the only case in which I am interested. If there is no such tension, then there is no problem, and no need to do anything because the system just optimizes our primary goals anyway.

Here’s the rub… Mathematically, these circumstances exist. Practically and empirically, they’re basically impossible to find. Every time (just about) we think we’ve found one, we look harder and find we haven’t. So they’re really not so important, although they are interesting (lots of things that don’t exist, like tachyons, are interesting).

The other half of the rub is that you can resolve these cases without regulation, and instead with property right allocation.
These are hard concepts, and I really don’t think you’ve got enough of the fundamentals for them. But, to (greatly) simplify: Given any existing allocation of property rights in which there are externalities (costs or benefits imposed by transactions on persons who are not parties to the transaction, which implies that the subject transactions are occurring at a non-optimal rate), so long as transaction costs are low, people will trade to re-allocate the property rights at issue and eliminate the externalities. Once the externalities are eliminated, then you are out of the rare case and back into the normal case.

Thus, the market will actually solve the problem you are identifying – but only if the transactional cost of doing so is lower than the benefit achieved.

This means that even in the rare circumstance you describe, the market is functioning, and the concepts of optimality, long-term equilibrium, etc. are working fine.

But, one of the things government can do is reallocate property rights at a transactional cost that is sometimes lower than the market. In that case, you can obtain a net benefit by reallocating the property rights at issue to eliminate the externalities.

This, again, is not regulation, it is property right allocation.

There are even more complex cases in which information is the transaction cost at issue… but lets start with the above first.

Please explain me, what do you do if by the time the market reacts to changes in the environment, irreversible damage has already been done, which could have been avoided through a change of incentives earlier? What do you do then, shrug shoulders and say, well that was a Zebra?

It is the case that economics tells us that, often when we see things in the world that are really terrible, and we’d like to change, doing so (at least through government) would actually make things worse. It is an unfortunate result, but that is what the science tells us.

I still don't see how you do avoid the problem that as long as your system runs by expressing opinions through monetary value people's opinions are inevitably weighted by their wealth

It is true that in the market, the tastes of people with more money get more satisfied. On average, rich people are happier than poor people. Do you mean something else?

this elegantly dismisses the option of changing the economic system itself, which is, so I guess, a consequence of your conviction that we have the one true theory that explains everything

I never said it explained everything. I said its is a correct fundamental theory and it has certain necessary predictions. This is true. Where it has trouble is in the middle-level of predictiveness. We can show that different social structures are better and worse than others, and we know what is happening fundamentally, but we can’t predict how long recessions will last.

This is the opposite of physics, where you get the motions of particles, stars, and galaxies right, but you can’t tell how the universe began or ended or what the particles are made of.

you tell all people in the world what the 'best' way is towards happiness, and if they disagree with you you tell them they don't know what they want, notwithstanding the fact that you have not addressed the previous two points that I regard crucial problems in your proposed ultimate way towards happiness.

No. I am saying that people on the whole will be happier if you let them choose for themselves how to make themselves happy. That people do better on their own than with government regulation.

What I have said repeatedly is that the consequence of that can certainly not be to just dismiss political decision making altogether as you seem to suggest, but to find a solution to these problems - for example by the suggestion the authors made in that essay. Certainly the input of somebody like you would be highly welcome - it would however require that you acknowledge people do indeed express preferences through the political system to begin with, and that the political decision making addresses important points that are not already satisfactorily included in a free market economy

I’m flattered. I do admit that people attempt to express their preferences through the political system. I continue to contend that the political system does not accurately assess their preferences, which is why people are always unahppy with the results.

As for my input: What you really want to do to make the political system better is gunk up the works. Make it really hideously complex and require agreement from lots of differently selected political entities for the government to do anything. Like if you had ten houses of Congress, all selected in different ways, and they all had to agree to pass a law… That would be great.

Arun said...

On Free Market Fundamentalism and the reasons why the markets collapsed:

Joseph Stiglitz, in Vanity Fair

Yes, it is an argument from authority on my part, citing a Nobel Laureate economist, but some of the comments here are bleep.

"Was there any single decision which, had it been reversed, would have changed the course of history? Every decision—including decisions not to do something, as many of our bad economic decisions have been—is a consequence of prior decisions, an interlinked web stretching from the distant past into the future. You’ll hear some on the right point to certain actions by the government itself—such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.’s had the same perverse incentive to indulge in gambling.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today."

Plato said...

January 2009? Nice, and looking back to December 21 an authoritarian perspective? :)

What anonymous said is true then. We only recognize it after it's happened:)

LoboGris de Lothlórien said...

Giotis said:

«To keep the world turning we need new myths, together with a new vision; we need new Gods to believe in.»

That is the class of approach that will never solve anything, but instead to make world worse.

Because for this to work, you not only need this, but also that all the people think exactly in the same manner. And this will never happen.

Human beings are diverse, and you must live with this. Like it or not.

LoboGris de Lothlórien said...

«Human beings are diverse, and you must live with this. Like it or not.»

And this is another way to express why neither socialism nor the attemps of the scientists of this essay can work better than free market.

Again:

individuals in a market do not act according to the model a group of scientist or religious men can eventually develop according to what they think the best. They act according to its own believes and knowledge about the effectiveness of the actions they will take for his own purposes.

Phil Warnell said...

Hi LoboGris,


“They act according to its own believes and knowledge about the effectiveness of the actions they will take for his own purposes.”


In science observation is the hard measure of reality, then you must also admit that the current crisis has indicated this best method doesn’t amount to much. It has been discovered lately that Darwin’s rules may be augmented and improved by utilizing a feed back mechanism as a complementary means to natural selection in the control and evolution of this process. What you insist as being the ultimate model for economy and commerce would seem to deny the necessity for this. Science to a great extent is the attempt to understand and learn from nature. To deny as to ignore nature's ability to teach such lessons is not only non scientific yet worse not even reasonable.


Best,

Phil

LoboGris de Lothlórien said...

Hi, Phil,

«It has been discovered lately that Darwin’s rules may be augmented and improved by utilizing a feed back mechanism as a complementary means to natural selection in the control and evolution of this process.»

I'm not denying learning in economic processes. At contrary, i am saying that individuals are feeded all the time from their experience.

«What you insist as being the ultimate model for economy and commerce would seem to deny the necessity for this. Science to a great extent is the attempt to understand and learn from nature. To deny that we should ignore nature's ability to teach such lessons is not only non scientific yet worse not even reasonable.»

I'm not denying that economics is a science. I'm denying that economics is an empirical science.

«In science observation is the hard measure of reality then you must also admit that the current crisis has indicated this best method doesn’t amount to much.»

Admitting that, then how can anybody argue that government can do better than individual themselves for the purpose of satisfying individuals if government has no access to the subjective information that motivates individual actions? (preferences, beliefs, wants, needs, knowledge from its own experience)

Also, in the current situation there is no only individual actions, but also actions from government which alters market prices and reduce the ability of individuals to make better decitions.

For example what do you think can happen if government imposes low prices on a given product? Well, individuals will act increasing the demand of this product, and this will led to an inmediate scarcity of it. Also, producers of this product will reduce its production because of a lack of rentability, so offer will be reduced and scarcity will not be solved.

Hence, many other individuals will not access to the product, contrary to the phylosophy of the regulation ("all people must access to this product")

Worser, now many of the buyers of this products will be people that will gain selling it in the black market.

This conclusions are provided by experience and a reflection about how individuals can act better for the benefit of his own purposes.

And this mechanism is very similar to the source of the crisis phenomena (it is false that the origin of crisis is an unknown chapter of economics, and this ignorance is another point i criticize in this essay and its intellectual supporters)

Bee said...

Hi Amos:

... the “political system” and “economic science” are about two different things. The political system is a method for decision-making. Economic science is a way of studying human behavior. As political preferences are tastes of the type economics can handle, they can be studied with the tools of economics, and their existence does not imply a gap in the taste-maximizing logic of economics.

The market is also a method of decision-making. I do not contend that the political system is the same as the market, but the tools of economics do apply to political actors as to all other human decisionmaking.


Well, I do agree that both, the market and the political system are a method of decision making. Both have their place in organizing our lives, and we need both to get along well. What I am trying, apparently unsuccessfully, to find out is where do you see the role of political decision making, and why do you seem to think it is unnecessary - or did I maybe misunderstand that?

What I have been saying now many times is that political decision making does and has to complement the economy. Otherwise we would constrain our options on which states our systems can reach. If the economic system does already work towards a goal or fulfils a desirable feature, there is no need to do anything about it - the micro-interests do already result in macrotrend that does lead us where we want to go. The relevance of having a political system is for the Zebra's where it doesn't work (it follows from this that the political system can't be part of the economic system).

Let me just quote you some parts from the results of this recent survey according to which Denmark is the 'happiest' country. What placed the country at the top of the ranking is according to the researchers its "prosperity, stability and democratic government". And one of the researchers says (though I think this is just an opinion of his) "Ultimately, the most important determinant of happiness is the extent to which people have free choice in how to live their lives."

That is what I want people to have. Prosperity, yes, sure. But also stability and the freedom to choose how they want to live their lives. Whereas you want to impose on everybody a free market ideology based on the argument that nobody can disagree this is the best option (notwithstanding the fact that most people do), and if somebody does disagree they don't know what they want. Stability? Who could want that? A democratic government? Who could need that?

I am afraid your point of view is a classical case of being blinded by science. You are so convinced that you know what's best for everybody that you believe you can ignore what everybody thinks about that. The point is, you can have *any* economic system that you or me or anybody else argues on whatever grounds will lead to optimal happiness, if the existence or the running of the system itself makes people unhappy it's not going to work. That is just an example for why your reasoning is flawed, it is the point that I already mentioned above: the possibility alone to influence the systems that govern our lives makes an important contribution to people's happiness. And yes, apparently, even if the arrangements that allow them this influence have the side-effect that people have "less stuff".

Here’s the rub… Mathematically, these circumstances exist. Practically and empirically, they’re basically impossible to find. Every time (just about) we think we’ve found one, we look harder and find we haven’t.

Well, where do you look? I look at the world around me and see plenty examples, some of which I have given you above. Except for saying the market will solve the problem you haven't told me how that would happen.

Besides this, I don't particularly care if you want to call it "regulation" or "property right allocation" or "law" or "ban". I am saying there are many cases where governmental intervention based on a democratic decision making process is necessary to complement the economic system.

It is the case that economics tells us that, often when we see things in the world that are really terrible, and we’d like to change, doing so (at least through government) would actually make things worse. It is an unfortunate result, but that is what the science tells us.

I would even agree on that. The better a system runs, the harder it is to improve it.

I still don't see how you do avoid the problem that as long as your system runs by expressing opinions through monetary value people's opinions are inevitably weighted by their wealth

It is true that in the market, the tastes of people with more money get more satisfied [...] Do you mean something else?


That is exactly what I mean. The more money you have, the more your 'taste' counts, the more influence your opinion has. This might make sense when it comes to investing large amounts of money as having it reflects you seem be successful with that kind of game, but it does not make sense when it comes to macroscopic and long-term issues.

For example poorer people might worry whether their children will be able to get a good education, thus they might be in favor of education being a public service. People who have sufficient money will probably not care very much, and see only the drawbacks. Unfortunately, if money is correlated with influence on such decisions this means the poor people will remain unhappy, and the rich people will remain happy. There will never be something like a public service because it relies on a social contract, a notion that you dismiss of because you believe people are not able to express their preferences in a political decision making.

I am pretty sure this kind of situation isn't news to you, so maybe just tell me

a) why you don't think there is anything wrong with that situation and

b) why you think if most people find this situation undesirable you can just ignore that

I am saying that people on the whole will be happier if you let them choose for themselves how to make themselves happy. That people do better on their own than with government regulation.

Government regulation *is* a choice they have made themselves. You want to take away that freedom of choice from them.

I do admit that people attempt to express their preferences through the political system. I continue to contend that the political system does not accurately assess their preferences, which is why people are always unahppy with the results.

What makes you say they are always unhappy with the results? Are you possibly extrapolating from your own country to the rest of the world? When it comes to political decisions that are supposed to regulate our macroscopic living together and the long-term effects when necessary then of course these regulations act against your notion of immediate happiness qua preferences expressed in the free market. As I said previously, if that was not the case, you would not need any government. People do complain about taxes, but they know they are necessary. Much like I can't say visiting my dentist makes me particularly happy, but I know it's necessary. (Again: tension between short and long-term preferences).

What actually sucks about the political system is how unnecessarily badly it does in detecting people's opinions. This is especially obvious if you look at the recent US presidential election. Not only are political opinions clumped into a few programs, it comes down to choosing either person A or person B, a relevant aspect of whose popularity is their available funding and PR management. Of course you can't even remotely undistortedly capture opinions that way, you can just hope whoever wins will do a good job in reading people's mind. To me this isn't a democracy, it's a farce.

Best,

B

Andrei Kirilyuk said...

Bee said: “Of course you can't even remotely undistortedly capture opinions that way, you can just hope whoever wins will do a good job in reading people's mind. To me this isn't a democracy, it's a farce.”

OK, but then what's your essentially better (and realistic) democracy version (or any other problem solution)? We are talking about an old and variously “developed” Western democracy (by efforts of many generations of rather skilled and critically thinking people). All those efforts did not succeed, according to you, because the result is but a farce. I am not against your estimate, I just think that there should be a good rule to make any criticism, especially of such an old and well-known problem solution, in a constructive form, where the proposed negative estimate is accompanied by at least a tentative positive solution (especially if it's discussed within a project of efficient “scientific” help to existing system: without confirming its possibility by at least approximately outlined example of better organisation, there is a risk to be not taken seriously in those efforts). In other words, there should be some better specified “light” in a “Lightcone Institute”...

Bee said...

Hi Andrei:

In other words, there should be some better specified “light” in a “Lightcone Institute”...

I am just the one who wants to make things happen, not the one who does the research. Given the oppotunity, people could apply with their projects to "specify" the light. Much like Amos, you are mistaking my intention. I am not claiming I have the answer, I am just pointing to a way to find them. Best,

B.

Amos said...

What I am trying, apparently unsuccessfully, to find out is where do you see the role of political decision making, and why do you seem to think it is unnecessary - or did I maybe misunderstand that?

A political process is necessary to prevent tyranny. It is possible, in rare cases, for the government to improve the economy. But those cases are rare, the government is far more likely to fail, and once the government has the ability to regulate, it will inevitably regulate poorly.

Economics is a very pessimistic science.

Whereas you want to impose on everybody a free market ideology based on the argument that nobody can disagree this is the best option (notwithstanding the fact that most people do), and if somebody does disagree they don't know what they want.

People can disagree with the science all they want. But it is what it is, and there’s nothing they can do about it—all they accomplish by trying is to render themselves poorer. That’s the scientific result.

I am afraid your point of view is a classical case of being blinded by science. You are so convinced that you know what's best for everybody that you believe you can ignore what everybody thinks about that.

I’m not ignoring anything. The science predicts the outcome. I don’t claim people will come to their senses about it.

if the existence or the running of the system itself makes people unhappy it's not going to work.

More unhappy or less unhappy than the alternative? Poor, unfree countries suffer economic cycles just like rich, free ones.

There’s nothing you can do about that. But the ones that comform more closely to the scientific prescription are richer in both upswings and downswings.

Isn’t that better?

Every time (just about) we think we’ve found one, we look harder and find we haven’t. Well, where do you look? I look at the world around me and see plenty examples, some of which I have given you above.

No, you think you’ve found examples. If you had a stronger set of fundamental economic tools at your disposal you’d be able to see that the “examples” you’re looking at really aren’t. This is why I said the transaction-cost/property-right stuff is too advanced. I told you about zebras, and so now every time you see a horse with a funny color or a giraffe you think “zebra.”

Economics is not an easy science, Bee.

am saying there are many cases where governmental intervention based on a democratic decision making process is necessary to complement the economic system.

Name one time this has been done successfully.

It is true that in the market, the tastes of people with more money get more satisfied [...] Do you mean something else?That is exactly what I mean. The more money you have, the more your 'taste' counts, the more influence your opinion has. This might make sense when it comes to investing large amounts of money as having it reflects you seem be successful with that kind of game, but it does not make sense when it comes to macroscopic . . .

I don’t get your point. Apart from the obvious (if money couldn’t buy you stuff you want, people would have fewer incentives to incentives to make new things, etc.) what’s the trouble?

if money is correlated with influence on such decisions this means the poor people will remain unhappy, and the rich people will remain happy.

Not universally, but in the aggregate more money makes people happier. It’s true.

On the other hand – the fact of the free market, for all the disparities it creates, has made the poorest of today’s poor vastly, vastly richer than the average person was a century ago.

Another example of the scientific result that you can’t beat the market.

a) why you don't think there is anything wrong with that situation and

b) why you think if most people find this situation undesirable you can just ignore that


The science tells me there’s nothing we can do about it.

Actually, it also tells me that its not as bad as you think, because the market does, in fact, make everyone richer than they would otherwise be. But really it’s the first point – there’s nothing we can do about it, and trying will only make things worse.

Government regulation *is* a choice they have made themselves.

No, it’s a choice some people make for everyone.

Of course you can't even remotely undistortedly capture opinions that way, you can just hope whoever wins will do a good job in reading people's mind. To me this isn't a democracy, it's a farce.

Right. The market does a much better job.

And before you propose making the political system more complex, more time consuming, etc., keep in mind that one of the costs you have to keep in mind is the transactional cost of having to learn the issues, about the candidates, etc. Its already so high most people don’t bother.

There’s a market for governments-offering-different-voting-systems too!

John G said...

"A political process is necessary to prevent tyranny... Economics is a very pessimistic science."

Things like predatory lending institutions, the path for uninsured health care, and the war in Iraq are a form of tyranny. You seem too timid and pessimistic. Try watching a good hero flick like V for Vendetta.

Neil' said...

Amos (are you the same as "Anonymous"?): First I disagree that the government can only rarely improve the economy. Most consumers and workers were very dissatisfied with the circumstances around 100 years ago and did two revealing things: First, they appreciated that economic actors don't have to make buy/sell selections "on their own" - they can get together and collude. Hence unions were formed (the very fact proves the members didn't like what choices they were being offered = like I said, being able to pick X over Y is petty choice. Real choice means *direct* power to put "Z" on the menu ...)

Also they demanded that the government make rules like 40-hour work week, food safety etc. The first encourages "a better menu to pick from" by penalizing asking workers to work longer. Indeed, as such rules have been weakened by the Bush operatives conditions and relative pay (how much of their own production they can buy back) has gone lower instead of higher. We are in fact worse off than when we had better regulation, despite your often-brayed but still never proven claims about how much better we all are under "Lousy Fare" economics.

Second, it isn't just the workers that realize they can get more by colluding. Company owners do also, and set up trusts, anti-competitive contracts, etc. which the public demanded action against. If government regulation didn't administer that efficiently, we basically just have a constant and even literal warfare between workers and companies and consumers using pressure exerted by collusion - so ironically, collusions of individuals that weren't satisfied to act independently in the manner described by simple-minded "scientific" economics. See, the FM system contains the ironic seeds of its own destruction in the temptation to collude, cheat, manipulate etc. instead of just directly offering goods/services to buyers, all acting independently. And then the government steps in to pick up and/or help prevent the mess.

Another case is, that buyers can't easily "see" the future problems with supply etc. and just buy according to immediate gratification. It is absurd to think, that must produce the best long-term result. If the US had imposed a high gas/oil tax back in the 70s, it may have hurt for awhile but over time the reduced demand and "artificially" stimulated demand for more efficient cars would have kept the price of oil down and the supply high. That's almost a paradigmatic case of what governments can do better than consumers knocking around on their own. We may have a breather now but soon oil crunches will hurt us again.

That reminds me, another problem for so-called "scientific" economics is predicting the actual increase in supply from more demand. The latter requires actual physical science knowledge, there isn't a pure economic way to find out. Economists use sloppy phrases like "increased demand will stimulate increased supply" but they can't predict quantitative changes in supply of "cobalt" without studying actual mining and geology issues. It is a fact that the best "economic consultants" in those fields do study extra physical science about that commodity because they know pure economics (especially simplistic economics) isn't enough.

All "economics" itself can predict is things like what price given what supply and what demand, but not how supply will change in detail, or demand (since the latter comes from human qualities.) Economics is propped up by auxiliary physical, political, and social science or it is very flabby and hollow.

(Bee: See, you are on the right track, don't let the free-market fundamentalists dazzle you with brassy, impressive-sounding talk that can be unraveled with deeper thinking.)

Bee said...

Hi Neil,

Thanks :-) Yes, Amos is the Anonymous from above. I agree with what you wrote above. All these are examples for the cases which I referred to above, where you have to solve a tension between the micro and short-term preferences and the macro and long-term preferences. The thing is that people are indeed inconsistent in what they want if you ask them and if you compare it to what they do. Indeed, an infinite amount of novels over several centuries elaborates on conundrums people do get themselves into this way. Dismissing what people say they want and focus on what they actually do does, and I agree on that, "solve" the problem by defining it away. But the results you can reach in such a way leave out possibilities. Best,

B.

Bee said...

Hi Amos:

It is possible, in rare cases, for the government to improve the economy. But those cases are rare, the government is far more likely to fail, and once the government has the ability to regulate, it will inevitably regulate poorly.

Economics is a very pessimistic science.


I really don't want to bring it up again, but this notion of 'poorly' is again a consequence of your constrained notion of "better" that I have pointed out already above. You are somehow missing that I am not talking about "improving the economy". I am talking about improving people's satisfaction with the way their lives are organized. They can, and they do, consider organizations "better" even though they are economically worse.

People can disagree with the science all they want. But it is what it is, and there’s nothing they can do about it—all they accomplish by trying is to render themselves poorer. That’s the scientific result.

But that's not the point I am talking about. Can we maybe get over that? I am saying that people do indeed, willingly, treat in a less effective economy for other features they desire. Like, they might prefer it to run more stable, even if that means it is less efficient. They might prefer to change incentives so the next generation does not grow up in a total economical disaster even if that means the economy runs less efficiently. They might prefer to live in a country where everybody has access to a good and reasonable healthcare even if that puts a "drag" on the economy. You are just saying, well, people just don't know what the science says. I am saying, well the science doesn't take into account that people's "taste" might include states of organization that a free market economy can't reach.

To repeat what I just said to Neil above, people are indeed inconsistent when it comes to contrasting their individual short-term preferences and their macroscopic long-term preferences. That is exactly the tension I am talking about that you need a political system for to balance it.

No, you think you’ve found examples. If you had a stronger set of fundamental economic tools at your disposal you’d be able to see that the “examples” you’re looking at really aren’t. This is why I said the transaction-cost/property-right stuff is too advanced. I told you about zebras, and so now every time you see a horse with a funny color or a giraffe you think “zebra.”

Economics is not an easy science, Bee.


If anything, your explanation makes it worse. Not only have you still not told me how the free market allegedly takes care of these cases, you now say the cases I talk about aren't actually the rare "Zebras" you brought up earlier when I was telling you what the problem is I am concerned with.

Name one time this has been done successfully.

Neil has given you examples above. I also mentioned previously the case of Denmark (happiest country etc) which definitely has not a free market economy, meaning the regulations that are in place do contribute to people's happiness. Also, having grown up in Germany, I can tell you that the vast majority there does appreciate having a universal healthcare. I personally can't understand how anybody can be comfortable living in a country without that. I had to realize that after I moved to the US. I also had to realize however, that there are indeed people who are not bothered by that at all. So, meaning one country does it this way, doesn't mean its the best solution for all other countries too. People do have different preferences, but not all of them can be addressed on the individual level. It matters for my individual happiness whether all people around me are happy. It's not a situation that I can improve on the micro-level - even if I'd donate all my money, I couldn't reach what I want - it just falls into a total blind spot of your free market ideology.

Not universally, but in the aggregate more money makes people happier. It’s true.

On the other hand – the fact of the free market, for all the disparities it creates, has made the poorest of today’s poor vastly, vastly richer than the average person was a century ago.


As I have said several times above, it is indeed the case that getting richer (on the average) is correlated with happiness. That doesn't mean however it is the same. People also care about relative wealth. Meaning, large income discrepancies contribute to unhappiness.

I think you really don't get the point. I am not talking about whether more money makes person A happier or unhappier. I am saying if person A says X makes me happy and person B says not X makes me happy and X is a macroscopic and/or long-term question, ie. not one that the free market would in general automatically address, then both of their opinions should carry the same weight. That is what I mean when I say in a democracy people's opinions should not be weighted by money, because it dismisses the influence of the poor who have the same right to an opinion on their society's future than everybody else.

Government regulation *is* a choice they have made themselves.

No, it’s a choice some people make for everyone.


As I already said previously several times, living together requires compromises. That does not generally mean the majority opinion is simply imposed on everybody, that is just the case in the most simplistic version one can think of. It is also true in a free market economy that one person's choice affects that of others, and that possibly to the disadvantage of minorities. Like, in North America I can hardly find any affordable clothing in my size that isn't also tasteless, because apparently there aren't enough people who share my size and taste. I think that's a case of "some people" making "a choice for everybody". I don't like that either since I have to fly to France to buy a decent dress.

Also, as far as I am concerned, I would support to just let people like you quit the social contract and lose your citizenship with all its rights that come with the duties. Then you can all go live on an island, totally free from any government regulation, and see where your theories get you. Makes one wonder why such an island doesn't exist if it would be such a great idea, no?

To let me show why your overall dismissive attitude to political decisions misses the point consider the case in where there is a consensus. Yes, a consensus. For example, everybody thinks it is a good idea to pay $10 every month to have a public library if everybody else does it. If they are left to themselves, this would never happen because nobody would just 'donate' the $10 (as you seem to have suggested as solution earlier). What do you do instead? Well, you take a vote, make a social contract, raise e.g. tax and people get what they want. Now according to what you say if only one person doesn't like that it's already a bad idea, but that is certainly totally off. As I said earlier, removing the drawbacks of political decision making by just throwing them over board altogether is not in generally going to make things better.

There’s a market for governments-offering-different-voting-systems too!

