Good arti­cle by Ross Git­tins on Eco­nom­ics and Equi­lib­rium

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Ross Git­tins has writ­ten a very good overview of the fail­ings of neo­clas­si­cal eco­nom­ics in today’s Syd­ney Morn­ing Her­ald:

Self-right­ing mar­kets and other shib­bo­leths

The arti­cle men­tions the Dahlem Report, but doesn’t pro­vide a link to it. For those who would like to read it, here it is.

I also wrote a post on the Dahlem Report shortly after it was writ­ten, and helped pub­li­cise it by plac­ing it on my blog. Given that its tone was in some ways even more dis­mis­sive of con­ven­tional eco­nom­ics than I am, the title for this post was obvi­ous:

And you think I’m ornery? The Dahlem Report

There are, as Ross implies,  many dis­si­dent groups within eco­nom­ics, but these are nor­mally overshadowed–and crowded out of pub­lic commentary–by the dom­i­nant “neo­clas­si­cal” school. As a result, most of the pub­lic takes what this school says to be all there is to “eco­nom­ics”.

Crit­ics like Paul Ormerod, me, and many oth­ers have railed against this over the years–in pub­lic talks, in lec­tures to stu­dents in any sub­jects where we have some con­trol over con­tent, in books like my Debunk­ing Eco­nom­ics or Paul’s But­ter­fly Eco­nom­ics–but we’ve largely been ignored by the pub­lic, since the econ­omy seemed to be work­ing just fine. Just as neo­clas­si­cal eco­nom­ics said it always would.

And then along came the Global Finan­cial Cri­sis.

A lot of the prob­lems in neo­clas­si­cal eco­nom­ics emanate from its methodology–the phi­los­o­phy under­pin­ning how neo­clas­si­cal econ­o­mists build mod­els of the economy–and I cover this in a sam­ple chap­ter from my Debunk­ing Eco­nom­ics which is avail­able online:

There is mad­ness in their method

The key point that Git­tins focuses upon is the obses­sion with equi­lib­rium. To aca­d­e­mics from other dis­ci­plines, this obses­sion appears quaint. Most sci­ences have con­cepts too, but they don’t attempt to model the sys­tems at the heart of their dis­ci­pline as if they are always in equi­lib­rium. They have instead devel­oped meth­ods to analyse the behav­iour of these sys­tems when they are not in equilibrium–which is almost all the time (and when they do model equi­l­brium, their con­cepts of equi­lib­rium are much broader than that which applies in neo­clas­si­cal eco­nom­ics, which implies that all agents in the sys­tem are in a state of rest).

Instead, neo­clas­si­cal econ­o­mists reflect their iso­la­tion from the broad sweep of intel­lec­tual his­tory by being igno­rant of these very meth­ods. I find this stunning–because the most basic such method is part of the edu­ca­tion of any engi­neer, physi­cist, or math­e­mati­cian, even if they only do an under­grad­u­ate degree in their sub­ject and never become aca­d­e­mics. This method is “Dif­fer­en­tial Equa­tions”, and any engi­neer, physi­cist, or math­e­mati­cian has to do at least an intro­duc­tory course in these in order to get a Bach­e­lors Degree.

Yet econ­o­mists can grad­u­ate with PhDs with­out ever com­ing across them.

Many neo­clas­si­cal econ­o­mists think they know about these–after all, the core con­cepts in neo­clas­si­cal eco­nom­ics con­cern things like “Mar­ginal Cost” and “Mar­ginal Rev­enue”, which are the dif­fer­en­tials of “Total Cost” and “Total Rev­enue” with respect to out­put: “We don’t know about dif­fer­en­tial equa­tions? Bah, what non­sense!”

