The Socialism Paradox

About James Hawkins

James is an accomplished entrepreneur, inventor, portfolio manager, financial advisor, and author, but alas, not a scientist. However, he is a reasonably smart guy that is interested in science... Full Bio

James
Hawkins

I find myself fascinated how similar people, with similar values, can feel so differently about social engineering. This comes out in political discourse, and certainly is a hot topic today, with those more in favor of socialism, which I’ll refer to in this article as socialism inclined, having dramatically increased momentum for putting their more socialistic policies in place.

I’ve paid attention to this for a while, inquiring of people who feel differently that I (I believe in little or no socialism) why they felt the way that they did. Over time, I’ve come up with a theory, which is that they generally perceive the effects of some socialism differently.

Fairly well all people, certainly capitalists and most socialism inclined, would agree that an entirely socialist system would result in a drastically smaller, less productive economy, so much so that everyone suffers. Spectacular and catastrophic failures of socialism dot history. The reason for this is human nature; take incentive away from those capable (for whatever reason) of producing and they stop producing, leading toward a subsistence like economy. The reality is that people don’t produce to give; they produce to get.

Where those more vs. less socialism inclined begin to disagree is in the effect of a little bit of socialism, frequently referred to as social engineering. The socialism inclined, in the United States generally considered to be most represented by The Democratic Party, believe that there is little if any effect of some socialism. The anti socialism crowd, generally fiscal Republicans (some Republicans, as well as Democrats, vote based on other reasons such as their opinion on abortion, religion, gay rights, etc., and don’t care about or concern themselves with economic policy), instead believe that the effect of a little bit of socialism is immediate and significant. The difference in this perception could be represented graphically as follows:

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Perception of Degree of Socialism vs. Effects On Economy

I personally believe more like the red line, that a little bit of socialism has an immediate and significantly negative impact, and that we would be better off over all with negligible socialism. This is what I refer to as The Socialism Paradox. In the process of trying to help those on the bottom, those in favor of socialism actually instead negatively affect them, as well as everybody else. At least this is what I believe is likely the case.

This is based in part on the way I find things tend to work. In general, it seems that if a lot of something has a given effect, a little will have some, and the incremental effect actually tends to be greater early on than later. This is frequently represented by the law of diminishing returns, but in this case might instead be called the law of diminishing diminishment (my lame attempt at being funny).

The good news is that we are on the same team, and have the same goal. We all want to go the same direction, and as far as possible. It is simply, to use a football analogy, that one person thinks we should throw a pass, while another thinks we should rush it up the middle; but we all want to get to the goal line. Frankly, given some of the animosity over the past few years, believing this grants me some comfort.

A Plug For My Convictions

Nevertheless, I get the feeling that we are, as a society, losing track of the fact that stuff does not appear out of thin air. You can't just give someone something without an effect somewhere else. Stimulus, for example, is borrowing. To use an analogy, if you max out your credit cards, you'll have more stuff in the short term, but you'll pay for it big time later. Isn't this essentially the same thing?

Worse yet, aren't we really simply borrowing money that we will not begin to start paying back, if ever, until those in grade school today are in the workforce? Thus, instead of owning up to our failures and enduring some pain, are we not instead saddling these children with debt so that we can avoid pain ourselves (as if they will have no problems of their own to deal with)? Is it not possible that the pendulum could swing too far?

Comments

James: that's an interesting perspective. I have a cynical view: politics is the art of being seen to give to the poor whilst invisibly taxing them out of house and home, demolishing the home to build a 99th airport runway, and then getting tax relief on a 'bung'^* from a lobbyist.

My late father used to talk about pendulum politics. We certainly do see countries lurch from extreme to extreme with elections and regime changes. But those swings are not limited to two dimensions only - an over-steered nation is more like a tiny tumbling toy in a turbulent tesseract. Small impulses can certainly produce long term disturbances in cyclic phenomena - whosoever plucketh a daisy troubleth a star. For as long as we have no economic model of interferences in the economic reality, we must be cautious about meddling.

I am by no means a Luddite, but the term 'social engineering' always conjures for me a community with its collective sleeves rolled up, working harmoniously to build a bridge for the good of current and future generations.

*'bung' - UK slang: to throw, lob - a bung: a bribe or less usu. a tip or gratuity.

Patrick Lockerby | 04/02/09 | 08:55 AM

We've certainly seen the chaos theory/butterfly flapping its wings phenomenon in the global market downfall. And excellent bridge reference - thanks for the segue into my comment! :)

Becky Jungbauer | 04/02/09 | 09:06 AM

Hi, James! Thanks for the thought-provoking article. I agree with your comment that people generally perceive the effects of some socialism differently - Patrick Lockerby just wrote an interesting blog on a related topic of what happens when people use the same word but attach different meanings.

I also like that you point out that we're all on the same team. I think that definitely applies for some issues - we want the economy to recover, for instance - but does it apply across the board? Does everyone want the entire population to have health insurance? I'd hope so, but I wonder if that's the case.

And perhaps while the tortoise wins the race against the hare, I'd argue that in some circumstances a larger investment is necessary simply because the gaping hole left by previous actions needs to be filled and quickly. You note correctly that you can't just give someone something without an effect somewhere else, and that stimulus is borrowing. I agree, and it's important to keep that in mind no matter what side of the debate you are on. But in some cases, the stimulus is desperately needed because the recipient has been neglected for so long.

Take bridges, for example. I was in my car about a half mile from the 35W bridge in Minneapolis, waiting in traffic to cross the bridge, when it collapsed in the summer of 2007. (Thank goodness I was running 15 minutes late that day!) Our infrastructure has been so neglected over the past several decades, and it needs to be fixed now before more bridges collapse and people die. This isn't something that can wait much longer, and as such incremental infusions of money won't do the trick.

I'd argue that programs to fix housing foreclosures also need a substantial infusion, as they are a major chunk of the economic problem. I'm not an economist and could be wrong, of course. But do you think that these types of issues count as socialism, or just a government being responsible for its citizens?

Becky Jungbauer | 04/02/09 | 09:01 AM

James

You are absolutely right - we are all on the same team. If we don't keep that in mind we will end up distructing the loyal opposition.

I am an old Socialist, have been all my life. We live in a socialist country (if we live in the U.S.) even if we don't want to believe it. As I tell my conservative friends, if you don't think this is true, don't call my police when you have a problem, don't call my fire department when you have a fire, and don't drive on my streets if you want to go someplace.

