1799. The meaning of “rational”

There is a lot of provocation today. Start with Sheila Dow’s paper  on our website, “The people have had enough of experts”, and the comments on Twitter in response, such as the paper posted by John Boit in Medium,

https://medium.com/@JohnBoik/an-economy-of-meaning-or-bust-2aa46457b649#.hp1u95kh3.

These are worth serious reading for their hints about new economic thinking. Dow writes for example ” but the fact remains that these models are by their nature incapable of predicting a crisis because of the way they are constricted to ensure settlement on equilibrium.” Great language.

As it is, wrongly constructed economics is blamed on excess formalism whereas it might be understood as making systems that support, or do not undermine, the economics of the one percent.

The reason a math approach gets it wrong is because you cannot do math without assuming some things in the system are constants or constantly distributed. The interesting things about life do not fit such assumptions. As  a society we may want steady state security but our social rhetoric is all in the direction of innovation, competitive advantage and change.

But l will add a few thoughts from a slightly different angle.

What is often rational is, in economics, called irrational and what is irrational called rational. The use of “rational” in economics generally refers to calculating probabilities.  What is not calculable  is called irrational.

This conflicts with classical thinking which treats rational as the use of the mind in the service of life and irrational what does not.

we have

https://www.bloomberg.com/view/articles/2017-01-25/behavioral-economics-isn-t-dead-yet

 

This throws cold water on the dream of linking psychology with economics, since it means that seemingly irrational economic behavior results from the sum of a whole plethora of psychological effects.

 

The implication is that all things psychological are not rational,  like mood, shifting preferences, concern for how a purchase looks in our community. From a human point of view such considerations are the height of  rationality. If my mood tells me “no” perhaps the mood reflects some state of my being I should take seriously. To call it irrational is to suggest that major structures that arose through evolution are irrational – do not serve a life purpose. This is a very strange place to end up, calling the results of evolution irrational.

 When interest rates or gross domestic product change, people in Gabaix’s model don’t quite realize that things are different. Even more importantly, they’re short-sighted — they don’t think as much about the probability of a recession happening 10 years from now as they do about one occurring in the next six months.

People have a lot on their minds, and limited bandwidth. To ignore something is not irrational. If we ignore something because our mind is preoccupied and we fail to make all the calculations , this is “irrational” in a way that discounts reality.

One example is a paper by Northwestern University’s Lorenz Kueng. He adds yet another piece of evidence against the so-called permanent income hypothesis — the theory that rational, forward-thinking consumers don’t increase their consumption when they get a temporary boost in income. When the Alaska Permanent Fund — a pot of money funded mostly by oil revenue — gives people their annual handouts, they go out and binge instead of sticking it all in the bank as standard rational theory would predict. Kueng shows that this is consistent with a behavioral theory in which consumers are close to rational, but not quite.

 

Why isn’t a binge  rational? What is life for? The model of rationality here is a caricature of a character type that sacrifices pleasure to savings.  Who is rational,  the saver or the pleasure seeker? This cannot be answered except in the assumption of a framework of values.  I think of William Saroyan’s “Every man knows his true destiny, but he likes his detours because they take time.

To equate rational with the results of calculation is to reduce rational to means-ends consistency, kind of like engineering. A design of a bomb can be rational from an engineering view, but its irrational when considered in the framework of life giving.

Want to see how “irrational” this gets?

Another example is a paper by Rawley Heimer, Kristian Myrseth and Raphael Schoenle. The authors document how young people save too little, and the elderly spend too little, relative to standard fully rational theories. The latter might be explained by old people wanting to pass money to their children, but low savings among the young require an explanation. Heimer and Schoenle’s theory is that young people don’t realize how long they’re going to live. Far from believing in their own immortality, Heimer et al. posit that young people spend like there’s no tomorrow. Presumably, once they reach middle age, people regret their youthful binges.

So I will live a long time. I will save everything I can  year after year – and then I die. Rational?

Rational comes from ratio, balance, proportion. Machine logic is not life  Logic and economics should be aware of the difference and not subordinate our description of people to an economy where at its most “rational” neither workers (low wages) nor owners (savers) get to benefit from the regime.

Economics avoids the flowing world and tries to replace it with a solid abstract model. Such solidity is not given to humans, though they yearn for it.

“Men find it difficult, Machiavelli noted, to accept a world of becoming; they hunger for constants. This leads them to create an illusory world which is then treated as though it were a real basis for action. In terms of human behavior this often took the form of clinging to certain habits despite their having been long outdistanced by the pace of events.”

 

from  Wolin Politics and Vision.

