Equilibrium Economics, as embodied by Walras and Debreu (where equilibria of competing forces determine observed economic states), is “barren and irrelevant.”

Assumptions of economics, unlike hard sciences, are not based on observation. For example, some are unverifiable: producers maximize their profits, consumers maximize utility. Some are counter-factual: perfect competition never exists, markets are not impersonal, economic actors never act from perfect knowledge.

Equilibrium economics wasn’t intended to describe reality, but it is often asserted as the description of how individuals act in a decentralized market to maximal outcomes. Neoclassical economics takes this view as the axiomatic starting point for all other theories.

This sort of economic theory started as a first-draft approach that was buttressed by intellectual scaffolding (“assume perfect competition for now… we’ll deal with the real world when we understand the theory better…”), but instead of removing such unrealistic scaffolding, more and more was added, such that now, economics is even more divorced from the real world than ever before-more filled with arbitrary assumptions than previously-in order to satisfy the modern demand for logical cohesion.

“In fact, equilibrium theory has reached the stage where the pure theorist has successfully (though perhaps inadvertently) demonstrated that the main implications of this theory cannot possibly hold in reality, but has not yet managed to pass his message down the line to the textbook writer and to the classroom.”

… To be Continued …

Reading Notes on Value and Distribution in the Classical Economists and Marx - by P. Garegnani, Oxford Economic Papers 26, 1984, 291-325.

Theories of value and distribution that seek to explain distribution and prices by means of price equilibrium between the forces of supply and demand.  Keynes refuted the idea that a competitive economy tends toward an equilibrium between the supply and demand of labor, creating an equilibrium wage.  

Another refuted idea (by Sraffa and Robinson) is that factors of production can be measured independently of distribution, challenging assumptions that distribution is governed by supply and demand of said factors.

The classical surplus theory, as expressed by Quesnay, states that the (agricultural) produce beyond what is required to pay the wages of the laborers and provide for the next year’s crop are social surplus and available to the society to dispose of without jeopardizing social survival.  Production and distribution are linked because the subsistence of the laborer is required for production and reproduction.  Smith extended Quesnay’s surplus to apply to all production, not just agricultural production, making profit the equivalent of social surplus.

Thus, the surplus is the share of the product going to non-laborer classes of society.  Wages are determined by the habits of the country as the assign what constitutes subsistence.  Ricardo argued that any rise in the wages of agricultural laborers would be absorbed by an increase in population or that the new standard of living would become permanently expected.

Adam Smith described the relationship of workmen and masters in wage disputes as unequal: masters can hold out longer in such disputes than workers as workers have a more immediate need for the masters than the masters have for the worker.  Smith saw this as keeping the average wage reluctant to rise.  Marx extended this idea to relating the average wage to the current pool of un/under-employed laborers willing to work for the lower wage.  

The common view among these economists is that the wage is governed not so much by social levels of subsistence, but rather from the institutional circumstances unrelated to social production and therefore ought to be studied separately.

(To be continued…)

1. Inflation - Inflate your way out.  This is really bad, but preferable to another great depression.  We will do this if we have to, but it’s not that bad yet.
2. Monetary Policy – The central bank buys government bonds to entice business to invest in production.  This is the weapon of choice, but we’ve already exhausted its possibilities.
3. Credit Policy – The government tries new policies designed to loosen lending and get people investing in otherwise risky projects.  We’re trying this a little bit.
4. Fiscal Policy – The government borrows and spends, directly stimulating the economy.

From Dr. Delong:

This brings us to the fourth tool: fiscal policy. Have the government borrow and spend, thereby pulling people out of unemployment and pushing up capacity utilisation to normal levels. There are drawbacks: the subsequent dead-weight loss of financing all the extra government debt that has been incurred, and the fear that too rapid a run-up in debt may discourage private investors from building physical assets, which form the tax base for future governments that will have to amortise the extra debt.

But when you have only two tools left, neither of which is perfect for the job – credit policy and fiscal policy – the rational thing is to try both, at the same time. That is what the Obama administration in the United States and other governments are attempting to do right now.