In fact, dif­fer­en­tial equa­tions are very dif­fer­ent beasts from sim­ple dif­fer­en­ti­a­tion, since they con­sider the rate of change of vari­ables not with respect to each other, but with respect to time (I’m tempted to pro­vide a Wikipedia link to the con­cept of “time” for the ben­e­fit of any neo­clas­si­cal read­ers who don’t know what it is… but I’ll restrain myself). They make it pos­si­ble to model how the economy–or any other system–will behave when its not in equi­lib­rium.

Instead, even Nobel Prize win­ners seem to believe that if they aban­don the fan­tasy that the econ­omy is in equi­lib­rium, they will be unable to model its behav­iour. Wit­ness this state­ment from Paul Krug­man on his blog when he gave some back­ground to his recent crit­i­cal essay on eco­nom­ics:

Actu­ally, let me put it this way: the econ­omy is a com­plex sys­tem of inter­act­ing indi­vid­u­als — and these indi­vid­u­als them­selves are com­plex sys­tems. Neo­clas­si­cal eco­nom­ics rad­i­cally over­sim­pli­fies both the indi­vid­u­als and the sys­tem — and gets a lot of mileage by doing that; I, for one, am not going to ban­ish max­i­miza­tion-and-equi­lib­rium from my tool­box [my empha­sis]. But the temp­ta­tion is always to keep on apply­ing these extreme sim­pli­fi­ca­tions, even where the evi­dence clearly shows that they’re wrong. What econ­o­mists have to do is learn to resist that temp­ta­tion. But doing so will, inevitably, lead to a much messier, less pretty view.

Then this guar­an­tees you’re never going to under­stand com­plex sys­tems Paul: the very start­ing point of com­plex sys­tems analy­sis is the mod­el­ling of systems–such as the Lorenz Attrac­tor that is the basis of mete­o­rol­ogy–which are never in equi­lib­rium.

Iron­i­cally, in that same essay Krug­man notes that mete­o­rol­ogy might be a valid model for eco­nom­ics to fol­low:

Third, on an inter­est­ing point raised by Dis­cover (via Mark Thoma): won’t we even­tu­ally have a true the­ory that’s as beau­ti­ful as the full neo­clas­si­cal ver­sion? Well, one thing’s for sure: we don’t have that beau­ti­ful final the­ory now, so the cur­rent choice is between ideas that are beau­ti­ful but wrong and a much messier hodge­podge. But my guess is that even in the long run it won’t be all that neat. Dis­cover sug­gests gen­eral rel­a­tiv­ity ver­sus New­ton­ian physics; but a bet­ter model may be mete­o­rol­ogy, which as I under­stand it starts from some sim­ple basic prin­ci­ples but is fiendishly com­plex in prac­tice [my empha­sis].

Well Paul, to under­stand mete­o­rol­ogy, you’re going to have to give up on equilibrium–or rather on the fan­tasy that a com­plex sys­tem can be mod­elled as if it is in equi­lib­rium. There are, for exam­ple, 3 equi­lib­ria in the Lorenz Attractor–all three of which are unsta­ble. Equi­lib­rium is a state in which the Attrac­tor will never be.

I also find it remark­able that intel­li­gent peo­ple like Krug­man can be so igno­rant of devel­op­ments out­side their own field of endeav­our. Notice the com­ment he made that not apply­ing the stan­dard neo­clas­si­cal eco­nom­ics sim­pli­fi­ca­tions like equi­lib­rium “will, inevitably, lead to a much messier, less pretty view”.

Pret­ti­ness itself should not be an objec­tive of sci­ence. But nonethe­less, some of the pret­ti­est objects in sci­ence are the result of non-equi­lib­rium dynam­ics. The Lorenz Attrac­tor is clearly one–take a look at it and you’ll see why peo­ple often talk of “the But­ter­fly Effect” when describ­ing the insta­bil­ity of the weather. But there are many oth­ers.

