Commentary

/ , / /

The Role Of Uncertainty in Economics

So much of economic theory needs to be replaced. We now realize that. I am especially focused on getting rid of the artificiality of rationality and complete knowledge from our thinking. At best they are crude approximations to real life. At worst they totally undermine our ability to deal with real world economic issues. They obscure reality, which to me is riven through with uncertainty.
Indeed, it seems to me that uncertainty is the central fact motivating all economic activity. Without it we would be living in some kind of nirvana devoid of the problem of scarcity. Uncertainty bedevils all living things. It motivates the invention of problem solving, competition, cooperation, and search. More to the point the process of learning is a response to the constant need to press back against the shadows uncertainty casts. It causes us to create boundaries within which we protect and control resources. It impels us to plan in order to invent viable futures to act out. It forces us to build institutions to stabilize our relationships and thoughts. It encourages us to develop cultures to enable association, network, and interchange. And it requires us to be relentless in our creativity in order to fend off the degradation and consumption of whatever exists today.
Above all else it manifests itself as entropy and the perpetual loss of order in our lives and surroundings. That is the greatest threat of all. One solution we have arrived at in our defense is the construction of economies. For an economy is simply the imposition of a kind of order – a system – within which we can exchange, create, and consume so we can survive despite the prevalence of uncertainty in our environment.
It is because such an order necessarily involves our geographic locale, our institutions, our cultures, our depth of knowledge, our technologies, and the networks we construct with each other, that economics is profoundly heterodox in nature. In other words, that heterodoxy is directly derived from the problem represented by uncertainty that economic systems seek to “solve”.
This is why orthodox economics and its simplistic focus on the mechanism of constrained allocation fails to account for the richness of real world economics systems, and why it is insufficient either as an explanatory or predictive account of real economies. Economic theories must confront uncertainty, else they are not dealing with economics.

Addendum:

This is a re-post from an entry I made on the Real World Economics Review blog.

/ / , , , , /

Unicorns and Free Markets

One of the more depressing features of the discourse on the parlous state of our economy is the constant refrain from some about the need to allow ‘free markets’ to do their magic and fix our ills.

That’s nice.

Or it would be were free markets not like unicorns.

Both are beautiful and captivating. Their features send us into paroxysms of joy and wonder. Their exploits and virtues are the stuff of great poetry or writing. They beguile us with the extent of their magical powers. They haunt us with endless dreams of what might have been.

Were they real.

Which neither are.

It is one thing for poets to wax lyrical about imaginary animals like unicorns in order to inflame our minds at the mythical. It is another for supposedly hard headed analysts to invoke free markets as an elixir of endless youth and vigor for our economy. Free markets are artifacts of our imaginations. They were invented in order that we could study the many differences between their imagined perfection and the grubby mess that is the real world. They allow us to identify all sorts of anomalies and quirks that clutter up real life and prevent it from ever being as pristine as the dream like wonderland we call a free market.

But there never has been, nor will there ever be, a truly free market. Like the unicorn they cannot nor do they exist. They remain a vivid and unfortunate reminder that human imagination and human reality inhabit two very different spheres. Call it a Platonic curse. I cannot abide Plato and his authoritarian views, nor can I stomach his obsession with the unreal. The notion that ‘pure’ forms exist, and that we are fatally compromised and thus shall never experience such purity is utter nonsense. It never existed in the first place, so it is hardly a failure not to experience such nirvana. Nonetheless Plato and his errors have infected our lives for more than two thousand years. Most notably in Christianity which is almost exactly built upon his faulty foundation – not that most Christians seem to notice or care. This is not an idle comparison: the exertions urged upon sinners bear a remarkable likeness to the exertions urged upon the unemployed. Both are deemed failures who should repent and improve themselves in order to be saved. Both are urged to hew more closely to a dogma remote from the front lines of modern living. No wonder Weber got lost in the Puritan work ethic.

And free markets?

They are a version of a Platonic ideal. They are unrealizable in the world of humanity. They turn to vapor and vanish the moment any contact with temporal considerations are introduced. They are a mist that distorts our dialog.

The reason is, of course, that markets in our real world and compromised daily by all sorts of stuff the free market dreamers call flaws. But they are not flaws at all: they are essential constructs and components of non-mythical markets.