This ought to be the ultimate question, regardless of who is President or what party they belong to.  It’s what really matters, right?

We ought to ask the same question of the economic stimulus bill (HR1 – American Recovery and Reinvestment Act of 2009) that, though passing, failed to get any Republican votes.  As far as I can tell, the reasons are some combination of:

1. Not enough immediate infrastructure spending as a fraction of the total amount of spending
2. Insufficient reliance on tax cuts or too much reliance on direct spending
3. It was written by Democrats

I hope we can all agree that Representatives objecting on grounds of authorship–sacrificing the well being not only of their own districts but of the entire economy in order to play a petty game of irrelevant politics–are nothing short of idiotic.

The first issue is related indirectly to the second in that the questions we really want to answer are: how many jobs can we create through a combination of spending and tax cuts and will it be enough?

Direct spending creates jobs by creating demand and by enabling shelved projects to be completed.  People are needed to make the extra products being demanded and to implement the projects being carried out.  It’s fairly straight-forward.

Tax cuts create jobs by giving individuals more money-in-pocket to spend and by giving businesses more capital to re-invest in operations.  The problem here and now with this is that scared people don’t spend extra money, they save it or use it to pay down debt on money they already spent.  Businesses can’t re-invest in production if there is no concomitant increase in demand.

Ultimately, we want to get the biggest bang for the buck and the way that is measured is by the associated multiplier:  The government spends a dollar on building a road, so a firm gets a new dollar.  That firm hires two extra people and pays them each $0.40 from that dollar.  Those people each have $0.40 extra from that dollar and use it to spend another $0.20 they wouldn’t have otherwise spent.  That spending goes to another firm and the process repeats.  Ultimately, we’ve bought more than a dollar’s worth of stimulus with our dollar.  It works similarly with tax cuts.  But which one has a higher multiplier?  Direct Government Spending! (See the previous post on this subject.)

If you listened to House Republicans, you might not know that.  They even have gone so far as to fudge the analysis behind their tax-cuts-only alternative (which satisfies #3 also, by the way), saying it will produce 6.2 Million jobs when the analysis they cite indicates it’s only 4 Million jobs (See Dr. DeLong’s post about this.  He’s the one who knows what he’s talking about.)  By contrast, the Obama plan creates 8.7 Million jobs under the same analysis.

The current Republicans are idealogically bankrupt.  The standard lines of Cut Taxes and of Shrink Government are no longer applicable.  We may not be in a Post-Partisan or a Post-Racial world, but I think it’s clear that we are in a Post-2000s-Republicanism world.  Cutting taxes and cripling government is the problem, not the solution.

By presenting a plan based entirely on tax cuts and refusing to bargain or even debate the original proposal in good faith, the House Republicans have shown that they have no interest in reality, solutions, or functional government.  All they are interested in is an unequivocal adherence to a dead-end policy because it advances a political ideology.  They are deceiving their constituents at a crucial juncture when time and clarity are of the essence!  They are not interested in asking Will this work? but only in asking Will this match my ideology? Why don’t we question the patriotism of people who operate in this deceptive, counterproductive mode, sabotaging plans for a functional government in favor of party gain?

There is a place for conservatism, opposition, debate, and competition among ideas.  There is no place for deception, bad-faith negotiation, and pure partisanship.  It is time to put away childish things.

Edit:  This is exactly my point: Building a Conservatism That Can Win Again (Via David Frum’s blog no less… Yeah, the Axis of Evil guy.)

Now imagine if the GOP did not have such a knee-jerk opposition to spending and actually thought strategically.  The lede could have been “Republicans voted against the measure because it did not include enough large infrastructure projects and lacked imagination.”  Instead of fighting Dems on the dollar amount of spending, knowing that we would lose that fight in any event, we could have stood with Obama and called for large high-tech infrastructure projects that would employ large numbers of minorities in construction and white collar suburbanites in development.  These projects (high speed rail corridors as an example) would also capture the imagination of the green close-in suburbs that are turning viciously against the GOP and have the strategic benefit of jamming up the young Dem members (Webb/Warner/Hagan/McCaskill) who depended on these voters for their victories.

