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Deconstructing Neoclassical Utility

Contains Math

Several commenters have pointed out definitional problems with the term “utility” as used in neoclassical economics, including Tarheel Dem, rg and Alan. As I noted in the linked post, Samuelson and Nordhaus are careful to call utility a “ scientific construct”, and not a measurable thing. Philip Mirowski is very helpful in clarifying what this remarkable notion might mean. I’ve referred several times to this paper, Physics and the “Marginalist Revolution”, in which Mirowski offers a brief, perhaps too brief, explanation, which he incorporated into a dense, perhaps too dense, book, More Heat Than Light: Economics as Social Physics, Physics as Nature’s Economics. I’m slowly making my way through the book, but the paper is probably enough for a decent understanding of one issue.

Mirowski says that the four most important neoclassical economists were hooked on the physics of the day. All of them, Jevons, Pareto, Walras and Edgeworth, were trained in math and physics, and all had at least some acquaintance with the work of Jeremy Bentham. They were also quite explicit that their ideas were congruent with the emerging understanding of energy as a mathematical basis for a number of expanding areas of physics. He quotes Jevons as follows:

Utility only exists when there is on the one side the person wanting, and on the other the thing wanted… Just as the gravitating force of a material body depends not alone on the mass of that body, but upon the masses and relative positions and distances of the surrounding material bodies, so utility is an attraction between a wanting being and what is wanted. Citation omitted.

Jevons repeatedly uses language suitable to calculus to explain his derivation of economic laws. He refers to the effect of the increase in utility that comes from the addition of an “infinitesimal” increase in the amount of the commodity consumed; the use of that term, which could not possibly arise in the real world, is intended to make it appear that standard integration rules are applicable to his theory, and he draws smooth curves instead of stairstep lines to show the consumption of goods and services. Samuelson and Nordhaus do the same thing, though a bit more subtly. Economics, 2005 ed.
chart from economics 2

This is hardly the only inaccurate use of math. Consider this drawing from the Mirowski paper:
Force graph from Mirowski paper
In this picture there is a point particle moved from point A to point B in a two-dimensional plane by a force F (vectors are usually indicated by bold-face; I’m also using italics). We can rewrite F as the combination of Fx and Fy the components of the force vector along the x and y axes. For a quick brush-up on this point, see this. The equation in the drawing gives the kinetic energy of the particle, denoted by T. If the expression Fxdx + Fydy is an exact differential, then there is another function U that meets this requirement:
Utillity defining function

The U in this equation is identified as the potential energy of the particle. The particle moves along a path such that the sum of T and U remains constant; usually this is written as T – U = 0. The point of Mirowski’s example is that we are looking at a force field, an energy field that describes the energy at each point by amount and direction. The function F does not have to be a simple equation as it would be in the first example; it can map out complicated curves. But F and each of its components have to be the exact differential of some other equation, which puts some constraints on them. Finally, we should note that this idea can be generalized to any number of dimensions.

This is from the Mirowski paper:

Walras insisted that his … equations resembled those of the physical sciences in every respect. We may see now that he was very nearly correct. Simply redefine the variables of the earlier equations: let F be the vector of prices of a set of traded goods, and let q be the vector of the quantities of those goods purchased. The integral ∫Fdq = T is then defined as the total expenditure on those goods. If the expression to be integrated is an exact differential, then it is possible to define a scalar function of the goods x and y of the form U = U(x,y), which can then be interpreted as the “utilities of those goods. In exact parallel to the original concept of potential energy, these utilities are unobservable, and can only be inferred from theoretical linkage to other observable variables. P. 368

In other words, utility is a scientific construct. I hope this from the book will make this somewhat clearer.
Field representation of utility
Suppose we have a person with a supply of two goods that can be traded, designated by x0 and y0. The point A is the intersection of the two goods. In neoclassical economics world, our hypothetical person is presumed to know how much of each good the person would purchase with an infinitesimal increase in money. The person is presumed to know this for every point in the commodity plane. This example can also be expanded into multiple dimensions to cover multiple commodities.

The math goes on from here, but we don’t really need to follow it. We can see that this doesn’t really make good sense, the idea that we would know what to do with an infinitesimal part of a piece of money. But even the math doesn’t make sense, as Mirowski explains in tedious detail. The equations aren’t solvable unless there are certain kinds of constraints. The physics problem is solved by assuming that the energy of the system is conserved, or at least it was when Walras and Jevons were writing, and we still use that idea today for simple local problems, like mechanics in physics. But that constraint isn’t available in economics: T is the equivalent of money, and U is utility, and the two are measured in different units. The term T – U doesn’t mean anything. Neither do other possible constraints, as Mirowski explains. The math fails at every level, including the levels Mirowski plumbs and I won’t.

One of the problem this creates for economics is that it undermines the claim that markets are demonstrably a superior form of organization. Recall from this post that Jevons makes this claim explicit. There are other problems, as Mirowski explains in section 5 of the paper and at much greater length in the book.

The standard response to the deconstruction of the basis of the model is to say it doesn’t matter. The models work, so who cares how or why. This was Milton Friedman’s view, as in this excerpt from Essays From Positive Economics from 1953. This raises a host of fascinating questions, but for now, here are two thoughts.

1. Lots of important problems can be solved with simple Newtonian analysis. If I want to figure out how a ball will roll down a ramp or how the moon revolves around the earth, I don’t need anything more complicated to get really close to the correct answers. But there are many other problems for which relativity theory is necessary. There are others that cannot be solved without quantum mechanics. The fact that some kinds of economic problems can be solved with simple neoclassical models doesn’t mean that all economics works that way, or that there might not be other and much better ways to figure out how to organize a society for production and allocation of scarce resources.