The dream like free market is something that is suspended in mid air. It has no contact with geography, with man made institutions, nor with our incomplete cognitive ability – neither our instrumental nor our cognitive constraints limit its computational powers – and its denizens are unrecognizable as human. They are what Miroswski calls cyborgs in his book “Machine Dreams”. Only when real people and all their many imperfections are totally expunged from a free market can it become free. Only when it is released from the constraints of the law, custom, culture, religion, class, gender, and family can it rise above the mess of humanity and become free. And only when it is universal and not locked into a specific earthly location can it be free.

In other words it cannot be.

The analytical mythology that is the free market came into being because economists wanted to set up a laboratory model against which to compare the real world. I am being generous here. In my more cynical moments I would argue that they wanted to justify a certain way of life – they wanted to ‘prove’ that the interference of government was deleterious to the creation of wealth. So the cynic within me would say that the entire edifice of classical economics has been an effort to prove the superiority of decentralized markets over centralized or planned economies. This is not science it is politics. And the upshot has been the creation of an artifact we know as the free market, which, when stripped of all humanity, is indisputably superior in exactly the long sought for manner.

That economists still advocate this artifact as an exemplar of reality is shameful. They know full well that it is an imagined object.

Having opened Pandora’s box they have armed an ideologically motivated group to march off with the concept and impose, or try to impose it, on society. These ideological storm troopers engage in all sorts of social engineering in order to force reality more closely to align itself with the dreamscape. And by so doing they both undermine humanity and they introduce conflicts and distortions into the everyday workings of a real economy.

One outcome of this social engineering is the enormous change in the distribution of wealth we see today. As long as we acknowledge the conflict between democracy, which is a device for ensuring a more equable distribution of power and wealth, and capitalism, which necessarily results in exploitation and concentrations of power and wealth, we can maintain a balance. The conflict between the two enforces compromise. And all compromise leaves purists dissatisfied. The great era of the US economy – the 1950’s and 1960’s – was built upon this messy compromise. Once we allowed ourselves to be beguiled by the free market myth we sacrificed that balance. We unwittingly undermined democracy and favored capitalism.

We started to believe that unicorns were real.

And so, having arrived at the nearest we can to executing the dream here in the real world, after having deregulated and tossed aside as much constraint as we can, we are faced with the ugly moment of truth. Our pursuit of unicorns has been in vain. We are awake from the delusion. Reality requires limits to the market. Because only within limits do real markets exist.

That is the great lesson to be learned from the decades of Reagan illusion: once we strip away humanity in order to explore the magic of the free market, we should not then fall into the trap of thinking we are looking at something real. A market without the trappings of humanity is not a market. It is a unicorn like myth. It simply cannot be. However beautiful. However mysterious. However perfect.

So it saddens me to hear advocates of free markets get any air time in our current discourse on the economy. They are selling ideology not economic advice.

Snake oil has no place in our debate when the livelihoods of over nine million of our fellow citizens are at risk.

The unemployed deserve more than stories about unicorns. They deserve policies to restore growth. Policies based upon real world economics.

/ , / , , , /

Poor Old Krugman

He’s getting glummer by the minute.

I can see why.

All the evidence piling up suggests that the best part of this recovery is now over, and that we are now entering a long, hard, and risk filled period of poor economic gains.

Not only this, but our policy options are in tatters. The sensible, text book approach is more stimulus. Then again the sensible, text book approach was massive stimulus back when it could stave off this malaise.

Oh well.

Moreover, the sensible approach to the banking crisis was the state takeover and cleaning up of the failed banks – Citibank I am looking at you – instead of this long drawn our and endless subsidization through the back door. It would have been painful and politically fraught. But we would have a healthy flow of credit right now instead of the dribs and drabs we now are faced with.

But since ‘nationalization’ is a nasty word, and since we lack the spine to deal with problems in a simple forthright way, we have condemned ourselves to years of weak and fraught activity.

Those among us who cry out that politics prevented strong action – the GOP seems hell bent on sinking the economy for their own electoral gain – should be quiet. We needed leadership. And got trimming. There is no excuse. As someone once said, countries get the leadership they deserve. We deserve mediocrity because we have drunk deeply the false truths at the free market well. We are collectively doomed to endure rather than prosper because we refuse to be strong together. We would prefer to fail apart.

The inadequacy of the economic policy team Obama relies upon has now been revealed by events. They tried to ‘get by’, and led us into the muck instead. We are given bureaucracy and paper clips, when we need declarative words and sharp knives.