Great. What I'd like to see is a market for political decisions. One in which people's opinions are not weighted by money, in which experience and scientific argumentation is valued, one that is flexible, easy, allows constant evaluation, instant feedback, and is integrated with the economic system (and vice versa). It is not necessary it be a grassroots initiative, I am skeptic about the merits of such.

Best,

B.

Phil Warnell said...

Hi LobisGris,

“I'm not denying learning in economic processes. At contrary, i am saying that individuals are feeded all the time from their experience.”

In this statement I can see the root of both your conviction and your problem, for I sense that you somehow believe that the reality of economics is so vastly different then what else is encountered in nature it cannot even remotely have semblance of the same. I think what is missed as to understand what’s being proposed is not a radial change of the system along with the method(s), yet rather a careful examination as to what affects the system's overall equilibrium and what signposts one can discover to have us know when it is about to be violently and detrimentally shifted. I think you believe this is more of an effort to limit the choices, rather then work to understand what those choices will manifest as to only be effected when they are shown able and likely to render harm.

To offer a biological analogy, this is no more then to ask that we allow ourselves to have an immune system that only is activated at times of real threat. What I’ve found with the current understanding is we have an immune system that only responds when the pathogen has greatly progressed and the response then taken is larger then the threat warrants and often misdirected. When I think of what science can bring to economics it’s more as how it can protect it, rather then how it can be used to mold or manipulate it. This I would agree we will have to leave for components of the system to choose and hope somehow they (we) improve despite having many faults and weaknesses.

Best,

Phil

Plato said...

Can Science Help Solve the Economic Crisis?"

Since not to good a drawer I thought maybe somebody could do something with it?:)

Underneath this heading above we find a scientist in white cloak, hair dishevelled and in a great state of excitement. IN his hands he holds two cables with clips, too adjoin too give of the spark of life.

Lying on the gurney( I know some might have heard this story line before please bear with me)there is this huge individual with a flattened head with two prongs sticking out of the neck. Under this figure is the gurney designed as such to reveal the wordings such as economy, capitalism and many other related issues with which represent the current state of affairs, supporting the figure above.

I just thought in relation to the title and heading of this blog entry, one might like to inject some humour.:)

Best,

Plato said...

Now you know one can go all kinds of places with this, but imagine then that this "thing is devoid of the human emotion and empathy" that any given creature manifested by the scientific hand, can become a "monster created" as to do the bidding of it's master's.

"Life! Life!," he saids, mechanistically of the human body which now becomes "the psychopathic model" of the biological plan. Devoid of the necessity to "instigate reason" then, to have no thought of and an outcome, destined.

It all started out "as a equation" in it's most simplest form.

Best,

LoboGris de Lothlórien said...

Hi, Phil:

«In this statement I can see the root of both your conviction and your problem, for I sense that you somehow believe that the reality of economics is so vastly different then what else is encountered in nature it cannot even remotely have semblance of the same.»

The problem i insist all the time is a methodological one. And i'm criticizing the lack of methodological foundations of the essay supporters, and the complete rejection of discussing about this. It is a pity that Bee abandoned this line of discussion, because it is the central point of the question.

Strictly speaking, one can't simply say "lets apply empirical method to understand this". One must prove first that this approach has any sense. In most of cases, this step is not necesary. It is part of the theoretical background. But this approach is risky. And in problematic sciences an strict methodological discussion has to be performed before. ¿why do you think that empirical methods has never get any result in economics? All sucesfull results in economics does not came from empirical theory. Nor people that all the days interacts in the market (practically everyone) has no knowledge about what empirical method is and do not apply them.

The inmune system analogy is not appliable here. It reacts in deterministics ways, it is easy to separate model causes to corroborate it, and you are always speaking about objective information. But economics are about individual action, that is, about the development of means to reach its own purposes, it is esentially undeterministic, and all in a context of subjectival information (individual knowledge, beliefs, needs, purposes). This makes economics system unsuitable for empirical method.

Human action is a purposeful action. Inmune system action is a deterministic reaction.

Phil Warnell said...

Hi LoboGris


“Human action is a purposeful action. Inmune system action is a deterministic reaction.”


I would say that this argument has passed from scientific to philosophical ground and in this way has lost its context. Yet if you combine the thoughts of Aristotle with those Plato one will discover that anything that works for Plato’s “good” is by way of necessity one of Aristotle's purpose. I would then offer two quotes by which this might be considered:

“It is absurd to suppose that purpose is not present because we do not observe the agent deliberating. Art does not deliberate. If the ship-building art were in the wood, it would produce the same results by nature. If, therefore, purpose is present in art, it is present also in nature. The best illustration is a doctor doctoring himself: nature is like that. It is plain then that nature is a cause, a cause that operates for a purpose.”

-Aristotle


” Whereas our argument shows that the power and capacity of learning exists in the soul already; and that just as the eye was unable to turn from darkness to light without the whole body, so too the instrument of knowledge can only by the movement of the whole soul be turned from the world of becoming into that of being, and learn by degrees to endure the sight of being and of the brightest and best of being, or in other words, of the good.”

-Plato


Best,


Phil

LoboGris de Lothlórien said...

Hi, Phil.

It is not a phylosophical discussion. It is a methodological one.

If you don't want to call it a scientific discussion, it is OK. But the methodological considerations already prooves that an empirical approach will no give results in this "investigation". And experience shows the same.

Again: economics is about individual actions, experiences, purposes, needs, beliefs and knownledge.

As soon as you empirically "develope" a law for economics, you will see how individuals breaks your law.

As soon as you regulate market in order to avoid individuals to do something, they will do something completely unenexpected, because as soon as you changes the rules of the game, they will implement other means to reach its purposes.

Also can be demonstrated that no regulation can reach its purpose, unless its purpose is to impoverish people. Because the only effect of any regulation is to raise costs.

This is a scientific result, if you want me to use this label.

Bee said...

Typo: I meant "They might prefer to change incentives so the next generation does not grow up in a total ecological disaster even if that means the economy runs less efficiently." (not economical)

Amos said...

once the government has the ability to regulate, it will inevitably regulate poorly.

I really don't want to bring it up again, but this notion of 'poorly' is again a consequence of your constrained notion of "better" that I have pointed out already above. You are somehow missing that I am not talking about "improving the economy". I am talking about improving people's satisfaction with the way their lives are organized.


No, I'm not missing it - I meant, in this context, that the government consistently mucks it up. This is also a prediction of economics; the rational value-maximizers (like all people) in the government will act in their own interests and muck it up.

People can disagree with the science all they want. But it is what it is, and there’s nothing they can do about it—all they accomplish by trying is to render themselves poorer. That’s the scientific result.
But that's not the point I am talking about. Can we maybe get over that? I am saying that people do indeed, willingly, treat in a less effective economy for other features they desire. Like, they might prefer it to run more stable, even if that means it is less efficient. They might prefer to change incentives so the next generation does not grow up in a total economical disaster even if that means the economy runs less efficiently. They might prefer to live in a country where everybody has access to a good and reasonable healthcare even if that puts a "drag" on the economy. You are just saying, well, people just don't know what the science says. I am saying, well the science doesn't take into account that people's "taste" might include states of organization that a free market economy can't reach.


I have understood your point here all along. Your point is wrong:

1. Assume unanimous consent that a country should shift to a new social order or adopt a new regulation. What function, here, does the political process serve? None - you don't need it. In the absence of the political process, the new regulation would still go into effect because everyone would agree voluntarily to follow it. Assuming the enforceability of contracts, the market has accomplished the desired result without the political process.

2. Now assume that consent is not unanimous. What do we know, and what don't we know? We know that some people will obtain a benefit from the new social order, and that others will pay a cost. We know that the number of voters in the first category exceeds the number in the second.

We do not know, however, who cares more - the average "yes" or the average "no" voter. We know nothing abouth depth of feeling. So even though the social order is "adopted" and imposed on all the "no" voters, we have no idea if it has actually increased aggregate happiness.

We do, however, know that transactions that both sides would like to do, which we know would be beneficial, are not taking place. We also know that we have taken out of the economy -- out of making things for people, growing food, etc. -- the cost of enforcing the new regulation.

In sum, we know of two definitive and significant negatives, and we cannot ascertain whether there is any positive. The regulation as a whole is (not definitely, but probably) a net negative.

If anything, your explanation makes it worse. Not only have you still not told me how the free market allegedly takes care of these cases, you now say the cases I talk about aren't actually the rare "Zebras" you brought up earlier when I was telling you what the problem is I am concerned with.

Sorry. To answer your first question, often -- quite often -- large numbers of people will come together and voluntarily agree to abide by a common set of behavioral restrictions that, if they were imposed by the government, would look like regulations. Examples are some mutual insurance arrangements, common interest housing developments, trading cartels, etc.

There is a market for social orders.

Name one time this has been done successfully.I also mentioned previously the case of Denmark (happiest country etc) which definitely has not a free market economy, meaning the regulations that are in place do contribute to people's happiness.

Couple of questions:

1. Is it Denmark citizens or residents that are supposedly happier?

2. How can it be possible to compare one person's happiness to another's?

3. Why do you say Denmark isn't in the free market -- its in the EU? In what sense is it not principally a market country?

Also, having grown up in Germany, I can tell you that the vast majority there does appreciate having a universal healthcare.

Yes, Germans do like to commingle government with a firm hand and health care. Sorry, but I'm surprised you went there.

I personally can't understand how anybody can be comfortable living in a country without that.

Remember exernalities? You can externalize benefits as well as costs. In this case, because science is international, the American market healthcare system externalizes the benefits obtained from that system--new medical science--which Germans etc. are able to take advantage of as freeloaders.

As I have said several times above, it is indeed the case that getting richer (on the average) is correlated with happiness. That doesn't mean however it is the same. People also care about relative wealth.

Yes, there is a group of people in society who would be made happier by the mere fact of other people having less. Schadenfruede, right? That's not really what you mean though, is it?

I am saying if person A says X makes me happy and person B says not X makes me happy and X is a macroscopic and/or long-term question, ie. not one that the free market would in general automatically address, then both of their opinions should carry the same weight.

But you can't measure their comparative depth of feeling, so you don't know if they have the same weight.

the poor who have the same right to an opinion on their society's future than everybody else.

Some people I went to school with chose to work less and make less money. Some people I went to school with chose to work in "public service" and make much less. They had other choices, this is what they chose.

Why should they pay a cent less in taxes (not percentage, but overall) than I?

These are moral questions, Bee, not scientific ones.

in North America I can hardly find any affordable clothing in my size that isn't also tasteless, because apparently there aren't enough people who share my size and taste. I think that's a case of "some people" making "a choice for everybody".

No, its an example of a good for which demand is so small that at long-term equilibrium supply is small too; greater value is obtained for society as a whole by investing capital elsewhere than in bringing lots of clothes in your size (most of which you would not buy) to your region for you to choose a few from.

I don't like that either since I have to fly to France to buy a decent dress. They can't fit you in New York?

Also, as far as I am concerned, I would support to just let people like you quit the social contract and lose your citizenship with all its rights that come with the duties. Then you can all go live on an island, totally free from any government regulation, and see where your theories get you.

We did. It's called America. We did such a good job you chose to move here.

John G said...

"Now you know one can go all kinds of places with this, but imagine then that this "thing is devoid of the human emotion and empathy" that any given creature manifested by the scientific hand, can become a "monster created" as to do the bidding of it's master's.

"Life! Life!," he saids, mechanistically of the human body which now becomes "the psychopathic model" of the biological plan. Devoid of the necessity to "instigate reason" then, to have no thought of and an outcome, destined.

It all started out "as a equation" in it's most simplest form."

Plato, you got it. Our Ponzi scheme world economy is right out of a psychopath's playbook.

Bee said...

Hi Amos:

Assume unanimous consent that a country should shift to a new social order or adopt a new regulation. What function, here, does the political process serve? None - you don't need it. In the absence of the political process, the new regulation would still go into effect because everyone would agree voluntarily to follow it. Assuming the enforceability of contracts, the market has accomplished the desired result without the political process.

That's like saying if everybody agrees that n% taxes are necessary people will just pay them without the need for any government. That's not going to happen for the simple reason that nobody knows everybody agrees and so wouldn't pay anything because he/she runs into risk of putting himself into a disadvantage, plus you need to make sure that people don't just pretend to agree and then don't pay and take a free ride. That's how I understand the collective action problem. You need a democratic decision making process and a social contract to overcome it.

large numbers of people will come together and voluntarily agree to abide by a common set of behavioral restrictions that, if they were imposed by the government, would look like regulations.

As I said several times above, I don't care how you call it. You seem to have the impression that "the government" is something like an undesirable parasite that operates on a nation. I am simply talking about governance as institutionalized means to 'come together' and negotiate to voluntarily form rules, laws, regulations, norms, guidelines, call it whatever, that organize our living together.

You further are repeating that this 'forces' some people to accept something they'd rather not have. I have repeatedly told you that a) yes, living together requires compromises b) there are means to make sure regulations are not imposed unnecessary on too large groups of people and c) people accept regulations nevertheless because they appreciate the advantages of having some order to begin with even if it doesn't always play out in their favor.

I'm not in the mood to argue about the specific definition of happiness the researchers have used for the survey I mentioned. One can argue about these things back and forth. Question is, why do you think your definition is better than theirs?

Why do you say Denmark isn't in the free market -- its in the EU? In what sense is it not principally a market country?

Maybe we're having a misunderstanding here. Every society that has regulations on the markets, bans, laws, trade restrictions, taxes, social security, toll free roads, universal health care, free school education, redistribution of wealth, any kind of public service and so on is not a free market. To my best knowledge no country in the world has a free market. I therefore can not understand why you keep defending it, given that (in the cases where governments are elected democratically) the majority of people has decided that what you are saying they really want is not what they want.

you can all go live on an island, totally free from any government regulation, and see where your theories get you.

We did. It's called America. We did such a good job you chose to move here.


I didn't move there because you did such a good job and I can't say I enjoyed the political situation. To be honest, I am kind of sorry for most Americans they have to live under such circumstances given how much potential the country has that remains unused. But then, it's a democracy and their choice, so I guess it is what they want.

Besides this, I thought you were the one complaining you are having too many government regulations, no?

No, its an example of a good for which demand is so small that at long-term equilibrium supply is small too; greater value is obtained for society as a whole by investing capital elsewhere than in bringing lots of clothes in your size (most of which you would not buy) to your region for you to choose a few from.

It doesn't matter what story you tell, the result is the same. There is a majority of people who have a specific preference and the minority has to live with it. Yes, in some cases one can go to a different country to circumvent that. You don't mind if this is the result of a 'free market' because it fits with your ideology. Let me emphasize however that this is not an example for a question that would be decided democratically. I already explained above (your question with the apples and oranges) that some questions just don't fall into the realm of political decisions (of course the boundary isn't quite well defined).

They can't fit you in New York?

I prefer France.

But you can't measure their comparative depth of feeling, so you don't know if they have the same weight.

We've had that before. I already told you it is not my intention to measure anybodies 'depth of feeling' more than you do measure anybodies 'happiness'. What one can measure though is the strength of preferences people express in political opinions. I said above that it would be of advantage if it was easier for people to express themselves such. Expressing preferences through investing money is easy, and it is one way. It is not the only way though, and what I am trying to tell you is simply that you discard other options for people to express themselves in the believe that you have the only right answer.

Why should they pay a cent less in taxes (not percentage, but overall) than I?

These are moral questions, Bee, not scientific ones.


These are political questions, Amos, and the ones that I am concerned with. Like it or not, people do care a lot about their perception of 'fairness' and 'justice', and you can call that an unscientific question but it is relevant for their happiness and, subsequently, in the political preferences expressed. You seem to believe a free market is fair. Fine, you are entitled to an opinion as everybody else. I hate to wake you up, but not everybody agrees with you. Now who are you to tell other people what is fair and what isn't? And no, to make that clear once again, what 'fairness' means to somebody is not a scientific question.

Best,

B.

Amos said...

I am saying that people do indeed, willingly, treat in a less effective economy for other features they desire. Like, they might prefer it to run more stable, even if that means it is less efficient. They might prefer to change incentives so the next generation does not grow up in a total economical disaster even if that means the economy runs less efficiently.

I want to elaborate on why this point is misguided.

As I explained above, when the government imposes a social order, even one supported by a majority, it necessarily renders society poorer in the aggregate (or, at least, the rare cases in which this is not the case cannot be identified).

Your argument has been that if people vote in favor of a new social order (through some non-majoritarian system, whatever it is you intend), then we know it is in some way "better."

Its important to point out, and the point I want to elaborate on, is that there is no objective character to these "inefficient but better social order" decisions. That is to say, there is no way, other than on grounds of pure moral preference, that you can distinguish one "we prefer to give up wealth for x" from another.

There is no logical distinction between selecting an inefficient social order in which the business cycle is forcibly dampened at the cost of aggregate growth, from one in which a particular religion or set of religions are banned.

In each case, the political system (majoritarian or not) has chosen to impose the will of one group of people on another by force, in the belief that the whole will be better-off (because of god or muted business cycles or what have you).

It is true that you draw a distinction between these types of "regulation," but that is a distinction that derives from your personal politics and worldview, not from any extrinsic thing in nature, or anything that we can access with science.

Indeed, philosphers have tried for decades to develop a logical and persuasive underpinning for liberalism and, to date, have failed miserably (as most readily concede).

My point here is not that you are a fascist. Rather, it is to bring into focus the fundamental point I have been repeatedly communicating: Whenever you regulate -- regligion, economics, etc. -- you are always, always making some group worse off, and expending a transaction cost. The only way the aggregate could be better off is if the benefit obtained by some other group exceeds those two costs. But there is absolutely no-way for you to determine if the pleasure obtained by banning someone else's transaction -- or their religion -- exceeds the pain inflicted and the cost.

This is one of the economic fundamentals I've been trying to get across.

LoboGris de Lothlórien said...

Bee,

«That's like saying if everybody agrees that n% taxes are necessary people will just pay them without the need for any government. That's not going to happen for the simple reason that nobody knows everybody agrees and so wouldn't pay anything because he/she runs into risk of putting himself into a disadvantage, plus you need to make sure that people don't just pretend to agree and then don't pay and take a free ride.»

That is misleading. People do voluntarily pay prices for anything he considers that will give him a net benefit, that is, a benefit that is bigger that the price payed.

That is called the market.

So, if many people think that a mutual association of any kind will benefit them, then they will pay their membership fee. There are lots of private mutual associations.

So

«a) yes, living together requires compromises»

Of course, but which kind compromises, for which kind of coexistence? market implies coexistence, and market transactions also imply compromises from each part.

«b) there are means to make sure regulations are not imposed unnecessary on too large groups of people and »

what happens with minorities? aren't them contemplated? have them to be subject to majority opinion?

«c) people accept regulations nevertheless because they appreciate the advantages of having some order to begin with even if it doesn't always play out in their favor.»

That is a logical absurd. If they appreciate advantages and are ready to pay the costs, then why the need of a state to enforce them? Of course, this question leads to the begining of my comment.

John G said...

"Indeed, philosphers have tried for decades to develop a logical and persuasive underpinning for liberalism and, to date, have failed miserably (as most readily concede)."

But what do you do when the black hat tyrants have the power. You then need white hat anarchists to go get the power back (this is anarchist in its philosophical definition). The governor of Illinois, the 70 year old Ponzi schemer, U.S. torture of prisoners, etc. are unfortuneately the rule not the exception. How much more evidence do you need that we do have the tyranny that even you say governments are supposed to stop. What if 9-11 really was something the U.S. government set up?

The expert to talk to however is a psychologist not a philosopher. The stress of bubbles forming and breaking, unjust wars, and large numbers under the poverty line is not only bad for mental health but it is a sign that the inmates run the asylum. Time for white hat anarchists to switch to Herman Daly steady state economics rather than black hat trickle down the toilette economics.

Neil' said...

I see that the free-marketeers are ignoring my arguments and examples because they unravel their framing of the issues. Even the whole definition of "regulation" used to make their points is phony. They are implying, there is some force imposed by "the government" or "society" that interferes with what people want to do. But a property owner can and will make rules, charge rent just to passively operate on his domain, etc. That is imposing will by force.

Look, the government imposed its will on each of us when it told us who owned what and had what rights - what if I believed in a different divvy up of property boundaries, in state of nature or geolibertarianism (look it up?) What about our right to "sell" the rights we want to, to corporations in order to allow them their limited liability? How about the public's inherent stake in the monetary system, which it can say is granted for economic use on condition it serve the public interest?

Most people were worse off until they demanded rules about better pay and hours, or gathered together to act by "collective bargaining" instead of being fooled into having to "sell labor" on an individual basis. That is an empirical fact. I could easily say, employees are claiming an inherent right to their own production and it is the winning of a legal argument and not an interference in the supposed natural order. I don't see that it literally costs more to divide up that way.

Also you talk of "cost of imposing regulation" but if the public effectively acts as shareholders in the economy, I don't see that the enabling of their desires has to "cost more" than having someone carry out votes of conventional shareholders.

BTW, if "there is absolutely no-way for you to determine if the pleasure obtained by banning someone else's transaction -- or their religion -- exceeds the pain inflicted and the cost" as an argument against supporting "regulation" (actually, public assertion of right to determine policy on the land they control as "a nation") then how can you compare people's pain and pleasure to prove that the free market does a better job of optimizing maximizing the latter and minimizing the former?

Amos said...

I can't quote because I'm working from my iPhone.

I think where I'm losing you is two places.

First, the ability of the political system to guage depth of preference. You believe it can do this. I have argued that since people do not know their own preferences and are unlikely to answer honestly, that political polling cannot take into account the degree of benefit or harm experienced by anyone. You don't seem to disagree with this, right? If you do you haven't explained why.

Second, the market does take depth of preference into account, and it does so automatically. Absent externalities (rare), the market always - as a scientific result, always - gets that right. As a method of social decisionmaking the market, which is based on consent and maximizes consent, is in this sense better.

This is not imposing a view on anyone, and it is not an ideology but a scientific result. The market maximizes preference satisfaction in the short term because it operates on - it's atom, it's fundamental unit - is acts of voluntary consent, imposed on noone. The science of economics has extended this simple short-term truth about voluntary consent, through mathematics, to show that preference satisfaction is also maximized in the long term by the market.

'maximized' here means not 'greatest logically possible,' but rather 'trying to do better will most likely make things worse and there's no way to tell when because depth of prederence can only be gauged by consenual behavior, which is defeated by the attempt to do better.'

You purport to disagree with the conclusion, but other than the repetition of 'people disagree and they can have their say too,' (so what? People can believe what they want, but the science tells us what it tells us - they can't do better) I don't get what stage in this logical process precisely I'm losing you at.

LoboGris de Lothlórien said...

John G:

«But what do you do when the black hat tyrants have the power. You then need white hat anarchists to go get the power back (this is anarchist in its philosophical definition). The governor of Illinois, the 70 year old Ponzi schemer, U.S. torture of prisoners, etc. are unfortuneately the rule not the exception. How much more evidence do you need that we do have the tyranny that even you say governments are supposed to stop. What if 9-11 really was something the U.S. government set up?»

Is this an argument in favour of state regulation? because it has completely the appearance of being the contrary. If it is the last, i agree with you.

LoboGris de Lothlórien said...

«I see that the free-marketeers are ignoring my arguments and examples because they unravel their framing of the issues. Even the whole definition of "regulation" used to make their points is phony. They are implying, there is some force imposed by "the government" or "society" that interferes with what people want to do. But a property owner can and will make rules, charge rent just to passively operate on his domain, etc. That is imposing will by force.»

That is not true. A property owner can't arbitrarily charge any rent because or impose any rule because he has to compete with other property owners.

If there is someone like the owner you are representing, then other owners will offer better conditions in order to compete for clients and profit from it.

This is the everyday story in the market.

Phil Warnell said...

Hi LobosGris,

“As soon as you empirically "develope" a law for economics, you will see how individuals breaks your law.”

The very concept of an economic system, whether it be what is called “free market” or what ever you come up with is a man made contrivance no matter which way you slice it, for it exists nowhere else in our experience. Also, you bandy about this word empirical as if it has meaning in this respect. Empirical simply means something that is being decided upon by way of observation aided by reason. How other would you propose should such decisions be made regardless of the system involved? The only one I can think of are those made within a philosophical framework based on faith, which is what is being contended here as to being what our current system amounts in many respects.

What is being advocated here is that we increase both are ability to observe and access to end up in a place where we make more of our decisions (micro and macro) based on reason and less on faith. Any argument counter to this that has been put forth by you or others is simply the opposite where it is insisted that faith rather the reason be our course. I’m sorry but I don’t think I or anyone else who were to consider this seriously and honestly could arrive at this being reasonable. So would I consider what you describe as being a science simply because it seeks to be uncontrolled and non regulated as being the best and only way, certainly not.

Best,

Phil

LoboGris de Lothlórien said...

Hi, Phil,

«The very concept of an economic system, whether it be what is called “free market” or what ever you come up with is a man made contrivance no matter which way you slice it, for it exists nowhere else in our experience. Also, you bandy about this word empirical as if it has meaning in this respect. Empirical simply means something that is being decided upon by way of observation aided by reason. How other would you propose should such decisions be made regardless of the system involved? The only one I can think of are those made within a philosophical framework based on faith, which is what is being contended here as to being what our current system amounts in many respects.»

But we are talking about two different things. As i explained before, one thing is the experience of the individuals in order to develope means to reach its purposes. You can call it empirical if you want.

Another completely different thing is the methodological approach of a group of investigators which want to model an economic system and understand it.

I'm saying that the second is impossible if we are talking about an empirical methodology. The class of information that these investigators want to obtain is different from the class of information the individuals in a market want to obtain.

One is for the purpose of satisfying its own needs, and interacting in the market with the rest of the individuals. The other is for the purpose of understanding an economic system and searching for better regulations overs the individuals.

Bee said...

Hi LoboGris:

That is not true. A property owner can't arbitrarily charge any rent because or impose any rule because he has to compete with other property owners.