I think my own non-equi­lib­rium mod­els of the econ­omy have a sim­i­lar beauty–here for exam­ple are two from my model of Minsky’s Finan­cial Insta­bil­ity Hypoth­e­sis. The first is of an econ­omy with­out a gov­ern­ment sec­tor which under­goes a debt-dri­ven Depres­sion:

The fate is not pretty–the econ­omy col­lapses as debt rises–but the image is “pretty”.

Both the image and the fate of the next model are pretty–this is an econ­omy start­ing from the same ini­tial con­di­tions, but which has a gov­ern­ment sec­tor that prac­tices counter-cycli­cal fis­cal pol­icy and there­fore pre­vents a debt-induced cri­sis:

The above is the time path of employ­ment and wages in this model, which is actu­ally a 2D slice through the 4-dimen­sions of the model: (1) the wages share of out­put; (2) the employ­ment rate; (3) the debt to out­put ratio; and (4) gov­ern­ment spend­ing as a per­cent­age of out­put). This next view shows 3 of those dimen­sions (exclud­ing gov­ern­ment spend­ing), and the 2 dimen­sional view of the pre­vi­ous sim­u­la­tion is shown as a shadow below the 3D shape):

So the out­put of non-equi­lib­rium mod­els can be “pretty”–it’s just the pic­ture they craft of cap­i­tal­ism that isn’t pretty. It isn’t a sys­tem that auto­mat­i­cally reaches equi­lib­rium and ensures the best out­come for the largest num­ber of peo­ple. It may not be “pretty” in that way, but it is the world in which we live.

As Git­tins argues in his piece, we have no choice but to under­stand that sys­tem, and the neo­clas­si­cal obses­sion with equi­lib­rium is pos­si­bly the major rea­son why we have not under­stood it to date.

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  • Hi Steve, I’m amused at how sim­i­lar the 3D ren­der­ing of the first of your two non-equi­lib­rium mod­els looks like water going down the drain or a tor­nado rip­ping up the Amer­i­can Mid-West. 

    Either anal­ogy seems apt 🙂

  • It’s a tor­nado as drawn Bruce–the direc­tion of move­ment is upwards as the debt to GDP ratio rises–but a bet­ter con­cept is the going down the drain since debt is effec­tively a neg­a­tive rather than a pos­i­tive.

  • Cin­quero

    Actu­ally, you may not need more com­plex the­o­ries as a pol­icy maker: just make sure that an equi­lib­rium exists! For debt, the equi­lib­rium may be roduced by rather high inter­est rates and, maybe, bet­ter reg­u­la­tion. Look at Brazil. As an econ­o­mist, it may be quite nice to play around with the­o­ries. As a prac­ti­cian, one should pre­fer not play­ing, but to make sure things work out the way we like them to be.

    I’m a fol­lower of socio­nom­ics. The Dahlem Reports indi­cates that the highly intel­li­gent econ­o­mists did not feel respon­si­ble to issue warn­ings. Indeed, if you fol­low those who warned for years before the cri­sis, it was not a nice time for them. And if you don’t have a good posi­tion as you have, Steve, most prob­a­bly won’t even dare to try issu­ing such soli­tary state­ments. The point is in my opin­ion: every­one could have known, but no one cared. It was a good time as long as it lasted. And you never crit­i­cize those who feed you well.

  • Cin­quero

    To be hon­est, I believe that when pol­icy mak­ers refer to eco­nomic the­o­ries, they have long run out of com­monly under­stand­able argu­ments. They all *wanted* to believe in the the­ory. The the­ory itself did not mat­ter at all. It was a sig­na­ture of the neoliberlism dis­trib­uted through­out the world by the IMF, the World­bank etc.

    There cen­tral insti­tu­tions pose a sys­temic risk to the global social wel­fare. As Gal­braith pointed out: the most severe crises have been trigged by offi­cials and politi­cians absolv­ing the whole B.S.