This my sound crazy, these are institutions and facilities we all know and love. Read your history, just 150 years ago these institutions didn't exist. If you house had an insurance fire emblem on it the fire company supported by the insurance companies put the fire out, if not you had better have a lot of friends.

The problem today is folks don't want to pay their fair tax. Case in point, Thomas E. Brinkman Jr. (you can find him in Wikipedia) probably a very nice guy, a good family man and a solid Republican. Several years ago he led the fight against the tax levy for Cincinnati schools. I remember an interview with him where he stated he would never support taxes for anything (not his exact words but what I chosed to remember - and keep in mind I have selective perception). He chose to send his kids to private schools and had no intention of supporting public schools - another socialist institution.

If we really don't want to pay taxes we have to figure out another form of government. The socialist instutions we depend upon exist on tax money. I an just too old and probably too far to the left to envision a pay-as-you-go society.

We are all in this together, we are on the same team, we need to support each other as best we can for the common good.

I always ask myself, What would St. Francis do?

Jim Myres

Jim Myres | 04/02/09 | 20:37 PM

Milton Friedman in Free to Choose:

The political system "tends to give undue political power to small groups that have highly concentrated interests; to give greater weight to obvious, direct and immediate effects of government action than to possibly more important but concealed, indirect and delayed effects; to set in motion a process that sacrifices the general interest to serve special interests rather than the other way around. There is, as it were, an invisible hand in politics that operates in precisely the opposite direction to Adam Smith's invisible hand."

kerrjac (not verified) | 04/04/09 | 10:06 AM

Why is it that economics always thinks that there is only one point that represents their perspective on a graph? Like the Laffer curve, there are TWO points to consider, instead of simply mouthing platitudes like "lowering taxes raises revenue". That is simply gibberish. It would only be true, if one is on the right side of the graph. On the left side, it simply reduces to zero.

Similarly, economics doesn't exist in a vacuum, but is a system that is supposed to provide a means by which a social organism can function in managing its resources and government. History is littered with thousands of examples of societies that failed to recognize that it is never beneficial to have a segment of their population that has nothing left to lose.

Therefore any smoothly running society must embrace some degree of wealth distribution to ensure that members of a society will receive more benefit than loss by being members. It is easy when one is at the top of the "benefits" side of the equation and then argue that there needs to be greater personal responsibility, blah, blah, blah. In the end, a society's success will be measured by how well it takes care of its members. If it is to simply be a free-for-all, then at least have the courage to support anarchy, and let social Darwinism do its thing.

It is becoming ridiculous to see how often economics is being explained as a "this is how it should be" story, instead of dealing with the reality that is in front of them. It is simply a fact, that some individuals will never do well, and some will cheat. So the question that needs to be answered is; what should become of such individuals? Let's stop dancing around the issues, because if we aren't prepared to let societal "selection pressures" exact their toll, then we need to figure out how it is supposed to work, instead of engaging in wishful thinking.

Survival invariably involves having some members live and others die. If we aren't prepared for the latter then its no good whining about why things are the way they are.

Gerhard Adam | 04/06/09 | 13:30 PM

Well economists are certainly not the only ones guilty of issuing platitudes. But when you look at the absurdity of some economic policies, can you really blame them?

Under Hoover's rule during the Great Depression for instance federal agencies wasted unimaginable resources trying to drive up prices of agriculture products, particularly wheat. Farmers were given hundreds of millions in subsidies in order to lessen their output; millions of bales of wheat & cotton were confiscated & warehoused for future sale when prices were higher; national parks increased by a couple million acres. These actions had negligible effects on the price, which lasted at most only a few months at a time. (http://mises.org/rothbard/agd/chapter8.asp#new_deal_farm_program)

Viewed from a greater "social" perspective, these acts border on criminal, particularly during a time of severe poverty & starvation. & they didn't even succeed in their narrow focus. Most economists would agree that they merely made things worse, & I think many people would see them as immoral.

I guess my point is that platitudes go either way. But when you look at the extremes of populist economic policy, like those above or hyperinflation, platitudes like "lowering taxes raises revenue" seem pretty harmless.

kerrjac (not verified) | 04/06/09 | 18:31 PM

Actually I would disagree. While there might be many such examples, but is markedly missing is a real economic perspective that can be examined and is part of the discussion. Invariable, economics is always filtered through the media, the political process, or the financial institutions.

From all this is almost always comes down to a matter of opinion with vague talk about what direction something will go based on equally vague assumptions. There is no place where one can go to obtain a real scientific information about the parameters that go into an economic model, or the basis for a recommendation. Instead it is all essentially a smoke and mirrors operation, so that's why I'm being so harsh.

As a practical matter, where is the economic theory that describes the current world situation and how it should be solved (beyond mere platitudes)? In truth, they are absolutely clueless about how things happened and what to do about them. If medical science operated in this way, we'd be telling them to hang up their rattles and masks.

Gerhard Adam | 04/06/09 | 18:38 PM

Great comments... Gerhard, perhaps you only need to look within yourself. If your tax rate was 99.9%, such that if you make $1,000, $999 would go to taxes, and $1 would be kept by you, how motivated would you be to work? You would have to be an extraordinary person to honestly answer anything in excess of not much. What if your tax rate was 90%? 80%?

At some point, as this tax rate declined, you would begin to regain motivation. This level might be 20% for one person and 50% for another. Additionally, as tax rates decrease, productive types may feel more interested in producing, a second lever on productivity. The point is that as tax rates are increased it reduces production for a higher and higher percentage of the population, and at greater rates. And production is the source of wealth. No production, no goods, new or used (to recall earlier goods based wealth postings of yours). Additionally, no production, nothing left to tax, at any tax rate.

99.9% x 0 =0

All that being said, I somewhat reluctantly agree with your reasoning for social programs at all, which simply put is social stability. You accurately suggest that the absence in past societies has caused social unrest. OK. But too much can also cause problems as well. In fact, I could submit that we have developed such a sense of entitlement that all levels of society have lost touch, with those toward the bottom expecting their mortgages to be forgiven as it "wasn't their fault," and those at the top feeling that they are entitled to walk out of institutions with enormous bonuses from companies that imploded under their leadership.

James Hawkins | 04/06/09 | 19:44 PM

There's more complications from your example, since what you're suggesting could never happen (and it has little to do with motivation). A tax rate of 100% would completely redefine the relationship of the government and the society, so there are numerous other factors that would come into play that negate the model itself.