 

 

 

 

1738. Equilibrium and wealth concentration.

Provocation # 60 equilibrium.

Here is a possibly naive question.

The equilibrium we have in our economy now is produced by a number if factors, forces, arrangements, that determine where the equilibrium is going. A moving point.

If we take simply the understanding that every cycle in markets moves wealth upward.. The rich have better information and can buy early at a lower price and with cheaper interest, and sell earlier at a higher price as the market starts downward.  Each cycle shifts the difference upward, making the rich richer.

Hence capitalism self-destructs. The hope is that regulation can keep the equilibrium point lower, but the pressure from within capitalism is always toward increasing profit, and narrowing the scope of the enterprise to what can be controlled or externalized. Things like the good of others is pushed aside. Climate is ignored by most business because it can only interfere with sales. The exception is business aimed at climate, but then the game is to use that business to make s profit by ignoring things like inequality and jobless automation.

So the question is, does not equilibrium dynamics lead to inequality? The equilibrium point of the dynamic is monopoly ownership?

The problem is, how else can we incentivize? The great agricultural empires did it with authoritarian control and hereditary class positions – roles. What is the future for new economic/political arrangements that are holistic and can cope with systemic problems?

1737. Who are the elites?

Provocation 59. Elites = professionals

Who are the “elites”? We tend to think they are they, not us. But lets take for the moment the idea that the elites are the owners of big capital and the supporting professional staffs of lawyers, accountants, pr firms, spouses and children, and all the people who have used licensing or selection, such as college admissions, to get a place in society. Residue of the old craft guilds.

The reality is that the game is quite fixed with prepared paths to neighborhood, school, college, and first “jobs” that follow from parental influence, outright interventions, and values. Some are supported by regulations that allow quasi monopolization of their small business such that the owner of a hardware store, a chain restaurant, can have an annual income in the neighborhood of a million. Other regulations create preferred paths to colleges and graduate degree, all protected by thousands of “procedures”, like the GRE, the grade system, grants and licensing that define and protect the professionals, making them part of the one percent, and being a target of the Trump voters. This would be tolerated if the income of the top 10% were reduced by 10%, the top one percent by half, the top .1% by 90%

The point is that the nexus of relationships is seriously hard to modify. This means, among other things that climate warming will proceed till the under 30 generation pulls governance apart, and inequality will continue to generate multiple social pathologies. We need to take responsibility that it was us, not the Trump supports who benefitted by and helped legitimate, if not create, the dysfunction we currently live in.

Our current mess highlights that the chief output of an economy is not the society of the spectacle as Guy DeBord brilliantly has it, but the society of power. We need to take seriously the idea that the power established is an economic outcome of the economy we have and participate in, as earners and spenders. Change must break habits. In order for economics to play a role in such changes we have to break out of the cocoon of economic formalism into the messy reality of the humanities and social sciences. From archeology through political thought to post modern novels.
PS.

Is this mere coincidence?

The first-move advantage in chess is the inherent advantage of the player (White) who makes the first move in chess. Chess players and theorists generally agree that White begins the game with some advantage.
First-move advantage in chess – Wikipedia
Wikipedia › wiki › First-move_advantag…

The white first rule seems to have been established in the 1860-1880 period.

1734. Bias in numbers away from action

Provocation # 58. Why do economists present us with bad numbers?

What can economics – and INET – do about the use of economic indicators that are distortions of reality, either toward simplicity, or politically motivated? GDP is the most grievous. “Third world country X has an increased GDP so all is well, we are lifting billions out of poverty”. But increasing earnings at the top (the people who work for corporations or government or the professions) and lowering for the bottom 80%, GDP can be increasing, but most people are worse off. Th effect is amplified because while income is up, costs have risen faster, and people are being pushed off the land removing them from the statistics on earnings.

Janet Yellin’s testimony to congress last week got standard headline across most of the press. “Unemployment at 4.9% we should move the fed rate up.”

4.9% fails to deal with the large number that give up job search because there aren’t any in their neighborhood, and that those who are working are working fewer hours and for less wages than their previous jobs.

Yellin’s testimony to Congress was relatively nuanced but you have to go to the Fed’s web site to find her speech and see that nuance.