    We need to get back to the state of mind where we care again for what hap­pens around us. And it is already start­ing. The press is more and more stuffed by the “car­ing type” of stuff (pros­e­cu­tions, forc­ing of the SEC against BofA trial, IRS enforce­ment etc. etc. etc.). Pro­tec­tion­ism will rise because it is a sane thing to do (if you do not exag­ger­ate) in order to curb out­sourc­ing (hell, China out­sourc­ing sec­tor increased 32,5% in the first half — the cri­sis accel­er­ates the struc­tural prob­lems even more because US com­pa­nies have to reduce costs even more!!!) and bring back jobs to the US — which will of course take down the econ­omy tem­porar­ily even more due to (nec­es­sary!) restruc­tur­ing costs.

  • Pingback: Math World | Good article by Ross Gittins on Economics and Equilibrium | Steve …()

  • Actu­ally, there were many non-ortho­dox econ­o­mists issu­ing warn­ings long before the Dahlem Report came out. I was one of them–from as long ago as 1995–but Min­sky clearly pre­ceded me, and many econ­o­mists who were influ­enced by Min­sky made reg­u­lar warn­ings about the inevitabil­ity of a cri­sis should the cur­rent debt-dri­ven process con­tinue.

    Some of the rel­e­vant names include Wynne God­ley, Jan Kregel, Randy Wray, Marc Lavoie, the Levy Insti­tute in upstate New York which has kept Minsky’s analy­sis alive, and which will host a sum­mer school and con­fer­ence on Min­sky next year.

    One of the sig­na­to­ries to the Dahlem Report, Thomas Lux, is a friend of mine, and he’s done his bit to point out the flaws in con­ven­tional eco­nom­ics over the years–as well as develop some very advanced new ways of mod­el­ling eco­nomic and finan­cial processes. Another sig­na­tory, Alan Kir­man, is a very respected econ­o­mist in gen­eral, with pub­li­ca­tions in main­stream jour­nals includ­ing a very impor­tant reac­tion to cri­tiques of neo­clas­si­cal eco­nom­ics enti­tled “The Intrin­sic Lim­its Of Mod­ern Eco­nomic The­ory: The Emperor Has No Clothes” (The Eco­nomic Jour­nal, 99 [Con­fer­ence 1989], 126—139). David Colan­der, the lead sig­na­tory, writes a best sell­ing text­book but unlike most text­book authors, is aware of the flaws in neo­clas­si­cal eco­nom­ics.

    But none of these were promi­nent in warn­ing about the cri­sis. It’s just one of the idio­syn­cra­cies of life that their cri­tique of eco­nom­ics has received the promi­nence it has, while the much more spe­cific cri­tiques of Wynne God­ley et al haven’t seen the light of day today.

    We’re also lucky that eco­nom­ics, and acad­e­mia, are not homo­ge­neous fields. Gen­er­ally life is pretty tough for a non-ortho­dox econ­o­mist, but there are some uni­ver­si­ties around the world where they are dom­i­nant or at least main­tain a bal­ance of power. I’m lucky to work at one of those (UWS), Randy Wray works at the Uni­ver­sity of Mis­souri Kansas City, which is another, and so on.

  • Tel

    If you gave gov­ern­ment a Lorenz attrac­tor and asked them to sta­bilise it, not only would they fail com­pletely but the result would be a big­ger mess than it started out.

    Ross Git­tins presents igno­rance bor­der­ing on dis­hon­esty:

    But the belief in self-right­ing mar­kets also fits nicely with the polit­i­cal phi­los­o­phy of lib­er­tar­i­an­ism — the supremacy of free­dom of the indi­vid­ual, the min­i­mal need for gov­ern­ments and taxes.

    And it suits busi­ness inter­ests, who want max­i­mum free­dom to make a buck in any way they see fit. 

    When was the last Lib­er­tar­ian gov­ern­ment we had in Aus­tralia? Howard? Was John Howard a Lib­er­tar­ian? Howard who intro­duced anti-ter­ror­ist laws allow­ing any­one to be locked away for weeks with­out even one phonecall. Howard who cracked down on rights of assem­bly and free speech. Howard who got involved in gov­ern­ment war mon­ger­ing despite no Demo­c­ra­tic man­date, and an admis­sion that he knew the peo­ple of Aus­tralia were not inter­ested.