2. Economics is not a normative field. The rules of a society must deal not only with economic efficiency and utility of individuals at a point in time, which seem to be the subjects of neoclassical market theory, but many and broader aspects of being human, including our interest in the future, the impacts of our behavior on other people, fairness, social justice, and a host of other concerns. The neoliberal program seeks to erase those concerns in search of homo economicus, the consuming person, as the sole exemplar and highest form of being human. When we talk about society, we are told by Margaret Thatcher that there is no such thing. Not only is there a society, there is a government, which is a tool for society to arrange things as we see fit. We don’t have to live like the solitary selfish solipsistic homo economicus. We have plenty of choices.

Neoliberal Utility and the Paradox of Taxation

I’ve written about definitions and uses of “market” in several posts. The term “utility” is equally important in the development of mainstream economics. Here’s what Samuelson and Nordhaus say in Economics, 2005 ed.:

In a word, utility denotes satisfaction. More precisely, it refers to how consumers rank different goods and services. If basket A has higher utility than basket B for Smith, this ranking indicates that Smith prefers A over B. Often, it is convenient to think of utility as the subjective pleasure or usefulness that a person derives from consuming a good or service. But you should definitely resist the idea that utility is a psychological function or feeling that can be observed. Rather, utility is a scientific construct that economists use to understand how rational consumers divide their limited resources among the commodities that provide them with satisfaction. Emphasis in original.

The idea of a “scientific construct” seems at first glance to be far from the early neoclassical economists; in fact it seems downright bizarre. Recall from this post that the neoclassical economist William Stanley Jevons defined utility this way, quoting Bentham:

”By utility is meant that property in any object, whereby it tends to produce benefit, advantage, pleasure, good, or happiness (all this, in the present case, comes to the same thing), or (what comes again to the same thing) to prevent the happening of mischief, pain, evil, or unhappiness to the party whose interest is considered.”

This perfectly expresses the meaning of the word in Economics, provided that the will or inclination of the person immediately concerned is taken as the sole criterion, for the time, of what is or is not useful.

Jevons recognizes something Samuelson and Nordhaus seem to think, but do not make explicit: utility is solely related to each individual in the role of consumer of goods and services at a specific point in time. Jevons says that we get the total utility of all consumers by adding up the utility of each consumer, and argues that for perfectly competitive markets, this is the highest possible total of utility given a specific group of resources.

But it’s easy to show that even with the highly unlikely circumstances of rational consumers and competitive markets, there are plenty of outcomes that are far less than optimal. One obvious example is the paradox of thrift, first identified by John Maynard Keynes, and popularized by Paul Krugman; here’s an example from his blog, complete with charts and graphs. Here’s another example:

… [S]ometimes the economy is not like a household, [and] our individual choices sometimes lead to outcomes that are in nobody’s interest.

In particular, when you have economy-wide deleveraging — when everyone is trying to spend less than his or her income, so as to pay down debt — you have a fundamental adding-up problem. My spending is your income, and your spending is my income, so if both of us try to spend less at the same time, what we end up achieving is mutual impoverishment.

Those who reject the paradox of thrift, including the Austrians, suggested that something else would happen in the current economic circumstances. They have been proven utterly wrong. For the individual consumer, it is easy to see why the choice of paying down debt is better than the choice to consume more, but the result is an interminable recession.

Here’s another example. No body wants to pay taxes. For each of us, it would be much better not to. But there’s a disaster waiting to happen if everyone ducks taxes, as the examples of Greece and Italy show. The problem is also present in the US, though so far only the rich and their corporations and trusts have managed to escape taxation in a big way; most of us just got miserly tax cuts, and cheating by the 99% is still low. But the results are just as horrible. As Elizabeth Warren and Elijah Cummings pointed out in this op-ed in USA Today, the US middle class is collapsing. They explain the problem this way:

Beginning in the late 1970s, corporate executives and stockholders began taking greater shares of the gains. Productivity kept going up, but workers were left behind as wages stagnated.

Families might have survived as their incomes flattened, except for one hard fact: the costs of basic needs like housing, education and child care exploded. Millions took on mountains of debt and young people began struggling to cling to the same economic rung as their parents.

The response of both political parties at the state and federal level to this slowly growing disaster was the standard neoliberal prescription: tax cuts and reduced regulation. There were some small tax cuts for the working classes, and massive tax cuts for the very rich and their corporations. At the state level, the damage was especially great as governments also doled out huge tax cuts to keep businesses or lure them from other states. See, e.g., Kansas.

Those tax cuts starved state and local governments, and led to cuts in federal spending on all discretionary programs except military and spying. The result was that the cost of education rose dramatically, and that meant a staggering increase in student debt. The cost of housing rose for reasons related to the stunning increase in money in the hands of the wealthy with no investment prospects in new productive enterprises. Child care rose as two worker families and single mothers worked longer and harder to pay for necessities.

Meanwhile, cuts to education were inadequate, so governments stopped maintaining infrastructure. Driving around Chicago is a nightmare of “Rahmholes” and invisible lane dividers. Bridges collapse, inadequate transit systems collapse under winter weather, schools rot, and generally life is more unpleasant.

This list could be extended indefinitely, but I’ll stop. It should be clear that for most of us, the extra costs imposed by the inadequate provision of public goods far outweigh the minimal savings from the tiny tax cuts available to the bottom 90% of income earners.

Here are three lessons I draw from the paradox of taxation:

1. Tax policy focused on the middle class won’t help. That’s the Third Way Democrat policy, and it’s the policy of the remaining sane Republicans. Warren and Cummings suggest getting rid of tax loopholes for the rich and their corporations. That’s a start. Heavy top end income taxes, heavy capital income taxes, heavy estate taxes, greater taxation of corporations, and a heavy wealth tax are a better goal. The key to higher incomes is reducing the ability of the rich to buy up politicians, reporters and compliant academics.

2. Neoclassical economics turns on a simple form of total utility in an economy. They teach that we just add up the utility of all consumers, and claim that we are maximizing utility. That is inadequate for accurate analysis of a complex economy. In fact, it is guaranteed to produce an inadequate supply of public goods, and thus a rotten distribution of scarce resources. It doesn’t deal with the future in any intelligent way. It doesn’t handle scale problems like poisoning of the atmosphere, or filling up the oceans with plastic.