Not that I want to see my Junior Senator (McCaskill) lose, but this shows that your party interest doesn’t have to be contrary to the public interest! (c.f. Andrew Sullivan here.)

Edit 2:  Dr. DeLong talks about Good and Bad stimulus skeptics here.  It’s worth the read because it separates out ideological doubt from evidentiary doubt.  It’s fine if you have academic objections to the stimulus plan, as long as they are not demonstrably false, unacceptable academic objections.  It’s definitely not ok if your objections are “belief-based” instead of “reality-based”.  DeLong says:

The depressing thing is the number and credentials of the stimulus skeptics who are making arguments that are either theoretically incoherent or empirically irrelevant.

Both of these come from Dr. DeLong’s blog.

First is a set of documents that show how Fannie Mae realized the risk involved in making adjustable rate loans and participating in the market for them created by the private sector.  Instead, Fannie Mae wanted to redirect the market toward fixed rate loans, which they had an advantage in selling, and to discourage the use of the home as an ATM.

Second, is a little Supply/Demand sort of discussion about how when the price of something drops, if it is because of increased supply, the quantity sold will increase.  If it is because of decreased demand, the quantity will also decrease.

So, knowing this, we should be able to look at a time-plot of the market share of GSE-originated loans and private sector loans, notice which way the “quantity” curve moves (up or down) and that will tell us if the crash (price drop) is a supply issue or a demand issue.  Looking at just such a graph (and reading Dr. DeLong’s explanation, which comes from Milton Friedman!), we see that in fact as price went down, quantity went down, leading us to conclude that:

This means that the dominant feature of the mortgage market in the 2000s was not an expansion of supply by Fannie Mae and Freddie Mac pushing their implicit government guarantee past the limits of prudence, but was a reduction in demand for Fannie Mae and Freddie Mac’s products as private-sector mortgage lenders aggressively pursued and took away their markets.

But if you don’t, here’s the takeaway message:

• People are lying about how much the Obama stimulus plan costs per new job created.  You can’t take a multi-year investment and divide it by the number of new jobs created in just one year of the plan to get the cost per job.  To do so is dishonest and/or ignorant.
• No economist* believes that a dollar of tax cuts is more stimulating than a dollar of government expenditure unless they have a political motive.  (See Spending Multiplier Statistics).  If anyone is telling you that a dollar of tax cuts stimulates the economy more than a dollar of direct spending, you should count that person as either lying to you or speaking out of ignorance.
• Finally, ignore anyone who says we ought to use monetary policy rather than fiscal policy (that is control the money supply rather than mess with government spending or tax structures).  Ordinarily this isn’t a dishonest argument.  What someone who argues this doesn’t realize is that we have already exhausted our monetary policy toolbox.  The interest rates the Fed controls are effectively at zero.  They can’t make them negative.  There’s no more stretch left in that elastic.

To summarize the summary: don’t believe the undisputedly false arguments being made against the spending stimulus plan being made only for ideological reasons.

Something not mentioned in the article that I think should be is that this spending-stimulus plan is an investment in our crumbling infrastructure.  If we just cut taxes, after 2 years we’d be left with debt and nothing to show for it.  If we spend on shovel-ready infrastructure programs (which abound and are not frivolous), we’ll be left with debt and a 21st century infrastructure.  A modern infrastructure enables higher efficiencies and stimulates the economy in and of itself.

In short, our kids’ kids are going to pay for this either way.  Don’t you think they’d less begrudgingly pay off a loan on a smart grid and public transit system that they’d still be using rather than what amounts to a night of hookers and blow for their great great grandparents?

—-

*See also:  Dr. Brad DeLong on What are Chicago’s Economists Thinking? and Krugman again in today’s NYT Op-Ed on A Dark Age of Macroeconomics.