I agree that there is a point at which you MIGHT be able to cause sufficient economic growth to offset the losses by reducing taxes, but it's ultimately a foolish model. It has virtually nothing to do with the tax rate, and everything to do with the total economic growth of the entire system. In other words, by providing tax relief, it presumes that there will be enough non-tax contributors that will join the ranks to make up the deficit. Without the new workers, the plan is foolish since you cannot get increased revenues from an existing pool of taxpayers when their rate is reduced.

My point is that economics tends to rely heavily on anecdotal evidence and has few (if any) models that can actually be used to predict the relationships they profess to understand.

Gerhard Adam | 04/06/09 | 20:55 PM

Motivation to work might have less to do w/it than whether $ is being spent in the best way possible. The question w/economics is whether the gov't taking that $ will spend it in the best possible way. Granted, it'll need some $ for some things; but $ spent that it doesn't need to govern is more wisely left up to citizens to freely choose how to spend it themselves. & conversely unnecessary gov't expenses are more likely to hinder a bad economy than they are to hinder a good one.

This is the outline of the argument. I don't think there's a model for it, but let me know if there is. There are a lot of variables, plus many that are unquantifiable. But is a model needed? The Soviets seemed to have a pretty intense model for communism based on price-setting. Did the founding fathers need a mathematical model to tell them why democracy was their best option? Do people need models presented to them of how happiness works in order to be happy?

Good research of course can help clarify things & inform either side of the debate, but it can of course backfire when you ask too much of it. This even occurs in areas w/pretty widely-accepted models (eg in giving statins to African Americans.)

kerrjac (not verified) | 04/06/09 | 22:03 PM

Evolution likewise lacks a degree of predictability, but does that make it any less of a science?

Most gov't intervention into the economy is based on Keynesian models, which give gov't spending a glorified role, overemphasize consumption (even in the calculation of GDP), & minimize the import of saving. & in the grander scheme of things, the "scientific" model-based side of economics that you're looking for is mostly embodied by Keynesians. So when the economy goes sour, you really should be looking to them. Austrian economists freely admit that economics is not a hard science. (for a good article on the subject see http://mises.org/story/3369)

To carry out your medical analogy, if a doctor prescribed crack cocaine to tired people, he might be hailed as a genius for a couple of weeks; in the long run however the solution would not only fail, but it would exacerbate the problem, & cause more problems. At this point your original doctor might simply up the dosage, until the patients' brain is a scrambled egg. We then send him to a proper doctor, whose first impression is, "boy, that other guy really screwed things up"; & for the time being, all he can really recommend is rest, & maybe a few antioxidants. Do we castigate medicine for not being able to rebuild our poor patients' brain? Why hasn't medicine come up w/brain transplants yet?

The analogy to evolution is once again apt, b/c all we can say is that nature has made the parts too complicated for a single doctor to rebuild. Likewise, the economy is quite intricate in its complexity, & it's quite much to expect a quick-fix from those who thoroughly know its depth of complexity. The Keynesian, mind you, sees that things have gotten worse, & is proposing a type of complete brain surgery that's never really been tried before; he'll give you a few statistical models vaguely supporting all this. But in the meanwhile can you blame the Austrian, or others, for shouting back, "For your God-sake, you are going to kill this poor bastard!" & then the Keynesians are like, "Prove it, where are *your* statistical models?"

Much like evolution, economists are adept at explaining history, but you might not be able to use those principles to guide further action. You'll notice that we're back at square one - if you can't use those principles to guide further action, then what's the point of it all? But this is precisely why it was wrong to use those principles to back the economy in the first place.

kerrjac (not verified) | 04/06/09 | 20:14 PM

Evolution likewise lacks a degree of predictability

Sorry Kerrjak, but I have to disagree there. It was from the predictive powers of evolutionary theories that the structure and function of DNA was unravelled. Biologists daily go from the history side of their science to its predictive powers. Apart from the academic value of such exercises, it has led to cures for many diseases.

back at square one - if you can't use those principles to guide further action, then what's the point of it all?

This is a good paraphrase of a pragmatist's response to some of the more obscure and acrcane arguments in ethics and theology: "Fine, but what can the theory produce?"

For me, economics is not a science. It's perusers, pursuers and persuaders are too quick to apply pet theories based on the observation of too few variables. If the science of aerodynamics had been following the economist's paradigm, we would still be seeing people jumping off structures with contraptions strapped to their arms.

Patrick Lockerby | 04/06/09 | 21:01 PM

"It was from the predictive powers of evolutionary theories that the structure and function of DNA was unravelled"

I was moreso referring to future events? Can you deduce from this the exact timeline of speciation? & can you predict the evolutionary future, as is being asked of economists?

From my understanding, its predictive qualities are more like those of meteorology, whereby you can create rough estimations here & there, but overall it lacks a degree of precision. Now this may be b/c science isn't advanced enough, or if you go back in time w/enough theoretical knowledge of evolution/genetics (lacking historical knowledge of the future) you still couldn't deduce exactly how evolution would unfold. I suspect that it's a bit of both, but more of the latter. Certainly there are models or systems from others areas of science that lack also such predictive precision, but can still give probabilities of various events (like weather or electrons). Add on top of that extraneous events unrelated to evolution/genetics like meteors from outer-space, which could likewise have a drastic economic effect.

Like any area of knowledge, advances are made, & breakthroughs & revelations make the knowledge more powerful & valuable. But you can't force such breakthru's when they're not there. It'd be like a creationist patient suffering from a virus harping on a doctor who happens to believe in evolution to use his evolutionary knowledge to break the viruses' DNA. The only honest, & sympathic, thing the dr could say to the patient is that we're not there yet, as internally he knows it'll probably be a long long time till we are, if ever. Likewise w/economics.

But the patient is insistent, & reasonably he's spiteful towards the prospect of losing his life to this virus, so he asks, "What does Darwin have to say on the subject?" The dr now has a headache of his own.

This gets at the heart of the difference btwn scientists' view & God's. Afterall, much of science is based on breaking things down thru analysis. But whenever you do that, you're forced to ignore the lionshare of reality, which is bound to produce various confounding variables & curveballs. Knowledge continually approaches God's view, but it's like Xeno's paradox, the closer it gets, the farther it seems.