If there is someone like the owner you are representing, then other owners will offer better conditions in order to compete for clients and profit from it.

This is the everyday story in the market.


That only works if the market is fair. Why do you think we have laws that protect tenants? Best,

B.

Bee said...

Hi LoboGris:

As soon as you empirically "develope" a law for economics, you will see how individuals breaks your law.

You are missing the point. Whatever "law" you have in mind, it is not for individuals. You are of course right that they collectively, free will and all, could spoil your model. In addition, models they know of could modify their behavior. Does that mean they have to do that, and there can be no such model as you seem to argue? No, it doesn't. The reason is fairly simple, namely that people might not have any reason to do that. Best,

B.

Bee said...

Hi LoboGris:

People do voluntarily pay prices for anything he considers that will give him a net benefit, that is, a benefit that is bigger that the price payed.

That is called the market.

So, if many people think that a mutual association of any kind will benefit them, then they will pay their membership fee. There are lots of private mutual associations.


You are missing my point. I am not talking about some club where benefits can be constrained to its members, but about a situation where benefits of an arrangement will be for all people, whether they payed their membership fee or didn't. It is in such a situation where you have the problem that people do hope for a free ride, and unless you take a vote so they can know everybody else agrees and everybody else will also pay, nobody is going to pay anything.

The best example is infrastructure. It is well known that a good infrastructure is necessary to get any decent market going at all. If you need evidence for this, look at those countries who got stuck in the poverty trap. A free market alone doesn't solve the problem. You also need a stable government and a good infrastructure. Roads, laws, education, etc.

living together requires compromises

Of course, but which kind compromises, for which kind of coexistence? market implies coexistence, and market transactions also imply compromises from each part.


That's not a compromise between you and the rest of the society, and it's not a compromise between now and the future of your society. As I have told Amos at least a dozen times above, I am not concerned about these 'compromises' or decisions the market takes care of itself, but of those where it doesn't. That's what you need a political system for. I am honestly stunned we are having such an elementary discussion at all. It seems you have never heard of the collective action problem and that the micro-interests on a free market do not necessarily automatically result in a desirable macro-trend, meaning it needs regulations. Could you please tell me what you think your political system is good for and why you have it?

Best,

B.

LoboGris de Lothlórien said...

Hi Bee,

«That only works if the market is fair.»

That works provided only the enforcement of contracts is applied.

«Why do you think we have laws that protect tenants?»

Because political actions are suboptimal.

There is no need to have laws to protect tentants. Competence makes owners offer best possible contract conditions in order to be choicen by the potential clients.

Again, this is the everyday story in the market.

Also, the results of the laws that protects tenants is no other than more costs for them, because the owners will demand higher prices to cover the eventual costs of protection, and that potential clients to fullfill more conditions in order to have better warranties.

This will make more difficult the access to the given market for people with less resources.

LoboGris de Lothlórien said...

«The reason is fairly simple, namely that people might not have any reason to do that.»

If the given laws are imposed by force, then it is because there are those who will have reasons to spoil the model.

Bee said...

Hi LoboGris,

If the given laws are imposed by force, then it is because there are those who will have reasons to spoil the model

I didn't say there is nobody who would want that. Unless mankind undergoes a dramatic change there will always be people who push the boundaries of laws. And if you ask me, we need them, because otherwise we would never question our laws and get stuck. The point is however that there are situations in which the enforcement of laws and the people who try to break them are in a reasonably stable situation. That's where a society preferably tries to operate. If you impose too many laws, people will either simply disobey or replace the government. If you impose too few laws, they will form groups in which they try to achieve self-protection. This can easily result in a civil war and sooner or later leads either again to central government or to a split of the country.

There is no need to have laws to protect tentants. Competence makes owners offer best possible contract conditions in order to be choicen by the potential clients.

Again, this is the everyday story in the market.

Also, the results of the laws that protects tenants is no other than more costs for them, because the owners will demand higher prices to cover the eventual costs of protection, and that potential clients to fullfill more conditions in order to have better warranties.

This will make more difficult the access to the given market for people with less resources.


Totally great idea, LoboGris. Why don't you take it to your city council and tell them you've found an optimal solution! There's no need to have laws, the free market will regulate everything. It will given them something to laugh about.

You know what I would do if I was a landlord and there were no laws for tenants? I would preferably try to talk elderly people into moving in. People who have great pain organizing a move and who can't deal with their furniture on their own, who get easily tired, and are maybe a bit forgetful. And then, once they are moved in, I would raise the rent by several hundred dollars. Because, you know, they have a "preference", and that preference as I know is they don't want to move again. And even better, if I have pushed them to such a high price where they will consider another move nevertheless, I will make sure all of my friends, who are also landlords in the vicinity, will offer a similarly high price. And why would they do that? Because in return I will do them the same favor.

So the question is, do people consider this fair? I haven't taken a vote lately, but in my impression most people like to know that others in their society (macroscopic) are treated equally even if they are elderly, because we all get there (long-term). So we have laws that prohibit such exploitation that the free market allows.

Besides this, weren't you the person who insisted above economy is not a science? Then how come you are now offering predictions how the free market will allegedly solve all problems that we can possibly imagine?

Best,

B.

LoboGris de Lothlórien said...

«The best example is infrastructure. It is well known that a good infrastructure is necessary to get any decent market going at all. If you need evidence for this, look at those countries who got stuck in the poverty trap. A free market alone doesn't solve the problem. You also need a stable government and a good infrastructure. Roads, laws, education, etc.»

How do you know market can't attend roads, infrastructure, education, etc? Indeed we are plenty of those cases, which we find only in most developed countries.

About laws, mainly in countries with english tradition inheritance, most important laws does not came from legislation, but from practice, precedence, usage, tradition, constitution and discovering. From the english tradition, and some local variants. That is called, the common law. And it is a consuetudinary development, as the market.

«Could you please tell me what you think your political system is good for and why you have it? »

For nothing. I'm anarchist.

LoboGris de Lothlórien said...

«You know what I would do if I was a landlord and there were no laws for tenants? I would preferably try to talk elderly people into moving in. People who have great pain organizing a move and who can't deal with their furniture on their own, who get easily tired, and are maybe a bit forgetful. And then, once they are moved in, I would raise the rent by several hundred dollars. Because, you know, they have a "preference", and that preference as I know is they don't want to move again. And even better, if I have pushed them to such a high price where they will consider another move nevertheless, I will make sure all of my friends, who are also landlords in the vicinity, will offer a similarly high price. And why would they do that? Because in return I will do them the same favor.»

Feudalism has been already beaten by quite free market.

Landlords does not compete only with other landlords. They compete will all the market. More higher prices you demand, less demand you will have. You can't demand arbitrarily high prices. This is already the reality of everyday market for most products and services, and no price limits are impossed by state.

Also, don't forget the enforcement of contracts (originated in common law)

Bee said...

Hi LoboGris,

don't forget the enforcement of contracts (originated in common law)

About laws, mainly in countries with english tradition inheritance, most important laws does not came from legislation, but from practice, precedence, usage, tradition, constitution and discovering. From the english tradition, and some local variants. That is called, the common law. And it is a consuetudinary development, as the market.

«Could you please tell me what you think your political system is good for and why you have it? »

For nothing. I'm anarchist.


I already said above, I don't care where a law comes from, I only care whether it exists. I don't care whether it was issued through a government or whether people agreed on it by some other means. I only care whether it is there. Also, the importance of the government lies not only in providing means to formulate and issue laws, but also to enforce them. If you're an anarchist, you want to live without laws of any kind. I encourage you to join Amos on his free-market anarchic island, then you can rediscover history.

How do you know market can't attend roads, infrastructure, education, etc? Indeed we are plenty of those cases, which we find only in most developed countries.

Please read what I wrote. I was talking about developing world countries who have gotten stuck in the poverty trap. I was saying a free market alone isn't going to solve their problem, they need stability, public services and a good infrastructure. Privatizing education and roads is definitely not going to help if you want people who hardly have money to widely use it in order to get progress going.

Also, the fact that more developed nations have this kind of structure does only mean they can afford it.

Best,

B.

LoboGris de Lothlórien said...

Hi, bee

«I already said above, I don't care where a law comes from, I only care whether it exists.»

You did not understand me. Common law does not came from collective agreements. They were provided as solutions to solve, in a private court, concrete cases of conflicts between two parts, without the aim to impose the result to everyone outside this group. They raised inside the "market of law", not from a global collective agreement, government, democratic meeting, or similar. That is why they consisted on optimal or, approached to optimal, solutions. By its nature is completelly different from the kind of regulation you support.

|If you're an anarchist, you want to live without laws of any kind»

You have an erroneous concept of what anarchism is. Anarchism does not imply absence of law. Implies absence of positive law, and state.

«I was talking about developing world countries who have gotten stuck in the poverty trap. I was saying a free market alone isn't going to solve their problem, they need stability, public services and a good infrastructure.»

I live in a developing country (Uruguay) and I can tell you how government has been the monopolic provider, for an entire century, of infrastructure, education and other public services.

Only in recent years, with some deregulations, we can access better services from private providers.

In the countries you find the poverty trap, the reality is bad public services since many decades ago and many obstacles to private enterprises.

Lets left economic development to private actions, and you will obtain in some years private services that everyone will access.

The poverty trap has been the inabilty to understand this.

Equality is the poverty trap. Left inequality alone, and poors will be less poorer quickly and progresivelly. All developed nations have developed in this way.

LoboGris de Lothlórien said...

A correction:

«Lets left economic development to private actions, and you will obtain in some years private services that everyone will access.»

Must say:


«Lets left economic development to private actions under a deregulated market, and you will obtain in some years private services that everyone will access.»

Giotis said...

LoboGris, the purpose of a society is to preserve the happiness of its members. The jungle rules of uncontrolled free market make people unhappy. It is that simple. You are unhappy if you are a afraid that you might loose your job next year. You are unhappy if you don't have money to educate your kid. You are unhappy if you don't have enough money for proper medical treatment. You are unhappy if you are afraid that you might loose your home. You are unhappy if you don't have personal, free time because you are forced to work 65 hours a week. We live only one life and it's not fair to live it in such anxiety. All the above are fundamental for the preservation of happiness and they should be given to all people for free. Every human being deserves them regardless of his economical background. They are the fundamental elementary rights of everyone and they are not negotiable. We have enough resources to accomplish this. I don't care which economical system you want to adopt. What ever that system might be, it should be able to secure that minimum for all people.

Bee said...

Hi Amos:

First, the ability of the political system to guage depth of preference. You believe it can do this. I have argued that since people do not know their own preferences and are unlikely to answer honestly, that political polling cannot take into account the degree of benefit or harm experienced by anyone. You don't seem to disagree with this, right? If you do you haven't explained why.

I already told you above several times that with regard to this point the disagreement between us lies in the fact that you consider 'political polling' to be a process of the sort everybody makes a cross and then we will have to live with the majority opinion for the next onehundred years. I have expressed several times that a political process of that sort does indeed reflect people's preferences very inaccurately, and it is not able to very well tell strength of preferences. For this to be possible, the process needs to be much more flexible and have a better evaluation. This is not presently the case. However, as I have also said several times, it is extremely short-sighted to conclude from the imperfection of this process that we would be better off without any. Instead, one should improve the possibility for people to express their preference and the strength thereof. I think people can know their political preferences as well as they can know preferences for goods. In both cases you don't really know what you get before you really have it, but you can learn from that. I don't know why you think people would not be 'honest'. I don't even know what that means. They have an opinion and they can express it. If they express an opinion they don't hold, that's their problem. I can also go into a grocery store and buy Hershey's chocolate even though I don't like it. For some sorts of 'honesty' you need law enforcement, but that's not specific to the political system. You also need law enforcement eg. so people don't just ignore contracts they have made.

Second, the market does take depth of preference into account, and it does so automatically. Absent externalities (rare), the market always - as a scientific result, always - gets that right.

As a method of social decisionmaking the market, which is based on consent and maximizes consent, is in this sense better.


It is better for some questions but not for all. I have given several examples above. Most notably, let me repeat that, I have tried to tell you that people are not consistent in their opinions on what they would 'prefer' to do, and what they would 'prefer' macroscopically or on the long-term. They are not consistent. They do disagree with themselves. The political system is supposed to negotiate this disagreement that we experience both on the personal level as also on the level of our societies. On the personal level, our ability for long-term planning possibly on neglect of the short-term reward is what sets humans apart from all other species on the planet and is an essential ingredient to the stunning evolution of our race. You are simply only considering the microscopic individual preferences as the only acceptable expression of people's preferences.

This is not imposing a view on anyone, and it is not an ideology but a scientific result. The market maximizes preference satisfaction in the short term because it operates on - it's atom, it's fundamental unit - is acts of voluntary consent, imposed on noone. The science of economics has extended this simple short-term truth about voluntary consent, through mathematics, to show that preference satisfaction is also maximized in the long term by the market.

I have above given you several concrete examples where I don't see how this can be unless you have a notion of 'preference maximisation' that is again only build on people's 'tastes' as expressed in how they spend their money.

You purport to disagree with the conclusion, but other than the repetition of 'people disagree and they can have their say too,' (so what? People can believe what they want, but the science tells us what it tells us - they can't do better) I don't get what stage in this logical process precisely I'm losing you at.

Okay, maybe I am indeed not making clear my problem with your argumentation, so here is another try. As I said above, I don't know very much about economy, and I have no particular reason to doubt what you say has been derived. So you have a model, the model builds up on specific assumptions, you can derive conclusions within it. Fine. I have no problem with that.

What I have been asking you instead in many different forms and from many different sides is why do you think this model is indeed a good description of reality? And more importantly, what makes you think that people would want to live in an application of it?

Considering the model that includes two points. For one, you need an identification of the model's parameters (elements, variables, etc) with the real world. And second, you need evidence that after this identification your model provides indeed a useful description of the world.

Now what I am saying is I have no doubt that neoclassical economics is a good model in many cases, and its application works well towards what people desire since their micro-interests do work a long way towards what also is a macro-trend they prefer. There are however cases where a free market economy is in conflict with what people desire on the macroscopic level. This is a fact: We do not have a free market even in countries where people can freely vote and could, if they wanted to, decide to remove all regulations. But they don't. They freely, voluntarily, decide they do not want a free market. What I am saying is not that there is something wrong with that derivation that a free market is the 'best' way for people to organize their lives, given some notion of 'best' and given the assumptions the model builds upon, I am simply saying, it doesn't describe reality.

Now there are two possibilities why this can be. Either your notion of what people consider 'best' is incomplete, i.e. it does not take into account that people might have 'preferences' for the organization of their economy itself. Or you have used assumptions for your model that just don't describe reality. For example, that people always and exclusively express their preferences in what they buy or invest in and no other way to express preferences has any relevance.

I think it is probably a combination of both. I have asked you in many cases how do you explain that people do express preferences against a free market, or how does a free market help to negotiate in case of a tension between micro-interests and macro-trends. I have given you concrete examples in which cases the market will not be able to work towards a preferred solution without being accompained by a political process. You either say the market will take care of that without explaining how so, or you say people don't know what they want. In both cases you are protecting your believe against problematic evidence.

You wrote way back up:

The assumptions underlying contemporary mathematical economics are so basic and sensible as to be essentially indisputable.

For one, I thought we halfways agreed that one needs some sort of regulation to have a market running to begin with.

But besides this, if you are dealing with a very complex model, you need to show that neglecting all kinds of other less basic assumptions does not alter your results. You are not in general done with finding a simple model, but by explaining why its predictions are robust in all realistic cases that can occur.

I hope that clarifies it.

Best,

B.

John G said...

"Is this an argument in favour of state regulation? because it has completely the appearance of being the contrary. If it is the last, i agree with you."

For the U.S. right now I think the problem is from tyrants in both the government and in business but if the government was was just and the businesses were all owned by organized criminals then I'd want to regulate things as much as possible to try to get rid of what the criminals like to do. Ponzi schemes are already illegal, that's a good law. I'd add all the hugely leveraged financial stuff too. I'd get rid of credit cards too, way too much usury rates and way too close to a big brother cashless society ID card.

There's other things like infrastructure and disaster preparedness that need lots of attention. It would be nice if everyone could own free and clear a piece of land big enough to subsistance farm on and create some kind of shelter and have the places not too far away from others you need to network with (essentially I'm describing how Russians survived the fall of the Soviet Union).

We are fighting things bad guys like to do. If good smart guys ever take over maybe the laws can be softened but then they probably won't need to be cause no good person in power will want to be close to the illegal situations.

Neil' said...

Like I keep trying to explain to Amos and LoboGris, the very fact that people organized into unions, voted for laws about overtime and food content, etc, was also a choice and it proved they didn't like the sort of choices the originally freer market provided. (Also, you have said landlords can't charge whatever price they want to - yes, and governments can't make any laws they want since you can leave them too in most cases. But the more important point is, the pay workers get if the owners pay the minimum the market allows is less than with rules, so the public - mostly workers - votes for the rules. They vote with their votes.

And like I've said, the "choices" in market theory is only relative preference. It's not what you'd rather actually have it you could control things more directly.

Also, the market contains the seeds of its own destruction, a tendency which interferes with isolated personal choice. That happens when actors realize they can get benefit from colluding and demanding contractual behavior into the future. Then they form unions or trusts, and require anti-competitive contracts like you can't buy from me without agreeing to keep buying from me for the next three years - even though you'd rather be able to buy from others too. Then unions and companies and trusts fight each other and game the system, and its a mess with constant strikes and fights with scabs, farmers pouring out milk since they don't like prices, etc. All that actually happened and most people hated it, and voted for something different. That IMHO proves you free-marketeers wrong. It's real history of what happened, real empiricism, not just endlessly-repeated theoretical burnishing of zealously believed theories.

Amos said...

Ok, now we're making progress.

I have expressed several times that a political process of that sort does indeed reflect people's preferences very inaccurately, and it is not able to very well tell strength of preferences.

So you agree with me so far...

For this to be possible, the process needs to be much more flexible and have a better evaluation. This is not presently the case. However, as I have also said several times, it is extremely short-sighted to conclude from the imperfection of this process that we would be better off without any. Instead, one should improve the possibility for people to express their preference and the strength thereof.

Why do you think this is possible, though? The point of my statement was not "people vote inaccurately," or merely "voting is binary," but rather that, given the opportunity express preferences without a cost for doing so, people neither discover their true preferences, nor have any reason to express honestly. Indeed, any system of voluntary, costless preference expression necessarily will have this defect. (And to the extent it is possible to test such systems, this has been shown empiricly to be the case -- and in my apples and oranges example, you conceded it.)

I think people can know their political preferences as well as they can know preferences for goods. In both cases you don't really know what you get before you really have it, but you can learn from that. I don't know why you think people would not be 'honest'. I don't even know what that means.

It means that if a regulation would be in someone's interest, they have an incentive to prefer it, whether by voting, or claiming that their preference is stronger than it is. Let me be crystalline: Besides not knowing their preferences (which is empirically proven), even if they did, if they are asked their preferences in costless circumstances, they will lie. They will claim that they think something is "good for everyone," when really they don't, or claim that their preference is more deeply held than it is. There's no way to catch them, and doing so is in their interests. To change this, you would have to change human nature.

The market, because expressing preferences comes with a cost, does not have this problem.

Now, with what step of the above, precisely, do you disagree?

Most notably, let me repeat that, I have tried to tell you that people are not consistent in their opinions on what they would 'prefer' to do, and what they would 'prefer' macroscopically or on the long-term. They are not consistent. They do disagree with themselves. The political system is supposed to negotiate this disagreement that we experience both on the personal level as also on the level of our societies.

I don't understand this point at all. I agree with you that preferences change. I also agree that people's opinions on their preferences (that is to say, costless expressions of their preferences) change, but I don't see those two as the same thing. I do not understand how the poltical system can resolve this "problem" (if it is one), unless the government is overruling people's politically expressed preferences -- i.e., if it is undemocratic. This cannot be what you mean, and since you agree that mind-reading is impossible... So I don't get this at all.

The science of economics has extended this simple short-term truth about voluntary consent, through mathematics, to show that preference satisfaction is also maximized in the long term by the market.

I have above given you several concrete examples where I don't see how this can be unless you have a notion of 'preference maximisation' that is again only build on people's 'tastes' as expressed in how they spend their money.


Two issues:

1. You say "only build" on tastes expressed on the market. But all of the examples you gave are understandable in terms of, and as, markets, including all the tastes you mentioned. So I don't get it.

1.5 Where you say "spend their money," we established early on that all tastes are comparable--you can ask "how much $ would you give up to eliminate economic ups and downs, establish universal health care, protect children, etc." So there is no "only" here. The way that economics works, is about comparing all preferences within a person to each other. The beauty of the market is that it does this automatically.

2. How does the science get from short term to long term? Through complex math. That mathematics is the neoclassical contribution.

What I have been asking you instead in many different forms and from many different sides is [1] why do you think this model is indeed a good description of reality? And more importantly, [2] what makes you think that people would want to live in an application of it?

1. I think it is a good description of reality because the assumptions are logically indisputable and empirically proven, and because the conclusions are empirically established (at least the core ones) as well.

2. I don't have an opinion as to whether "people would want to live in an application of [the model]." Under any social order, people are living "in the model." The "model" is about how the complex preferences of large groups of people interact--that, not "free markets," is the subject of economic science. The "model" applies in capitalism, in communism, and in any regulatory regime. It tells us what will happen in the presence of regulation. If one wanted to study the interactions of rats, it would apply there too. The model is not proscriptive, and it is not descriptive of a particular regime. It is descriptive of the behavior of any society of rational preference-maximizers.

I will not say that is as inescapable as physics. Rather, it is as inescapable as a proven-correct Theory of Everything would be. The "model" -- the core components and predictions of economics -- are rigorously proven conclusions based on indisputable assumptions, based by empirical testing of both the assumptions and the predictions. It's like round-earthness. Like evolution.

Of course, here where I am being more general, I am speaking about the core components and conclusions of the theory--the elements common to all (non-marxist) economics. Many particular economic models are particular to topics that are human-exclusive, capitalism-exclusive, etc. We study these things by application of the core components described above.

This is a fact: We do not have a free market even in countries where people can freely vote and could, if they wanted to, decide to remove all regulations. But they don't. They freely, voluntarily, decide they do not want a free market.

So you have shown how the market does, in fact, apply to the question you asked! The economics predicts that the countries with less-free markets will, over time (at long-term equilibrium), be poorer and unhappier than the ones with freer markets. Economics does not predict that people will wake up and stop repeating the same mistake! Rationality -- not intelligence -- is the assumption.

Really, though, by any standard, markets in western countries are quite free, among other reasons because regulators have picked up on the lessons of economic science I've described. E.g., the advent of bandwidth auctions, tort law, etc.

Actually, there something very interesting here: Are you familiar with the concept of "common law"? You don't have it in Germany, where all the laws are written down in a book "this is the law, that is the law, etc."

In anglo countries, we have the "common law," judge-made law, which means that judges make up the law of each case when they see it, bound (to a greater or lesser degree) by the opinions of prior judges in prior, similar cases. They make up new rules when they think the old rules need an exception for particular facts, etc. And they do this based principally on their notions -- and jurys' notions -- of basic fairness.

What is very interesting is that, it turns out, that the common law very closely matches the set of rules for protecting and balancing property rights, enforcing contracts, etc. that is economically optimal. This is the field of Law and Economics and it is (or was) my field. The extraordinary thing is that while we started out planning to find ways to make the law better -- to better maximize preference satisfaction -- it turned out that the law was already getting it right most of the time, and we accomplished much more explanatory than prescriptive work.

Put another way, the basic notions of fundamental fairness that are common to all developed human cultures (that is, nearly all post-tribal ones), turn out to adhere very closely to economic rationales.

You can take this as evidence, I think, that people do, in fact, "prefer" what economics says is a "better" system, but that isn't something rigorously established. On the other hand, it is one of those beautiful results that you look at sometimes and say "wow, we've really done it."

I have asked you in many cases how do you explain [1] that people do express preferences against a free market, or [2] how does a free market help to negotiate in case of a tension between micro-interests and macro-trends.

I think I've done so. I'll try again.

1. People's expressed costless preferences do not match their true preferences. If you say "would you like universal healthcare," people say "yes." If you say "would you like universal healthcare at the cost of x in taxes and y in decreased healthcare quality" (which you can never do, because you can't accurately predict x or y and never will be able to do so), people are more likely to say "no."

But maybe you are talking about something else, people voting "with their feet." Economics tells us that, over time, less-free-market countries will be unhappier and poorer, and thus that (limited by the intelligence and learning of the population) over time the long-term trend will be for freer markets as people get smarter about it. The empirical evidence, of course, supports this conclusion, and the clear historical trend is toward fewer regulations, smaller regulations, and pseudo-regulations designed with economic principles in mind (i.e., adjusting property rights to eliminate externalities rather than regulating conduct). (See, e.g., former Warsaw Pact region.)

2. The free market can negotiate cases of tension between the micro- and macro- in two ways:

First, in the case of externalities, unless transaction costs are prohibitive people will voluntarily come together and agree to bind themselves to a set of preference-maximizing rules. Examples of this (I gave a few) abound. A few more:

Common-interest housing developments (condos, etc.) are an example of people coming together to voluntarily bind themselves to a private regulatory regime.

The securities markets are another--brokers come together and set up a set of rules to trade with each other, creating an "Exchange." Participation in an exchange is voluntary, and the exchanges compete with each other.

Another example is annuities. If you're really concerned about market ups and downs, and prefer to eliminate that risk, you can invest in an annuity which guarantees you a fixed return. Of course, that return happens to be much lower than what you'd get by accepting the risks of investing in a market, which is how the seller of annuities makes a profit. There is a thriving market for annuities of all sorts of flavors, carrying different levels of credit and other risks, etc.

If the "macro-trend" you are concerned with is that reward goes hand in hand with risk -- well, that is neither a "problem" nor "solveable." It is a consequence of our inability to predict the future.