The pile of debt we will accumulate in order to break the back of this crisis is huge. It could have been less had we acted decisively. The indenture we are handing forward is a token of our failure. The indebtedness a sign of our collective ineptitude and meager store of moral courage.

Throughout it all poor old Krugman has tried to point out the errors. He has been proven correct. But he has been far too nice. And now he’s glum about the future. Not because there are no solutions, but because he cannot see us deploying those solutions.

We are too weak.

So, please, no comments about ‘decline’ or anger about ‘Chinese competition’. No more wailing about the loss of manufacturing jobs. No more commentary on the diminished middle class.

The American economy is the world’s largest, most dynamic, and urgent. That we cannot muster the courage to use those qualities to restore ourselves to health is not due to the lack of anything other than spine.

So where is it?

Addendum:

Naturally Krugman is not alone. He is simply the most prominent. Other voices of economic sanity include Brad DeLong and Mark Thoma two of Krugman’s fellow travelers. Indeed the list of people complaining about the totally ineffectual nature of our nation’s leadership – in politics and in business – is very long.

The pity is that we are beset by a disease: bureaucracy has robbed us of an ability to be bold. Everything has to be ‘run by legal’. Everything has to be done by the book. Everything is reduced to jargon infested gobbledygook. Responsibility is diffused into ‘team’ rather than focused on individuals. We are a nation of face lifts, boob jobs, veneers of all kinds, fear, psychiatry, and denial. We are the age of analysis, when we need to be that age of ideas and action.

No wonder Krugman is so glum.

/ / , , , /

BP, Calamity, and Hypocrisy

The ongoing saga of the BP oil spill has generated an enormous amount of nonsense at practically every level. The media has made the story its central news item for weeks, and now the White House is piling on. None of the spewing forth helps at all. Most of it simply highlights our astonishing ability to ignore simple truths.

That BP was drilling in the deep open ocean should be a wake up call for all those who are in oil dependence denial. Our insatiable desire to consume every last drop of the planet’s oil reserves has driven the big oil companies into ever more risky corners of the earth in order to meet that demand. It should come as no surprise therefore when things go wrong. As we search further into the deep the more likely something will go wrong. Worse, in those parts of the world, when something goes wrong, it is likely to go seriously wrong. Fixing an oil leak 5,000 feet down is a horrendously difficult challenge to engineering. That it takes weeks, or even months, instead of hours can be no surprise to any but the most ignorant of us.

My bet would be that these kind of accidents will become more frequent. That is until we ease off our addiction to oil.

The extraordinary and vindictive name calling now being showered down onto BP is also reflective of our supposed environmental sensitivity. We are being overwhelmed with horrible photos of dying sea birds and stories of destroyed fishing locations. Neither of these are new phenomena. The disaster that is the Nigerian oil field is testimony to the awful consequences that our pursuit of oil has on a routine basis. That none of us care too much about that environmental catastrophe is a massive indictment of our parochialism and our weak attachment to global environmental stewardship. We, in the US, only care about our own shores. We care not one wit about the people of Nigeria who have been suffering for decades as we suck our precious oil from their homeland. Apparently destroying the African environment isn’t something that our heroic Congress needs to get worked up over.

Further, the indignant calls for retribution against BP are simply a way of avoiding the more hurtful fact that lax oversight is as much to blame as lax corporate governance. How many more examples of weakened government regulation does the American public need before it overthrows the Reaganite call for the elimination of government regulation? We cannot blame BP for playing within the extraordinarily loose rules. We made those rules. We did. We the people. We have resolutely and repeatedly elected governments whose mantra has been to strip government of its ability to create and enforce exactly the sort of rules that might – only might – have helped avoid this disaster. So we trash government and then throw a hissy fit when our government strains, and fails, to react to a crisis.

Spoiled children are more sober than the American voting public is when it comes to the hypocrisy inherent within the Reaganite project.

There are just so many ways to spell out self-indulgence. When you add in a goodly dose of outright ignorance the brew is both toxic and counter productive.

I abhor the mess that is now the Gulf coastline. But I also abhor the voting history of the states whose shores are now spoiled. They have provided much of the anti-government energy. They have yet again reaped the whirlwind they have sewn.