That doesn't automatically excuse economics if it truly is a worthless 'field', but I'm sure that it's similar to the defense that many of us would give in response to attacks upon evolution for its inability to predict future evolutionary events w/any degree of meaningful precision.

kerrjac (not verified) | 04/06/09 | 21:43 PM

Perhaps I was over harsh, Kerrjak.

In medicine there is the concept of informed consent. I like that. Now, in politics there is a notion that Nanny knows best, so let's do what those nice economists tell us is good for the people. I have a major problem with that idea.

Governments like to talk about safety nets for the disadvantaged.

Have any of these people never visited a circus, never spoken to the circus folks?

The veto on safety net design must go to the poor sucker who has to jump!

Patrick Lockerby | 04/06/09 | 21:51 PM

"Perhaps I was over harsh, Kerrjak."

Not at all I'm just getting tired ready for bed & crude in my thoughts, & typing.

Tho another thing to consider in terms of the informed consent issue is that in medicine the buck usually stops w/an individual patient; whereas economic interventions - particularly those related to special interests or populist tendencies - favor this or that party at others' expense. It poses a particular problem in such a strong democracy, whereby minority special interests sap power from the majority, populist majorities sap it from minorities, & economists are given that free reign to do just kind of whatever like you said in between. As many have pointed out, acts like hyperinflation or destroying food crops - even if you can somehow justify them in the name of the economy, & even if they somehow do good for it - are of a criminal nature.

kerrjac (not verified) | 04/06/09 | 22:17 PM

Ignoring the idea of an economic model for a moment, what about those affected, who have no say?

In two related statements, kerrjac says that "lowering taxes raises revenue" seems harmless, and James says that as tax rates decrease, productive types may feel more interested in producing. While in theory this may be plausible, it depends on an entire system of independent actors, and it also depends on how you define production.

An example: the school district in my hometown was ridiculously underfunded. I say "ridiculously" because the socioeconomic status of the district residents was such that the public schools should have been leaders in the metro area. But every single time a referendum came up that asked residents to vote to raise taxes by an infinitesimal amount, they refused. My brother was bussed to a temporary mobile home for first period, and then bussed again to the high school for certain classes, and then back to the crumbling junior high for others. (I was in high school by this time and my parents sent all of us to private school starting in high school because our school district was so bad. We lived on the very edge of the district, far from the school, but the community as a whole was still impacted.) It turns out that many of the taxpayers were older and their children had already graduated, and they felt they no longer needed to contribute to the community's education. (I'm not making this up; this is actually what folks said during debates.)

Perhaps those older people benefited from the revenue saved by lower taxes, and perhaps they produced something of value, but the rest of the area suffered. As a result, the high school now has one of the highest drug and pregnancy and drop-out rates in the metro area, and many of the original residents near that school have moved out as lower-income rental properties have been built. The social instability does little to encourage production.

James says production is the source of wealth. While I agree, I think that might be overly simplistic. Without social stability, how can you produce? And without some taxes, how can you ensure social stability?

Becky Jungbauer | 04/07/09 | 00:02 AM

The problem overall is that economics isn't touted as something that has marginal explanatory powers, instead it is used to build and foster political policies and ultimately public implementation. The very concept of someone mentioning words like socialism and communism suggest that there IS a right way to do economics, so when it is put to the test, it is not legitimate to suddenly suggest that it has no predictive powers.

The entire premise of economics is that it is a means of modeling the flow of money and resources in a definable way. If that isn't the case, then by all means, let's dump the economists, since a ouija board would clearly be as effective.

The problem is exacerbated when nonsense platitudes like "lower taxes raises revenue" are spouted as if they even make sense. Under the most optimistic interpretation, the reality is that it is nuanced by trying to predict what motivates individuals and that somehow there will be enough motivation to grow the entire pool of resources. On the face of it, the "lower taxes" mantra is simply idiotic.

I will certainly agree that motivation and incentives are major factors in how an economy behaves, so the issue of blind socialism is fraught with as many difficulties in that you can be too liberal and stifle innovation or motivation too. But economics has held a dominant position for far too long in the national attention and it has uniformly failed to deliver even the most obvious predictions.

1. You cannot grow indefinitely.
2. You cannot grow an economy when there is no actual production
3. You cannot raise revenue if there is no resource pool against which it can be levied.
4. You cannot have a free market when companies are not allowed to fail.
5. You cannot have a free market when countries can manipulate currencies
6. You cannot have a free market when the government itself may be a customer.
7. You cannot have a free market when corporations may control both the supply and demand.
8. You cannot have a free market when corporations are effective monopolies over required resources that the government regulates
9. You cannot have a growing economy when corporations think they are entitled to make money simply because they have money.
10. You cannot raise revenue to the government when the employment is in another country.

In short, economics is a national joke and it's time we reined in this pseudo-science and started acting fiscally responsible at the local, state, and ultimately federal levels.

Gerhard Adam | 04/07/09 | 00:27 AM

Morning Gerhard,

Again I think you're oversimplifying the problem. There is no one 'right' way to do economics, just as there's no one right way to practice medicine or do science. The mere mention of socialism/communism might somehow imply to outsiders that there's a right way & a wrong way, but this has no more truth than if the mention of chemotherapy suggests that there's a right way to treat cancer.

Again this problem is not unique to economics, & it spans across most scientific disciplines. Most economists, I'm sure, will tell you that their practice is more of an art than a science. That isn't evidence that economics is a fluke. Rather, it's a willful admission of the limitations of the field's tools, in an attempt to distinguish objective & subjective knowledge. But just b/c there's varying degrees of subjectivity, doesn't mean that the objective portions are all bunk. Of course, half of the debate is simply in finding out where these border lines are. The problem, as we're finding out, lays in the presumption that we know more about economics & have more of a power to manipulate the relevant than we really do. The latter has created a pseudo-science, & it's led to actions that are similar to what any scientist does who claims to have more knowledge than he really does.

Likewise, many scientists will tell you that the practice of science - at least in their discipline, which they're familiar w/ - is almost more of an art than a science as well. Consequently, when outsiders & novices find this out, they sometimes act as if there's some sort of scandal, as if they expected everything to be set in stone; as if they thought that all the scientist has to do is to approach the scientific method machine w/a question, work the machine, & the machine will spit out an answer. But of course that's not the case, else no one would need so many educational degrees to practice science.