3. The rich take advantage of the inadequate supply of public goods by privatization.The problem the rich have is what to do with all the money they’ve gouged out of the economic system. One solution is to buy roads and rent them to you, to buy street parking and rent it to you, to establish training schools to sell you an education and keep you in debt and hungry for income so you’ll take any rotten job. They want to profit from goods and services we can buy cheaper through government.

The plain fact is that neoliberal economic theory is solely about keeping the rich happy. It has nothing to offer average people who only have labor to sell for the money they need to live.

Markets as a Justification for Milton Friedman’s New Liberalism

I’ve put up several weedy posts explaining my view of the terms Market and Market Economy. In this post I pull back to see how this all fits in with neoliberalism. The basic idea of 19th Century liberalism was stated by Milton Friedman in this essay:

This development, which was a reaction against the authoritarian elements in the prior society, emphasized freedom as the ultimate goal and the individual as the ultimate entity in the society. It supported laissez faire at home as a means of reducing the role of the state in economic affairs and thereby avoiding interfering with the individual; it supported free trade abroad as a means of linking the nations of the world together peacefully and democratically. In political matters, it supported the development of representative government and of parliamentary institutions, reduction in the arbitrary power of the state, and protection of the civil freedoms of individuals

… Whereas 19th century liberalism emphasized freedom, 20th century liberalism tended to emphasize welfare. I would say welfare instead of freedom though the 20th century liberal would no doubt say welfare in addition to freedom. The 20th century liberal puts his reliance primarily upon the state rather than on private voluntary arrangements.

Friedman prefers 19th Century liberalism, or as he calls it “new liberalism”, which focuses on the freedom of capital, and the economic liberty of the rich. Friedman takes up the misery of the working class and the poor in 19th C. England, and the solutions of Bentham.

The relation between political and economic freedom is complex and by no means unilateral. In the early 19th century, Bentham and the Philosophical Radicals were inclined to regard political freedom as a means to economic freedom. Their view was that the masses were being hampered by the restrictions that were being imposed upon them, that if political reform gave the bulk of the people the vote, they would do what was good for them, which was to vote for laissez faire. In retrospect, it is hard to say that they were wrong. There was a large measure of political reform that was accompanied by economic reform in the direction of a great deal of laissez faire. And an enormous increase in the well-being of the masses followed this change in economic arrangements.

Perhaps this quote is unfair; this is just a short paper. However a quick review of the google on this issue shows absolutely nothing of the sort. Here’s a typical example of what Bentham thought of the Poor Laws of 1834. Since the greatest good would be produced by the lowest taxes, this author says Bentham supported cutting poor relief to the bone.

Nevertheless, this quote seems to capture a central difference between Friedman’s new liberalism, and 20th Century liberalism, characterized by a willingness to use government to solve problems and rejecting the use of “private voluntary agreements” as solutions. Given the takeover of the mainstream Democratic Party by a version of Friedman’s new liberalism, (maybe changing, huh Rahm?) the current version of that view is largely the province of progressives, by which I mean those who question the prevailing economic discourse of neoliberalism.

Friedman tells us that neoliberalism values freedom, which he says has two parts, economic and political freedom. He claims that economic freedom supports political freedom by establishing a counterweight to the strength of government.

It is important to emphasize that economic arrangements play a dual role in the promotion of a free society. On the one hand, “freedom” in economic arrangements is itself a component of freedom broadly understood, so “economic freedom” is an end in itself to a believer in freedom. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom.

Nobody doubts that economic freedom benefits the rich. The harder problem for Friedman is to explain how economic freedom for the rich benefits the rest of us. At the same time, most of us can see that political freedom can be a tool to make our lives better. We benefit from a well-run government that provides a common infrastructure on which we can build our lives: physical infrastructure like water and sewer services, roads, bridges, and health services; intellectual infrastructure like schools and colleges, research and development, and record-keeping and statistics; and security, in the form of police, fire, EMTs and military. The harder part is to explain how these benefit the very rich, who think they are exempt from such mundane needs; at least, they don’t want to pay for them.

To explain how the 99% benefit from economic freedom, Friedman and his neoliberal colleagues say that the market benefits all of us by allowing us to maximize our personal individual utility in exchanges of various kinds. They claim that the market will always maximize the utility of the individual, and will do a fabulous job of allocating scarce resources. This argument rests on neoclassical economic analysis from the likes of William Stanley Jevons. I think that argument is facially wrong, in part for the reasons I discuss here. There are no competitive markets in the sense Jevons uses the term. The idea that individual benefit at each point in time is the correct measure of utility is silly. It ignores the free rider problem, the problem of the tragedy of the commons, and the simple fact that most of us value our friends and family and neighbors, and want them to have good lives too. I’ll discuss various measures of utility in another post, I hope.

Deeper than this, there is a conflict at the heart of Friedman’s analysis. He claims to favor political freedom, but he argues that it must not be used to infringe on economic freedom. For example, he says:

The citizen of the United States who is compelled by law to devote something like 10% of his income to the purchase of a particular kind of retirement contract, administered by the government, is being deprived of a corresponding part of his own personal freedom.

There isn’t any question that Social Security has worked well to provide minimal support for all of us and our families and the disabled. When Friedman says that it abridges freedom, he is asserting that the only interest of any person is their personal utility at a given moment, which is to pay no taxes. He ignores, as Jevons does not, the personal utility for me in providing for the future, and for taking care of other people today. He is saying that if you disagree with this assessment of utility, you are being damaged by being forced to participate in the system, and that’s a denial of freedom. It’s obviously not political freedom, because Social Security is a valid law. It must be a violation of economic freedom. Or maybe it doesn’t matter.

The essence of political freedom is the absence of coercion of one man by his fellow men. The fundamental danger to political freedom is the concentration of power. The existence of a large measure of power in the hands of a relatively few individuals enables them to use it to coerce their fellow man. Preservation of freedom requires either the elimination of power where that is possible, or its dispersal where it cannot be eliminated.