Her testimony. The Economic Outlook
The U.S. economy has made further progress this year toward the Federal Reserve’s dual-mandate objectives of maximum employment and price stability. Job gains averaged 180,000 per month from January through October, a somewhat slower pace than last year but still well above estimates of the pace necessary to absorb new entrants to the labor force. The unemployment rate, which stood at 4.9 percent in October, has held relatively steady since the beginning of the year. The stability of the unemployment rate, combined with above-trend job growth, suggests that the U.S. economy has had a bit more “room to run” than anticipated earlier. This favorable outcome has been reflected in the labor force participation rate, which has been about unchanged this year, on net, despite an underlying downward trend stemming from the aging of the U.S. population. While above-trend growth of the labor force and employment cannot continue indefinitely, there nonetheless appears to be scope for some further improvement in the labor market. The unemployment rate is still a little above the median of Federal Open Market Committee (FOMC) participants’ estimates of its longer-run level, and involuntary part-time employment remains elevated relative to historical norms. Further employment gains may well help support labor force participation as well as wage gains; indeed, there are some signs that the pace of wage growth has stepped up recently. While the improvements in the labor market over the past year have been widespread across racial and ethnic groups, it is troubling that unemployment rates for African Americans and Hispanics remain higher than for the nation overall, and that the annual income of the median African American household and the median Hispanic household is still well below the median income of other U.S. households.

Quite good, though I fault the lack of mention of automation and climate on future trends in employment. (I think these are already having effects). The press is a huge industry hungry for quotes, conflict, and emotion. How does a profession like economics function in such an environment? And how much have economists swallowed the 4.9% unemployment rate as real?

Perhaps the tendency of the press, echoing the more vocal economists, make things look better than they are is because the pressure is then off to do something, in particular redistribution.

I realize that in the time of false news, this is a bit quixotic, but standards are important for building a viable culture.

——-
I sense that Trump’s overreach on a number of issues will lead to massive reactions and mid course changes. But meanwhile perhaps he tries to run the government as an infrastructure for Trump Inc. The feudal system of large corporations evolves toward a strong King. History favors this dynamic. The enlightenment reaction against absolute monarchy may have run its course and the parts, such as IT have aligned with central power.

1733. Race and economics conference

Provocation # 57.

INET Detroit Race and Economics conference

https://www.ineteconomics.org/events/tomorrows-detroits-and-detroits-tomorrows

The conference has so many edges open to explore. First, economics came off well, presenting usable analytic perspectives on some key issues.

At the same time speaker after speaker made it urgent that we deal with complexity, combinations of issues “intertwined’, heard a number of times. Economics was severely criticized for “ignoring reality.”

John Powell in the closing moments of the conference said, “the stakes could not be higher.”

What should INET do? So many INET sponsored and posted pieces take one issue at a time.

Barber, in the opening keynote said, “We cannot wait. You cannot just do one, you have to deal with the whole.” With the interaction of the issues.

The way to handle complexity of many intertwined issues is through creating some plausible narrative scenarios of how the future, starting now, and aware of the past and working out the implications, letting conversation bring out blind cul de sacs and unintended but unavoidable secondary consequences, discovering both feasible and implausible narratives through an analysis that includes all the issues. They cannot be adequately judged before lots of talk, rubbing contrasting scenarios together to bring out conflicts and potential possibilities. Indeed, we do not know ahead of time what the interwoven issues are/ Climate and jobs, governance and wealth ..? This is just one suggestion. I hope we get others.

We could start, for example, on what would happen to the economy if
We cut economic activity by a third and froze use of all oil and coal in order to prevent +3 degrees global heating. Jobs? Financial system? Impact on all asset values?

Obviously that would quickly lead to a need to
1. Discuss the structure of an alternative green economy
2. Some plausible paths to get through that transition.

As a second example, what possible path could there be to restructure the economy under severe tech induced unemployment ? That would shift from the current distribution of jobs to a world where the major full employment job categories are

1. Serious greening (food and living conditions and aesthetics for the planet)
2. New forms of health and care for the billions that would be dislocated
3. Managers needed for the two.

Think Freedrick Law Olmstead and Central Park x10(6) as a world wide social task.

As we think about these we will probably realize that we have a choice to stay within the system, or break it open. Do we assume all basics remain as they are while we try to change from within? Private property, money, capital, ownership, corporations, insulated representative democracy, corporate owned Media?

Or change some of these?

Derrick said that growth, for whites was based on government guidance. Now that the results of subsidies are realized, the powerful want to eliminate government interference, especially that which would attempt redistribution.

All downturns in the economy transfer wealth upward because the rich know earlier when to sell, and if there is an upswing, when to buy.

We are in a mess. Is economics a peripheral player, or intimately implicated in politics, morals, quality of life for all, the understanding and management of the earth and society. Economics comes from the greek, estate management. The estate is larger but our vision seems to have become smaller. Lots to do.