Economics is stuck here just like w/the rest of the science. We can see the problem unfolding in the stats, we can see how the recession spread from one area to another in a manner of fine detail that, w/o any notion of economics, one would never perceive. But we remain powerless to manipulate the variables in any meaningful way. Social Darwinists, I'd imagine, are stuck w/ a similar problem as the Keyensians; that's not a knock on evolutionary theory, just a poor way of applying it.

The objections you raise, Gerhard, gets to the heart of what is fascinating about both economics & science in general. As I've been thinking of this I've recently been making the point on various comments here that science overall is given an undeserved air of authority, & is sometimes even given more power in determining policy than it should. In one sense - albeit, a short-sighted sense - this a criticism of science as a whole; but in the grander scheme of things, it's a necessary realization that true scientific progress often requires scientists to not only explicitly recognize their field's true limitations, but also to embrace them.

kerrjac (not verified) | 04/07/09 | 07:53 AM

I think you're being too gentle with economics. Most science never enters the realm of public policy, and it certainly isn't being interviewed on every television program, every week,and creating the illusion that we know what's going on.

In addition, one of the biggest problems I have with economists, is that when concerns are raised, instead of using models or assessing the question, the economists almost uniformly blew off the concerns and said that this was a strong economy. Yet, by your own statements, they had no way of knowing that, let alone knowing that nothing could bring it down.

As I mentioned in my quick list, these are issues that still have been largely ignored or glossed over by economists, so it is irritating when they adopt the attitude that no one could've known what would happen. It was knowable, and it was a combination of ignorance, wishful thinking, and incompetence that lead to the current problem. It wasn't an inadequacy in the "art or science" of economics, it was a fundamental failing.

Using your analogy of meteorology, it would be like looking at a sunny day and refusing to acknowledge that hurricanes exist because the sun was shining so you couldnt conceive of clouds.

Gerhard Adam | 04/07/09 | 11:47 AM

The collapse wasn't 'predictable' in any meaningful sense of the word. Multiple parties have stakes in the future of the economy - banks, investors, etc. Their stakes run deeper than public policy experts or state economists. A common line of inquiry is that when a depression occurs, the only logical explanation is that it was not predictable from the perspective of the majority of players involved. Of course some nutso is bound to come out & say that he predicted it, but that's just a matter of probability.

The occurrence of sharp recessions or depressions does not prove economics to be meaningless; as many efforts are made, from above & w/in, to avoid them/keep them contained. & most recessions are reasonably contained. It's a common belief that economic cycles are due to miscommunicated signals - credit expands artifically, certain sectors expand when they shouldn't; poor accounting makes it hard to judge others' books, along w/your own. In a sense all this is tautology, as most depressions wouldn't have occurred if enough buseinssmen & others could've foreseen it. The point is that for every accumulated mass of miscommunicated signals - which economists must now pay scrutiny to - there are infinity more well communicated signals, which lay on foundations such as sound accounting & contractual law.

Certainly you can imagine how such signals would wreck havoc. Imagine if tomorrow every American bank said that they used bad software which overestimated all their customers' savings by %200, or just by %1. Or imagine if suddenly the gov't doubled the money-supply. These signals further have an insidious time-lag, whereby - not unlike crack cocaine - the short-term effect is positive, the long-term effect negative (see http://mises.org/story/3155 for an example).

Perhaps you're right that I'm being to easy on economics. I don't know. I'll have to think about it more. I'm open to more argument from all sides of course.

But let's not lose perspective. A few banks have collapsed. There's considerably less wealth in the world than there was before. It sucks but it's not the end of the world. You further have to look where that wealth came from. It might not have come directly from peer review economics articles, but it required a reliable system in order to reward innovation & harness private entrepreneurship. A strong economy can produce fruits that permanently better mankind. Wealth maybe temporal, but thanks to developed economies we'll always have the knowledge to build, say, computers, which make so many other things easier in life & in science. You often express the sentiment, Gerhard, that people who are ignorant about science complain about it, while they themselves are basking in its glory. In seriously all due respect, I can't help but wonder whether the same is true of people who complain about economics.

kerrjac (not verified) | 04/07/09 | 20:52 PM

"You often express the sentiment, Gerhard, that people who are ignorant about science complain about it, while they themselves are basking in its glory."

Actually I have a beef with creationists that want to act as if their perspective is scientific despite the lack of evidence. It's the same fight. I have a beef with economists that act as if their perspective is scientific despite the lack of evidence.

Here's part of the problem I have. Despite the fact that nothing can grow forever, there is an implicit assumption in economics that wealth can. However, it should be clear by the simplest arithmetic operations that there aren't enough resources on the entire planet for everyone to do well. It simply can't happen. All one has to do is look at the consumption in the United States, to see that if the entire world were living at the same standard, we'd need several planet Earth's to accommodate them. Therefore, the "global economy" is based on the idea that we can grow, knowing full well that there is a huge segment of the population that will have to do without.

Despite the fact that many people want to tout capitalism as the only system that works, in truth, there has been little capitalism at work in this country for decades. Capitalism presumes the creation of wealth through the means of production, while the latest economic theories seem to be based on the idea that wealth can be created out of thin air. Money producing money .... as if that isn't a fantasy.

So we have companies looking for the cheapest source of labor which allows them to move into third world countries, and thereby taking the only economic recovery safety net with them, because the lowest paying jobs are no longer available. In addition, we practically require anyone that wants to advance to start off with a mountain of debt and make it more difficult than ever to even enter the game. Consider the role of student loans and debt that are often carried for nothing more than a four-year degree. A graduate degree is a veritable fantasy for anyone that actually has a family to support.

So we send the low-paying jobs overseas, bring in foreign workers (with special visas like the H1B) because we don't want to pay Americans (so much for supply and demand, eh?), and then look to the government to legislate and bail out the incompetence when it collapses on them.

All this with the blessing of the economists who stood by and watched it develop and happen over the decades and cheered them on. Bear in mind, that this recession didn't happen during one or two quarters, but was years and decades in the making. All the while the "experts" stood by and did nothing. Their models predicted nothing, the incremental actions of governments/corporations were no cause of concern, and the ever rising debt garnered barely a raised eyebrow.

Yet, even the man in the street knew that it couldn't last, and the majority had been complaining about these very things for some time. However, the "experts" knew better. So where are they now?

Gerhard Adam | 04/07/09 | 21:56 PM

The end of wealth is not - as Keynsians might have the public believe - more wealth, or more consumption. If that were true, then you could create jobs & capital out of nothing.