• Egalitarianism is an enforced equality
• Individual ownership leads to greater wealth and wealth inequality
• Only Hunter-Gatherer societies permit realized egality, though non-hunter-gatherer societies may attempt it
• Hunter-Gatherer societies are bifurcated into Immediate Return and Delayed Return organization.  
  • Immediate Return societies use low-labor, high-skill tools and consume what is hunted or gathered nearly immediately with no complex food storage processes or structures
  • Delayed Return societies use limited-access, high-labor tools and have involved food-storage processes or structures, delaying the use of produce.
  • Most human societies are Delayed-Return societies

Systems and operations that give rise to Egality in Instant-Return Hunter-Gatherer Societies:

• Mobility and Flexibility 
  • Inter-camp movement is permitted with no economic penalty
  • Movement between camps is more than just ecologically-motivated.  It can be a means of escape of inequality and a leveling mechanism
  • Free movement reduces conflict and subverts the accumulation of wealth or authority
• Equal Access to Means of Coercion
  • Each (male) member has equal access to weapons and tools for hunting which can and are also used for assassination or coercion 
  • Accumulation of wealth is thwarted by the threat of envy
  • Provides universal, immediate, and direct access to social control, as opposed to social control institutions which dispense social control on behalf of an individual.
• Equal Access to Resources
  • Access to resources hunted, gathered, or immediately available is universal and equal
  • No member may withhold resources in equal share from any newcomer to the group
  • Ownership is discouraged as it leads to permanent associations which reduce equality
  • Boundaries necessarily lead to material inequality as resources move from one area to another or are depleted in one area over time.  Boundary-less occupation of the land reduces this source of inequality.
• Sharing
  • Boasting on the return of a hunt is discouraged.  The hunter is denied first-access to their kill to actively prevent a sense of privileged access to the resources
  • Societal values reinforce equality
  • Transactions are not forms of reciprocal exchange, but rather a form of taxation where the incomes of the successful are redistributed by the society.
• Sanctions on Accumulation of Personal Possessions
  • Above the requirement of a nomadic existence, even the accumulation of small, easily transported possessions is discouraged
• Fluid Transmission of Property Among Individuals
  • Mechanisms exists to fluidly circulated property among individuals rather than allowing specific people to accumulate specific property
  • The Hadza use a gambling game with randomized outcomes to redistribute valuable property among members.  
  • Winners are encouraged to gamble away proceeds and garnered items are expected to be exchanged in future gambling games.
  • This mechanism of exchange ensures that items available only in a particular place are semi-randomly distributed throughout the society.
  • In societies with non-random, formal exchange mechanisms, no individual is dependent on any specific other individual for subsistence.  
  • The inherent abundance and equality of distribution of wealth leads to very low values for goods, ensuring equality of access and discouraging accumulation

Other Notes:

• Equality arises from disengaging people from property and from the potential of accumulation to create dependency
• Equal, but not Egalitarian societies often exhibit competitive equality, where the individual must compete with others to maintain equal status.  Egalitarian societies assert an automatic entitlement which guarantees equality despite comparative advantage.
• Since Egality relies on discouraging accumulation, a transition to agriculture is difficult as agricultural production requires accumulation.  

The Process Which Precedes the Formation of the Capital Relation or of Original Accumulation

• The purpose of capitalist labor is to create value.  The purpose of pre-capitalist labor is to produce sustenance for the individual and the community.
• This idea of the individual as a worker divorced from the land and the means of sustenance except by commoditized labor is an artificial product of history.
• In pre-capitalist societies, the individual regards himself as an owner of property only in so far as he regards himself as a member of the community
  • Property ownership–”the relationship of the individual to the natural conditions of labor and reproduction”–is granted by membership and unity with the community
• Cities arise from villages when the location and geography are favorable to external trade.  The head of state exchanges the surplus of labor.
• Cities are owners of the surrounding supportive farm land in the same relationship as despots to labor.  Villages are appendages of the supporting land in the same relationship as the pre-capitalist laborer to the community.
• War is required for the perpetuation of non-transient occupation of land by a particular group and the society is naturally organized into military-like relationships.  War reinforces territorial notions and individual ownership of property.
• Private land ownership arrises as a result of validating membership in the community by acceptable maintenance and use of said property.  The individual is a member of the community by virtue of being in possession of land ultimately in the community’s possession.  
  • “Property formally belongs to the Roman citizen, the private owner of land is such only by virtue of being Roman, but any Roman is also a private landowner.”
  • The Germanic model consists of only communal property with private possession.
• “Ancient classical history is a history of cities,” as seats of land ownership and agriculture. Asian history is a history of town and country without differentiation.  The Middle Ages see history as the history of the countryside in opposition to the town.  ”Modern history is the urbanization of the countryside.”