Again, I’m citing a short paper by Friedman, and perhaps he has a more sophisticated argument, but this is patently absurd. The whole point of government is mutual coercion of all of us not to do things that damage us or the things we share in common, like air and water and safety, and to do things together that we cannot do by ourselves in the exercise of our maximum economic freedom. Friedman is arguing that preventing people from dumping nasty chemicals into rivers from which we drink is an abridgment of personal freedom; and that letting our neighbors die poor and sick is fine as long as we don’t coerce anyone to do anything.

Perhaps the danger of concentrated wealth in the hands of a few thousand people wasn’t paramount in Friedman’s mind, and if he were writing today he might rethink the italicized sentence in that quote. But the plain fact is that one of the best parts of democracy is our ability to protect ourselves from the power of a few rich people. As examples, Elizabeth Warren, Chuy Garcia, and Net Neutrality. Doing so requires a new way of thinking about the economy, because this one isn’t working for anyone except the rich. The first step on that road is knocking down the existing framework of discourse about the economy. And that is the goal of this series of posts.

Caesars Palace Not Held to Same Standard Lavabit Is

I’m going to have a longer post about this opinion recommending a judge throw out the warrant, based on evidence FBI obtained by shutting down DSL and then pretending to be the cable guys that would fix it, used in bust Paul Phua (see this article for more).

But I want to point to the excuse FBI Agent Minh Pham used to explain away several other errors he made in the search warrant:

After Pham submitted and obtained the search warrant, he learned the affidavit contained errors. Specifically, it stated that Paul Phua wired $4 million into a Caesars account to secure a credit line. Pham later discovered it was actually Seng Chen “Richard” Yong that requested the wire to secure both their lines of credit. However, at the time Pham submitted the search warrant affidavit, he believed it was correct that Paul Phua had initiated this transfer.

The affidavit also stated Paul Phua had transferred approximately $900,000 from a casino in Fort Lauderdale, Florida, to the Caesars account. However, Pham later learned that Paul Phua had been only one of the individuals who signed the consent to have that money wire-transferred into Yong’s account. At the time Pham submitted the affidavit, he believed the statement was true based on documents from Caesars concerning monetary transfers that he had received. Pham referred to the spreadsheet contained in government’s Exhibit 2F as a document he relied upon to support his statement in the affidavit. The font size was very small and difficult to read.

He also discovered another error in the affidavit days later. There were transfers for $3 million between individuals in the villas. He looked at the spreadsheet, and it was off by one or two lines,” which caused him to associate the wrong name with the transfer. [my emphasis]

The font on the spreadsheet Caesars Palace had given the FBI when it requested they open an investigation was “very small difficult to read.”

You’ll recall that when the FBI went after Lavabit to get its crypto key, Lavar Levison tried to comply by providing a printout of the key. But the government complained it was illegible, and got Levison held in contempt.

In an interesting work-around, Levison complied the next day by turning over the private SSL keys as an 11 page printout in 4-point type. The government, not unreasonably, called the printout “illegible.”

“To make use of these keys, the FBI would have to manually input all 2,560 characters, and one incorrect keystroke in this laborious process would render the FBI collection system incapable of collecting decrypted data,” prosecutors wrote.

The court ordered Levison to provide a more useful electronic copy. By August 5, Lavabit was still resisting the order, and the judge ordered that Levison would be fined $5,000 a day beginning August 6 until he handed over electronic copies of the keys.

Apparently, huge casinos are held to a different standard than small email providers.

 

What is the Definition of a Market?

The US economic system is based on what we’ve all agreed to call free markets. The entire system is often called the free market system instead of the capitalist system. I’ve been looking for a definition of the term market.

1. Textbook Definition. Samuelson and Nordhaus define markets early in their textbook Economics (2005 ed.):

A market is a mechanism through which buyers and sellers interact to determine prices and exchange goods and services. P. 26.

Markets consist of buyers and sellers interacting to determine prices? I’d call that moderately descriptive. Is it interacting when you go to the grocery store and decide to buy one brand of crackers rather than another? Is Macy’s is running an auction? You get into an accident and your car needs body work. The insurance company negotiates with your body shop. Is that interacting? You need to see a doctor. There’s no interaction over prices. This definition implies that as far as ultimate consumers are involved, a market is an arrangement where prices are set by sellers, and buyers get to pick whether or not to buy and from whom among the reasonably available sellers. It is a reasonable description for transactions among merchants. There isn’t really a mechanism, and the whole thing doesn’t constitute a mechanism, and the term interacting seems inaccurate. There is, of course, exchange of goods and services.

They also define the term “market economy”

A market economy is an elaborate mechanism for coordinating people, activities, and businesses through a system of prices and markets. It is a communication device for pooling the knowledge and actions of billions of diverse individuals. P. 26.

Again we see the word “mechanism”. It must be a metaphor, and not a definition. These descriptions lead you to think a market is a circuit on the motherboard of a computer that is running the market economy program. You’d think a market economy operates by formal laws and in accordance with mechanical rules. You’d think it was a permanent thing, to be studied in the same way you’d study galactic movements or steel balls rolling down an incline. That seems completely wrong.

And anyway, the term mechanism doesn’t tell us anything about what a market is. The other terms are vague and unconnected to anything. It’s hard to see how this definition could serve as the basis for an economic system.