While you're right that we don't live in a true "capitalist system", we also don't live in any "true" kind of system. Theoretical models are an abstraction involving explicit assumptions & simplifications. That's how applying math & stats to the real world works. Which is to say you can still make the argument that theoretical "capitalist" systems are such a poor representation of reality that they're inapplicable; but that's not the same as saying that they differ somewhat from reality.

In reality, all of this produces true progress. We're having this conversation no doubt thru typing on computers that likely have Intel chips, or at least a chip whose creation was made possible thru the chip wars. Unlike a real war, Intel & AMD weren't trying to kill each other, they were trying to produce the best chip. As chips came out that were faster than we know what to do w/, we're still reaping the benefits, & finding new applications for it all everyday.

These innovations - not just wealth or capital - are the true fruits of economic progress. Certainly it's possible to have progress where everyone benefits. Look at vaccines. Air conditioners. Technology. Basic comforts of life, which no doubt we're all enjoying. You don't see much science, which we're all so enthused about, coming out of developing nations. You can argue that the fruits of the economy will make life on earth unsustainable, but the argument is by no means inherently true simply b/c it "seems" like progress can't go on forever. & past scientists have made similar dire predictions, which have time has proved to be embarrassingly false. The environmentalist argument is a different line of reasoning all together.

kerrjac (not verified) | 04/07/09 | 22:23 PM

These aren't "dire predictions", they are mathematical inevitabilities. There are only a finite number of atoms on this planet, which combine in a finite number of molecules and elements. Therefore, there cannot be infinite, exploitation of a finite resource. It simply isn't possible.

I'm not suggesting that I know where that line is, but it certainly is there.

Regarding your example regarding Intel and AMD; they most certainly were trying to "kill" each other (if economically possible). In addition, this is precisely what they are supposed to do, since cooperation is too close to collusion to represent a viable business model. Your suggestion that they were driven to build the "best chip" sounds a bit too altruistic for my tastes. While I can agree that one can't draw absolutely lines regarding motivation, I also can't buy the argument that they were simply focusing on chips without regard for their competitors.

In truth, most companies certainly have a combination of product motivators as well as competitive concerns, and often what gets companies in trouble is when they confuse the two or let one dominate.

My point remains, in that economic theory fails to describe much of anything except the most obvious relationships and then it is still couched in terms of uncertainty since one can't know the motivation or incentives between any transactions.

One thing is abundantly clear, is that companies have gotten too large (and economics failed to recognize this problem) and there is too much unequal control to provide anything resembling real competition.

Let me give a more specific instance of where economics fails to grasp reality. When we consider something like labor costs, supply and demand for labor, and competition, this all sounds great on paper. It seems like there is a real dynamic at work that can explain the decisions that might be made, as well as the rationale for such decisions. However, let's look at reality.

Labor cannot compete on a global basis, since it doesn't involve individuals. A worker in Detroit can't simply pack up and move to Bombay to remain competitive. There are too many long range effects that aren't articulated in these models. Similarly when work gets outsourced, there is no information that reflects how that affects the re-employment of a laid-off work force in an economic downturn. Virtually all the economic "experience" such as it is was based on a closed system. Ironically the same old models that were used for the original closed economies are still being dusted off to provide arguments in a global economy.

I would like to see one economic model that is grounded in mathematics that actually makes some sort of prediction that could be evaluated against actual results.

Gerhard Adam | 04/08/09 | 16:32 PM

"Therefore, there cannot be infinite, exploitation of a finite resource. It simply isn't possible."

It's funny how when you get babies to laugh, you can repeat the same action over & over, & they'll keep on laughing each time as if they've never seen it before. Say you're raising 10 babies - they're all babies, let's say you adopted them, or had them all at once - & you wanted to make sure that each grows up w/a healthy dose of laughter. But you only have your wife to help you out, & both of you have a finite amount of time after work.

So you decide to run a study in which you manipulate different versions of "peekaboo". The trick is that you don't want to do a quick "peekaboo" & run on over to the next baby, or else it'll go right over the baby's head, & there won't be any laughter; but you don't want to linger & laugh w/the baby, or else you're not optimizing your time. You find a way to rate each laughter, & you might include additional non-peekaboo acts in case somehow the baby really does get tired of it. Once you have the time down right, you & your wife are able to come home, & after honing the technique, you're able to squeeze more laughter out of your babies in 1 hour than most parents could ever dream of.

Or to take an exp I'd written of: You are carrying grocery items individually, or to save energy you can put them all in a bag (or you can use stones & pouches if you prefer to stay away from the modern world). Clearly using the laws of physics, we can optimize how we use our muscles such that the weight of carried goods produces less strain than it otherwise might; using levers & wheels you can move goods so heavy that they wouldn't budge before.

These are all concrete examples of how we can make progress that doesn't depend on "exploiting" finite resources. They rest on the fact that subjective well-being is not a zero-sum game.

"I would like to see one economic model that is grounded in mathematics that actually makes some sort of prediction that could be evaluated against actual results."

If I happen to find one, I'll let you know.

kerrjac (not verified) | 04/08/09 | 16:57 PM

"These are all concrete examples of how we can make progress that doesn't depend on "exploiting" finite resources."

Actually none of them are, since you're ignoring the energy necessary to make the humans be responsive. There is a considerable amount of resource and infrastructure necessary to be "healthy" and so you examples are failing to take into account the disproportionate consumption of resources needed to achieve a relatively minor effect.

I'm not splitting hairs here, because this is precisely why analysis of phenomenon like this needs to be examined from the complete perspective instead of isolated events. This is precisely why economics has gotten itself into trouble, is the persistent belief that one example constitutes a principle.

Gerhard Adam | 04/08/09 | 17:34 PM

"I'm not splitting hairs here, because this is precisely why analysis of phenomenon like this needs to be examined from the complete perspective instead of isolated events."

Resources are used in those examples, but there's no danger in them running out; it's easy to see how from the parents' subjective perspective, the time they spent - altho it was taken from a finite pool of time - to them might've felt like it was well-spent. & we might assume that the babies enjoyed it, as that was the point. Of course these are assumptions, but it's easy to see how they maybe true.

What makes this analogy work is once again the *subjective* experience. A core characteristic of subjective reality is that the sum can be - & quite often is - greater than the sum of the parts. Wheat by itself is useless; make bread, & suddenly you can live off of it. A box is useful; 5 separate pieces of wood, when you need a crate, isn't. The difference btwn the useless products & the useful ones aren't so much that the useful one's involve more resources; it's that the resources are combined in a manner that makes them useful.