Second, the tension you perceive between micro- and macro- is overstated. When the costs of the supposedly-desired macro result are taken into account, the macro-result is invariably less desirable to people than long-term equilibrium (although they may express the opposite view if asked to do so in costless, e.g., voting, circumstances). How do you get to this result from the simple fundamental micro-economic principles I have been describing? With a lot of math!

Plato said...

Greed and Competition are not the result of the immutable human temperament...greed and fear of scarcity are in fact being created and amplified....the direct consequences is that to fight with each other in order to survive. Bernard Lietaer-Founder of the EU Currency

When I last left you, science was developing the first model application to the bionic man.

Physiologically correct, and through developmental complexity sequences of the biological human system, a much better robot that one could hardly distinguish then those true beings with a heart.

Trial after trail, robots were built, each progressive, and housing the methodicalness of the habitual creature, whereby, this supposed "emphatic consideration" would "do the bidding of its creator." IN this perverted sense, it would have the "seed of the father" and raised in an environment of family tradition, thus producing a new generation of it's ideal.

Methodology applied to the principals of the economy, so all under the umbrella of acceptance, partake of this economic social view.

"Who am I," these new science children asked, and low and behold they learnt to recognize who the creator was?

Imposing "new ideas" into combating the manipulators attempt, was to clear away the illusions created for that society. They were much more subtle in the approach. Descendants too, into the matter states who sought to create another "legal entity" not unlike it's "corporate designed for profit" robot builders, to implement a pendulum reversal to inflation, and a development of equilibrium of proportions, that had favoured the corrupt, was now slowly being dissolved by the "non-prophet of the future.":)

No...like this perverted notion of emphatic design in a robot without a heart (to a nurture of it's mechanical creation), the manipulators sought fantasy to provide for the idea in human form as a construct that would have been written by densest matter states of the human intellect as the creator of the darker forms had strayed from the light of goodness.

Thusly, in it's most purest form, the robot would have dreamt "their dreams....," a new generation of robots, with a "mechanical heart" were born.

Psychological mindedness is distinct from intellectualisms and obsessional rumination about one's inner problems. The latter is of no help in psychotherapy, but it is a sign of resistance.

Resistance is a decay from that "perfect symmetry of money" that the human mind in mathematics sought to establish on principal?

Best,

Phil Warnell said...

“One is for the purpose of satisfying its own needs, and interacting in the market with the rest of the individuals. The other is for the purpose of understanding an economic system and searching for better regulations overs the individuals.”

I can tell that despite sound arguments being raised you remain convinced that individualism is the key to economic perfection, both on the micro and macro levels. I strongly believe that this is resultant of first this being your primary interest and second that to concede otherwise has you give up some personal level of control. I have for instance already indicated that Darwinism is being modified as a theory due to the discovery of a feed back mechanism that plays a role in evolution. The greatest defense for what is called “free market” is that like Darwinism it allows survival of the fittest to decide who does and who does not succeed to continue. The truth is however it appears that nature goes further then this and one should stop to wonder why?

The clear answer of course is to better assure the survival and continuance of a species as survival of the fittest through attrition is not enough. I would simply ask then if blind faith as a methodology has thus been demonstrated as not enough for nature, why then should it be settled for as being enough for man, from both individual the overall perspectives? No I’m afraid your contentions are in the end not supported by reason based on experience and or experiment, yet rather faith based, rooted solely in self interest and compounded by a lack of trust in the motives of others in the more general sense.

My concern therefore is not so much for you or I in such matters, yet rather the species as a whole. This is what economics should be thought of as being, where however what you are focused on at best could be called simply personal planning. I wish you well, yet for me I’ll stick to the confidence I have in science with its effort to understand nature so that we can be further enlightened and improve.

Best,

Phil

LoboGris de Lothlórien said...

Hi, Giotis,

«LoboGris, the purpose of a society is to preserve the happiness of its members.»

Agree. But that does not mean that any social organization is good.

«The jungle rules of uncontrolled free market make people unhappy.»

There is no country with uncontrolled free market. All countries has a big degree of intervention and regulation. And people live worser where market is more regulated. People don't migrate to latinamerica. People migrates to england, usa, japan, new zealand, or australia.

«It is that simple. You are unhappy if you are a afraid that you might loose your job next year.»

No system can guarantee anything magically. In countries with laws that guaranties your job, it is at expenses of the rest of the people, which has to paid the costs of your job, even it is has no value for them. Does that apport happiness to them?

In a free market, you can purchase unemployment insurances.

«You are unhappy if you don't have money to educate your kid.»

When state guarantees education to your children, regardless of what they give to society, many people are unhappy because has to pay not only their childrens school, but also your children school. State is not magic. State takes money from people to do that.

«You are unhappy if you don't have enough money for proper medical treatment.»

And many people are unhappy when they have to pay your medical treatment.

«You are unhappy if you are afraid that you might loose your home.»

People are unhappy when has to pay the cost of your home.


«You are unhappy if you don't have personal, free time because you are forced to work 65 hours a week.»

People are unhappy when they have to pay you with more of their time so you can have more free time.

«We live only one life and it's not fair to live it in such anxiety.»

That is valid also for the rest of the people who has to pay your medical treatment, your education, your children, your job and your free time.

«All the above are fundamental for the preservation of happiness and they should be given to all people for free.»

No economical model gives nothing for free. The most it can do is to transfer hapiness from ones to others, with the additional bureaucratic and political cost.

«Every human being deserves them regardless of his economical background. They are the fundamental elementary rights of everyone and they are not negotiable. We have enough resources to accomplish this.
I don't care which economical system you want to adopt. What ever that system might be, it should be able to secure that minimum for all people.»

That has nothing to do with science. That are mere declaration of principles.

But if you want to speak about economy, the free market is the most effective way to attain this target. People in more free markets lives much better than people that don't.

Giotis said...

LuboGris, I don't have a problem with the free market, I have a problem with the unregulated free market and with the enforcement of the free market logic to every aspect of our lives. Some things are to important and sensitive for the welfare of the society to be considered as an opportunity to make money.
Unregulated free market leads to the exploitation of people and to the enormous accumulation of wealth in the hands of few at the expense of the society. This is a fact that nobody can deny.

As for the fundamental human rights (the right to live a life with dignity no matter who you are), as I told you they are not negotiable. Every organised society must provide them to all its members, period.

Andrei Kirilyuk said...

LoboGris, I am rather on your (“free-market”) side in the “economical” part of this discussion, but Giotis means something else in his previous comment you answer to and this something else is certainly outside of usual science definition and purely economic issues we were mainly concentrated on here. Let's acknowledge that life is more important than any most correct science, already because the latter is always more limited that the former. The developed market system (pertinent “control” including) is the best one and the “developed” countries apply it and their average wealth (including both private and public possessions) does grow very high above the necessary minimum, apparently at a maximum practically possible rate (it is finally limited by a much more fundamental factors, such as our physical needs, see my previous comment here). But here appears a major paradox: this ever richer Western society has a growing feeling of unhappiness, contrary to all “evident” assumptions and including, surprisingly, even material prosperity estimates. It's almost like having more means ... having less! This effect has even its “scientific” name of “Easterlin paradox” (involved in the same my previous comment). Now if you appear and say to the people “shut up, poor idiots, our scientific estimates show that you live better, so you live better!”, you may discover a major problem of economic science (and real economics), its desperate openness to “other factors” that can practically compensate the influence of “purely economic” tendencies, after which the most correct theory of the latter may become much less important practically. My own explanation of the “paradox” is that we are now close, if not within, a much deeper change of man and its society, far from that purely economic “efficiency” (which is an essential but not only important factor). See the above comment and (the end of) my today's comment on John Horgan blog post for further details.

Bee said...

Hi Amos:

Instead, one should improve the possibility for people to express their preference and the strength thereof.

Why do you think this is possible, though?


Because I think many people have more distinct political opinions than "Obama" or "McCain" and, given a simple possibility to do so, would express them. I believe it is possible to improve that process because a) I'm generally optimistic and b) our political systems haven't been updated for centuries, it's about time they arrive in the 21st century.

given the opportunity express preferences without a cost for doing so, people neither discover their true preferences, nor have any reason to express honestly. Indeed, any system of voluntary, costless preference expression necessarily will have this defect

It is not costless. You have explained yourself above what the cost is. Whenever a macro-trend is desirable that is not automatically a result of the micro-incentives of the free market, putting regulations in place to better work towards the macro-trend means the market works less efficiently. People know of this cost. They maybe don't know it very accurately (scientists needed here), but they know that putting a high tax on companies that do not act in agreement with goals of environmental protection does on the short run not benefit them. Etc etc, see examples I had above. What reason do they have to be honest? Because they all have to pay a price for what they get.

They will claim that they think something is "good for everyone," when really they don't, or claim that their preference is more deeply held than it is. There's no way to catch them, and doing so is in their interests. To change this, you would have to change human nature.

You don't have to "catch" them, they will feel the consequences of their doing and given the possibility of evaluation and feedback, will improve their decisions. That process does happen all the time, just that the evaluation and feedback in the political system is enormously slow and inefficient. The question whether something is "good for everyone" again isn't an appropriate question. Political decision making, for the cases I told you it is relevant, is always a trade of now for later, or some for others.

Now, with what step of the above, precisely, do you disagree?

On the costlessness, as I said.

Most notably, let me repeat that, I have tried to tell you that people are not consistent in their opinions on what they would 'prefer' to do, and what they would 'prefer' macroscopically or on the long-term. They are not consistent. They do disagree with themselves. The political system is supposed to negotiate this disagreement that we experience both on the personal level as also on the level of our societies.

I don't understand this point at all. I agree with you that preferences change. I also agree that people's opinions on their preferences (that is to say, costless expressions of their preferences) change, but I don't see those two as the same thing. I do not understand how the political system can resolve this "problem" (if it is one), unless the government is overruling people's politically expressed preferences -- i.e., if it is undemocratic. This cannot be what you mean, and since you agree that mind-reading is impossible... So I don't get this at all.


Sorry, I think you really don't understand it, even though I have tried to tell you many times. If people are faced personally with making a decision they come to a certain result based on how the system is set up, based on their preferences and the incentives. That are their micro-interests. These result in an emerging macro-behavior and a long-term trend. The tension that I am talking about is that people people can have and do follow micro-preferences that act against their macro-preferences.

You hear this every time somebody says something along the lines "Yes, it sucks, but this is how the system works." This happens each time somebody takes the car because it's less expensive than the train, even though he is all for reducing carbon emissions etc.

What do you do then? You change the incentive structure such that the micro-interests work better towards the macro-preferences. That's what regulations are good for.

Where you say "spend their money," we established early on that all tastes are comparable--you can ask "how much $ would you give up to eliminate economic ups and downs, establish universal health care, protect children, etc." So there is no "only" here. The way that economics works, is about comparing all preferences within a person to each other. The beauty of the market is that it does this automatically.

Except that it doesn't. The question "how much $ would you give up to eliminate economic ups and downs, establish universal health care, protect children, etc." is one that I would have called political. How does the economical system address it? When and where are people asked: How much $ would you spend to have your economic system run more stable? Where are people offered this option? It requires that people come together and form some social contract to put these things into place. You can call that spontaneous self-organization, I call that a political system. It doesn't matter how you think about it, I am just emphazising its importance to complete the way people's preferences can be turned into reality.

There are however other political questions that can't be framed into the "how much $" question (sorry, as I said earlier, they can, but it does't make sense). How much money would you give up to legalize gay marriage? When it comes to question of that sort you are again back to the problem that I mentioned several times above: people's opinions on these question should not be weighted by how much $ they are willing to spend, because the importance of their opinion then depends on their wealth, which - at least as far as I am concerned - is against the basic idea of democracy.

I am really constantly repeating the same thing.

Under any social order, people are living "in the model." The "model" is about how the complex preferences of large groups of people interact--that, not "free markets," is the subject of economic science.

Fine with me, I have no problem with that. I have a problem with people who argue that we are all better off without any regulations on the "free market" and try to hide the fact that their idea of "better" is a personal opinion behind a shield of alleged scientific conclusion. If you are not advocating a free market as the best solution for all the world, then what are we arguing about?

are rigorously proven conclusions based on indisputable assumptions,

I already told you above that basing a model on "indisputable" assumptions is not sufficient, especially if the system you are trying to describe is very complex. You also need to show that additional assumptions or small alterations (no assumptions about humans is ever indisputable) don't completely spoil the results.

So you have shown how the market does, in fact, apply to the question you asked! The economics predicts that the countries with less-free markets will, over time (at long-term equilibrium), be poorer and unhappier than the ones with freer markets. Economics does not predict that people will wake up and stop repeating the same mistake! Rationality -- not intelligence -- is the assumption.

If you look at surveys that have been made how happy people are (for example the one I mentioned, there are more, read also Andrei's comment) you will find that the increase in wealth does not reflect in an increase in happiness in highly developed nations.

Really, though, by any standard, markets in western countries are quite free, among other reasons because regulators have picked up on the lessons of economic science I've described. E.g., the advent of bandwidth auctions, tort law, etc.

Once again, I am not telling anybody what amount of regulations he or she should prefer. I am just saying that is too is an option, and it requires a political decision making process to find out what people want. They could decide they don't want regulations at all. Yes, these markets are relatively free, but the amount of regulation changes from country to country and it also changes over time. I don't think any particular regulation is a 'best' option, it depends on people's preferences. For example, I would guess we will be seeing an increase in regulation in the soon future.

If you say "would you like universal healthcare," people say "yes." If you say "would you like universal healthcare at the cost of x in taxes and y in decreased healthcare quality" (which you can never do, because you can't accurately predict x or y and never will be able to do so), people are more likely to say "no."

Indeed. I don't know why you think I had in mind the former rather than the latter, given that I have repeatedly told you that people should have a way to more accurately express their preferences and strength thereof. I have also repeatedly pointed out the necessity to allow for a feedback. E.g. if the healthcare turns out to be much more expensive than expected, people should 'feel' that and have a way to reconsider. Generally, taxes should be raised not for the sake of getting money in, but for a specific purpose. Etc etc. Maybe you see now why I say I want a market for political preferences.

Best,

B.

LoboGris de Lothlórien said...

Hi, John G,

«For the U.S. right now I think the problem is from tyrants in both the government and in business but if the government was was just and the businesses were all owned by organized criminals then I'd want to regulate things as much as possible to try to get rid of what the criminals like to do.»

If you give extra powers to the state, then state will be the target of the political market. Tyrants from bussiness are possible thanks to the legitimacy of the state to regulate.

At the inverse, let reduce the power of the state, and big bussiness will not have the power to protect its interests.

Again, societies that live better, are those that have more limited states.

US state is too much powerful. That is why it is associated with some bussiness (financial, oil)

Amos said...

given the opportunity express preferences without a cost for doing so, people neither discover their true preferences, nor have any reason to express honestly. Indeed, any system of voluntary, costless preference expression necessarily will have this defect

It is not costless. You have explained yourself above what the cost is. Whenever a macro-trend is desirable that is not automatically a result of the micro-incentives of the free market, putting regulations in place to better work towards the macro-trend means the market works less efficiently. People know of this cost. They maybe don't know it very accurately (scientists needed here), but they know that putting a high tax on companies that do not act in agreement with goals of environmental protection does on the short run not benefit them. Etc etc, see examples I had above. What reason do they have to be honest? Because they all have to pay a price for what they get.


Putting aside whether measuring those costs in advance is possible, which in a world of unpredictable futures is impossible... I think you've missed the point of the apples and oranges thought experiment...

The point is, when someone is presented options in abstract terms, which is all a political choice ever is, what you think you prefer is not the same as what you would actually do if the choice was immediately there and the cost payable. Being forced to actually pay -- not just contemplate -- the cost, is what reveals the preference to the individual. You don't know which option you prefer--althogh sometimes you think you do--until you are actually confronted with the REAL choice.

Didn't you ever go to the store planning to buy something, and then think back and say "you know, this really isn't the way I want to spend my money," or decide to buy something else? Preferences are kind of like wavicles; you don't know where they really are until they hit something.

You agreed with this in the apples-and-oranges thought experiment. And it is an empirically proven result, by the way! Do you really disagree with it?

Now, with what step of the above, precisely, do you disagree?

On the costlessness, as I said.


But... when you make a political choice, you don't actually pay the cost. You just contemplate the cost. I'm not sure why you find this concept difficult -- you do remember that when I presented you with the apples and oranges hypothetical, you agreed with the point, right?

Sorry, I think you really don't understand it, even though I have tried to tell you many times. If people are faced personally with making a decision they come to a certain result based on how the system is set up, based on their preferences and the incentives. That are their micro-interests. These result in an emerging macro-behavior and a long-term trend. The tension that I am talking about is that people people can have and do follow micro-preferences that act against their macro-preferences.

You hear this every time somebody says something along the lines "Yes, it sucks, but this is how the system works." This happens each time somebody takes the car because it's less expensive than the train, even though he is all for reducing carbon emissions etc.


No... What happens in your car hypothetical is that they've decided that the benefit of saving the money exceeds the cost of the environmental damage. That isn't "acting against a macro trend," its just someone being presented with an actual choice and that choice not reflecting their abstract, costless, expressed preferences. This is an example of why markets work, not why they fail. What is being demonstrated is that what you call the "macro preference" isn't what the person really prefers. Its what they say they want, but not what they really want when presented with the choice.

Now, there are cases of social coordination in which individual decisions work against a shared preference, but they're very rare and, again, you have to get the fundamentals first, because otherwise you'll see zebras everywhere!

Where you say "spend their money," we established early on that all tastes are comparable--you can ask "how much $ would you give up to eliminate economic ups and downs, establish universal health care, protect children, etc." So there is no "only" here. The way that economics works, is about comparing all preferences within a person to each other. The beauty of the market is that it does this automatically.

Except that it doesn't. The question "how much $ would you give up to eliminate economic ups and downs, establish universal health care, protect children, etc." is one that I would have called political. How does the economical system address it? When and where are people asked: How much $ would you spend to have your economic system run more stable? Where are people offered this option?


"How much would you pay for the whole economy to be stable" is a fundamentally externalized question. The question you want to ask each person is "how much would you pay for YOUR income to be stable." You then want to somehow combine those results across society. The market solves this "problem" through the financial instrument known as an annuity which, as I explained, was developed for people who have the preference you described.

Similarly, there are people who choose jobs that are lower risk and lower pay, as low-risk and low-pay as the post-office, and there are others who choose higher risk for greater reward.

So, the market has, in fact, solved the problem you identify. If the problem you are really concerned with is that you want the reward without the risk, that isn't a "problem" and isn't "solveable."

There are however other political questions that can't be framed into the "how much $" question (sorry, as I said earlier, they can, but it does't make sense). How much money would you give up to legalize gay marriage? When it comes to question of that sort you are again back to the problem that I mentioned several times above: people's opinions on these question should not be weighted by how much $ they are willing to spend, because the importance of their opinion then depends on their wealth, which - at least as far as I am concerned - is against the basic idea of democracy.

No, all of these tastes are monetizable in the sense that you can ask how much of one thing someone is willing to give up for another.

It is, as I pointed out many posts ago, distasteful in our society to say "its all about money." We use "money" in economics in lieu of an abstract term like "utility units," because it works and its really approximately the same. And the point of money, its function in our society, is to be a unit that has no intrinsic value but can be substituted for other things that do have intrinsic value.

On the other hand, the relationship between money and "utility units" (which is really what we're studying) isn't perfect, because money is a thing like any other and it has declining marginal utility... Again, way too advanced for this discussion. For our purposes, money and "utility units" are interchangeable.

It is interesting to note that all of your examples are externalized. You do not ask "what would i give up to get..." but rather "what would I give up to get everybody to..." This is why you are having trouble seeing the role of the market, why you are seeing zebras everywhere -- you are asking the questions in a way that creates artificial externalities. This isn't right, because then you can't sum the preferences properly. If you ask the question without the externalities, the math will work and the market will solve the problem. The two different ways of asking it are equivalent, its just that one is amenable to analysis and the other is not.

Fine with me, I have no problem with that. I have a problem with people who argue that we are all better off without any regulations on the "free market" and try to hide the fact that their idea of "better" is a personal opinion behind a shield of alleged scientific conclusion. If you are not advocating a free market as the best solution for all the world, then what are we arguing about?

Whether economics as a science is correct, and what the implication is of its results. Of course, I do believe that the free market is the best solution, but that's just because its what the science says. That's a result not an assumption or an ideology.

people's opinions on these question should not be weighted by how much $ they are willing to spend, because the importance of their opinion then depends on their wealth, which - at least as far as I am concerned - is against the basic idea of democracy.

That is not what economics says. Economics says that rich people will have their tastes satisfied to a greater degree than poor people... sort of. Actually, it says that, putting aside random chance and birth, etc., people will make choices about whether they prefer to work harder, take on more risk, etc., that determine their wealth. Which, of course, is ok.

I already told you above that basing a model on "indisputable" assumptions is not sufficient, especially if the system you are trying to describe is very complex. You also need to show that additional assumptions or small alterations (no assumptions about humans is ever indisputable) don't completely spoil the results.

And I told you: (a) the "model" applies equally well to rats, to communist societies, etc., and (b) both the assumptions and conclusions are empirically tested.

So.... what piece of scientific proof are we missing?

If you look at surveys that have been made how happy people are (for example the one I mentioned, there are more, read also Andrei's comment) you will find that the increase in wealth does not reflect in an increase in happiness in highly developed nations.

And if you look, insted of at polls (voluntary, costless, expressions of preference), at the actual choices people make, you will see a lot more moving from poor, unfree countries to rich, free market ones, than the other way around.

Andrei Kirilyuk said...

Bee said: “Because I think many people have more distinct political opinions than "Obama" or "McCain" and, given a simple possibility to do so, would express them. I believe it is possible to improve that process because a) I'm generally optimistic and b) our political systems haven't been updated for centuries, it's about time they arrive in the 21st century.”

In fact, b) here is redundant, as a) is absolutely self-sufficient :). More seriously, if you hear what you say, then b) by itself would rather imply that your “political systems” cannot be changed, if they were unable to do so during all previous periods and efforts of so many so clever and “optimistic” people (including a relatively long last period of technically developed Western democracy). Indeed, the system is by all means “saturated” as such, i.e. only very small and increasingly smaller details can vary. A greater change can be brought about only by a more radical transformation but which will inevitably change the very nature of the system, so that in any case you wouldn't call the result “our political system” (and most probably any political system at all). Have a happy transformation, at least for the forthcoming holidays :).

Phil Warnell said...

Hi Bee,

I thought you might be interested to know that the current word count in this comment section has exceeded 67,000, which places it in a range approaching that of the average novel. In comparison this is still a long way from Tolstoy’s War and Peace at 587,287 yet larger then Bradbury’s The Martian Chronicles at 64,768. Just more reason to wonder that perhaps ownership or copyright issues really are something to think more about:-)

Best,

Phil

Bee said...

Hi Phil,

That is interesting indeed. Though, if you would omit the redundancies I am sure this comment section would be considerably shorter. I feel somewhat like a broken record and wonder why it is so hard to see that people do want and do find ways to express their preferences other than through spending and investing money. Best,

B.

Phil Warnell said...

Hi Bee,

“I feel somewhat like a broken record and wonder why it is so hard to see that people do want and do find ways to express their preferences other than through spending and investing money.”

I would agree as for the many years I have been in private industry I have to tell you truthfully more effort is being spent today by many companies trying to differentiate there products and services in the public perception then actually improving those products and services.

This for example is primarily why the big three automakers are now in line for hand outs. The myth that many have that all that’s required is to build a better mouse trap and the world will be beat a path to your door is exactly that, a myth. If you equate marketers to generals and advertizing to soldiers you basically have what ‘free market” is considered by most today as being.

The first order of business that needs to happen is to find ways of channeling more of that time and effort into product and service development and less to the battles of perception. You can slice it any way you want, yet when you spend more and more time and effort on perception and less and less on improvement and productivity in the end that’s all what one really has, a perceived economy rather then a real one.

Best,

Phil

Andrei Kirilyuk said...

Phil said: “I thought you might be interested to know that the current word count in this comment section has exceeded 67,000, which places it in a range approaching that of the average novel.”

Bee responded: “That is interesting indeed. Though, if you would omit the redundancies I am sure this comment section would be considerably shorter. I feel somewhat like a broken record and wonder why it is so hard to see that people do want and do find ways to express their preferences other than through spending and investing money.”

I would rather develop Phil's analogy, which is far from being only a quantitative one. Has it ever occurred to you that such a properly developed blog post with comments can indeed be a modern, “collective-intelligence” version of the old (and now actually dead) art of novel (any “fiction”), combining today's necessary “real-life” heart beat (generalised “reality show”) and yet artistically unpredictable and diverse imagination of individual contributions? It is unique in its quality and has unique perspectives of development, contrary to the dying usual art forms or even all those artificial reality-show substitutes. It is a direct successor of the classical novel as similar to the latter it represents a subjective description of contemporary reality. In this sense, even its multiple visible “imperfections” have a value as but another reflection of reality, in its full diversity. As to “redundancy”, it's a hallmark of any art (as opposed to science). So even when one discusses formally “scientific” issues, but within such properly diverse exchange, one actually obtains a piece of art, just as a chat by-product! Indeed, if an ET intelligence will find, much later, occasional remnants of our, alas, self-destroyed civilisation, in the form of this blog post scripture, it will already be able to deduce many interesting conclusions about our life and sad destiny. Are you aware of your related responsibility?! By contrast, those blogs that try to discuss their authors' scientific “abracadabra” in its own terms or provide a series of life banalities are rather without interest as cyber-novels of our apocalyptic époque. It can thus even be advanced as a criterion of blog quality: it if still looks as a “novel” (not quantitatively but in diversity, etc.) it is of superior quality with respect to all those simple “snap-shots” of reality. And by the way, why (rationally and irrationally) are you doing it, after all, this so time-consuming and visibly non-professional activity, ah, Bee, especially in your “strong-interaction” mode? Writing a novel by our hands :)?

Phil Warnell said...

Hi Andrea,

I’m not certain if these comments should be taken as simple writing or rather prose. That is should it relate to Tolstoy’s War and Peace or Milton’s Paradise Lost.