If a plank of the right wing in politics is responsibility, as it appears to be worldwide, then it should live by that code. The southern states whose shores are now tarred should look inwardly: the examples of Katrina and now this BP oil spill should surely force a reconsideration of the anti-government mantra so necessary to get elected down there.

I do not hold my breath on that one.

Nor do I hold out hope that the left wing ‘big business bashers’ will connect the dots and support proper corporate governance reform. It is one thing to bash all things big business, it is another to channel that energy into constructive dialog with business. I find it depressing that some people have accused BP of lagging in its reaction as if that lagging was deliberate. It simply cannot be. The enormous financial damage this spill is doing to BP is sufficient motivation for BP to work tirelessly to find a solution. It is absurd to think otherwise. You have to suspend all theories of human logic to arrive at a suitable place in which BP is embroiled in conspiracy and deliberate foot dragging.

Nonetheless we read that rubbish in the blogosphere. No wonder that the public is confused.

As for my fellow Britons who are currently wrapping themselves in American style nationalistic fervor as they rush to defend ‘poor old BP’: yes I understand that BP represents a huge part of the pension fund assets of a large number of British retirees. Those pension funds are sucking wind currently. But so what? Just because the assets are owned by retired folks does not absolve them of the fiduciary responsibility to exert oversight of the companies whose stock they own. We cannot have one form of capitalism for young folks and another for the retirees. If your retirement is dependent upon cash flowing from a big corporation like BP you had better make sure it is managed and run properly. Such is private enterprise. Get used to it. It is absurd for British politicians to get into a lather over American hysterics just because the collapse in BP’s stock price may hurt some British retirees. If Exxon had dumped a ton of oil on Brighton beach I suspect that even the most committed pro-busines Tory would be calling for suitable retribution. Hypocrisy is not a uniquely American quality.

The fact of the matter is that most, if not all, our largest corporations are massive bureaucracies whose senior most managers have little day to day knowledge of what goes on. The BP fudging and evasion of public transparency is endemic throughout all our big businesses. The efforts of the big banks to deny their collapse two years ago is emblematic of the same disease. Bureaucracy is bureaucracy whether it privately or publicly owned. Both are notoriously slow to react to crises. Both evade. Both avoid responsibility for their actions. Both dissemble. Both hide behind legalese and fiscal trickery. Both are iniquitous to democracy. Yet we need them both. We live in a technologically complex world that needs minute and intensely specific rules based management. That calls for specialists and bureaucrats. Deep sea oil drilling is just such a technology.

That these bureaucracies function beyond our direct control and appear to dither whenever a crisis erupts is simply a fact of current bureaucratic society. While we may yearn for the simpler days, but that simplicity has long been banished by the enormous complication of modern living.

Within that complexity stuff happens. Not all of it good.

Meanwhile a calamity has happened and we are appalled at the very visible consequences. Hopefully the other oil companies are paying close attention and preparing for the day when they face the same kind of accident. Hopefully our pension fund managers are getting ready to invade corporate board rooms and take responsibility for the governance of those retiree assets. Hopefully our governments are writing new and stringent rules to reduce the risk of future catastrophes. Hopefully they are ramping up their hiring of suitably trained government inspectors to visit those deep sea rigs. And hopefully we all are trying to use less oil so we don’t have to invade every inch of natural wilderness to keep that motor running.

Oh well.

I can hope. But I won’t hold my breath. It’s much easier just to sue someone and collect a gratuitous lump sum than it is to take responsibility for one’s actions.

Expect more spills.

/ / /

A Pat On The Back

The New York Times offers us a good editorial this morning about the fuss being made over the potential loss of health care coverage for retirees now that the new reform law eliminates a subsidy that used to given to business.

It is a non-issue.

The subsidy being eliminated is one where companies were allowed to deduct, for tax purposes, an expense that they did not actually incur out of pocket. Instead the deduction was for payments by the government that were funneled through the businesses. It was government cash paying for the service, but because it passed through company hands it became tax deductible for the company in question.

In other words it was a rip-off of the taxpayer.

Guess when it was passed into law? That’s right during the Bush era. At the same time he was preventing Medicare from using its bargaining power to get us all lower drug prices.

The rip off should never have been on the books in the first place.

The pat on the back?

That’s for me.

I told you about this last Wednesday. The NYT: all the old news fit to print.

«< 52 53 54 55 56 >»