2. Markets as defined by early neoclassical economists. One of the first neoclassical economists was William Stanley Jevons, a mathematician and philosopher. His principle contribution to economics is his book The Theory of Political Economy, published in 1871. The book includes an early effort to apply the new Riemann Integral to the field of economics. Compare the drawings in III.17 and III.21 with the graphics at this link. Here’s his definition of Market:

By a market I shall mean two or more persons dealing in two or more commodities, whose stocks of those commodities and intentions of exchanging are known to all. It is also essential that the ratio of exchange between any two persons should be known to all the others. It is only so far as this community of knowledge extends that the market extends. Any persons who are not acquainted at the moment with the prevailing ratio of exchange, or whose stocks are not available for want of communication, must not be considered part of the market. Secret or unknown stocks of a commodity must also be considered beyond reach of a market so long as they remain secret and unknown. Every individual must be considered as exchanging from a pure regard to his own requirements or private interests, and there must be perfectly free competition, so that any one will exchange with any one else for the slightest apparent advantage. There must be no conspiracies for absorbing and holding supplies to produce unnatural ratios of exchange. Were a conspiracy of farmers to withhold all corn from market, the consumers might be driven, by starvation, to pay prices bearing no proper relation to the existing supplies, and the ordinary conditions of the market would be thus overthrown.

The theoretical conception of a perfect market is more or less completely carried out in practice. IV.16-17

This is an excellent description of what we call a competitive market, you know, the kind that doesn’t exist in the real world today, if it ever did. Jevons thinks the model is close enough to reality to allow him to create equations, which he thinks this is crucial.

But if Economics is to be a real science at all, it must not deal merely with analogies; it must reason by real equations, like all the other sciences which have reached at all a systematic character. IV.38

3. Post WWII economics. Neoliberal economists of the Chicago school updated the metaphor of the early neoclassicals. Bernard Harcourt in his excellent book The Illusion of Free Markets explains that neoliberal theory extolling marvels of markets rises from 18th and 19th Century theories that markets are part of the natural order of things. One branch, related to the ideas of Friedrich Hayek, springs from Adam Smith’s metaphor of the invisible hand of the market, a form of spontaneous order, updated with “new models from computer science.” Chapter 8.

Harcourt describes another strand of thought about markets, this one closely linked to Gary Becker and Richard Posner of the Chicago school of economics. He says it focuses on the alleged economic efficiency of the market economy, and he traces its roots to French Physiocrats who believed that markets were the embodiment of a natural order. Just as we perceive order in the physical universe (more or less, depending on how you understand quantum behaviors), so markets reproduce that efficiency. Efficiency is set up as the chief goal of the economy. With this step, we incorporate a determinative model of the economy, one that can be represented by equations.

But there is still no definition of the term market.

4. Contemporary works. Now, as in the past, economists raid the physical sciences for new ideas. Here’s a fascinating example: The Market as a Creative Process, available starting at page 378 here [huge .pdf] by James M. Buchanan and Viktor J. Vanberg. They discuss an early book on complexity theory by Ilya Prigogine and Isabelle Stengers; Prigogine won a Nobel Prize in chemistry, and later turned to the study of complexity. His book is about the role of chaos theory in the self-organization of more complex forms.

Buchanan and Vanberg discuss a very old problem arising from Newtonian physics. That system is thought to be deterministic, in the sense that if you knew the position and motion of every particle in the universe, you could predict the future. Nobody has actually thought that was true for decades, at least. As far as I know, economists don’t think that markets are deterministic. Buchanan and Vanberg point out that lurking in a system of equations based on the idea of general equilibrium, there is a kind of determinism lurking. They explain that Prigogine’s book should bring an end to ideas about determinism in economics, and presumably an end to the idea of equilibrium in the economy.

Ideas about chaos theory were cutting edge in the mid-80s. Chaos theory is a mathematical field, so I’m not sure it’s the best argument Buchanan and Vanberg could have made. There has been much progress since then in both complexity theory and ideas about self-organization. This seems to me to be a very elegant solution.

Buchanan and Vanberg’s paper is in a book titled Philosophy and Economics. Therefore, you’d expect a bit of formalism, like a definition of market. But no. We learn that standard economic teaching is based on the “self-organizing nature of markets.” 383. That doesn’t accord with Samuelson, which I have set up as standard economic teaching, but it seems to be at the heart of the Austrian School; you can see it in this paper by Friedrich Hayek. This school preaches that markets are self-organizing and automatically compute the proper allocation of resources without resort to any centralized apparatus. Hayek explains that the “price system”, which seems to mean the market system, “evolved without design”. H.24. He doesn’t cite any evidence for this proposition, and surely no one really thinks the bread markets in 18th Century France evolved without design, any more than the Chicago Board of Trade did. See Harcourt’s The Illusion of Free Markets.

I’ve got a lot of stuff to look at, but so far, I don’t see a formal definition of “market” that will bear any scrutiny. Why it matters is the subject of a future post.

Ghani Institutes Night Raids While Facing Treason Accusations Over Absence of Cabinet

Despite the rampant corruption of his administration and his many other faults, Hamid Karzai was a consistent critic of US-led night raids that led to many senseless civilian deaths, disappearances and torture. Those raids, and the US death squads that carried them out, were right at the top of the list of reasons Karzai refused to sign the BSA authorizing the continued presence of US troops in Afghanistan beyond the beginning of this year. Now that Ashraf Ghani has signed the BSA, the US has retained its right to “counterterrorism operations”, meaning that US-led night raids are still authorized despite Barack Obama’s declaration that combat operations have ended (while relying on a semantic sleight of hand in omitting that counterterrorism operations continue).

Ashraf Ghani seems to feel that US-led night raids are not enough, and so he called a meeting of Afhganistan’s National Security Council to authorize more night raids carried out by Afghan forces. Learning from Obama, Ghani has termed these raids “special military operations” rather than the unpopular night raids, but Khaama Press clearly knows that this is about night raids. Here is a partial screen capture of their article on the move, where we see that the chosen illustration for the story is a photo taken at night, showing forces wearing night vision equipment routinely employed in night raids:

Khaama Press article on Ghani's move to institute night raids.

Khaama Press article on Ghani’s move to institute night raids.

Perhaps in a bit of a nod to Karzai’s previous objections to US-led night raids, the article notes:

The Afghan national security forces were instructed to take all necessary measures to respect the Islamic values, the Afghan culture, Afghan constitution and other laws of the country while executing a special military operation.