Best,

Phil

John G said...

"Tyrants from business are possible thanks to the legitimacy of the state to regulate."

Even if the state isn't powerful enough to make it worth getting control through the state, there are other ways to get control like through religious leaders or militia leaders. Good guys are good no matter where they are and bad guys are bad no matter where they are. The bad guys unfortuneately are con artists too and we the people are so easy to con. If good guys notice the con, they could be good and smart and actually go along with the con for a time for strategic reasons.

John G said...

"Being forced to actually pay -- not just contemplate -- the cost, is what reveals the preference to the individual. You don't know which option you prefer--althogh sometimes you think you do--until you are actually confronted with the REAL choice."

But in cost vs risk situations there's the problem that people don't get to experience the down side of the risk before making the decision. People might be willing to do without insurance, repairs, regulations, charitable giving, etc. before a catastrophe but afterwards they may wish otherwise. Lives full of gambles gone wrong isn't healthy.

Bee said...

Hi Amos:

Putting aside whether measuring those costs in advance is possible, which in a world of unpredictable futures is impossible... I think you've missed the point of the apples and oranges thought experiment... You agreed with this in the apples-and-oranges thought experiment. And it is an empirically proven result, by the way! Do you really disagree with it?

I think you have missed the reason for my reply. You are right that the future is unpredictable (in practice. Whether it is unpredictable in principle is a different question.) Nevertheless, people do have preferences about it, they do like to express them, and they do indeed argue about their preferences endlessly - as you can see very clearly in this comment section. This argumentation is supposed to be mediated by the political system.

It is irrelevant whether you think people know or don't know their preferences accurately before they are actually faced with them, or whether you do or don't think this argumentation is useful. The point is that they articulate their preferences nevertheless, and evidently articulating itself it a preference. Let me repeat this once again, whether you think this does indeed express their actual preferences is not the relevant point. And to repeat once again what I said above, even if their knowledge about their actual preferences about the future is inaccurate or can only be poorly expressed, just simply completely ignoring is not an acceptable solution.

In fact, I am repeating the same two points that you are apparently either unwilling or indeed unable to understand.

The one is that people do evidently express preferences through other means than investing and spending money, and they do express them about things that apparently the economic system does not satisfactorily address. Now you are either replying to this, people a) don't have such preferences or b) don't accurately know them or c) the market takes care of everything automatically. Which is a) wrong b) not a reason to dismiss them altogether and c) I have given you several examples where this isn't the case (see e.g. the public choice problem). Faced with this, you have been saying roughly in a free market people would come together and taxes for social purposes would be replaces with voluntary 'donations' (expressing that you misunderstand the public choice problem) or they would spontaneously come to voluntary agreements about laws and regulations and so on. And indeed, people do that: it is called the political system and that's what I am talking about. So if it is a consequence of the free market approach, why do you keep denying its necessity?

You are further doing an admirable task in trying not to answer my question how a system in which the only way people's preferences are weighted is through their money can be democratic in the sense that everybodies opinion on political matters is equally important. As an example I have given you the question whether or not gay couples should be allowed to marry and how the free market without a political system would address that. You either obscure your answer by saying that yes, on the average, rich people are happier than poorer people, or state things like "the point of money, its function in our society, is to be a unit that has no intrinsic value but can be substituted for other things that do have intrinsic value". But the point is, Amos, you do say that Bill Gates opinion on gay marriage is more important than e.g. mine because he can 'substitute' more of his money to work towards his 'taste'.

Sorry, I think you really don't understand it, even though I have tried to tell you many times. If people are faced personally with making a decision they come to a certain result based on how the system is set up, based on their preferences and the incentives. That are their micro-interests. These result in an emerging macro-behavior and a long-term trend. The tension that I am talking about is that people people can have and do follow micro-preferences that act against their macro-preferences.

You hear this every time somebody says something along the lines "Yes, it sucks, but this is how the system works." This happens each time somebody takes the car because it's less expensive than the train, even though he is all for reducing carbon emissions etc.


No... What happens in your car hypothetical is that they've decided that the benefit of saving the money exceeds the cost of the environmental damage. That isn't "acting against a macro trend," its just someone being presented with an actual choice and that choice not reflecting their abstract, costless, expressed preferences. This is an example of why markets work, not why they fail. What is being demonstrated is that what you call the "macro preference" isn't what the person really prefers. Its what they say they want, but not what they really want when presented with the choice.


Let me try this one more time. You are using a specific notion of 'what the person really prefers' that does not include other ways of that person to express his or her preferences other than through investing or spending money. You are simply denying that people do have what I call the 'macro-preference' despite the fact that they evidently do have and express these preferences, just read the essay or the comments in this post, or look around on the internet.

Your statement that the person when 'presented with the choice' of either taking the car or being nice to the environment takes the car means the person does not 'want' to protect the environment again denies that there can be any tension between the individual short-term interests and the long-term macro-preferences, because in your mode of thinking this tension can not exist; the only preference that exists is what people put their money in. Whereas I am trying to tell you the political system is necessary to take into account the inability of people to properly express their macro-preferences through the economic system.

It is interesting to note that all of your examples are externalized. You do not ask "what would i give up to get..." but rather "what would I give up to get everybody to..." This is why you are having trouble seeing the role of the market, why you are seeing zebras everywhere -- you are asking the questions in a way that creates artificial externalities. This isn't right, because then you can't sum the preferences properly. If you ask the question without the externalities, the math will work and the market will solve the problem.

That is the kind of question people do ask in political decision making. What would I give up to know everybody in my country has access to a health insurance? What would I give up to make sure our children will grow up in a country that is as green and fertile as the one I grew up in? I am not asking these questions because I want to accurately sum up preferences. I am asking these questions because these are the questions people ask.


And if you look, insted of at polls (voluntary, costless, expressions of preference), at the actual choices people make, you will see a lot more moving from poor, unfree countries to rich, free market ones, than the other way around.

I was not talking about differences between rich and poor countries, but explicitly referred to countries that have already reached a high level of average wealth. I have repeated probably a dozen times that yes, over a long period of economic growth it seems to go along with an increase in people's happiness. So I would appreciate if you'd stop accusing me of saying otherwise.

Now, there are cases of social coordination in which individual decisions work against a shared preference, but they're very rare and, again, you have to get the fundamentals first, because otherwise you'll see zebras everywhere!

I have already told you that I don't care how you call it. I don't even care whether you think these cases are automatically addressed by the 'free market', I just want them to be addressed. If they are, I can't make sense of naming it a 'free market' but fighting over words isn't a game I like to engage in.

Since this doesn't get us anywhere, let me make a different try to tell you what the problem is with your approach. You have a system that I will call the free market. It is useful to help us distribute goods, capital and to connect traders etc etc based one some very simple microscopic rules that everybody has meanwhile understood. It works very well and 'optimizes' the state our societies are in with excellent success towards a place where people are happy.

Now one of the point I am unsuccessfully trying to make that people do have a preference about that system itself. This is an option, or call it a preference, or a taste. Is this taste accommodated from within the system? This would be equivalent to saying there is no state in people's preferences that a free market can not reach, but what if people do prefer regulations? Now you can either say these are part of the system. Fine, so, you have to conclude that regulations are part of the system, which is great just that 'free market' then sounds somewhat like a misnomer. Or people just can't have this preference, which means your model does not satisfactorily describe the world.


Best,

B.

Bee said...

Hi Andrei:

And by the way, why (rationally and irrationally) are you doing it, after all, this so time-consuming and visibly non-professional activity, ah, Bee, especially in your “strong-interaction” mode?

Because I learn a lot through this blog and I hope some of the readers can learn something as well. I regard blogs to some extend useful to accumulate information and build knowledge. The usefulness of the medium is limited however and you can see it very clearly in this comment section. The exchange with Amos is pretty much pointless at the present stage. Brockman solves the problem by only allowing a limited amount of replies by selected people. I think this greatly helps to keep the discussion interesting, worthwhile, and on topic.

The short answer is obviously that I'm interested in the topics that I write about. That's why I write about them, and that's why I like to discuss them. The topics are not necessarily topics I have worked on myself.

Best,

B.

Amos said...

It is irrelevant whether you think people know or don't know their preferences accurately before they are actually faced with them, or whether you do or don't think this argumentation is useful. The point is that they articulate their preferences nevertheless, and evidently articulating itself it a preference.

No, it is completely relevant, because the question is whether what is being articulated is really their preference! The point -- which I will repeat again, because it is absolutely crucial -- is that what people say are their priorities, are not their real priorities.

And to repeat once again what I said above, even if their knowledge about their actual preferences about the future is inaccurate or can only be poorly expressed, just simply completely ignoring is not an acceptable solution.

In fact, I am repeating the same two points that you are apparently either unwilling or indeed unable to understand.


I did not understand this to be your claim. It seems to be a new claim. But let's get the cards on the table: Are you now actually saying that what justifies intervention in the market is that, even if people truly prefer the result of the market, they may mistake (or be dishonest about) that preference, and the mistake (or dishonesty) is what we should follow?

I find that a difficult position to maintain, Bee.

The one is that people do evidently express preferences through other means than investing and spending money, and they do express them about things that apparently the economic system does not satisfactorily address. Now you are either replying to this, people a) don't have such preferences or b) don't accurately know them or c) the market takes care of everything automatically. Which is a) wrong b) not a reason to dismiss them altogether and c) I have given you several examples where this isn't the case (see e.g. the public choice problem). Faced with this, you have been saying roughly in a free market people would come together and taxes for social purposes would be replaces with voluntary 'donations' (expressing that you misunderstand the public choice problem) or they would spontaneously come to voluntary agreements about laws and regulations and so on. And indeed, people do that: it is called the political system and that's what I am talking about. So if it is a consequence of the free market approach, why do you keep denying its necessity?

My reply is not what you describe in a-c above. Rather it is that: (a) left to their own devices, people will solve the problems you describe, (b) it is a prediction of economics that, (1) in all but the rarest cases people left to their own devices will do better than the government, and (2) there is no way to identify the exceptions to (1), and (c) it is a prediction of economics that markets find a way around regulation.

I'm not sure what you mean by the "public choice problem." I'm familiar with public choice theory, but not a "public choice problem," and google did not help. I think what you may be referring to is a coordination problem from game theory; that in certain circumstances, people acting independently will produce a suboptimal outcome when coordination would produce one that all would find superior.

If that is what you are referring to, it is true, but only in very special circumstances, and people acting on their own generally solve the problem anyway. We have learned in economics that it is important to try the basic tools in the toolbox before resorting to the fancy-schmancy stuff like game theory, because our experience is our basic tools almost always solve the problem.

You are further doing an admirable task in trying not to answer my question how a system in which the only way people's preferences are weighted is through their money can be democratic in the sense that everybodies opinion on political matters is equally important.

I'm not sure how to answer whether spontaneous social order is "democratic" or not. I don't suppose its either democratic or anti-democratic. It simply is.

As an example I have given you the question whether or not gay couples should be allowed to marry and how the free market without a political system would address that.

Sigh... ok... Marriage exists, existed, exists, logically and historically prior to government. Marriage is, at its core, historically and traditionally, a contract relationship. One role of government that is non-regulatory and economically beneficial (and, indeed, common to all post-tribal governments) is the enforcement of contracts.

So it happened that, over time, governments came to recognize and enforce the expectations of the marriage contract. And, over time, governments began to regulate the marriage contract, imposing unwaivable rules, and default rules that can be contracted around (i.e., pre- and post-nuptual agreements).

Those expectations can be created through ordinary contracts -- which, by the way, is how gays who want the security of a marriage-like relationship have been organizing their affairs for decades. Co-habitation agreements, etc. Such contracts can be, and done properly are, enforceable like any other market arrangement. This, by the way, is another example of the market evading a regulation. In this case, the market found a way around the anti-gay-marriage regulation.

But, you say, those contracts don't provide as much as marriage, they have all sorts of enforcement problems. And you would be correct -- this is another example of how, while the market will get around regulation, regulation necessarily imposes wasteful costs.

What the market cannot provide in this case is either the symbol that public recognition of gay marriage would offer, or the many benefits conferred on married couples through the tax and health care systems, etc. But, that the market cannot do this is not an accident -- these are creations of government, not of the market.

You either obscure your answer by saying that yes, on the average, rich people are happier than poorer people, or state things like "the point of money, its function in our society, is to be a unit that has no intrinsic value but can be substituted for other things that do have intrinsic value". But the point is, Amos, you do say that Bill Gates opinion on gay marriage is more important than e.g. mine because he can 'substitute' more of his money to work towards his 'taste'.

I don't think I said that. I think I said that rich people will have more of their tastes satisfied, because they can buy more things. This does not imply that the dignity of one human spirit is greater than another's. But so what for our discussion?

As for the point about the function of money, that was a deep point. I'll come back to it if it comes up again.

Let me try this one more time. You are using a specific notion of 'what the person really prefers' that does not include other ways of that person to express his or her preferences other than through investing or spending money. You are simply denying that people do have what I call the 'macro-preference' despite the fact that they evidently do have and express these preferences, just read the essay or the comments in this post, or look around on the internet.

I suppose on one level, you're right. I think that if what people actually would choose in a situation is different from what they say they would choose, then the actual choice, not the statement, is their "true" preference.

At this point, your position seems to be "people say they want things, even if that's not what they'd really choose, but you have to honor what they say." I suppose that's true in a democracy, and as I said democracy is the price of avoiding tyranny. But if the point of this discussion was to talk about what role government can have in the market, or really about what role science can play in telling government what role to play in the market, then I really don't get the point. I'm not sure what, even if your epistemological distinction regarding "taste" were true, that would imply.

Your statement that the person when 'presented with the choice' of either taking the car or being nice to the environment takes the car means the person does not 'want' to protect the environment again denies that there can be any tension between the individual short-term interests and the long-term macro-preferences, because in your mode of thinking this tension can not exist; the only preference that exists is what people put their money in.

I'm not saying the person doesn't want to protect the environment. What I'm saying is that the person has decided that, as much as they want to protect the environment, their preference for taking the car to work is greater. That seems obvious to me, and I don't see where the tension is to "macro-preferences" (whatever they are). Of course, everyone has a preference for having other people take mass transit, because its better for the environment and clears up the traffic, but I don't think that's what you mean.

I'm sorry, but I think this "macro-preference" thing is not a coherent concept. I think you're using it to apply to circumstances in which someone says they want something for the greater good, but isn't willing to pay the cost of themselves.

Let's assume uniformity of preferences. Everyone would prefer a cleaner environment, but no-one is willing to voluntarily give up their car for it. So, we know that, for everyone, the benefit of the car exceeds the benefit of the cleaner environment. Now suppose that the "macro-preference" is honored, and cars are banned. (Simplifying for clarity, of course.) Why would you think that people are in the aggregate, happier? They have now all been forced to give up something that they each chose was worth more than what they got in return.

That is the kind of question people do ask in political decision making. What would I give up to know everybody in my country has access to a health insurance? What would I give up to make sure our children will grow up in a country that is as green and fertile as the one I grew up in? I am not asking these questions because I want to accurately sum up preferences. I am asking these questions because these are the questions people ask.

If you ask the question in a political way, it will suggest that it is only amenable to political solution. But the tools of economics allow us to look deeper and to ask, if we can only accomplish this goal through government, is it really one that will make people happier, and if so, why haven't they done it on their own?

Now, there are cases of social coordination in which individual decisions work against a shared preference, but they're very rare and, again, you have to get the fundamentals first, because otherwise you'll see zebras everywhere!

I have already told you that I don't care how you call it. I don't even care whether you think these cases are automatically addressed by the 'free market', I just want them to be addressed. If they are, I can't make sense of naming it a 'free market' but fighting over words isn't a game I like to engage in.


They are being addressed. You've defined your "issues" in terms of government. Should the government do x or y? Well, of course that question is necessarily political, because you've phrased it that way. But underneath all of the issues you've raised, from gay marriage, to health care, to the swings in the market (an example you have dropped), are non-political issues of preference that can be analyzed using economics. What economics says in each of those cases (although the health care and environment quesitons are complex) is that people will do better on their own than the government can do through regulation.

I think you have a very narrow view of "market" as "trading floors." What's meant by free market more means that, although property rights and promises are (varying around the margins) enforced, people are generally left to their own devices to arrange their social relations.

Now one of the point I am unsuccessfully trying to make that people do have a preference about that system itself. This is an option, or call it a preference, or a taste. Is this taste accommodated from within the system? This would be equivalent to saying there is no state in people's preferences that a free market can not reach, but what if people do prefer regulations?

Of course they do. Indeed, there is a market for regulations. They just happen to all prefer different regulations. The prediction at issue is that these regulations will make society worse off as a whole. Actually, when you apply the tools of economics to the government, you get all sorts of neat predictions that match up with reality. Places that are harder to leave will have more regulation, etc.

Now, you have not addressed a point I have made several times, and I think its because there's no answer to it: What if some people prefer the regulation, and others do not? If the regulation is passed, then some group of people is being compelled (through the threat of violence) to do something (or refrain) they do not want to do. Other than through majoritarianism, how do you pick? How do you know the preferences of the minority are not more deeply held, and that the harm to them is not greater than the benefit conferred on the majority?

You've sometimes said "well, that's a problem we need to solve," and I've responded "give up, its impossible, you can't read minds, you need to rely on voluntarism instead."

This is a crucial point. What is your response to it?

Amos said...

Actually, just to be fair to you -- there are reasons that health care and the environment are "complicated."

In the environment, the theory is that each person's actions have negative consequences for others through emissions, which is a negative externality case.

In health care, the theory is that adverse selection and moral hazard imply that the government can insure more efficiently than the market. This has to do with the somewhat more complex economics of insurance.

A debate about either of these specifically would be very, very complex and highly technical. These are the two most actively debated issues in the contemporary literature. For some time people thought these might be those "rare" cases, but by now I think most people have conceded and said that, yes, as predicted, government does worse.

If we can stick to what we were talking about, which was economic regulation for economic purpose (or, really, just about any regulation outside of these categories), the discussion will stay cleaner.

John G said...

Really, arguing over how to efficiently get the last penny of marginal utility out of the economy is like fiddling while Rome burns.

From the badtux blog:

So what's the endgame?

That's a question asked below. What's the endgame of the current plan of our most evil oligarchs to turn America into Mexico North, with a small handful of filthy rich people (them) and the rest of Americans being impoverished peasants in the mud? And why don't our oligarchs realize that they'll be poorer if they impoverish the rest of America?

Well, my answer there is threefold: a) Some oligarchs don't care, because impoverished peasants will give them a servant class to relieve them of the burdens of child care, dressing themselves, cooking for themselves, etc. and the fact that they'll have only 1/10th the money after the Mexico North plan succeeds... well. They already have 100 times the money that they really need to live a good life, so why should they care? b) Some oligarchs (the majority) are simply stupid. They got their money the old fashioned way -- they inherited it. Paris Hilton is the smart one there, she at least figured out a way to make a few bucks of her own by being famous for being famous, but most of her compatriots haven't a clue. And c) Some oligarchs simply enjoy cruelty and feeling superior to other people, and don't care whether they're poorer under the Mexico North plan than they currently are.

The problem with Mexico North is that it's not a stable situation. People do not willingly starve to death. And with most arable farmland controlled by megacorporations today, it's impossible to send them off to be subsistence farmers. If you look at the real Mexico, you will see the instability. The only reason Mexico has not completely collapsed is that so many Mexicans fled to the U.S. and sent remittances home to keep their relatives from starving to death. But now that the U.S. economy is slowing, Mexico is disintegrating - the drug gangs are taking over and executing judges and police officers and buying army brigades and threatening school children and even kidnapping kidnapping experts. And if you think Americans are too fat and lazy and complacent... well. When they're starving on the streets and desperate for their families' survival, when they have nothing to lose, they'll do the same things. And like the Roman aristocracy once the supply of grain to feed the masses of Rome was cut off, the aristocrats will be the ones who end up hanging from the neck amongst the ruins of American civilization.

So anyhow, that is why the goal of economic policy has to be close-to-full employment. Idle hands are the devil's workshop. And that's why the U.S. must have a thriving middle class rather than the Mexico North situation of a few super-rich and tons of impoverished people -- as I've pointed out previously, that's the only way to get sufficient consumption to keep everybody employed. Mexico North simply does not work if your goal is to create a stable wealth-creating society. You can prop it up with petrodollars for a while, as Saddam did, as Mexico did for many years, but the U.S. doesn't have petrodollars anymore... meaning that the Mexico North plan is not only bad for the majority of Americans. It's bad for the people who are trying to put into place. But will they see that? Probably not. They've never had to work for a living, they've never been hungry a day in their lives, they simply have no clue. So it goes...

LoboGris de Lothlórien said...

Hi, bee

«The one is that people do evidently express preferences through other means than investing and spending money, and they do express them about things that apparently the economic system does not satisfactorily address.»

The point is that, when one express preferences through political system, one also expects that the regulations imposed by the preferred political model will lend to the ideological tendencies of this model.

The truth is that it never happens, unless the political claim is to satisfy the individual interests of a small group at expenses of the rest. And that is the reason why merely expressing a political preference is unefficient.

Sustainable jobs are not created by decree. Bigger salaries are not reached by decree. Poverty is not reduced by a simple decree.

There are economic forces that can't be controlled, but only turned in ways that will follow their own courses, outside the control of politicians.

If you ban salaries below a given level, you will obtain less jobs in the legal market.

If you ban inmigration, you will obtain a black market for inmigrant employees with lower salaries than the same activity in the legal market.

If you protect financial practices that generate losses with fiscal funds and low interest rates (as does the USA government, violating the principles of free market, that is, contrary as you claim), then you will obtain economic cycles when the ammount of losses is not anymore sustainable. And those who pay are the entire society. That is, all the society pays for the error of a few.

Imagine what will do a person that knows that if he bet and lose, government will save him with money from all the society, or by loans at zero or negative real interest rates: he will continue to bet, even by irresponsible means.

But which is your argument? that these regulations are needed to save the economy from the irresponsability of free market.

Wrong! you are indeed avoiding free market rules to eliminate that kind of practice. Under a free market, any not profitable activity is cleaned out in short term, before the damage could be greater.

There is no free market in financial system. Financial system is heavy hampered by governments.

Bee said...

Hi Amos,

is that what people say are their priorities, are not their real priorities.

I am wondering, do you actually notice how presumptuous it is to tell people what their 'real' priorities are and to ignore what they say? Now please don't give me again that story according to which experiment has shown that people do not know what decision they will make until they buy something. I understand that.

What I am trying to tell you instead is that by designing a system that only takes these immediate individual tastes into account you are completely ignoring all preferences people do have that are in conflict with these. You are, to repeat it once again, just simply denying their other preferences have any relevance whatsoever. If you run a system on these micro-interests only you are not necessarily working towards people's long-term preferences. You justify this by saying the latter have no relevance.

As I said above, we have the same tension on an individual level, and it is overwriting them if neccessary that allows us to consciously shape our future at all. To bring up my dentist again, I certainly have no desire to let somebody drill into my teeth when faced with the option. My preferences is definitely to get our of the chair and leave immediately. The reason why I stay nevertheless is that I have a long-term preference that is in conflict with this. Don't misunderstand this analogy, I don't want you to tell me how people chose a dentist. I am comparing the system 'human brain' to the social system. Also in the latter we have short- and long-term preferences and if there is a tension between both simply saying the former is the 'real' one is, well, extremely short-sighted. In an earlier post I have compared the issue to the reward system of the human brain that can easily be fooled with drugs. Drugs artificially trigger the reward circuit which is even worse than just going for natural stimuly because it shows there might be cases where the knowledge that a behavior is destructive is there, but the problem can't be solved nevertheless.

Luckily, and also this I have repeated several times, most people seem to be aware that this tension exists and that we need a political system to deal with it by adjusting the incentives such that they better work towards the macro-preferences.

But let's get the cards on the table: Are you now actually saying that what justifies intervention in the market is that, even if people truly prefer the result of the market, they may mistake (or be dishonest about) that preference, and the mistake (or dishonesty) is what we should follow?

I find that a difficult position to maintain, Bee.


What I am saying, once again, is that your notion of 'truly prefer' is based on what the market tells you and ignores that people have and use other ways to express their preferences. And yes, these might be in conflict to what their preferences are that are expressed on the market.

I'm not sure what you mean by the "public choice problem." I'm familiar with public choice theory, but not a "public choice problem," and google did not help. I think what you may be referring to is a coordination problem from game theory; that in certain circumstances, people acting independently will produce a suboptimal outcome when coordination would produce one that all would find superior.

Sorry, I garbled this up. I also mistakenly assumed it was you who I had explained that to above, but it was somebody else as I realize. This might help. Yes, you could call it a coordination problem, though that only addresses part of the issue. The problem is that in some cases people would take an action if everybody did it, but not unless they can be sure everybody does, because they might put themselves into a disadvantage by taking the action, or in an advantage if they are the only one not taking the action. There are plenty of examples for this. The way you coordinate it is that you allow for a way how people can express their preference without immediate action, and if you have identified the 'public choice' you later make sure people do indeed do what they said they would. That's what our political system does for us.

Example I had are contributions to make a public library possible, to encourage literacy.

Now before you go on again by saying that unless everybody agrees on the action there might be people who are 'forced' to do something let me say two things. One is, that problem also occurs if indeed everybody agrees. Second is, I have said earlier that one would of course try to find a solution in which this affects as few people as possible, but it might practically not always be feasible. If would mean that for any such case you'd have to track and check who did or didn't contribute to what or agreed on what or is a member of what and so on and so forth. It's just impractical.

If that is what you are referring to, it is true, but only in very special circumstances, and people acting on their own generally solve the problem anyway.

Again it seems to me the problem is far more common, and it's the problem I am concerned with. To make that clear one more time, if the economic system would indeed take care of these things, that would be fine with me! Let's just forget about politics. The thing is, I just don't see it happening.

You are further doing an admirable task in trying not to answer my question how a system in which the only way people's preferences are weighted is through their money can be democratic in the sense that everybodies opinion on political matters is equally important.