    That was sup­pos­edly lib­erty?

    Per­haps Hawke and Keat­ing were Lib­er­tar­i­ans? Those with the famous “Accord” reg­u­lat­ing wages and cre­at­ing a deal between big gov­ern­ment and big unions. Keat­ing who cre­ated a cen­tralised sys­tem for set­tling indus­trial dis­putes, made it ille­gal for employ­ees to nego­ti­ate terms.

    Some­how these straw-man Lib­er­tar­i­ans get the blame for the Global Finan­cial Cri­sis… where were these guys?

    But surely, you may object, the whole dis­ci­pline of macro­eco­nom­ics is the study of how to sta­bilise the econ­omy as it moves through the busi­ness cycle. Well, it used to be. Increas­ingly, how­ever, it’s been about try­ing to prove that gov­ern­ments are inca­pable of influ­enc­ing the course of the macro econ­omy and that what seems to be a cycle of defi­cient or exces­sive demand isn’t really. 

    Oh please. Key­ne­sian mon­e­tary pol­icy has been stan­dard fare in the US and the UK and Aus­tralia for decades. Right up to and includ­ing the GFC, right to the present day. If the Key­ne­sians slipped up and failed with their sta­bil­i­sa­tion efforts then they can have the hon­esty to sit and blame them­selves for doing it wrong.

    What would you call Obama’s mas­sive TARP and stim­u­lus pack­age? Is that Lib­er­tar­i­an­ism? Sounds more like Key­ne­sian on steroids, and employ­ment in the USA con­tin­ues to con­tract.

    Scape­goat­ing the Lib­er­tar­i­ans… good arti­cle my foot.

    This bub­ble was pumped and blown by gov­ern­ment inter­ven­tion, pri­mar­ily arti­fi­cially low inter­est rates com­ing out of the USA, and loose mon­e­tary pol­icy from the Fed, and delib­er­ately push­ing banks to lend money to high-risk poor home own­ers (encour­ag­ing them to buy a far more expen­sive house than they needed) in order to achieve polit­i­cal objec­tives.

    May Fair­fax con­tinue on their fine road to bank­ruptcy for ped­alling trash.

  • You have failed to dis­tin­guish between the eco­nomic the­ory that Git­tins was talk­ing about and eco­nomic pol­icy Tel.

    Of course there were mas­sive inter­ven­tions in the actual econ­omy, and you could type­cast them as Key­ne­sian quite eas­ily (so long as you used a text­book def­i­n­i­tion of Keynes). But eco­nomic the­ory argued that the best of all pos­si­ble out­comes would result from zero gov­ern­ment inter­fer­ence in the mar­ket. This is the per­spec­tive that Git­tins was com­ment­ing on.

  • Tel

    It’s an arti­cle dis­cussing the GFC so it only makes sense to con­sider such a thing in the light of the poli­cies and his­toric events that were part of the larger chain of cause and effect. It would be naive to expect any reader to inter­pret this as a dry dis­cus­sion of the­ory with a dose of blame-point­ing regard­ing pol­icy.

    To con­ve­niently ignore the mas­sive inter­ven­tions and gov­ern­ment spon­sored debt expan­sion, only to attempt to lump the blame on peo­ple seek­ing indi­vid­ual lib­erty is down­right dis­hon­est.

    Git­tens actu­ally gives the impres­sion that the whole GFC just hap­pened, all by itself, as one of those things that proves free mar­kets can’t be trusted. Yes mar­ket bub­bles are a mat­ter of his­toric record, yes they do hap­pen, but the scale of the cur­rent cri­sis is some­thing again. The only expla­na­tion is that assets were pumped by pol­icy.