It’s hard to see how that instruction can be carried out, though, since the ANSF have been trained by US forces whose actions led to those very charges against them by Karzai. Even though Karzai forced the US to sign an “agreement” supposedly reforming US night raids in 2012, Karzai was still complaining about the US violating Afghan homes more than a year and a half later. Ghani is now authorizing these crimes to be committed by Afghan troops as well as US troops.

On a separate front, a number of Afghan Members of Parliament have declared that the failure of the Unity Government led by Ghani to establish a cabinet more than three months after assuming power rises to the level of a charge of treason. Ghani, however, appears to be shrugging off the charge.

With the idea of impeachment already in the air, Ghani’s move to institute night raids by Afghan forces might just provide a stronger basis for moving ahead with charges.

Distribution of Income By The Plutocracy

I’ve written a pair of posts at Naked Capitalism on the neoclassical theory of marginal productivity as an explanation for the distribution of income in our neoliberal market economy. The first is based on Thomas Piketty’s Capital in the Twenty-First Century, and examines the bloated pay of top management. The second focuses on pay for the rest of us, based on the discussion of Paul Samuelson and William Nordhaus in their introductory textbook Economics (2005 ed.).

The second post points out that John Bates Clark, who dreamed up this theory around 1900, said that it is based on the natural law. In other words, the distributions it supports are morally just. People want to believe the “market” pays them fairly, and the theory comports with the Invisible Hand mumbo-jumbo they also believe, so they buy into it despite overwhelming evidence to the contrary, including their own experience. Both posts suggest an alternative hypothesis, that incomes are distributed on the basis of power. So one good question might be: what is the basis for rewarding capital?

Here’s a brief description of the theory of marginal productivity advanced by Samuelson and Nordhaus, from the second link

… [T]hey define Marginal Revenue Product as the additional revenue produced by a unit of input of something (labor, steel, electricity, cash loans) while all other things are held constant. It is equal to the marginal revenue the firm gets from the sale of the additional output, if any, created by the additional unit. Hands are waved, and the authors tell us that the firm should add inputs of all kinds to the point that the marginal revenue product of the input is less than or equal to the cost of the input. Here’s a chart, Samuelson/Nordhaus at 238.
S:N Marginal Product Graph 2
The authors explain that the rent triangle is equal to about 1/4 of wages, which “… reflects the fact that labor earnings constitute about three-quarters of national income.” Nice and simple. So then we calculate the supply and demand for the entire economy by adding up all the supply and demand curves of every firm. Then we have equilibrium at the point where the supply equals the demand. From here, it’s a short step to determining the distribution of money to wages. Samuelson and Nordhaus give us the model of John Bates Clark from 1900.

Clark reasoned as follows: A first worker has a large marginal product because there is so much land to work with. Worker 2 has a slightly smaller marginal product. But the two workers are alike, so they must get exactly the same wage. The puzzle is, which wage? The MP (marginal production) of worker 1, or that of worker 2, or the average of the two?

Under perfect competition, the answer is clear: Landlords will not hire a worker if the market wage exceeds that worker’s marginal product. So competition will ensure that all the workers receive a wage rate equal to the marginal product of the lat worker.

But now there is a surplus of total output over the wage bill because earlier workers have higher MPs than the last worker. What happens to the excess MPs…? The rest stays with the landlords as their residual earnings, which we will later call rent. Why…? The reason is that each landlord is a participant in the competitive market for land and rents the land for its best price. 237-8, emphasis in original.

John Bates Clark was one of the important neoclassical economists. This is from a recent paper.

Clark is best known for his marginal productivity theory of distribution, which famously says that “the distribution of the income of society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates”. Labor’s wage, which Clark interchangeably calls “standard,” “normal,” “natural,” and “competitive,” is thus determined by the value of its marginal product (what Clark ordinarily terms “specific product”). Fn and refs. omitted.

Most of the rest of both posts is devoted to showing that the evidence doesn’t support this armchair speculation. Evidence is irrelevant, of course. People don’t want to believe they are being cheated by the capitalist system or by the rich, because that would violate their Secular Religion, US Constitutional Capitalism, to which all has capitulated, including their religious belief system and their belief in the rule of law and the Bill of Rights and so on. If people really thought that Constitutional Capitalism was totally corrupt, they might have to do something about it.

The explanation offered by Samuelson and Nordhaus for income distribution is worth another look. Here’s the caption in the text:

Each vertical slice represents the marginal product of that unit of labor. Total national output ODES is found by adding all the vertical slices of MP up to the total supply of labor at S.

 

The distribution of output is determined by marginal product principles. Total wages are the lower rectangle (equal to the wage rate ON times the quantity of labor OS). Land rents get the residual upper triangle NDE. 238.)

So, this chart is supposed to represent an entire societ. The wage portion is the wages that go to everyone from wildly overpaid CEO to the minimum wage home health care worker. That means it hides all of the changes among wage-earners. As this paper by Larry Mishel shows, that rectangle hides a huge change in allocation between the top earners and the rest of us. We are all familiar with charts like this one by Mishel:

Click to enlarge.

Click to enlarge.


He estimates that about half of the gap between productivity and wages is accounted for by increases in incomes at the very top. That’s a convincing demonstration that power is the determinative issue in income distribution, not anything to do with “markets” or natural law. And it gives a clear idea of how much is hidden in the lower rectangle.

Now take another look at that Samuelson and Nordhaus chart. They say that the money in the triangle DEN belongs to landowners, as “rent”. Of course, since this is about the entire economy, it must be that this “land” is actually all capital, machines, factories, and natural resources, to the extent they are owned by some specific human being or Corporate Person. So why exactly does all of what the authors call excess marginal product go to the capitalists? “The reason is that each landlord is a participant in the competitive market for land and rents the land for its best price.” That doesn’t sound like a reason to me. It sounds like a pre-ordained conclusion.