I'm not sure how to answer whether spontaneous social order is "democratic" or not. I don't suppose its either democratic or anti-democratic. It simply is.


Democracy is a spontaneous social order, and it simply is. Why then aren't you able to recognize its task?

I suppose on one level, you're right. I think that if what people actually would choose in a situation is different from what they say they would choose, then the actual choice, not the statement, is their "true" preference.

At this point, your position seems to be "people say they want things, even if that's not what they'd really choose, but you have to honor what they say." I suppose that's true in a democracy, and as I said democracy is the price of avoiding tyranny. But if the point of this discussion was to talk about what role government can have in the market, or really about what role science can play in telling government what role to play in the market, then I really don't get the point. I'm not sure what, even if your epistemological distinction regarding "taste" were true, that would imply.


Well, I see a slight chance we might eventually come to the point. Yes, what I am saying is you have to honor what they say. If it is true what you say and the only preferences that 'really' matter are the ones they express through investing their money, that doesn't agree with my impression, but if that is the case that is the system they should have. The point I am trying to get at however is what if it isn't the case. That is why I am saying, I don't want to prematurely discard ways for people to express their preferences and subsequently constrain the states the system can reach. Once again, if they find a free market is what they want, they can chose it. But if they find it isn't, that should be an option too.

Now to come to the role of science, the role is to find out how the system would have to be set up so people can turn their preferences (both micro- and macro) into reality most efficiently. I understand you are saying science has solved the problem as far as micro-interests are involved (though I am not sure your notion of 'efficiency' includes anything about the timescales involved, does it? Is it the fastes way? Do we know that?). What I am asking you for is, acknowledge for a moment people do have and express other preferences that are potentially in conflict with these. How do we resolve this tension to their maximal satisfaction?

Best,

B.

Bee said...

Hi Amos:

Sorry, forgot this

Indeed, there is a market for regulations. They just happen to all prefer different regulations.

Where is it?

Now, you have not addressed a point I have made several times, and I think its because there's no answer to it: What if some people prefer the regulation, and others do not? If the regulation is passed, then some group of people is being compelled (through the threat of violence) to do something (or refrain) they do not want to do. Other than through majoritarianism, how do you pick? How do you know the preferences of the minority are not more deeply held, and that the harm to them is not greater than the benefit conferred on the majority?

You've sometimes said "well, that's a problem we need to solve," and I've responded "give up, its impossible, you can't read minds, you need to rely on voluntarism instead."

This is a crucial point. What is your response to it?


I have answered this question several times. Do I really have to repeat it one more time? Yes, as I said is that is a problem we need to solve, instead of just denying its existence as you do.


I also said several times that a) You'd want to find a way so as few people as possible are forced to do things they don't want. That isn't in conflict with democracy as you seem to assume, it is in conflict maybe with some versions of decision making. b) People can vote with their feet and go where they like the regulations, that is perfectly fine, just that some don't like that option which necessitates compromises, so c) You always have to make compromises in a society, that is also the case in a free market, in that case it just doesn't bother you for ideological reasons if people are 'forced' to 'buy' what the majority likes d) Even if it is hard or difficult to do, doing it imperfectly is still better than not trying at all e) You are neglecting the importance that people assign to the possibility to have that influence to begin with f) I have told you above several shortcomings of relying on 'voluntarism' when it comes to public goods or social help. It just doesn't work because people put themselves into a disadvantage unless they know others will do the same thing, and for this you need a way of decision making. Best,

B.

Bee said...

PS: Actually, just to be fair to you -- there are reasons that health care and the environment are "complicated."

Thanks.

Amos said...

What I am trying to tell you instead is that by designing a system that only takes these immediate individual tastes into account you are completely ignoring all preferences people do have that are in conflict with these. You are, to repeat it once again, just simply denying their other preferences have any relevance whatsoever. If you run a system on these micro-interests only you are not necessarily working towards people's long-term preferences. You justify this by saying the latter have no relevance.

1. I am not designing a system. Economics tells us what the result will be in a given system. One of those predictions is that regulation reduces aggregate preference satisfaction.

2. You have now changed your position (again) on what a "macro-preference" is. Before, you were speaking about group behaviors. You're now speaking about short- versus long-term, and in that regard plainly wrong. People often -- all the time -- give up short-term preference satisfaction for a long-term benefit. In doing so, a person chooses one transaction (perhaps "investing") over another. Your "dentist" example is an example.

Nothing I have said in any way suggested that immediate gratification was at issue.

3. I am not denying that any preferences have "no relevance." I dispute that something someone says is their preference, which does not match their actual behavior, is really their preference.

Are you now actually saying that what justifies intervention in the market is that, even if people truly prefer the result of the market, they may mistake (or be dishonest about) that preference, and the mistake (or dishonesty) is what we should follow?

I find that a difficult position to maintain, Bee.


What I am saying, once again, is that your notion of 'truly prefer' is based on what the market tells you and ignores that people have and use other ways to express their preferences. And yes, these might be in conflict to what their preferences are that are expressed on the market.


I am not ignoring your point, Bee, I think your point is incoherent.

Let's stay with it: Person x says they prefer apples to oranges. Person x, however, never purchases any apples, but often purchases oranges. Is it your position that this person prefers apples to oranges, and that society should (through some mysterious public choice system) take this person as "voting" for apples and against oranges?

I mean, is that really what you're saying?

The problem is that in some cases people would take an action if everybody did it, but not unless they can be sure everybody does, because they might put themselves into a disadvantage by taking the action, or in an advantage if they are the only one not taking the action. There are plenty of examples for this. The way you coordinate it is that you allow for a way how people can express their preference without immediate action, and if you have identified the 'public choice' you later make sure people do indeed do what they said they would.

This reflects a common misunderstanding of popular accounts of the simple-form game theory (a/k/a "the prisoner's dilemma"). The misunderstanding (putting aside the problem of non-unanimity) is that you don't actually need the government to do anything--in the rare cases of coordination problems, people will talk to each other, negotiate, and agree on a system (if doing so is actually beneficial and transaction costs are not prohibitive). That is the "market" functioning -- people voluntarily agreeing to do things.

The only circumstances in which this does not occur are (a) externalization, which is not resolveable by regulation but instead by property-right adjustment, and (b) where transaction costs are prohibitive, in which case, before intervention, a serious question has to be asked of whether the government will actually be able to solve the problem at lower transaction cost (which it invariably cannot).

Now before you go on again by saying that unless everybody agrees on the action there might be people who are 'forced' to do something let me say two things. One is, that problem also occurs if indeed everybody agrees. Second is, I have said earlier that one would of course try to find a solution in which this affects as few people as possible, but it might practically not always be feasible.

You've missed the point of the argument on non-unanimity. The point is -- how do you know that the benefit will actually outweigh the cost.

Again it seems to me the problem is far more common, and it's the problem I am concerned with. To make that clear one more time, if the economic system would indeed take care of these things, that would be fine with me! Let's just forget about politics. The thing is, I just don't see it happening.

That's because you don't have a strong enough graps on the economic fundamentals. Most of what you are seeing are not, in fact, "problems." They are actually a superior outcome to the "solution" -- superior in the sense that they offer greater aggregate utility satisfaction.

Try this: identify a "problem" and prove that regulation would result in a superior outcome. Seriously, try it.

Democracy is a spontaneous social order, and it simply is. Why then aren't you able to recognize its task?

No, democracy is a non-spontaneous social order, it is a form of government.

the role is to find out how the system would have to be set up so people can turn their preferences (both micro- and macro) into reality most efficiently. I understand you are saying science has solved the problem as far as micro-interests are involved (though I am not sure your notion of 'efficiency' includes anything about the timescales involved, does it? Is it the fastes way? Do we know that?). What I am asking you for is, acknowledge for a moment people do have and express other preferences that are potentially in conflict with these. How do we resolve this tension to their maximal satisfaction?

I don't think there is a coherent concept of "macro" versus "micro" preferences. You've changed your position on what this means several times now.

The word "efficiency" has two relevant but distinct uses. First, an exchange is "efficient" if it increases aggregate utility. We know that any exchange which is consensual, voluntary, is an "efficient" exchange. I will try to use the formal "Pareto-efficient" terminology here out. Second, a market is "efficient" if transaction costs are low. The lower transaction costs, the more Pareto-efficient transactions can take place.

I don't get your point about "timescales," because this is something you've now newly introduced into the discussion. As for what economics says about timescales, I refer you to my first two or three posts. There, I discussed the concepts of "optimality," (really, Pareto-optimality, to be technical), and short- and long-term equilibria.

What economics says is that, as long as you protect property rights and enforce contracts, you will move faster toward long-term equilibrium, and long-term equilibrium will generate higher aggregate utility, if you permit rather than prevent Pareto-efficient transactions from taking place. In the inverse, preventing Pareto-efficient transactions from taking place degrades society's ability to move toward long-term equilibrium, and degrades the aggregate utility generated at long-term equilibirum.

Economics also says that, as a hard limit on information (like the uncertainty principle), although there may be limits imposable on Pareto-efficient transactions (i.e., "regulations") that would actually improve the long-term equilibrium, it is impossible to tell which regulations these are.

The principle here is the maximization of consent.

Well, I see a slight chance we might eventually come to the point. Yes, what I am saying is you have to honor what they say. If it is true what you say and the only preferences that 'really' matter are the ones they express through investing their money, that doesn't agree with my impression, but if that is the case that is the system they should have. The point I am trying to get at however is what if it isn't the case. That is why I am saying, I don't want to prematurely discard ways for people to express their preferences and subsequently constrain the states the system can reach. Once again, if they find a free market is what they want, they can chose it. But if they find it isn't, that should be an option too.

I did not say that "the only preferences that matter are the ones they express through investing money." I said, the real preferences are the ones demonstrated by behavior. Deciding to select one job instead of another is such a behavior. So is spending the afternoon in the park instead of at a job.

As for the "free market," whenever people are engaging in voluntary, consensual exchanges -- including entering into consensual agreements regarding each others' behavior, exchanging one promised behavior for another -- that is the market.

This definitional misunderstanding resolved, do you continue to press your current point?

Indeed, there is a market for regulations. They just happen to all prefer different regulations.

Where is it?


In the operation of government, silly! Groups come together to vote for, or donate to, candidates. Candidates announce positions for or against regulations in order to procure support. This is a market, like any other (although a grossly inefficient one).

Well, there are also lots of other regulation markets.

Now, you have not addressed a point I have made several times, and I think its because there's no answer to it: What if some people prefer the regulation, and others do not? If the regulation is passed, then some group of people is being compelled (through the threat of violence) to do something (or refrain) they do not want to do. Other than through majoritarianism, how do you pick? How do you know the preferences of the minority are not more deeply held, and that the harm to them is not greater than the benefit conferred on the majority?

You've sometimes said "well, that's a problem we need to solve," and I've responded "give up, its impossible, you can't read minds, you need to rely on voluntarism instead."

This is a crucial point. What is your response to it?


I have answered this question several times. Do I really have to repeat it one more time? Yes, as I said is that is a problem we need to solve, instead of just denying its existence as you do.


I'm not denying the problem's existence, I'm denying its solveability. It is a hard limit on the information we are able to obtain, like the uncertainty principle. That is the point of the question -- how do you solve the problem?

I've read through the answer you gave, and I'm sorry, but I don't think you've addressed the question at all. Your proposals all fall into two categories. The first is aspirational -- "we should try hard to find a way." The second is gasp! the market! -- people "vote with their feet," etc.

(You also mention negotiation. Of course, if all of society could negotiate at once to a consensus, we wouldn't need a government except to enforce unanimity, so really not at all. If we're talking about government, then someone is being forced to do something they don't want to do, so "compromise" and "negotiation" are not answers to the question I put forth.)

In the meantime, while we're trying hard to "find a way" -- waiting to invent the miraculous device that can read and compare all persons' infinite-dimensional preference curves at the same it compares their capacities to experience pleasure -- in the meantime, what do we do? Any regulation is going to force people to do something they don't want to do, imposing a cost on them. You cannot compare the depths of preference of the pro-regulation and con-regulation groups, so you cannot determine whether the regulation will actually improve or degrade aggregate social utility (I wish you wouldn't make me be so technical...).

So, in the meantime, how do you tell whether the regulation will actually make things better or worse?

Amos said...

I did not say that "the only preferences that matter are the ones they express through investing money." I said, the real preferences are the ones demonstrated by behavior. Deciding to select one job instead of another is such a behavior. So is spending the afternoon in the park instead of at a job.

Some slight elaboration on this (recap, really) is appropriate.

I did not say that "how people spend their money" is all that matters. I did say that all of their choices are monetizable. What is this about?

Much earlier, we talked about the shape of an individual's utility curve, the infinite-dimensional thing that shows how many of every thing one would be willing to trade for how many of every other thing, given every possible combination of every thing they have. ("Thing" here includes time, intangibles, etc.) What the curve shows is how an individual's preference satisfaction -- "utility" -- would be maximized in a given situation.

The point of that discussion was to demonstrate that all choices can be compared to each other, in terms of their utility.

So, what's money? Money is something society invented to make transactions more convenient, so you don't have to carry around your pigs to the market, and find the only cow dealer who's also interested in buying pigs. Money makes transaction costs lower.

What is money? Money is something that has no intrinsic value, but is maximally fungible with anything else someone would want. We trade money for time (i.e., work), and for just about everything else.

As a result, money is a good proxy for the concept of utility. The relationship is definitely not perfect, but it is good enough for most purposes.

One particular advantage of using the concept of money in economics is that we cannot measure utility directly. This is that whole mind-reading problem. What we can measure, however, is money, and that allows us to do the math. But what we're talking about isn't really money, its really utility.

John G said...

Here is Tony Smith's take on the present economic meltdown and what should be done about it. Tony is not only a physicist with a pre-Lisi E8 model but before he became a grad student of David Finkelstein in his 40s, he was a lawyer so laws/regulations are also quite within his area of expertise:

As the chart above (from The New York Times in October 2008) shows, although the Credit Default Swap problem had grown from $45 trillion in March 2008 to $55 trillion in October 2008 (an uncertain figure - Paul Solman says $62 trillion), the total value of Derivatives based on Interest Rate Swaps and Options and Currency Swaps had grown to $465 trillion, and the total growth in the 6 years from 2002 to 2008 of effective asset-money supply created by Derivatives
of the Shadow-Banking-System increased by $531 - $106 = $425 trillion. Just as overvalued mortgages triggered a collapse of the excess $55 - $2 = $53 trillion in the Credit Default Swap asset-money Bubble, inaccurately valued Interest Rate and Currency
Situations can (and probably will, when a Black Swan Event hits) trigger a collapse of the excess $465- $101 = $364 trillion in the Interest Rate-Currency Swap asset-money Bubble. When that happens, the $45 to $53 trillion construction programof nuclear reactors, rapid rail transit, etc., needed to rescue the USA from the Credit Default Swap debacle will be insufficient and a $364 trillion program will be needed. If the USA cannot handle that, then the New York/London Financial System may collapse like a Ponzi Scheme, the Global Financial System will probably change to a Shanghai System based in China, and the USA may become a backwater nation, with Havana as the Western Hemisphere capital of the Global China Hegemon.

update October 2008 ... Beyond SubPrime ...Cory Doctorow said, on BoingBoing on February 26, 2008: "... The Subprime Primer is a 45-slide presentation that uses stick figures to explain the present economic meltdown ...". The next day on BoingBoing Chief Jimbo said: "... I have it on good sources that this was actually made at Countrywide Financial ...". In light of some things that happened since February 2008, when The Subprime Primer appeared on google, I added an alternate ending and put it on the web... The first is a 3.4 MB pdf file and the second is a 1.9 MB mov file.The post-February 2008 events were:

1 - A 23 March 2008 New York Time web article by Nelson D. Schwartz and Julie Creswell said, about Credit Default Swap Derivatives: ... Today, the outstanding value of the swaps stands at more than $45.5 trillion, up from $900 billion in 2001. ...

2 - Joseph Coleman, in a 6 June 2008 AP news article about an International Energy Agency (IEA) report, said: The world needs to invest $45 trillion in energy in coming decades, build some 1,400 nuclear power plants ....

3 - A Reuters web article on 17 Sep 2008 said: "... a leading Chinese state newspaper said ... the world must consider building a financial order no longer dependent on the United States ...

4 - I saw "Gabriel Over the White House" on Turner Classic Movies. In a 17 September 2008 National Review Online article, Jonah Goldberg said [some of the bracketed material is from a Synopsis a TCM web page]: "... William Randolph Hearst believed America needed ... FDR (and claimed that he put Roosevelt over the top at the Democratic convention). Deciding that the best way to influence FDR - and the American people - was via Hollywood, he personally reworked a script based on the book Gabriel Over the White House, which became a movie of the same name starring Walter Huston as President Judd Hammond ... One of the project’s uncredited script doctors was the Democratic presidential nominee, Franklin D. Roosevelt. He took time off from the campaign to read the script and suggested several important changes that Hearst incorporated into the film. I want to send you this line to tell you how pleased I am with the changes you made in ‘Gabriel Over the White House,’ Roosevelt wrote a month into office. ... [In the movie]... Hammond, a Hoover-like partisan hack of a president, has a car accident and is visited by the archangel Gabriel. When he recovers, he is reborn with a religious fervor to do good for America. He fires his entire cabinet - big-business lackeys ... He orders the formation of a new Army of Construction [to employ the unemployed in useful construction projects]... Congress impeaches Hammond, and in response he appears before a joint session [He declares martial law and]... suspends Congress ... [With martial law powers, he repeals Prohibition and]... nationalizes the sale and manufacture of alcohol. When he meets with resistance from gangsters ... he orders a military trial ... Immediately after the trial, the gangsters are lined up against a wall behind the courthouse and executed. ... Hammond [calls a conference of world leaders, threatening an American military build-up if they do not stop their own excessive military spending and use those resources for peaceful production, thus forcing all of the world leaders to sign a peace covenant. After all of the world leaders sign the historic covenant]... He dies of a heart attack ... and is eulogized as one of the greatest presidents who ever lived".

Bee said...

Hi Amos:

You have now changed your position (again) on what a "macro-preference" is. Before, you were speaking about group behaviors. You're now speaking about short- versus long-term, [...] I don't think there is a coherent concept of "macro" versus "micro" preferences. You've changed your position on what this means several times now.

I haven't changed my opinion on what I mean with micro and what I mean with micro. I didn't expect that to be a problemantic notion, so maybe your idea of what I mean has changed. What I refer to as 'macro' are emergent features of the system. (See here for what I mean with emergent). These are trends that develop from their individual behavior. That might for example be market fluctuations, but also long-term trends of the system. What I am saying is simply people have an opinion also about these macro-features and not only their micro-preference. The way to deal with the former is a political system.

I am not ignoring your point, Bee, I think your point is incoherent.

Let's stay with it: Person x says they prefer apples to oranges. Person x, however, never purchases any apples, but often purchases oranges. Is it your position that this person prefers apples to oranges, and that society should (through some mysterious public choice system) take this person as "voting" for apples and against oranges?

I mean, is that really what you're saying?


Ah, the apples and oranges again. I have already told you above that this is not a question that falls into the political domain, but apparently you didn't understand what I meant. Whether you like apples or organges is a micro-preference, you need no political system for that.

The misunderstanding (putting aside the problem of non-unanimity) is that you don't actually need the government to do anything--in the rare cases of coordination problems, people will talk to each other, negotiate, and agree on a system (if doing so is actually beneficial and transaction costs are not prohibitive). That is the "market" functioning -- people voluntarily agreeing to do things.

I have already told you above that we might have a misunderstanding of terminology. You seem to see the government as some oppressive force that has been imposed on the people, whereas I am talking about the role of the political system, and its role it exactly that: a voluntary way to solve coordination problems. That is what I am concerned with. I also already told you above if you want to see that as part of the 'market' that is fine with me, as long as you acknowledge its importance.

You've missed the point of the argument on non-unanimity. The point is -- how do you know that the benefit will actually outweigh the cost.

I don't. How do you know it doesn't? My take is ask people what they think. And, once again, I am not interested in reading anybodies mind as you are constantly accusing me of. People have opinions, they must express them. If they express opinions about preferences they don't have, that's their problem. One would think if what you say is correct they would lean that very quickly. Strange though they hold on to having preferences about macro-trends, no?

No, democracy is a non-spontaneous social order, it is a form of government.

Please explain the difference. Our democratic systems would not work if people just decided not to use them, much like no government would be able to enforce laws if all people just decided to ignore them. Unless you want to introduce an alien civilization or an intelligent designer all our social systems have emerged spontaneously out of no or other orders.

Indeed, there is a market for regulations. They just happen to all prefer different regulations.

Where is it?

In the operation of government, silly! Groups come together to vote for, or donate to, candidates. Candidates announce positions for or against regulations in order to procure support. This is a market, like any other (although a grossly inefficient one).


Well. That's what I'm saying all the time. We have that market, people use it, it doesn't work efficiently, so we should improve it. That is why I think what the authors in that essay proposed is short-sighted. They talk about regulations, but don't ask how they would chose which regulation for whom.

I'm not denying the problem's existence, I'm denying its solveability.

Yes, I got that.

I've read through the answer you gave, and I'm sorry, but I don't think you've addressed the question at all. Your proposals all fall into two categories. The first is aspirational -- "we should try hard to find a way." The second is gasp! the market! -- people "vote with their feet," etc.

Right. And thus the way to go is a combination of both.

You cannot compare the depths of preference of the pro-regulation and con-regulation groups, so you cannot determine whether the regulation will actually improve or degrade aggregate social utility (I wish you wouldn't make me be so technical...).

So, in the meantime, how do you tell whether the regulation will actually make things better or worse?


I don't. I have already told you above, it's not for me to tell, it's not for me to determine. People have an opinion, they are entitled to have it, and they have it about the present status as well as about the macro-trend that results from them following their micro-interests. It is up to them to decide whether they consider a change is for better or for worse, and act accordingly.

One particular advantage of using the concept of money in economics is that we cannot measure utility directly. This is that whole mind-reading problem. What we can measure, however, is money, and that allows us to do the math.

So what you are actually saying is that the problem isn't solvable with money as a measure. It's not solvable within the model you have. I never claimed it would be.

Best,

B.

Bee said...

Hi LoboGris,

You have an erroneous concept of what anarchism is. Anarchism does not imply absence of law. Implies absence of positive law, and state.

Right, I seem to have had an erroneous concept, thanks for the correction. But either way, though this version of anarchism is less dumb it is still a suboptimal option that would be quickly replaced. The reason is that it lacks security and stability. If you have no government people will form all kinds of groups and communities etc to protect themselves and their interests. Just consider in such a situation you'd go into the next store but instead of knowing that store runs under your country's law you'd have to find out which group the owner belongs to, which law he might conform to, and if he is telling you the truth about it, and so on and so forth. What would happen is that people would segregate into local groups in which they just all follow the same law and you could just go into the next store and know what you are at, like, they would form homogeneous neighborhoods, districts, nations.

What is worse than that however is that in an anarchy power is with the size of your interest groups. One of the most important aspects of governments is, I think, the protection of minorities.

I live in a developing country (Uruguay) and I can tell you how government has been the monopolic provider, for an entire century, of infrastructure, education and other public services.

Only in recent years, with some deregulations, we can access better services from private providers.

In the countries you find the poverty trap, the reality is bad public services since many decades ago and many obstacles to private enterprises.

Lets left economic development to private actions, and you will obtain in some years private services that everyone will access.

The poverty trap has been the inabilty to understand this.


Well, I never denied private services can't be better than public ones. I said public ones are necessary, and they are very often a first step. Maybe you should ask yourself how did you ever get to a stage where investment in private services was large enough to allow for progress? Why do you find toll roads in well developed countries? Because they can afford it! Once the level of wealth is high enough such that most people can pay for it, it is no longer an obstacle to progress. You are confusing the cause with the effect. Do you really think anybody would invest any money into a country that has no government, that is an 'anarchic' free market? I warmly recommend you read Jeffrey Sachs' book Common Wealth. He explains very well what steps have shown to be useful for countries to get out of the poverty trap (it is a bit of a dry read but contains a lot of useful facts, plus it has a pretty cover).

Best,

B.

John G said...

Hi Bee, I have a friend who is listed in the Anarchist Encyclopedia yet his paying job was as a consultant for businesses on organizational structures that optimize autonomy and community. In other words anarchists are needed cause world governments and businesses are so messed up but theoretically you could have good organizations where you would not need anarchists.

Amos said...

I'm going to do this not following the same order, because I think it will get us toward the heart of the matter.

You cannot compare the depths of preference of the pro-regulation and con-regulation groups, so you cannot determine whether the regulation will actually improve or degrade aggregate social utility (I wish you wouldn't make me be so technical...).

So, in the meantime, how do you tell whether the regulation will actually make things better or worse?


I don't. I have already told you above, it's not for me to tell, it's not for me to determine. People have an opinion, they are entitled to have it, and they have it about the present status as well as about the macro-trend that results from them following their micro-interests. It is up to them to decide whether they consider a change is for better or for worse, and act accordingly.


No no no. No cop outs here, even if it is your own blog!

You are conceding that there is no way to tell, from the political process (at present), whether any proposed regulation, even one that has obtained majority support (or whatever system is used), will actually make people better off (in the sense of satisfying more preferences at less cost in the lost satisfaction of other preferences).

So, you are conceding that there's no way to tell (at present) whether any regulation is actually going to be good or bad.

But that isn't the whole story. If a regulation goes into effect (presuming some degree of enforcement), that means that transactions which both sides want to do are not going to take place. You and I want to do a trade, but we can't because a regulation prevents us. A Pareto-efficient transaction that otherwise would have taken place, will not, and we know that society is worse off (utility-wise) as a consequence.

So while we have no way of knowing if the regulatory benefit has been obtained, we know to an absolute certainty that we are paying the cost.

Unless you have a basis for disputing that statement, and at this point I don't think you can, you have conceded the argument.

Onwards to some of the rest of it...

I am not ignoring your point, Bee, I think your point is incoherent.