The stakes could not be higher – Powell

1725. D.H. Lawrence on America

Our minds are a buzz and the connection with feeling almost lost. Here is an analysis by D.H. Lawrence  in his introduction to the novel Bottom Dogs by Edward Dahlberg, written in 1928-29 published in 1930.

When we think of America, and of her huge success, we never realize how many failures have gone, and still go to build up that success. It is not till you live in America, and go a little under the surface, that you begin to see how terrible and brutal is the mass of failure that nourishes the roots of the gigan~ tic tree of dollars. And this is especially so in the country, and in the newer parts of the land, particularly out west. There you see how many small ranches have gone broke in despair, before the big ranches scoop them up and profit by all the back-breaking, profitless, grim labour of the pioneer. In the west you can still see the pioneer work of tough, hard first-comer, individuals, and it is astounding to see how often these individuals, pioneer first-comers who fought like devils against their difficulties, have been defeated, broken, their efforts and their amazing hard work lost, as it were, on the face of the wilderness. But it is these hard-necked failures who really broke the resistance of the stubborn, obstinate country, and made it easier for the second wave of exploiters to come in with money and reap the harvest.

The real pioneer in America fought like hell and suffered till the soul was ground out of him: and then, nine times out of ten, failed, was beaten. That is why pioneer literature, which, even from the glimpses one ha. of it, contains the amazing Odyssey of the brute fight with savage conditions of the western continent, hardly exists, and is absolutely unpopular. Americans will not stand for the pioneer stuff, except in small, sentimentalized doses. They know too well the grimness of it, the savage fight and the savage failure which broke the back of the country but also broke something in the human soul. The spirit and the will survived: but something in the soul perished: the softness, the floweriness, the natural tenderness. How could it survive the sheer brutality of the fight with that American wilderness, which is so big, vast, and obdurate! The savage America was conquered and subdued at the expense of the instinctive and intuitive sympathy of the human soul. The fight was too brutal.

By the sympathetic heart, we mean that instinctive belief which lies at the core of the human heart, that people and the universe itself is ultimately kind. This belief is fundamental, and in the old language is embodied in the doctrine: God is good. Now given an opposition too ruthless, a fight too brutal, a betrayal too bitter, this belief breaks in the heart, and is no more. Then you have either despair, bitterness, and cynicism: or you have the much braver reaction which says: God is not good, but the human will is indomitable, it cannot be broken, it will succeed against all odds. It is not God’s business to be good and kind, that is man’s business. God’s business is to be indomitable. And man’s business is essentially the same.

This is, roughly, the American position today, as it was the position of the Red Indian when the white man came, and of the Aztec and of the Peruvian. So far as we can make out, neither Red-skin nor Aztec nor Inca had any conception of a “good” god. They conceived of implacable, indomitable Powers, which is very different. And that seems to me the essential American position to-day. Of course the white American believes that man should behave in a kind and benevolent manner. But this is a social belief and a social gesture, rather than an individual flow. The flow from the heart, the warmth of fellow-feeling which has animated Europe and been the best of her humanity, individual, spontaneous, flowing in thousands of little passionate currents often conflicting, this seems unable to persist on the American soil. Instead you get the social creed of benevolence and uniformity, a mass will, and an inward individual retraction, an isolation, an amorphous separateness like grains of sand, each grain isolated upon its own will, its own indomitableness, its own implacability, its own unyielding, yet heaped together with all the other grains. This makes the American mass the easiest mass in the world to rouse, to move. And probably, under a long stress, it would make it the most difficult mass in the world to hold together.

The deep psychic change which we call the breaking of the heart, the collapse of the flow of spontaneous warmth between a man and his fellows, happens of course now all over the world. It seems to have happened to Russia in one great blow. It brings a people into a much more complete social unison, for good or evil. But it throws them apart in their private individual emotions. Before, they were like cells in a complex tissue, alive and functioning diversely in a vast organism composed of family, clan, village, nation. Now, they are like grains of sand, friable, heaped together in a vast inorganic democracy.

While the old sympathetic glow continues, there are violent hostilities between people, but they are not secretly repugnant to one another. Once the heart is broken, people become repulsive to one another secretly, and they develop social benevolence. They smell in each other’s nostrils. It has been said often enough of more primitive or old-world peoples, who live together in a state of blind mistrust but also of close physical connection with one another, that they have no noses. They are so close, the flow from body to body is so powerful, that they hardly smell one another, and hardly are aware at all of offensive human odours that madden the new civilizations. As it says in this novel: The American senses other people by their sweat and their kitchens. By which he means, their repulsive effiuvia. And this is basically true. Once the blood – sympathy breaks, and only the nerve-sympathy is left, human beings become secretly intensely repulsive to one another, physically, and sympathetic only mentally and spiritually. The secret physical repulsion between people is responsible for the perfection of American “plumbing,” American sanitation, and American kitchens, utterly white-enamelled and antiseptic. It is revealed in the awful advertisements such as those about “halitosis,” or bad breath. It is responsible for the American nausea at coughing, spitting, or any of those things. The American townships don’t mind hideous litter of tin cans and paper and broken rubbish. But they go crazy at the sight of human excrement.