    Paul Keat­ing was already talk­ing about the hid­den infla­tion in Aus­tralia back in 2007, here’s the link:

    http://www.abc.net.au/lateline/content/2007/s1945485.htm

    Now the higher wages which are in the inef­fi­cient sec­tor of Aus­tralia like infra­struc­ture, trans­port et cetera, these are being sub­sidised. That infla­tion rate which is run­ning at about 4 per cent is being sub­sidised by zero per cent com­ing across the wards. If you’ve got half the econ­omy doing four and half doing zero, the infla­tion rate is two. That’s where Mr Costello gets his 2 per cent from, noth­ing clever from him. 

    Keat­ing was only talk­ing about Aus­tralia, and if it had just been a mat­ter of Aus­tralian gov­ern­ment pol­icy, we wouldn’t have come down nearly so hard. Mostly we have been dragged down by the USA, who had a delib­er­ate pol­icy of con­tin­u­ous debt expan­sion.

  • MichaelM

    Nice to see Ross Git­tins acknowl­edg­ing weak­ness in eco­nomic ortho­doxy. How­ever, I used to read his columns only a few years ago and despair at their blink­ered ortho­doxy. I sup­pose its a good thing if he broad­ens his view, how­ever belat­edly.

  • As long an Uni­ver­si­ties con­tinue to teach one school of Eco­nom­ics all Econ­o­mists will be painted with the same brush.

    While I appre­ci­ated that there were dif­fer­ent schools of eco­nom­ics I had decided in my head that they were either dis-proven or unproven.
    It never occurred to me that the alter­na­tive might actu­ally be more cor­rect!

  • Anar­cho

    Good arti­cle, although it looses points for this:

    the polit­i­cal phi­los­o­phy of lib­er­tar­i­an­ism — the supremacy of free­dom of the indi­vid­ual, the min­i­mal need for gov­ern­ments and taxes.”

    The term lib­er­tar­ian was first coined in 1858 by an anar­chist as an alter­na­tive for his anti-state social­ism:

    http://anarchism.pageabode.com/afaq/150-years-of-libertarian

    Gen­uine lib­er­tar­i­ans argue that indi­vid­ual free­dom does not stop at the bound­aries of pri­vate prop­erty and that wage-labour and land­lordism are just as oppres­sive as states (which exist, of course, to defend pri­vate prop­erty and the power of its own­ers).

    Since the 1970s, the free-mar­ket right have tried to steal the term “lib­er­tar­ian” to describe their vision of pri­vate serf­dom, but there are still anar­chists around to protest this mis-appro­pri­a­tion by the right of a great label of the left!

  • Philip

    Yes, I have found the use of the word lib­er­tar­ian to refer to the defense of pri­vate prop­erty to be strange con­sid­er­ing that the social rela­tion­ships that flow from the insti­tu­tion of pri­vate prop­erty is that of dom­i­na­tor hier­ar­chy.

    It is obvi­ous when exam­in­ing a typ­i­cal insti­tu­tion of pri­vate prop­erty: the cap­i­tal­ist firm. I don’t think humans have cre­ated a more psy­cho­pathic and orga­ni­za­tion­ally total­i­tar­ian insti­tu­tion than this one, along with the fas­cist and Bol­she­vist state sys­tems.

    Aus­tri­ans and Marx­ists have got one half of the equa­tion right, but nei­ther are con­sis­tent with the orig­i­nal mean­ing of the word lib­er­tar­ian (that is, both the state and pri­vate prop­erty are author­i­tar­ian insti­tu­tions).

    Hayek wrote the book The Road to Serf­dom, but what he favored and advo­cated was the road to pri­vate serf­dom.

  • The graphs are “beau­ti­ful” but there is a sim­pler model of eco­nomic sys­tems which is illus­trated with the expla­na­tion of behav­iour of social insects like bees and ants. 