Let's stay with it: Person x says they prefer apples to oranges. Person x, however, never purchases any apples, but often purchases oranges. Is it your position that this person prefers apples to oranges, and that society should (through some mysterious public choice system) take this person as "voting" for apples and against oranges?

I mean, is that really what you're saying?


Ah, the apples and oranges again. I have already told you above that this is not a question that falls into the political domain, but apparently you didn't understand what I meant. Whether you like apples or organges is a micro-preference, you need no political system for that.


But that's what regulation is about, Bee. Its about whether you allow transactions to take place on voluntary, consensual terms, or the government bars transactions that don't satisfy the regulatory requirement. All regulations are about apples and oranges.

I have already told you above that we might have a misunderstanding of terminology. You seem to see the government as some oppressive force that has been imposed on the people, whereas I am talking about the role of the political system, and its role it exactly that: a voluntary way to solve coordination problems. That is what I am concerned with. I also already told you above if you want to see that as part of the 'market' that is fine with me, as long as you acknowledge its importance.

But it isn't a voluntary way to solve coordination problems. Its an involuntary way--it is completely straightforward that if the government is imposing a regulation, then it is preventing transactions from taking place that otherwise would because both sides would like to transact. That's the point of government - it forces people to do things. Doing so imposes a cost in lost utility.

Is it an "oppressive force . . . imposed on the people"? That's continental philosophy stuff, and not a position I've taken. What I have said is that all regulations prevent consensual transactions from taking place.

No, democracy is a non-spontaneous social order, it is a form of government.

Please explain the difference. Our democratic systems would not work if people just decided not to use them, much like no government would be able to enforce laws if all people just decided to ignore them. Unless you want to introduce an alien civilization or an intelligent designer all our social systems have emerged spontaneously out of no or other orders.

I guess this is definitional... From my perspective, if people sitting in a room (even if democratically elected and governing with the consent of the people) make a plan for society then pass laws that impose the threat of force for actions contrary to the plan, that is non-spontaneous.

In the operation of government, silly! Groups come together to vote for, or donate to, candidates. Candidates announce positions for or against regulations in order to procure support. This is a market, like any other (although a grossly inefficient one).

Well. That's what I'm saying all the time. We have that market, people use it, it doesn't work efficiently, so we should improve it. That is why I think what the authors in that essay proposed is short-sighted. They talk about regulations, but don't ask how they would chose which regulation for whom.

It isn't that it "works inefficiently," its that it will necessarily make society worse-off to the extent it is allowed to regulate. The market for regulation is a market in which what people are attempting to purchase is having inefficiency imposed on others. (And don't even get into subsidies... ugh!) This is not a solveable problem. It is an inherent, necessary consequence of the fundamental economic principles -- consent, limitations on knowledge, the Pareto logic, etc. -- we have been discussing. That is the point of the "gotcha" at the top of this post. Unless you can dispute the statement at the top of this post, you have conceded that the regulation-game is one in which society loses.

One particular advantage of using the concept of money in economics is that we cannot measure utility directly. This is that whole mind-reading problem. What we can measure, however, is money, and that allows us to do the math.

So what you are actually saying is that the problem isn't solvable with money as a measure. It's not solvable within the model you have. I never claimed it would be.

No... that isn't what I'm saying. I was saying the opposite: I was saying that money is a good enough proxy for utility that we can use them interchangeably except in particular circumstances that we need to keep an eye on.

More particularly, it matters when you talk about redistribution or tax structures (i.e., taxing the rich to provide benefits to the poor). In that case, you have to take into account that the marginal utility of any good (including money) declines -- the utility generated by having one additional apple will be worth more to you if you have no apples than if you already had 1000, so too earning one dollar represents more utility to me than it does to Bill Gates. This principle of declining marginal utility (the utility generated by one additional unit of a good declines as you have more of the good) is important in understanding the shape of demand curves. With money, the argument is that taking $10 from the rich and giving it to the poor creates a net benefit because the marginal utility of the $10 is greater for the poor person. The counter-argument is that people have different marginal-utility-of-money curves. As a consequence, apart from random wealth distributions, actual wealth correlates with the utility generated by wealth (people who like money more go into banking, work more hours, money acts as an incentive, etc.). The second part of the counter-argument is that because money is maximally fungible, its marginal utility declines very, very, very slowly. The third part of the counter-argument is that more recent empirical studies in psychology suggest that the demand curve looks different from different directions -- that the loss of utility in having $10 taken from you is greater than the gain would be of being given $10.

But outside of that context, for the reasons stated in the counter-arguments (particularly counter-argument 2), money is interchangeable with utility.

LoboGris de Lothlórien said...

Hi, Bee

«If you have no government people will form all kinds of groups and communities etc to protect themselves and their interests.»

Exactly. Does that worry you?

«Just consider in such a situation you'd go into the next store but instead of knowing that store runs under your country's law you'd have to find out which group the owner belongs to, which law he might conform to, and if he is telling you the truth about it, and so on and so forth.»

Why people in anarchism would develop difficulties instead of solutions? In real world, where there is no government intervention, people themselves developes common legalities mutually convenient. Think about roman private law or english common law. Your suppositions are not valid arguments.

«I said public ones are necessary, and they are very often a first step.»

USA has been evolved to most economically advanced country in the world and its first steps, during all the 19 century up to WWI, were exclusivelly private actions. USA decadence begun with government interventionism in WWI to organize economy.

«Maybe you should ask yourself how did you ever get to a stage where investment in private services was large enough to allow for progress?»

May be you should ask yourself the same question, revisiting the early history of USA, or the history of how japan became a modern economy from its medieval structures, or the history of europe and japan post WWII.

May be you should ask yourself how our governments in latin america had to resource to private investors to build roads and all kind of infrastructure, and why, after one century of state monopoly in this situation, our countries lacked of the needed infrastructure.

May be you should ask yourself the origin of state resources: taxes drawn from private investors.

You will find always the same pattern in the history of well developed countries, even those with a present high state presence: that their development and progress which made that possible was supported almost exclusivelly in private investments

LoboGris de Lothlórien said...

«Do you really think anybody would invest any money into a country that has no government, that is an 'anarchic' free market?»

I assure you that investors prefer to invest in those places where there are no job regulations, where there are no taxes, where there is no money devaluation, where there are clear rules and they are not changed at any time by the changing political regulation.

Bee said...

Hi Lobogris:

Do you really think anybody would invest any money into a country that has no government, that is an 'anarchic' free market?

I assure you that investors prefer to invest in those places where there are no job regulations, where there are no taxes, where there is no money devaluation, where there are clear rules and they are not changed at any time by the changing political regulation.


Well, they want stability. An anarchic system with no central government isn't particularly suited for that purpose since everybody needs to protect their own interests and the only thing that matters for who has influence is the power of the moment. It's a perfect setting for civil wars ending in a military tyranny. Anarchy is not a stable system. The easiest way to see this is the fact that we have none, anywhere. Those nations that come closest to anarchy are probably the ones in the middle of a civil war right now. Maybe you should ask some investors what they'd think of the idea to invest in a country where there is no enforcement of property rights for example, and any group they will be negotiating with could change their laws (or interpretation thereof) tomorrow, or some other group could try to overtake them.

If you have no government people will form all kinds of groups and communities etc to protect themselves and their interests.

Exactly. Does that worry you?


I wouldn't want to live in that country and I doubt many people would want to. As I wrote above, you have no protection of minorities in that situation. You have no investment in public services, lacking support of non-profit activities such as arts and culture unless you hope (as Amos does) for voluntary donations. You have no central social or health security, no emergency system, and will have to live with the thought that people in your country will simply die in case they are too old or to sick to work.

Just consider in such a situation you'd go into the next store but instead of knowing that store runs under your country's law you'd have to find out which group the owner belongs to, which law he might conform to, and if he is telling you the truth about it, and so on and so forth.

Why people in anarchism would develop difficulties instead of solutions? In real world, where there is no government intervention, people themselves developes common legalities mutually convenient. Think about roman private law or english common law. Your suppositions are not valid arguments.


And where did that get us? To national governments and overall applicable laws. Also, to repeat what I must have said a dozen times by now: The existence of a government and some universal laws does not mean all laws have to be universal. If there are better solutions that only apply to subgroups, fine. That is in no conflict with a political system. The whole point of a democractic political system is that people can decide *not* to have a regulation or a law. But evidence tells that's not what they want.

I said public ones are necessary, and they are very often a first step.

USA has been evolved to most economically advanced country in the world and its first steps during all the 19 century up to WWI, were exclusivelly private actions ... May be you should ask yourself the origin of state resources: taxes drawn from private investors.


To repeat what I already wrote above, I was talking about developing world countries in reply to your question. Also, you should maybe decide what you want to say. First you incorrectly conclude that because private services are correlated with a higher level of wealth the former causes the latter. Now you seem to be saying since many initiatives in the history of the USA were private, this must be the origin of happiness. Of course the origin of taxes are the nation's citicens. Maybe you should ask yourself why they are raised if what you said was true? And once again, do me the favour and don't interpret things in my writing I never said. I never claimed that I consider a certain level of taxation particularly good or necessary. I am just simply saying that seems to be what people want, and at the very least you should offer them a possibility to express their opinion. That's what a political system is good for.

Best,

B.

Bee said...

Hi Amos:

I have already told you above, it's not for me to tell, it's not for me to determine. People have an opinion, they are entitled to have it, and they have it about the present status as well as about the macro-trend that results from them following their micro-interests. It is up to them to decide whether they consider a change is for better or for worse, and act accordingly.

No no no. No cop outs here, even if it is your own blog!

You are conceding that there is no way to tell, from the political process (at present), whether any proposed regulation, even one that has obtained majority support (or whatever system is used), will actually make people better off (in the sense of satisfying more preferences at less cost in the lost satisfaction of other preferences).


Predictions in systems that are very complex are generally hard if not impossible. You have no way of telling either whether a particular investment will make people better of or not. The essential point is that people in the system be able to evaluate their happiness with the status and react to it. If they don't like the price for a product is too high, well, they don't buy it. Evaluation, feedback, optimization. People have a political preference, they make an according decision and if the outcomes doesn't work towards their expectations, change their opinion. Evaluation, feedback, optimization. People might have no way of actually predicting what they will like in the future, but they definitely have an opinion about that. That's the point I must have repeated two dozen times. They have an opinion, and that opinion matters for their happiness. I don't know whether in twenty years from now I will be happier if the world would stop dumping waste into the ocean . But I have a pretty clear opinion about that and it matters for my state of happiness *now* what I expect to happen. Do I know that for sure. No. Do I have a preference and can express that. Yes. I don't know about you, but that seems to be the case for most people on the planet, and that's what we have political systems for.

So, you are conceding that there's no way to tell (at present) whether any regulation is actually going to be good or bad.

But that isn't the whole story. If a regulation goes into effect (presuming some degree of enforcement), that means that transactions which both sides want to do are not going to take place. You and I want to do a trade, but we can't because a regulation prevents us. A Pareto-efficient transaction that otherwise would have taken place, will not, and we know that society is worse off (utility-wise) as a consequence.

So while we have no way of knowing if the regulatory benefit has been obtained, we know to an absolute certainty that we are paying the cost.

Unless you have a basis for disputing that statement, and at this point I don't think you can, you have conceded the argument.


I have repeated numerous times that your notion of 'worse off' does not include how well people's preferences regarding macro-variables are fulfilled. In a real world system where you can't repeat evolution from a given initial state and therefore not compare outcomes you will never know whether one result would 'really' have been better than the other, therefore your argument is none. But you can very well figure our whether certain regulations, political decisions etc, work towards people's preferences - that's the optimization process, it does not necessitate to compare two distant points but change under a small variation. How do you evaluate: just ask people. You wanted X, we did Y, is that a good state of affairs or does it need a change?

You seem to see the government as some oppressive force that has been imposed on the people, whereas I am talking about the role of the political system, and its role it exactly that: a voluntary way to solve coordination problems. That is what I am concerned with. I also already told you above if you want to see that as part of the 'market' that is fine with me, as long as you acknowledge its importance.

But it isn't a voluntary way to solve coordination problems. Its an involuntary way--it is completely straightforward that if the government is imposing a regulation, then it is preventing transactions from taking place that otherwise would because both sides would like to transact. That's the point of government - it forces people to do things. Doing so imposes a cost in lost utility.

Is it an "oppressive force . . . imposed on the people"? That's continental philosophy stuff, and not a position I've taken. What I have said is that all regulations prevent consensual transactions from taking place.


Well, as I said, you are seeing the government as an imposed force, I see it as a voluntary one. People do want to have a government and regulations. It's a democracy, if they didn't want to, they could avoid it. But they don't. It is voluntary. Now you can say but that process as it presently is doesn't well capture what they want, and I would agree on that as I have done before.

From my perspective, if people sitting in a room (even if democratically elected and governing with the consent of the people) make a plan for society then pass laws that impose the threat of force for actions contrary to the plan, that is non-spontaneous.

And it's not democratic either.

It isn't that it "works inefficiently," its that it will necessarily make society worse-off to the extent it is allowed to regulate. The market for regulation is a market in which what people are attempting to purchase is having inefficiency imposed on others. (And don't even get into subsidies... ugh!) This is not a solveable problem. It is an inherent, necessary consequence of the fundamental economic principles -- consent, limitations on knowledge, the Pareto logic, etc. -- we have been discussing. That is the point of the "gotcha" at the top of this post. Unless you can dispute the statement at the top of this post, you have conceded that the regulation-game is one in which society loses.

I will repeat one more time that and efficient economic system might just not be everybodies understanding of happiness, and your notion of 'worse off' does not include people's preferences about macroscopic trends.

Best,

B.

LoboGris de Lothlórien said...

Why people in anarchism would develop difficulties instead of solutions? In real world, where there is no government intervention, people themselves developes common legalities mutually convenient. Think about roman private law or english common law. Your suppositions are not valid arguments.

«And where did that get us? To national governments and overall applicable laws.»

¿How do you argue that the fact that those systems were replaced by national governments implies that the firsts were suboptimal? Don't you consider at all the posibility of mistakes in human history evolution?

What i'm saying to you is that experience in systems like common law makes them be applied spontaneously by people everywhere. Common law and roman private law expanded by usage, without need of governments, as a product in market that gives good result to its consumers also expands quickly in market and it is converted in a standard.

Money, private property, markets, all them works with common laws that were developed and emulated everywhere without government intervention. Indeed, all them were developed thousand of years before any national government.

«The whole point of a democractic political system is that people can decide *not* to have a regulation or a law. But evidence tells that's not what they want.»

That does not prove that the existence of regulations are good. You have already conceded that it is not possible to determinate the effects of regulations. So, ¿why are you so sure that people that votes for regulations know which effect would have, even for themselves?

People that vote for regulations, -- almost all people in the world-- votes for them not because they are expressing a preference, as they do in market, but instead, because they are ignorant of the effects of those regulations and they only think that the regulations are good, but are convinced by politicians and mainstream political discourse of the benefits of those regulations, when indeed they benefit directly just another interest group, or it is not possible at all to determine its effects.

When you exchange a product in the market, you act because you think that the effects of the exchange are benefitial for you. But this class of effect is predictable, because they are restricted to a pair of agents, one of which can compare benefits and cost for themselves, according to their interests and knowledge. It is not perfect, but it is the most optimal possible action.

But a completely different thing is to express a preference in terms of voting for regulations. Regulations does not affect merely the two agents involved. Regulations affects all the people, and the people reacts in different ways to those regulations, and the effects, even to the same people that supported the regulations, are completely out of the scope of their capacity to understand the problem.

So, the whole point about democracy is indeed that everybody is voting for regulations that does not understand, which affect people in ways they can't ever know.

Do you want a proof? The crisis was originated in democratic countries, with regulations that exists thanks to the democratic process. Another proof? the investigation that this group of pretended experts want to drive. After two centuries of democracy seems that nobody knows how to control the economy, and you are saying to me that democracy is needed for expressing regulation preferences? How can anybody vote for good regulations if even those "experts" admit that they don't understand how economy works? How can you say that voting is a way to express preferences as like as an exchange in market is.

John G said...

"How can anybody vote for good regulations if even those "experts" admit that they don't understand how economy works? How can you say that voting is a way to express preferences as like as an exchange in market is."

Ponzi schemes have to be illegal and the economic crisis was essentially caused by a Ponzi scheme relying on housing prices always going up. It should have been more illegal not more freely legal. Nobody really likes the system we have and the problem is more the people running it than the system itself. Bad people can make the best of systems bad and good people can make the worst of systems good. Good people don't do get rich quick Ponzi schemes whether they are legal or not.

Bee said...

Hi Lobogris:

¿How do you argue that the fact that those systems were replaced by national governments implies that the firsts were suboptimal? Don't you consider at all the posibility of mistakes in human history evolution?

Oh, I do. It just seems very unlikely that all civilized nations made the same 'mistake'.

«The whole point of a democractic political system is that people can decide *not* to have a regulation or a law. But evidence tells that's not what they want.»

That does not prove that the existence of regulations are good. You have already conceded that it is not possible to determinate the effects of regulations. So, ¿why are you so sure that people that votes for regulations know which effect would have, even for themselves?


Indeed, that does not prove the existence of regulations is good. But you are making the same mistake as Amos. There is no 'scientific' notion of 'good' or 'bad'. The only way to find out what people do consider good or bad is to ask them. If they think regulations are good, that's what they think. Who are you to tell them that's not what they want, that's not what makes them happy? Also, regarding predicting the effect of regulations, you are making the same mistake as Amos. You also can not predict what effect the absence of regulations will have. You are just trusting that the system is set up in such a way that it works towards a goal to cherish. That is *not* the same as predicting the evolution. To make your system work towards your goals, you need frequent evolution and feedback. Part of this evolution and feedback is done through our political systems. Unfortunately, it has (as far as I am concerned) a too large inertia and needs an upgrade.

So, the whole point about democracy is indeed that everybody is voting for regulations that does not understand, which affect people in ways they can't ever know.

You are again missing the point of how feedback and evaluation leads to optimization.

People that vote for regulations, -- almost all people in the world-- votes for them not because they are expressing a preference, as they do in market, but instead, because they are ignorant of the effects of those regulations and they only think that the regulations are good, but are convinced by politicians and mainstream political discourse of the benefits of those regulations, when indeed they benefit directly just another interest group, or it is not possible at all to determine its effects.

That is your opinion. Needless to say, other people have other opinions. The only way to change that is to convince them of your opinion. Judging from this comment section you are not very successful in that. Telling people they are too stupid to know what is good for them (even if it was true) isn't a particularly smart move.

Besides this, if people truly 'believe' they want something, that is virtually indistuingishable from wanting something. That's the same reason why advertisements work. They convince people they will be happy if they buy a certain product. And I have little doubt that indeed many people *are* happy if they do, because now they are hip and cool and feel great. And who am I to tell them they are not 'really' happy? Buying an advertised product isn't a particularly great goal in human life however, and most people know that themselves. So that's why I am trying to tell Amos merely paying attention to these micro-interests works against people's long-time large-scale preferences that remain potentially unaddressed.

Regarding anarchy, I would like to share this nice quotation by Steven Pinker with you:

"As a young teenager in proudly peaceable Canada during the romantic 1960s, I was a true believer in Bakunin's anarchism. I laughed off my parent's argument that if the government ever laid down its arms all hell would break loose. Our competing predictions were put to the test at 8:00 AM on October 17, 1969, when the Montreal police went on strike. By 11:20 AM the first bank was robbed. By noon, most downtown stores had closed because of looting. Within a few more hours, taxi drivers burned down the garage of a limousine service that competed with them for airport customers, a rooftop sniper killed a provincial police officer, rioters broke into several hotels and restaurants, and a doctor slew a burglar in his suburban home. By the end of the day, six banks had been robbed, a hundred shops had been looted, twelve fires had been set, forty carloads of storefront glass had been broken, and three million dollars in property damage had been inflicted, before city authorities had to call in the army and, of course, the Mounties to restore order. This decisive empirical test left my politics in tatters..."

By the way, when I was a teenager, I also believed anarchy was a great idea. That was even before my fling with socialism. Both however are solutions that work past reality. They might work in some idealized world, but not as long as humans are as humans are today.

A very recent example to see that anarchy doesn't work is right in front of your eyes: the internet. I can really recommend the book "Who Controls the Internet? Illusions of a Borderless World" by Jack Goldsmith and Tim Wu, read my review here.

Best,

B.

Phil Warnell said...

Hi Bee,

With all that has been pointed to and said it has caused me to look around a bit to find those that predicted our current dilemma and in particular the reasons for it that exceeded more then a few months before it came to be. Interestingly enough in the current Edge post which points out the article this entry is focuses it also makes note of something said by Nassim Taleb in his book The Black Swan, as follows:

"Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ….I shiver at the thought."

— Nassim Taleb, The Black Swan (2006)

Interested, I did some link tracking to come up with another piece he wrote in 2005 giving warning about the dangers of what he refers as being The Opiates Of The Middle Classes. I found his assessment painfully true and almost as if they where something only attainable with the benefit hindsight rather then being foreseeable. Then when one comes to realize he is a mathematician, whose specialty is Risk Engineering it has one wonder if the right people and groups had been listened to and consulted if all of what has happened up to now along with what is still left to come could have been avoided? That said what he says about the “Opiates” are still with us and the method that he contends needs to be utilized to dispel them I find agree much with what you have contended.

Best,

Phil

John G said...

From a John Fudjack website article by David Thoreau Wieck

In terming anarchism an Idea, I mean to convey specifically that it is non-doctrinal; that it has always been *understood* rather than defined; that it gives shared meaning to deepfelt longings; that it indicates an ideal aim for which a social movement, of everyday human beings who in practice will often enough contradict their ideals, is called forth; that it expresses an *ought* that is an anticipation of its object of striving; that it serves as object of faith, as ground of solidarity and mutual aid; that it has been enriched but not transformed essentially by supporting speculations. and reasoned argument; and that it has remained continuously and intensely in touch with its originating ideals.

By no means does this anarchism signify mindlessness, irrationalism or an anti-intellectual attitude -- a misinterpretation common in the youth-radical movements of the 1960's, possibly reflecting confusion between (in my terminology) ideas and ideology. On the contrary, self-education, thinking through and discussing exhaustively the meaning and consequences of one's basic beliefs, being their master and not their servant, these are implicit in *the anarchist Idea* and were the norm, and frequently the practice, of traditional anarchist movements. To say that this Idea is a thought seeking its realization is to say that it demands a maximum of social inventiveness and practical imagination, that it demands (again) that one know what one wants. It is opposite to obedience to ideas abstracted from life and to action uninformed by thought. This, rather than the anarchism of one or another *theorist*, is the anarchism whose meaning I shall try to bring forth.

From a John Fudjack website article by Andrew Dinkelaker

Traditionally, community and autonomy are viewed as opposite poles on a linear spectrum. The amount of individual 'autonomy' that can be permitted in any given society is conceived as inversely proportional to the extent that that society is considered a socially cohesive 'community'. The two principles resemble the rise and fall of two people on opposite ends of a seesaw. As the value of individual autonomy is elevated, the capacity for community sinks - and vice versa.

This tension between presumed ‘opposites’ appears to produce two strikingly different strategies: 1) community is sought, at the expense of individual autonomy, or 2) insofar as individual autonomy is honored, this happens in a way that detracts from the need for community. Our options are presented as an 'either or' situation. This is because, as the argument would have it, autonomy and community are mutually exclusive options. Political theorists who operate within this formula but realize the importance of both principles thus typically focus their energies on achieving the ‘proper balance’ between the two, never realizing the full potential of either. The brilliance of the anarchist theorists in particular, however, is in providing a solution that calls for rejecting the logic imposed by the false dichotomy – what I have elsewhere called the ‘Autonomy versus Community’ fallacy.

John Fudjack the Anarchist is a co-founder of the Buddhist Peace Group. Peace and Anarchism go together.

LoboGris de Lothlórien said...

Hi, Bee.

«There is no 'scientific' notion of 'good' or 'bad'. The only way to find out what people do consider good or bad is to ask them»

That is just what i'm saying to you, and that is just why regulations fails and why i am saying to you that there is no way to justify regulations in scientific means. The error is yours, not mine amos's. I'm not defining good or bad in other way than in individuals subjective preferences, since the begining of this discussion.

So, when you say:

«If they think regulations are good, that's what they think. Who are you to tell them that's not what they want, that's not what makes them happy?»

You are advancing an argument in favour of anarchism!!

If a group of people wants themselves to be regulated by such regulations because they think those regulations are good, then, they have to have the right to do so. At the inverse, if a group of people don't want certain regulations because they think they are pernicious, who are you or a majority to say that those regulations are better for them?

Who is anybody to say anybody else under which code of law they will live happier? I'm totally agree with you in this point.

And democracy is a system which violates this principle. Democracy is a system in which a majority forces a minority to live under the rules that makes the former happier. But, what about the happiness of the minority?

YOU are who are considering happiness, good and bad as objective, scientific, concepts. YOU are making the mistake you attribute to me.

«It just seems very unlikely that all civilized nations made the same 'mistake'.»

You are very simplistic if you consider the different countries as a collection of different experiences which all evolve to the same thing.

The republic and democratic system is a concept developed in the context of monarchic and oligarchic societies in the cradle of occidental culture, and emulated as an ideal in most countries in the world. Nothing else than that.

Occidental culture is very influential in the world. And the entire world just follow the same mistake as occidental culture did.

And, if you still think it is very unlikely that all civilized nations made the same mistake, then, which was the source of this discussion but the global crisis that affects all civilized nations? it seems to be a mistake that all them have made. What does it seem to you?

Bee said...

Hi LoboGris:

That is just what i'm saying to you, and that is just why regulations fails and why i am saying to you that there is no way to justify regulations in scientific means. The error is yours, not mine amos's. I'm not defining good or bad in other way than in individuals subjective preferences, since the begining of this discussion.