And it is this repulsion from the physical neighbour that is now coming up in the consciousness of the great democracies, in England, America, Germany. The old flow broken, men could enlarge themselves for a while in transcendentalism, Whitmanish “adhesiveness” of the social creature, noble supermen, lifted above the baser functions. For the last hundred years man has been elevating himself the same exclamation: They stink! My God, they stink!

And in this process of recoil and revulsion, the affective consciousness withers with amazing rapidity.

1718. Who cares about economics?

Provocation # 51.

(remember these are called “provocations” because I am trying to be provocative to stimulate debate from which a better understanding can emerge).

Who cares about economics (as distinct from the economy)?

Most obviously, the profession with graduate training and research and faculty on the treadmill to first jobs and then tenure. For these economics is like a jungle gym and the journals and conferences are mostly good for scanning for those slippery hand holds and foot placements to go up.

Could this process turn more positive?

There definitely are economists who care about society and actually thought entering economics would be to gain leverage to make a better society.

Some of these economists are quite vocal -and ignored within the profession. Perhaps even a large percentage of those going with the mainstream would prefer not to go with the mainstream but can’t imagine how to do it and survive.

If graduate students learned what we think would be better economics: more history, humanity, sociology, anthropology – could they get jobs, or is the jungle gym the main source of employment?

The choice of supporting the mainstream or being scientific is painful, and made worse because “being scientific” is often used as the argument to support the abstract quantification (method centric) at the expense of avoiding phenomena, like banking, wealth, class, and the emerging unknowns that effect change in the structure of the economy.

Does current economics interest people outside the jungle gym?

What of bureaucrats with economic portfolios? They also do not read the journals but justify their own positions based on the impression given by the existence of the journals, departments, and conferences that economics is serious and hence seriously informed people are running the economy. Serious people are in charge.

There are signs that the jungle gym is coming apart. You all know of the problem with the Nobel for economics. Mirowski among others had been eloquent showing that the prize is more political than scientific. But the critique is spreading

http://www.theatlantic.com/business/archive/2016/10/nobel-factor-offer-soderberg/503186/

The Political Slant of the Nobel Prize in Economics
Avner Offer, the co-author of a book on the award, explains how it has legitimized free-market thinking over time.

The core problem is that, since the prize is given for orthodoxy, it cannot be given for anything else. That market orthodoxy (that free markets are good and possible is used to justify the monopoly and regulation based market we have) keeps us from thinking.

Larry Summers probably in quest for a Noble and or a good job in the next Clinton administration, is struggling to be relevant (secular stagnation) but is trapped, and trapping us, in orthodoxy. His almost good arguments too quickly carry the baggage of existing assumptions. He published yesterday [my comments in [….]’s

Voters sour on traditional economic policy.

It is hard to escape the conclusion that the world is seeing a renaissance of populist authoritarianism.” [But you will notice that populist anxt is seen asdriven by lack of growth, and no other possibility is to be considered.]

As the world’s finance ministers and central bank governors came together in Washington last week for their annual global financial convocation, the mood was sombre. The spectre of secular stagnation and inadequate economic growth on the one hand and ascendant populism and global disintegration on the other led to widespread apprehension.

[“Secular stagnation” is interesting because it mixes religious associations (secular, not religious, with decay and death – a potent piece of rhetoric. “Secular” means not universal but of an age, hence not transcendent nor religious, and “stagnation” means sitting water with hints of decay, as pond or swamp. The impression given by the phrase, “secular stagnation,”. is we should have something that is neither secular(what is the unspoken alternative) nor stagnation. The implication is that we should return to the natural state of growth ( a natural state which is not secular and not stagnant.)]

Unlike in 2008 when the post-Lehman crisis was a preoccupation or 2011 and 2012 when the possibility of the collapse of the euro system concentrated minds, there was no imminent crisis.

Instead, the pervasive concern was that traditional ideas and leaders were losing their grip and the global economy was entering into unexplored and dangerous territory.

[so far correct. Which continues..] Continue reading