    We can describe the eco­nomic activ­ity in col­lect­ing food of an ant colony with a descrip­tion of the “rules of behav­iour” of an ant.

    If I find food then col­lect it and start to move in the gen­eral direc­tion of the nest and leave a trail.

    If I hit a trail then fol­low the trail.

    If I meet an ant see if it is car­ry­ing food. If no food with the other ant con­tinue down the path. If food wait for an ant that has no food.

    If I have no food then fol­low a trail. If I find a trail junc­tion then fol­low the strongest trail.

    If I have no food and am not on a trail then wan­der around at ran­dom look­ing for food.

    The scent I drop fades over time.

    These sim­ply rules results in com­plex pat­terns of behav­iour that can be eas­ily mod­elled using com­pu­ta­tional meth­ods based on “ant agents”. The mod­els we con­struct by build­ing a sys­tem looks like the behav­iour of an ant colony par­tic­u­larly when we intro­duce exter­nal events such as the break­ing of trails and see what hap­pens.

    We can change the “rules” and we can see what hap­pens. For exam­ple, what hap­pens if we change the rules asso­ci­ated with meet­ing another ant on a trail?

    We can describe “mar­kets” in the same way and we can model them by hav­ing agents “inter­act­ing” and observe what hap­pens to the mod­els. The rules of behav­iour are rel­a­tively sim­ple but the total activ­ity is com­plex.

    Eco­nomic mod­el­ling using gen­eral equi­lib­rium is like mod­el­ling an ant colony by tak­ing snap shots of the ant trails over time and observ­ing changes in the pat­terns of trails and try­ing to deduce what will hap­pen in the future by look­ing for cor­re­la­tions with other vari­ables such as the ini­tial dis­tri­b­u­tion of food, or the amount that each ant can carry, or the amount of scent each ant on aver­age can drop. Such mod­els explain noth­ing because the pat­terns are the result of the activ­ity and can­not be pre­dicted from other pat­terns.

    If you want to change the sys­tem you look for changes in the way inter­ac­tions are car­ried out. If we want to fix the money mar­ket we are best to look at the rules we use in the money mar­ket sys­tem and vary them. 

    At the moment we increase the money sup­ply through loans against exist­ing pro­duc­tive assets. We rarely increase the money sup­ply with loans against new pro­duc­tive assets. We might use loans against old assets to build new assets but it is unusual to give loans backed by future assets.

    What if we biased the cost of money so that tar­get­ted future pro­duc­tive assets had lower finance costs through loans of low or zero inter­est?

    If the tar­get­ted assets are assets where there is a propen­sity for asset infla­tion (houses, stocks) then this gives a mech­a­nism to pre­vent such bub­bles by cre­at­ing enough loans to sat­isfy demand with new assets.

    If the tar­get­ted assets are ones that have a gen­eral social good such as invest­ments in renew­able energy then we would find that those invest­ments would occur instead of invest­ments in energy plants that burn fos­sil fuel.

  • There are prob­lems in using multi-agent mod­els for com­plex sys­tems cscoxk,

    The most impor­tant of which are the very “emer­gent prop­er­ties” that multi-agent mod­els try to uncover. Those these are obvi­ous at the sys­temic level–in eco­nom­ics this includes the devel­op­ment of finan­cial crises–the indi­vid­ual level behav­iour that gives rise to this is not at all obvi­ous. So I pre­fer to work with “tops down” dif­fer­en­tial equa­tion mod­els.

    A sec­ond rea­son for this is that–apropos my com­ments on the gen­er­a­tional debate which sprung up here recently–is that the struc­ture of soci­ety does more to deter­mine the per­for­mance of that soci­ety than the oper­a­tions of indi­vid­ual agents within it. Again this is my rea­son for pre­fer­ring tops down mod­el­ling to mul­ti­a­gent. One day, when we’ve done the for­mer well enough, I’ll have time and inter­est for the lat­ter.