In fact, as Mishel shows, the last 35 years have seen a reallocation of income between labor and capital. Mishel estimates that about 20% of the gap between productivity and wages is accounted for by increases in the share of national income going to capital. The balance is accounted for by faster increases in prices for goods purchased by consumers compared the prices of things they produce. Mishel calls this the “terms of trade”, and it accounts for a significant part of the variance. Mishel suggests that the gap may mean that higher productivity is not improving overall standards of living, and that further research is needed. I’d suggest that this gap ultimately goes to the capital owners and their highest paid employees.

We’re told this is all for the good, either on natural law grounds or because it’s efficient. The natural law thing is nothing but a veneer of philosophy over the greed of rich patrons. Efficiency is currently structured to prioritize the rich over the rest of us. As Mishel shows, the rich, both capitalists and top earners, are taking all of the gains from increased productivity for themselves, money that used to be distributed across the income spectrum. Why should I care at all about efficiency if the burdens fall on my back and the benefits all flow to a tiny number of Capitalist Aristos?

Week 16 Trash Talk

Hey, turns out there is actual NFL football on today. Who knew? The early game is on the NFL Network, and features the Eagles at the dysfunctional Redskins. Not long ago, the Eagles had the best record in the league, now they don’t even control their own playoff destiny. So they have to beat the Eagles today and Giants next week and hope for some help. RGIIIis back at QB for Washington, but it is hard to see the Eagles losing here. The later game is on CBS and has the Bolts at the Niners. San Diego still has some life left in them, the Niners not so much.

On Sunday, the Lions are at the Bears, and should have no issue there. Cutler has been benched in favor of Jimmy Clausen. It has gotten so bad that the Bears are talking bout offering a high draft pick along with Cutler to get another team interested enough to take Cutler. Ooof.

The Chiefs at Steelers should be a decent game, as should Colts at Cowboys and Broncos at Bengals. The supposedly marquee matchup is the Seahawks at Cardinals. The winner will almost certainly win the NFC West and may well have home field advantage for the playoffs. But I say “supposedly” because it is hard to imagine how the Cardinals are going to find enough offense to hang with the Squawks. Drew Stanton is still out and Ryan Lindley will be starting. Lindley is really a quality kid, but the Legion of Boom is probably going to light him up. Hope springs eternal here for some kind of miracle game from the Cards, but the odds of that are effectively zero.

The rest of the games just aren’t that interesting, especially considering how late in the season it is.

Turkee Trash Tawk

Welp, here we are for another Thanksgiving at the Wheelhouse. And thankful you all are hear with us. This will be a pretty abbreviated trash because there are only three games on the docket for today. First up, as always, is the traditional game from Detroit. This year the Kitties host Da Bears. We are at halftime as I write. I actually thought the Bears might have a chance at the upset, but Stafford just threw a late TD to Megatron and the Lions are up 24-14, and the Bears just don’t seem like they are clicking on either side of the ball, but especially on defense. Expect more of the same in the second half.

Next up is the Eagles at Jerryworld and the Cowboys. This has the makings of an excellent game. Both teams come in at 8-3 and seem to have withstood midseason uncertainty. My inclination is to take the ‘Boys here. But Philly can wear out defenses, and Dallas is good, but not deep. If Sanchez doesn’t make a bunch of mistakes, I think the Eagles can pull it off. The night game is another division slugfest, this time in the NFC west. Squawks at Niners. Both teams are 7-4 going in, but the loser is in some trouble for the post season. Seattle dominated Arizona in Seattle last week, but they are a different team on the road, and this game is in the Big Bluejeans Stadium. No idea who wins this, strikes me as a tossup.

We will have a special guest trasher on Saturday for the weekend’s festivities, but there are a couple of interesting college games tonight and tomorrow. Tonight is TCU at Texas. Probably will be a TCU blowout, but I would love to see the Longwhorens pull the upset. Tomorrow the action is in the Pac-12. Stanford is at UCLA. Always a tough game, and the Tree could really monkey wrench things with an upset. I don’t think so, I’ll take the Bruins.

And last, but certainly not least, is THE BIG GAME. For the Territorial Cup. Arizona State at the hated Arizona. Calling this a rivalry is wholly insufficient. The schools, and teams, loath each other with a passion. And this is the first time in many, many years that both teams enter the game so highly ranked and with big bowl aspirations in play. I highly urge you to tune into this, the game rarely disappoints. Much as I hate to say it, the game is in Tucson this year, and for that reason I give the edge to Rich Rod and the Cats. The Devils rebounded from their soul crushing road loss at Oregon State to get back on track, mostly in the second half, against Washington State last weekend. Can they keep it up and pull off a win in the Old Pueblo? We shall see!

Have a great Thanksgiving, enjoy your friends, family and food. See you in comments!

Amano, Sanger Still Trying to Disrupt P5+1 Deal With Iran

Monday is the deadline set by the P5+1 group of nations and Iran for achieving a final agreement on steps to assure the world that Iran’s nuclear program is only aimed at the civilian uses of producing electricity and providing isotopes for medical use. With that deadline rapidly approaching, those who take a more hawkish view toward Iran and wish to see no agreement are doing their best to disrupt the negotiations as they enter the home stretch to an agreement or another extension of the interim agreement, which is nearing a year under which Iran has met all of its obligations.

A primary tool used by those who prefer war with Iran over diplomacy is Yukiya Amano, the Director General of the International Atomic Energy Agency. Keeping right on schedule, Amano has interjected himself into the story on the final stage P5+1 talks (in which IAEA has no role) and one of his chief transcribers, Fredrik Dahl of Reuters, has fulfilled his usual role of providing an outlet for those wishing to disrupt a deal. Today’s emission from Amano [Note: During the time that this post was being written, Reuters changed the Fredrik Dahl piece that is being referenced. Here is an upload of the version of the story as it appeared with an 8:09 am Eastern time stamp. Usually, Reuters just sends new stories out with new url’s, but the url under which the 8:09 version loaded for me now loads a 10:09 story by different reporters discussing a likely extension of negotiations to March.]:

Iran has yet to explain suspected atomic bomb research to the U.N. nuclear agency, its head said on Thursday, just four days before a deadline for a comprehensive deal between Iran and six world powers to end the 12-year-old controversy.