You and Amos are both trying to dictate a specific version of an economic and political system, the former a laisse-faire free market, the latter absent. That is a *particular* choice. What I have been, apparently unsuccessfully, said more than a dozen times, is that I want people to have the freedom to decide for themselves how the system looks like that organizes their lives. My sort of individual freedom includes yours since people could decide to have a laisse-faire economy and not to use political decision making at all, but not the other way round: your version imposes a specific organization on them. Well, at least that isn't an option in the system you envision. People would do it nevertheless and that's why we have governments.

«If they think regulations are good, that's what they think. Who are you to tell them that's not what they want, that's not what makes them happy?»

You are advancing an argument in favour of anarchism!!


No, it's an argument in favour of democracy.

If a group of people wants themselves to be regulated by such regulations because they think those regulations are good, then, they have to have the right to do so. At the inverse, if a group of people don't want certain regulations because they think they are pernicious, who are you or a majority to say that those regulations are better for them?

Who is anybody to say anybody else under which code of law they will live happier? I'm totally agree with you in this point.

And democracy is a system which violates this principle. Democracy is a system in which a majority forces a minority to live under the rules that makes the former happier. But, what about the happiness of the minority?

YOU are who are considering happiness, good and bad as objective, scientific, concepts. YOU are making the mistake you attribute to me.


Would you please read what I have told Amos a dozen times already above? You, as he, have a very simplistic and inappropriate idea of democracy. It is only in the simplest case you can consider that a majority vote is taken as an option which is then imposed on all. If you think about it, you will find that in practice this is hardly every the case for anything. The goal of a political system is to find an option that is to the best benefit of everybody and *not* just what the majority can push through. (One of) the reason why our political systems work to incredibly slow is that there are a lot of negotiations and compromises to find that solution. Again, as I also have said several times, I acknowledge that this system doesn't work very well in most countries.

What YOU are missing, LoboGris, is that in your 'anarchy' people have no way to MAKE their decisions. That is what you need a political system for, and that is the reason why, if there is none, it will 'spontaneously' emerge in whatever form.

You are very simplistic if you consider the different countries as a collection of different experiences which all evolve to the same thing.

*lol* Indeed, that was a very simplistic argument. It was a reply to your argument that because you like some private services in Uruguay better than the public ones, privatization is the cure for all problems. Give me a break. If you think your thoughts to an end you might come to find that you actually agree with me.

By the way, I acknowledge that should there really be people who do not want to be part of the social contract they presently have no way to leave it. You are born into a country, you can change to a different one, but you will never get out of it. If somebody was a true anarchist, I think he or she should be offered the possibility to be state-less, be without a passport, be without taxes, without social security, without any citizen rights whatsoever and just reduced to his human rights. I would suggest we dedicate an island to these people. You could move there. I think you would be cured of your illusions very fast. As I said above, in contrast to what you seem to think it is in an anarchy that you have no protection of minority rights, not in a democracy. It is a pure 'survival of the fittest' environment, and if you come to find you don't fit, then 'natural selection' will take care of you. Most people would regard that as unhuman, but if those who like the idea only harm themselves, that would be fine with me.

Best,

B.

Amos said...

Predictions in systems that are very complex are generally hard if not impossible. You have no way of telling either whether a particular investment will make people better of or not.

No, that's just wrong Bee. When a consensual transaction occurs we know that it has made both sides better off. That is the Pareto logic, and it is a natural consequence of human rationality.

Of course, it may turn out (because of risk and uncertainty) that things don't work out the way one side planned. That's inescapable whether or not we regulate. But the consensual transaction did, in fact, increase total utility.

You've agreed with that before - there's no escaping it now.

People might have no way of actually predicting what they will like in the future, but they definitely have an opinion about that. That's the point I must have repeated two dozen times. They have an opinion, and that opinion matters for their happiness.

That isn't a "point" Bee, its an attempt to evade logic through clumsy linguistics, and I've repeatedly demonstrated that it isn't even coherent.

So, you are conceding that there's no way to tell (at present) whether any regulation is actually going to be good or bad.

But that isn't the whole story. If a regulation goes into effect (presuming some degree of enforcement), that means that transactions which both sides want to do are not going to take place. You and I want to do a trade, but we can't because a regulation prevents us. A Pareto-efficient transaction that otherwise would have taken place, will not, and we know that society is worse off (utility-wise) as a consequence.

So while we have no way of knowing if the regulatory benefit has been obtained, we know to an absolute certainty that we are paying the cost.

Unless you have a basis for disputing that statement, and at this point I don't think you can, you have conceded the argument.


This is where we left off, and you haven't engaged it all.

I have repeated numerous times that your notion of 'worse off' does not include how well people's preferences regarding macro-variables are fulfilled.

Sigh... I will try again...

We know (from the Pareto logic) that regulation will reduce utility in the people who would have transacted. We also know that we are reallocating resources to regulatory enforcement that would otherwise be used to expand the total "pie" -- new machines, new technologies, schools, etc. And we have no way at all of even beginning to try to measure the benefit sought by the regulation in a way that would allow it to be compared with those costs.

That is true even if the goal of the regulation is to alter an emergent property of the market, because the benefit is no more measurable than any other benefit. (If that is what you mean by "macro-preference," since the definition seems to change with each post.) It is true regardless of the goal.

What say you?

Now, I will make the point even stronger:

When you extend from individual transactions to the market as a whole, the costs described above magnify. Why? Because we are not just preventing people from trading apples and oranges, we are interfering in the mechanism by which resources are allocated to the production of new things. That process--economic growth--is an exponential one.

So we don't just know that we have no way of valuing (in terms of utility) the effect on the emergent property, we also know that we have imposed a utility cost that grows exponentially over time.

Allow me to demonstrate:

Let us say that we could measure the benefit of altering the emergent property, and it generates an aggregate 10 units of utility per year.

The annual cost of the regulation is 1 unit of utility devoted to regulatory enforcement, diverted from growth; plus 1 unit of lost transaction benefit; plus 1 unit of misdirected investment.

Now hypothesize that (a) each unit of utility directed to investment (growth) expands society's total utility pool by 0.06 of a unit annually, one half of which is reinvested in growth; and (b) when a unit of utility is misinvested, it expands the utility pool by only 0.04 units annually, one half of which is (mis)reinvested.

I leave an exercise to you, to figure out:

(a) How many years does it take before the aggregate cost exceeds the aggregate benefit?

and

(b) How many years is it before people say "wow, we really made a mistake with that one" because the annual lost utility exceeds the 10 units generated annually by altering the emergent property.

As a hint, I will answer for you (c), what is the total cost over time of the regulation? The answer is -- the cost is infinite, and even if you undo the regulation, the loss will always be there, accumulating for all eternity!

u can't repeat evolution from a given initial state and therefore not compare outcomes you will never know whether one result would 'really' have been better than the other, therefore your argument is none.

No, my argument has demonstrated that regulation always does worse for society as a whole than it would have without regulation.

But you can very well figure our whether certain regulations, political decisions etc, work towards people's preferences - that's the optimization process, it does not necessitate to compare two distant points but change under a small variation.

It necessitates mind-reading if you want to compare that benefit to the cost imposed.

How do you evaluate: just ask people. You wanted X, we did Y, is that a good state of affairs or does it need a change?

But you previously agreed that doesn't work.

At this point, Bee, you're running over your own prior admissions. I really think you should just concede the point, because the game is over.

From my perspective, if people sitting in a room (even if democratically elected and governing with the consent of the people) make a plan for society then pass laws that impose the threat of force for actions contrary to the plan, that is non-spontaneous.

And it's not democratic either.

That's exactly how a representative democracy works.

I will repeat one more time that and efficient economic system might just not be everybodies understanding of happiness, and your notion of 'worse off' does not include people's preferences about macroscopic trends.

It isn't going to become a coherent statement no matter how many times you repeat it.

John G said...

Amos, I think for your rather strange view of things perhaps the points need reworded. Even you said a government is needed to prevent tyranny. This begs the question of how one defines tyranny. Is too much wealth transferring to the hands of the top one percent tyranny? Is tyranny too many people whose healthcare consists of waiting till things become an emergency then waiting to be harrassed by collection agencies. Is tryanny a government that uses its military to bully other nations? Is tyranny the legalization of transparent trillion dollar Ponzi schemes relying on housing prices always going up? So to put Bee's points in your strange language perhaps amounts to whether the above things constitute tyranny at the big picture macroeconomic level. Bee is not giving answers to these questions, she is just saying they are questions that need to be asked.

Bee said...

Hi Amos:

Predictions in systems that are very complex are generally hard if not impossible. You have no way of telling either whether a particular investment will make people better of or not.

No, that's just wrong Bee. When a consensual transaction occurs we know that it has made both sides better off. That is the Pareto logic, and it is a natural consequence of human rationality.

Of course, it may turn out (because of risk and uncertainty) that things don't work out the way one side planned. That's inescapable whether or not we regulate. But the consensual transaction did, in fact, increase total utility.


Even though you are first stating it is wrong what I said, you are then agreeing on my point: Even in a free market economy you don't know what the future brings and whether an investment will pay off. There is always a risk in what you do, with some investment more than with others. People don't know in advance. They guess what will work towards their preferences. Some guess better, some worse. And if many people guess badly they will notice it at some point and correct their behavior. That is the same with political decisions but the inability to predict, which you are criticising, is present also in our economic systems.

People might have no way of actually predicting what they will like in the future, but they definitely have an opinion about that. That's the point I must have repeated two dozen times. They have an opinion, and that opinion matters for their happiness.

That isn't a "point" Bee, its an attempt to evade logic through clumsy linguistics, and I've repeatedly demonstrated that it isn't even coherent.


To be honest it bothers me considerably you are not able to follow my argument which is not so complicated altogether. Calling it 'clumsy linguistic' doesn't work in your favour, and your attempt to distract with throwing in irrelevant technical terms doesn't work in your favor either.

It is as easy as this: People do have opinions that they don't know how to express via the economic system. They want a way to do it so their preferences expressed in these opinions can be addressed and incorporated. That's what the political system is good for. If you deny its relevance because you are a believer in extreme laisse-faire that needs no government you are denying people this possibility, period. Whether you think somebody has proved that is the "best" option in some way is completely irrelevant because it constrains people's freedom in deciding about the circumstances of their living - and that's what I am against. I want people to have that freedom.

Your repeated claim that people don't know what they will like in the future until the future is there is equally irrelevant, the only thing that matters is they have an opinion about it, and it matters to them this opinion is heard and addressed.

u can't repeat evolution from a given initial state and therefore not compare outcomes you will never know whether one result would 'really' have been better than the other, therefore your argument is none.

No, my argument has demonstrated that regulation always does worse for society as a whole than it would have without regulation.


Because once again your so-called argument does not take into account how well people's opinions about the macro-preferences are addressed, you have no measure for that in your economic system, that's what you need the political system for. Haven't I told you a dozen times that it is logically impossible to include people's desire to change a system into the system itself? So what are you even trying to "prove" here? The only way out of this conundrum would be if you would say (and I am not sure if that is what you are saying) that no matter what opinion people hold the economic system will always address it automatically. Again, unfortunately, this is nothing you can prove within your framework if it is, as you say, consistent for there is no way you can get out of it.

See, there are plenty of models that are 'consistent' but don't describe the real world either, and fact is people do express the wish not to live in an unregulated free market economy for whatever reasons, thus your model's notion of "best" does not include all of the realm people want to operate in.

From my perspective, if people sitting in a room (even if democratically elected and governing with the consent of the people) make a plan for society then pass laws that impose the threat of force for actions contrary to the plan, that is non-spontaneous.

And it's not democratic either.

That's exactly how a representative democracy works.


Yes, sorry, I misread your original statement, so let me try this again. For one, there is nothing unspontaneous about this, since underlying the process you describe is the nationwide acceptance of this organization of matters. People decided a representative democracy is a good way to govern their country, then they have agreed to live with whatever comes out of it. If it would go dramatically wrong, they could change the system (peacefully or in a revolution). Unless you want to introduce aliens or an intelligent designer all of this is spontaneous.

Besides this, even in reality, laws are not made by people sitting in a room and making them up. They are trying to find the best solution negotiating with representatives of various branches of our societies. However, as I have said several times, I agree that this process doesn't presently work very well. (If it comes to passing laws there is also the issue that laws need to be consistent, which constrains options and does so for a good reason, that's another point related to the short-term question, but not so relevant here.)

Best,

B.

Amos said...

Bee, you are ignoring the bulk of my post.

I have included it at the bottom of this.

Even though you are first stating it is wrong what I said, you are then agreeing on my point: Even in a free market economy you don't know what the future brings and whether an investment will pay off.

No, I’m not agreeing with your point. At the moment a consensual transaction is made, we know that it has, in fact, made both sides better-off. Things may evolve later in a way people don't like, but that’s inherent to the nature of time. And the government has no superior economic predictive ability anyway, so your point (even if true, which it isn't) doesn't help your case.

In all events, you are again evading rather than engaging the fundamental point.

To be honest it bothers me considerably you are not able to follow my argument which is not so complicated altogether.

Because your argument doesn’t engage any point at issue. It's simply beside the point, to the extent its coherent at all.

It is as easy as this: People do have opinions that they don't know how to express via the economic system. They want a way to do it so their preferences expressed in these opinions can be addressed and incorporated. That's what the political system is good for. If you deny its relevance because you are a believer in extreme laisse-faire that needs no government you are denying people this possibility, period.

I am not denying the “relevance” of any preference. What I have repeatedly demonstrated is that you cannot sum from politically expressed preferences to a conclusion that any regulation will actually generate a net benefit. Your repetition of this “point” is simply missing the point, which is that you can never ever tell whether satisfying these politically expressed preferences will, in fact, make society as a whole better off.

(And your new assertion that people “don’t know how” to express these preferences is simply wrong – see, e.g., annuities, low-wage/low-risk jobs, etc.)

I want people to have that freedom.

The “freedom” you’re talking about is the right to petition for the government to restrict the freedom of others by force. In all events, your argument seems to reduce to “there should be a government and it should be democratic,” which does not engage with any point at issue.

Because once again your so-called argument does not take into account how well people's opinions about the macro-preferences are addressed, you have no measure for that in your economic system,

Because it can’t be measured – you can’t measure it either! You want to enforce politically expressed preferences – the preference of some for preventing others from acting on their preferences – without knowing whether there will be any net benefit, and against the certainty of substantial costs. This is the point you have not engaged -- you have no way of determining if the regulation will make people better off, and every reason to believe it will make them worse off. And that is always true of regulation.

Haven't I told you a dozen times that it is logically impossible to include people's desire to change a system into the system itself?

You haven’t said that, but its obviously wrong in any event.

are you even trying to "prove" here? The only way out of this conundrum would be if you would say (and I am not sure if that is what you are saying) that no matter what opinion people hold the economic system will always address it automatically.

What I have said is that the market will always do better at addressing all preferences without regulation than with regulation.

That is true even if people’s opinion is to the contrary, and even if they say they prefer interference, and even if the regulation itself somehow magically generates utility – the market will still produce greater total utility (preference satisfaction) for society without regulation.

Here is what you are ignoring:

I have repeated numerous times that your notion of 'worse off' does not include how well people's preferences regarding macro-variables are fulfilled.

Sigh... I will try again...

We know (from the Pareto logic) that regulation will reduce utility in the people who would have transacted. We also know that we are reallocating resources to regulatory enforcement that would otherwise be used to expand the total "pie" -- new machines, new technologies, schools, etc. And we have no way at all of even beginning to try to measure the benefit sought by the regulation in a way that would allow it to be compared with those costs.

That is true even if the goal of the regulation is to alter an emergent property of the market, because the benefit is no more measurable than any other benefit. (If that is what you mean by "macro-preference," since the definition seems to change with each post.) It is true regardless of the goal.

What say you?

Now, I will make the point even stronger:

When you extend from individual transactions to the market as a whole, the costs described above magnify. Why? Because we are not just preventing people from trading apples and oranges, we are interfering in the mechanism by which resources are allocated to the production of new things. That process--economic growth--is an exponential one.

Allow me to demonstrate:

Let us say that we could measure the benefit of altering the emergent property, and it generates an aggregate 10 units of utility per year.

The annual cost of the regulation is 1 unit of utility devoted to regulatory enforcement, diverted from growth; plus 1 unit of lost transaction benefit; plus 1 unit of misdirected investment.

Now hypothesize that (a) each unit of utility directed to investment (growth) expands society's total utility pool by 0.06 of a unit annually, one half of which is reinvested in growth; and (b) when a unit of utility is
misinvested, it expands the utility pool by only 0.04 units annually, one half of which is (mis)reinvested.

I leave an exercise to you, to figure out:

(a) How many years does it take before the aggregate cost exceeds the aggregate benefit?

and

(b) How many years is it before people say "wow, we really made a mistake with that one" because the annual lost utility exceeds the 10 units generated each year by altering the emergent property?

As a hint, I will answer for you (c), what is the total cost over time of the regulation? The answer is -- the cost is infinite, and even if you undo the regulation, the loss will always be there, accumulating for all eternity!

John G said...

So you are saying that when two people do a Ponzi scheme transaction both sides are better off cause the guy being suckered gets to feel good about the transaction for a little while. That the future makes him realize he's been ripped off is irrelevent thus there should be no regulations against Ponzi schemes cause the government isn't smart enough to know Ponzi schemes are bad anyways.

Also hiring murderers should be OK cause the two people are better off and just cause someone gets murdered is OK cause fixing that little problem would be restricting the freedom of others just so someone has the freedom to not get murdered. The government isn't smart enough to know whether murder is good or bad anyways.

Amos said...

So you are saying that when two people do a Ponzi scheme transaction both sides are better off cause the guy being suckered gets to feel good about the transaction for a little while.

A transaction procured by fraud is not a consensual, and therefore not a Pareto-efficient, transaction.

Also hiring murderers should be OK cause the two people are better off and just cause someone gets murdered is OK cause fixing that little problem would be restricting the freedom of others just so someone has the freedom to not get murdered.

Protection of property rights -- which is what the murder laws do -- is not regulation, is enacted by unanimous consent, and is economically efficient.

I will return to not responding to the comments of persons other than Bee.

Bee said...

Hi Amos:

Indeed, I am ignoring the bulk of your post because we're approaching comment 200 and I was hoping we could make some progress here. I have understood what you are saying already four weeks ago, the problem is you don't understand my reply, you just call it incoherent because it doesn't fit into your sphere of thought: I do understand you say that regulations of any kind will always make people 'worse off'. What I am saying is that you have no way of proving or knowing that your version of 'worse' or 'better' is complete and evidence tells it is not. I have repeated that so many times it is getting very tiresome. I don't know how I can possibly make this simpler. How about this:

Consider you get everything you want, free market, no government whatsover, whatever you want. Now you claim that "science" tells you this is the "best" way to organize a society. Then go and ask people who live in this system whether they are happy with the state of affairs. There is very plausibly the possibility they will say "No". That possibility however does not exist in your model. The reason why I am paraphrasing "science" above is that it is really a conclusion within a model, and that conclusion is only as good as the model. That is the simplest case I can possibly imagine to get my message across: people might not *want* to live in the system you envision, it will make them unhappy, whether you tell them that is the scientifically "best" solution or not. Why is that so hard to understand? That's why you need a political system to go along with the economic one.

Even though you are first stating it is wrong what I said, you are then agreeing on my point: Even in a free market economy you don't know what the future brings and whether an investment will pay off.

No, I’m not agreeing with your point. At the moment a consensual transaction is made, we know that it has, in fact, made both sides better-off. Things may evolve later in a way people don't like, but that’s inherent to the nature of time. And the government has no superior economic predictive ability anyway, so your point (even if true, which it isn't) doesn't help your case.

In all events, you are again evading rather than engaging the fundamental point.


Huh? Excuse me, you are the one who is evading here. You were trying to say there is no way to tell whether a proposed regulation will actually make people better off as an argument against me. I am answering there is also no way to tell whether an investment eventually will indeed make people better off. People have to extrapolate and later correct. Same in politics.

I am not denying the “relevance” of any preference. What I have repeatedly demonstrated is that you cannot sum from politically expressed preferences to a conclusion that any regulation will actually generate a net benefit. Your repetition of this “point” is simply missing the point, which is that you can never ever tell whether satisfying these politically expressed preferences will, in fact, make society as a whole better off.

What you are "demonstrating" is that you can't think of a way to figure out whether a regulation will make society better off or not. I've told you repeatedly the way to tell is to give them a political system where they can just express their opinion on whether a status is better or worse than a previous one.

And your new assertion that people “don’t know how” to express these preferences is simply wrong – see, e.g., annuities, low-wage/low-risk jobs, etc.

Okay, so then I recommend you better teach people what exactly they are supposed to do or not to do if they want their political system to run more stable, have a decent social security, minimum wages etc etc.

The “freedom” you’re talking about is the right to petition for the government to restrict the freedom of others by force. In all events, your argument seems to reduce to “there should be a government and it should be democratic,” which does not engage with any point at issue.

We have governments to protect people's rights, even if that interfers with other people's freedom. The only other option is anarchy, and I hope you are not as silly as LoboGris above to advocate that. But indeed, the point I am trying to make is simply this: There should be a government to balance the economic system and it should be democratic.


Because it can’t be measured – you can’t measure it either! You want to enforce politically expressed preferences – the preference of some for preventing others from acting on their preferences – without knowing whether there will be any net benefit, and against the certainty of substantial costs. This is the point you have not engaged -- you have no way of determining if the regulation will make people better off, and every reason to believe it will make them worse off. And that is always true of regulation.

Same point once again. Don't you even notice how you are turning in a closed circle? You can't 'measure' it in the system you have, therefore you conclude it can't be measured. Your notion of 'worse' doesn't include anything that can't be measured in that system, that includes eg the satisfaction of people with the system itself. Etc etc. I have also told you a dozen times at least the way to determin if people are 'better off' with a regulation is to ask them. Yes, via a political system.

Haven't I told you a dozen times that it is logically impossible to include people's desire to change a system into the system itself?

You haven’t said that, but its obviously wrong in any event.


Please explain. If it is wrong then you are saying that in your setup people have the option of chosing to have a different system. Where is that option if it is not within our political system? If you include this option, chosing it will get you out of the model you are working with, so your axiom system is not closed.

Best,

B.

Amos said...

What I am saying is that you have no way of proving or knowing that your version of 'worse' or 'better' is complete and evidence tells it is not.

Actually, what I have proven is that my version of “worse” and “better” is complete to the limits of what is knowable, and I have also explained that the evidence is universally consistent that regulation does, in fact, make things “worse.”

In all events, the point of the portion of the post you are ignoring is that it doesn’t matter how large you make the “benefit” from regulation (which you can’t measure anyway). Even granting you that the regulation increased utility in the short term (which never actually happens), over time, the cost will always accumulate to exceed that “benefit” both in the aggregate and periodically. In the hypothetical I gave, I even made the regulatory “benefit” dwarf the immediate cost. But it still turns out a net-negative in the long run.

Consider you get everything you want, free market, no government whatsover, whatever you want. Now you claim that "science" tells you this is the "best" way to organize a society. Then go and ask people who live in this system whether they are happy with the state of affairs. There is very plausibly the possibility they will say "No".

The models of economics depend on the notion that resources are finite at any given moment in time (although they can expand over time). They cannot be applied to a universe of infinite, immediate, unlimited gratification. But this “assumption” matches reality, so I don’t see it as a problem.

You were trying to say there is no way to tell whether a proposed regulation will actually make people better off as an argument against me. I am answering there is also no way to tell whether an investment eventually will indeed make people better off. People have to extrapolate and later correct.

No, that isn’t right. We know (the Pareto logic) that a consensual transaction immediately (at T1) makes both sides better off than they were beforehand (at T0), and that regulation makes them worse off. It may well be the case that a transaction (or the consequence of a regulation) may evolve poorly at T2, but so what? Unless the government is better at predicting T2 than individuals (and there is every reason to think the opposite), the point is irrelevant—we have every reason to believe that regulation will make people worse off, and no way to determine if we’re wrong.

Actually, in the world of human beings, people have a lot of ways of ensuring that T2 doesn’t look so bad. For example, they may think hard about how much they really want the thing they are buying. Or they may enter into a second transaction to hedge the T2 risk, such as insurance. So it all works out, really.

And actually, it works out (in favor of my argument), much better than that. Because we also know that allowing Pareto-efficient transactions to take place, over time, causes resources to be allocated to their most productive use (new factories are build, buggy-whip factories are replaced by car factories and then chip factories, etc.) such that the total “pie” of utility upon which society can draw grows exponentially. And we know that when we regulate, we impede the functioning of that resource-allocation system (the presence of the buggy-whip subsidy and anti-chip-regulation cause people to invest in ways that are not as utility generating as they would otherwise be) such that the “pie” either does not grow or grows more slowly.

What you are "demonstrating" is that you can't think of a way to figure out whether a regulation will make society better off or not. I've told you repeatedly the way to tell is to give them a political system where they can just express their opinion on whether a status is better or worse than a previous one.

But you already conceded that you cannot know from the political system whether any proposed regulation will actually make society (as a whole, not just the individuals who vote for it) better off.

Okay, so then I recommend you better teach people what exactly they are supposed to do or not to do if they want their political system to run more stable, have a decent social security, minimum wages etc etc.

People already do a tremendously good job, on whole, of managing their lives. Of course some do worse than others, and some terribly, but on the whole, in the aggregate, letting people figure this out for themselves works just great.

the point I am trying to make is simply this: There should be a government to balance the economic system and it should be democratic.

No-one (at least I don’t) disagrees with that. (Whether the government should be prevented from enacting regulations by, for example, constitutional limitations, is a different question.) But it is not what we are discussing. The question on the table is whether science can be used to create regulations that make society better off by, for example, muting the business cycle. (See your original blog post.)

If it is wrong then you are saying that in your setup people have the option of chosing to have a different system. Where is that option if it is not within our political system? If you include this option, chosing it will get you out of the model you are working with, so your axiom system is not closed.

I don’t have an “axiom system.” I don’t even have a “system.” What I have is a set of rules that represent mathematically the behavior of rational animals within any political or economic system, which lead to certain predictions about the effects of adopting one “system” or “another.”

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