I couldn't imagine what the world would look like if this subjectivity principle didn't hold true; I want to say that the essence of life depends on it (but conceptually, not casually). Maybe if it weren't true, then every resource would be equally valuable to every species? Speciation (& even differentiation w/in species) occurs so that some species can take more advantage of certain resources than others. Stated conversely, resources are of different values to different creatures.

While you're right that this all requires the presence of some resource, the linchpin isn't their mere existence, it's in how they're combined & used. Gas would be useless w/o cars. Dirt is infinitely more useful to ants than for humans. The glue holding all this together is human - or animal - ingenuity, not the actual resources themselves; & as Julian Simon is famous for arguing, there is no cap to the latter. You can always improve your lot, rather like science & the pursuit of knowledge. How would evolution have occurred otherwise?

Economics tries to explain how humans take advantage of their resources. Economic predictions in both capitalist & communist systems have been sketchy to say the least. But just as evolution occurs w/o perfect explicit knowledge of evolutionary science, so can we continue to take advantage of resources w/o pristine economic models.

On the absolute amount of resources - even if you somehow ignore ingenuity which allowed us to advantage of them in the first place - the question isn't whether at our current rate we'll run out of them, the question is when (similar to Patrick's Goldilocks function, http://www.scientificblogging.com/chatter_box/blog/intelligence_made_sim..., correct me if I'm wrong). Certainly if ants keep expanding, they may one day run out of dirt & soil. But even if you assume that ants have an optimistic future ahead of them population-wise, the day they run out of dirt is probably centuries away - in ant years, you're approaching infinity. While that doesn't mean we'll always have our resources, the point is you have to look at the scale of time we're dealing with. You can't simply say that resources are finite; otherwise how would life have evolved? There's obviously enough elasticity in how creatures can take advantage of various resources that evolution has occurred for as long as it did. Of course, we don't know have much *more* elasticity there is. But from my understanding, the mathematical models predicting the fall of mankind due to a lack of resources - there have been a good amount - have all proved false. As a 'science', environmentalism, & its predictions, seems to fall pray to your same criticisms as economics.

kerrjac (not verified) | 04/08/09 | 22:49 PM

You can't be serious. One of the numbers I've seen indicates that 2.8 billion people live on less than $2 per day. Numbers indicating that 1 in 12 people is malnourished, doesn't sound like "resources aren't the problem".

Please don't go to the distribution argument. The net result is that a significant number of people are doing without and regardless of the cause, the resources are either not there, not being distributed, or wasted. Doesn't really matter which one it is, because it is clear that whatever system is in place is inadequate to do a better job.

The "box" that you mentioned in your post is precisely what many people would love to be able to live in. The notion that ingenuity is what makes the difference may be true when you're living in a vibrant economy, but it tends to ignore the reality that a large number of people actually have to deal with.

My point remains, which is that .... until you see all those other people lifted out of starvation and poverty, there is NO room to talk about an abundance of resources. In addition, resources aren't created out of thin air. They require actual planetary resources and no amount of ingenuity can produce something when there is nothing there.

Just follow the mathematics of oil consumption. If the U.S. consumes 25% of the supply, but only has 5 % of the world's population, you can't possibly argue that there is enough oil resource available for everyone on the planet to enjoy the same standard of living (or at least oil consumption). To even approach it would require a 500% increase in oil production .... which I seriously doubt is going to happen anytime soon.

Even your example of children misses the point regarding the millions that won't be laughing, but rather will be starving or dying from lack of proper medical treatment. This doesn't even address those millions that will survive, but are relegated to perpetual poverty.

If economics can still maintain a rosy view of production after examining the actual world we live in, then they really are living in a fantasy world. As I said before, it doesn't matter why these situations are true. What matters is that they are and there is no system in place to fix it. For too long economists have gotten away with simply shrugging their shoulders and saying ... "Oh well, it's a distribution problem, or a political problem, or a whatever problem". The bottom line is that it doesn't work.

Gerhard Adam | 04/09/09 | 01:52 AM

The point is that if usage of resources was completely inelastic & unchanging (eg, every organism needs x amount of y resource to live, period) then evolution would not have occurred. Clearly there is a large degree of elasticity.

It's not a question of living at or below whatever modern society deems to be the poverty level. The vast majority of animals live on no dollars per day, & unlike some of the poorest Americans (or humans for the majority of their existence), they don't have healthcare or TV.

kerrjac (not verified) | 04/09/09 | 08:00 AM

I'm not sure what you're talking about. Resource usage is not elastic. It is variable only when there are enough resources to go around. If there is an inadequate amount of water, then species that are unadapted to it will move on or die off. If there is an inadequate amount of food, then species will move on or die off. Where's the elasticity? The only thing flexible here is your tolerance for how much of a species dies off.

I can't even begin to imagine what you mean by saying that "the vast majority of animals live on no dollars per day". That's either really cold, or really irrelevant. Not sure which with that comment.

Gerhard Adam | 04/09/09 | 12:40 PM

The analogy again can be made to science. Just as we'll never have absolutely perfect knowledge about the world, our endeavors, largely thru science, can help us approximate it. & altho we have finite resources in producing scientific advancement, our potential to always learn more about the world is practically infinite. It's not like one scientific advancement comes at the 'expense' of another...unless you want to argue that science is funded w/blood $ stolen from poor people, but really the fact that there are poor or starving people in the world doesn't disprove any point by itself. History has shown us that when we actively try to 'distribute' resources from a centrally planned system, everyone is worse off. The practice of communism in the Soviet Union killed more Russians than the holocaust; hypothetically you might say that this left more resources for us, but in reality no one benefited from their loss, just as no one benefited from the holocaust.

kerrjac (not verified) | 04/09/09 | 08:57 AM

Science has nothing to do with it. No one is talking about forcing a redistribution of resources. The point is quite simple. If almost half the world can be said to be living in poverty, then regardless of the reason or excuses, resources are clearly not getting to those people.

In the second case, we would have to determine if resources are even available to go to those people, so when 25% of a resource is consumed by 5% of a population, then there is not enough to be shared. Forced distribution isn't being discussed. The simple availability of resources cannot defy basic arithmetic.