  • Steve,

    I under­stand exactly where you are com­ing from. It would be great if we could know the final out­come and work back from the solu­tion. Unfor­tu­nately the odds are about as good as win­ning the lot­tery.

    The rea­son is that there an “infi­nite” num­ber of pos­si­ble solu­tions and try­ing to pick a good one — which is what you do when you start at the top — is unlikely. You may fluke it but the odds are way against it hap­pen­ing. Good search algo­rithms in com­plex spaces are ones where you start with a solu­tion — mod­ify it a bit in dozens of dif­fer­ent ways — then pick the ones that give the best results and move on from there. 

    We all like to think we can see where things are going but inevitably things do not turn out as we expect. An evo­lu­tion­ary approach is one where we can say — “that looks like a good idea let us give it a go”. If we try it and see it is dif­fer­ent to what is expected then we adjust and try some­thing else. Unfor­tu­nately bureau­cra­cies and politi­cians and econ­o­mists are uncom­fort­able with this approach. They seem to want “cer­tain­ties” instead of prob­a­bil­i­ties and they do not like to change their minds.

    For exam­ple I believe very con­fi­dently that decreas­ing the cost of finance for new assets rel­a­tive to the cost of financ­ing exist­ing assets will sta­bilise the mon­e­tary sys­tem — but I can­not be sure until it is tried. If it does not work as expected then we need to be in a posi­tion to rapidly adjust and say — ‘that did not work because of xyz but it did make a bit of an improve­ment because of pqr so let us fol­low the pqr path’.

    Evo­lu­tion­ary sys­tems do not work by know­ing the answer and work­ing towards them. Evo­lu­tion­ary sys­tems work by try­ing things out and killing off the ones that do not work. We have a sys­tem where cre­at­ing money ONLY through debt backed by exist­ing assets, includ­ing other debt, does not work but we seem unable to “kill it off” and try some­thing else. 

    Today I pre­sented the idea of giv­ing zero inter­est non recourse loans to cre­ate pro­duc­tive assets and at the same time cre­ate new money “backed” by pos­si­ble future assets. I was told “that does not obey the prin­ci­ples of dou­ble entry book­keep­ing so it can­not even be con­sid­ered”.

    Hello.

    Still I am unde­terred and I will con­tinue to press on and try to get some­one, some­where to put new asset cre­ation at least on an equal foot­ing rel­a­tive to financ­ing costs to the finance cost of pur­chas­ing old assets. The trick is to make the changes small enough that they “silp in” with­out peo­ple notic­ing and once they are in and work they become dif­fi­cult to dis­lodge.

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  • davo

    Steve, do you know why many econ­o­mists don’t have the train­ing in applied math­e­mat­ics nec­es­sary to at least han­dle ordi­nary DEs in math­cad? It’s not like you’d need to go through the full process of learn­ing ana­lyt­i­cal solu­tions — you could go straight to the appli­ca­tion of DEs to var­i­ous sce­nar­ios.

    If any maths, sci­ence or engi­neer­ing stu­dent can learn them in 1st and 2nd years, why not eco­nom­ics stu­dents? It is time for com­pul­sory math­e­mat­ics sub­jects in eco­nom­ics courses?

  • It’s a weird one davo,

    They seem to think that they’re bet­ter at teach­ing stu­dents “the maths they need to become econ­o­mists”, but my expe­ri­ence as a first year under­grad doing both was that the Quan­ti­ta­tive Meth­ods lec­tures lit­er­ally skipped 7 lines of deriva­tion in every line writ­ten on the black­board (I enter­tained myself dur­ing lec­tures by work­ing this out). I realised that all my fel­low stu­dents who weren’t doing math were tak­ing this stuff on faith.

    I think it is time for that–though there’s also an argu­ment for a his­tory of eco­nomic thought ori­ented course–and I’ve rec­om­mended as such in a chap­ter in a new book on teach­ing het­ero­dox eco­nom­ics.

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