Notebook V, Chapter on Capital (continued)

• A city is more than the composition of individual colocations.  The whole is a new entity, not the sum of its parts.  
  • In the Germanic model, the rural community is an association of members, more than a series of mere unions.  Membership involves shared language, history, etc.  The community is geographically sparse and therefore has no existence as a state, since it has no existence as a city.
  • In the Roman model, the community exists in the city, apart from colocation, in the polity.
• Individual households represent an entire micro-economy, having production (usually by women in domestic labor).  
  • In classical antiquity, the city is composed of many household economies occupying the territory attached thereto.
  • In the Germanic model, the individual home is independent from one another.  Land ownership is not a form of citizenship, but rather shared language, culture, history, etc is. 
  • In the Asian model, with only community property and private possession, the community is the individual economic unit. Citizenship is not a form of ownership.
  • In the Roman model, private landed property is mediated through state landed property, making private land owners citizens and members of the state owned property.
• Two elements are common to each of these land-worker-community relationships:
  • Appropriation of land - Appropriation of land is a precondition for labor.  The worker’s reproduction is a natural consequence of laboring on appropriated land.  
  • Attitude to the land - Man is more than a laborer.  His separate, independent existence is antecedent to the role of a laborer, even though the role as laborer is a necessary consequence of this existence.  One aspect of this land-independent existence is community membership.
  • Isolated individuals cannot possess land, but merely subsist off it.  
  • Land as property exists only through mediation of a community.
  • Community is formed by the contract in which men are cast as laborers through the appropriation of land.

… More to come…

• Only 12% of the CRA-Made loans were sub-prime (29% of non-CRA-regulated loans were sub-prime)
• CRA-made loans were half as likely to go into foreclosure than non-CRA regulated loans made in the same geographic areas
• Of all the sub-prime loans made, 60% went to medium-to-high income borrowers or non CRA geographies.

On the other hand, deregulation of the finance industry encouraged banks, including Fannie Mae and Freddy Mac, to purchase non-CRA sub-prime loans from CRA geographies so they could count toward their CRA requirements.  In this situation, you have the unregulated origination, re-packaging, and resale of sub-prime loans where due diligence is discouraged and moral hazard is encouraged. It’s one thing for a bank to evaluate the income and risk of an individual and choose to lend to low income borrowers who can pay the loan back.  It’s another thing to make such loans without doing due-diligence since you know you’re just going to re-package and sell it off, making it someone else’s problem.

It’s a failure of regulation, not a crisis of lending to poor people.  Even illegal immigrants are less likely to default on their loans than the average US Citizen.

Peter Kraus

Peter Kraus worked at Goldman Sachs for 3 months as head of strategy.  But, after the Bank of America takeover, his contract terms changed and he was able to take a $25M golden parachute… paid for, in part, by your tax dollars in the form of $25Bn in TARP funds given to BoA. Now he’s gone and bought a $37M NYC apartment.

I think we need a new term to describe these people.  One I’ve heard and like is Corporate Welfare Queen.  I can’t even afford a $3M NYC apartment.  Why should my tax dollars pay for this man, who probably has zero kids, to drive around in some stretch Cadillac up and down the streets of Manhattan, while he sits at home and collects a check in the mailbox paid for by my tax dollars!  He should be out there being a productive member of society instead of wrecking it with disastrous banking policies and rap music.  I manage to hold down a job, he should too.  It’s not my fault his bank merged and eliminated his job.  He should have thought of that when he decided to get an MBA.

Story here and here.