After nearly a year of difficult diplomacy, Washington is pushing for agreement on at least the outline of a future accord and U.S. Secretary of State John Kerry will attend talks with Iran, France, Germany, Britain, Russia and China on Friday.

But Yukiya Amano, director general of the International Atomic Energy Agency, made clear it was far from satisfied, saying it was not in a position to provide “credible assurance” Iran had no undeclared nuclear material and activities.

It comes as no surprise that Amano would try to disrupt the talks at such a critical juncture. Recall that he replaced Nobel Peace Prize winner Mohammad elBaradei in 2009. Amano laid low for a while, but in 2011 came out swinging against Iran. By moving in such a politically motivated way, I noted at that time that Amano was doing huge damage to the credibility of the IAEA after its terrific work under elBaradei.

Amano was carefully chosen and groomed for his role at IAEA.

Wikileaks documents revealed in 2010 showed how Amano assured US “diplomats” that he would be solidly in the US camp when it came to pursuing charges against Iran’s nuclear program:

Amano reminded [the] ambassador on several occasions that he would need to make concessions to the G-77 [the developing countries group], which correctly required him to be fair-minded and independent, but that he was solidly in the U.S. court on every key strategic decision, from high-level personnel appointments to the handling of Iran’s alleged nuclear weapons program.

More candidly, Amano noted the importance of maintaining a certain “constructive ambiguity” about his plans, at least until he took over for DG ElBaradei in December.

And what of these “possible military dimensions” of Iran’s nuclear work that Amano is holding against Iran? They are based on a total fabrication known as the laptop of death. Further, IAEA is not structured or staffed in a way for it to be the appropriate vehicle for determining whether work in Iran is weapons-related. It is, however, built for monitoring and accounting for enrichment of uranium, where it has found Iran to divert no material from its declared nuclear power plant fuel cycle.

Amano is far from alone in his campaign to disrupt the talks. Recall that a couple of weeks ago, David Sanger took to the front page of the New York Times to plant the erroneous idea the Iran was nearing an agreement to outsource its enrichment of uranium to Russia. The Times never noted nor corrected the error, which, conveniently for Sanger and other opponents of a deal, could give hardliners in Iran another opening for opposing any deal.

Sanger returned to the front page of the Times on Monday to gleefully list the forces he sees arrayed against any deal with Iran. Remarkably, Sanger did at least make an offhand correction to his earlier error (but of course there still is no note or change on the original erroneous report). He only does this, though, while also describing how he thinks Russia could undermine the breakthrough in which they have played a huge role:

Perhaps the most complex political player is Russia. It has remained a key element of the negotiating team, despite its confrontations with the West over Ukraine. It has been a central player in negotiating what may prove the key to a deal: a plan for Iran to ship much of its low-enriched uranium to Russian territory for conversion into fuel for the Bushehr nuclear power plant.

But Russian officials may want an extension of the talks that keeps any real agreement in limbo — and thus keeps Iranian oil off the market, so that it cannot further depress falling prices.

So, yes, Sanger finally admits the deal would be for Russia to convert low enriched uranium to fuel rods, not to do the enrichment itself, but only while also cheering on what he sees as a path for Russia keep Iranian oil off international markets.

Missing from Sanger’s list of forces lined up against a deal with Iran are those working behind the scenes in the US intelligence and “diplomatic” communities. Those forces gave state secrets to United Against Nuclear Iran to be used in false allegations against a Greek shipping firm providing goods to Iran that were not subject to sanctions. We still don’t know what that information was nor how UANI came into its possession because the Justice Department has intervened to quash disclosure in the lawsuit resulting from the false allegations.

As we enter what is slated to be the final weekend of the negotiations, the stakes are clear. Barack Obama has gladly jumped on board with most neocon dreams of open war in many of their target nations. Iran remains a huge prize for them, but so far Obama has shown remarkable resolve in pushing for an agreement that could avert a catastrophic war that would make the current ones look only like small skirmishes. I’m hoping for the best this weekend, but I also worry about what opponents of the negotiations may have in store for their final move.

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Emptywheel Twitterverse
bmaz @arcsine @CNN Sure, but where, as bad as they are, is the better alternative for real TV news on breaking events?
2hreplyretweetfavorite
bmaz Oh good grief, now idiot Don Lemon + @CNN have all around terrorist hit twit Juliette Kayam on to spew about aviation stuff she doesn't know
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bmaz @jackgillum @yvonnewingett No no, that is why our main wall current vacuum is a "Dyson Animal"! http://t.co/vbj3Yj7ows
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JimWhiteGNV RT @Ali_Gharib: How nasty is UANI? They tried to block entirely legal humanitairan trade with Iran: http://t.co/JhM80IJ6J7 cc @ggreenwald
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JimWhiteGNV RT @Ali_Gharib: Even as DOJ shielded UANI, the group was spreading more smears: http://t.co/ZOMVb1ldcM cc @ggreenwald
3hreplyretweetfavorite
JimWhiteGNV RT @mkonnikova: Nerds, rejoice. This @NewYorker cartoon is for you. http://t.co/jm5QDv39on http://t.co/edGTK5tFqy
3hreplyretweetfavorite
bmaz Has @CNN put quack idiot Drew Pinsky on yet to bloviate about "psychology" of Lufthansa pilot. That's final moment CNN will be totally dead.
3hreplyretweetfavorite
bmaz @misterdevans Old, Alzheimers, dolt... I dunno, fill in the blank.
3hreplyretweetfavorite
bmaz @yvonnewingett Seriously! She guards it like a child!
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bmaz Sweet jesus, I have just realized my wife's precious hand held battery super suck Dyson vacuum is PERFECT for cleaning my patio pool table.
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