Gerhard Adam | 04/09/09 | 12:43 PM

You should send this list of 10 to Geithner. I especially like #2 - how can you produce if you outsource all of your production overseas?

Becky Jungbauer | 04/07/09 | 08:43 AM

Maybe I don't have simillar values. Taking the graph to either end of the curve is unlikely to be even close to optimal

There are things that governments do well, things that markets do well, and things that other institutions, such as professional associations do well.

In the areas government does thing well, some socialism adds to the size of the economy and in the areas government does things badly socialism reduces the size of the economy. It seems that governments run health care better than the private sector. And they do this with a socialist model. And a private sector with large numbers of small producers has on many occasions run agriculture better than socialist governments.

Brendan (not verified) | 04/07/09 | 07:39 AM

Cover of March's issue of Wired magazine: the mathematical model "that destroyed Wall Street."

Becky Jungbauer | 04/07/09 | 15:54 PM

What would you expect from a group of individuals that can take a linear equation (like the reduce taxes) and produce a parabola?

Personally I'd be shocked if there was an actual mathematical model. Never seen one of those coming from economists.

Gerhard Adam | 04/07/09 | 16:13 PM

Personally I'd be shocked if there was an actual mathematical model. Never seen one of those coming from economists.

Or from an AI researcher:

"before the computer age, to form a theory and defend it required empirical evidence or stringent logical deduction. With the advent of computer programs, the fact that there was an unbiased device that would repeat the same process multiple times added another method to forming a theory: simulation. ...
"Is the program a theory?", or "Is the theory a program" ..."

Klaus K. Obermeier: "Natural Language Processing Technologies In Artificial Intelligence.", 1989,
pointing out the lack of genuinely scientific theories in the field.

Patrick Lockerby | 04/07/09 | 16:33 PM

Interestingly enough, many people point out the failings of communism because of the idea that a forced redistribution of resources doesn't work. While there are certain many examples that support this view, it also shows how one can fall into the related but not necessarily causal argument.

One of the more serious failings of economic theory is that there doesn't seem to be any recognition that resource distribution (in terms of resources used and resources available) is assymetric. When this is coupled with the political divisions that define our geography, it clearly illustrates why the vague notion of how animals survive cannot be applied to humans in any meaningful way.

While an argument can certainly be made that redistribution is not anyone's particular problem and that politics, alliances, etc will ultimately determine how this is done. It begs the basic question. Whatever solutions or shortcomings exist, must be definable using economic theory if there is to be any credibility to economics as an operational method to describe resource distribution and wealth.

I simply have not seen anything from economic theory which suggests that these ideas have ever been modeled, or analyzed. Certainly there are plenty of ideas and opinions that float around regarding this issues, but I have not seen a real model that would elevate this rhetoric to the level of science.

Gerhard Adam | 04/09/09 | 13:45 PM

I'm still not sure why you're demanding a theoretical model. Many of the economic models that people have tried to apply proved disastrous. This is why the example of communism is so chilling, with countries like the Soviet Union setting prices of millions of items centrally (I've been meaning to read this book on it http://www.amazon.com/Turning-Point-Revitalizing-Soviet-Economy/dp/18504...). I'd think it naive to view their collapse as independent of their communist system, but maybe I haven't looked at it from the right angle. The Soviet Union had a sizable army of economists working for it, all trying to artificially apply models into the pricing of items. They had the best of intentions, & yet unquestionably the results were disastrous.

In a broader sense, as science continues to merge w/public policy - particularly per Obama's promises - examples like the Soviet Union are apt. They had the models, or at least they acted like they did.

I don't see our state-funded scientists bringing down America like the Soviet economists did to Russia, but the analogy - & potential for harm - is quite real.

On this matter, 2 articles - both in the field of medicine - have been haunting me all week.

The 1st is a New York Times article (http://www.nytimes.com/2009/04/07/science/07tier.html?_r=3&ref=science) questioning public health's war on salt. Recent research has not only suggested that salt maybe good for your health in some ways, but that salt mild deprivation can be quite harmful. Quite frankly it's surprising that these findings ever got out, b/c I'm not sure how a dr. would get funding by saying that public health doesn't need to declare salt a public enemy. All the same, the article pits these findings next to New York's current attempt to ban restaurants from serving high sodium foods, the implication of course being that such bans are not only unnecessary, but potentially dangerous.

The 2nd, in the Wall Street Journal, was broader in scope (http://online.wsj.com/article/SB123914878625199185.html). It questions current growing standards in medicine (deemed "quality of care"). These have been growing in use w/the goal of ultimately helping to standardize medicare (& perhaps even to set the stage for universal care). Like the ban on salt, these standard practices - one includes monitoring blood sugar of all ICU patients - not only appear unhelpful, but might kill more lives than they save. All the same, hospitals that've adopted them punish dr's who fail to implement them.

Medicine - infinitely moreso than economics - is a *science*. But the point is that even policy based on these medical 'models' have snafus, & quite commonly when you attempt to implement them on a widescale. Models ideally are supposed to help us, not confine us. Not that we can't keep plugging away at medicine or economics hoping to come out w/something; & of course in the meanwhile we'll have to implement economic policy even if it means that it's more based on rhetoric & historical example rather than mathematical models (just as a dr's, who are bound to have imperfect knowledge of most things they come across, must supplement factual knowledge w/their own judgment).

Like any area in life that involves some degree of expertise, that's doesn't mean that any ol' hair-brained idea that comes to mind about economics is necessarily correct (eg, b/c we lack a perfect model to test it by). But it also doesn't mean that we can't say or do anything about the economy until we have an adequate model.

kerrjac (not verified) | 04/11/09 | 22:31 PM

"I'm still not sure why you're demanding a theoretical model"

Kerrjac: I'm not picking on you, but it should be obvious that without a theoretical model there can't be a theory.

My point is that if there is no economic theory, then everything we hear is merely opinion. If that's the case, then there clearly can be no economic policy based on theory. It's strictly based on whatever bias or philosophy one has, but it isn't based on actually knowing how anything works.

If that's the case, then we have made a huge start in recognizing that economics is nothing by philosophical opinion about wealth and resources. Then at least we know why it can't be fixed, or how come no one knows what to do.

If one has a model, then one can determine what assumptions went into it, what parameters are used to evaluate it, and what predictions it is intended to make. In this way, we get closer and closer to understanding what is being described and how it can be adjusted to make up for deficiencies. In the absence of any information like this, it really is strictly superstition and ritual.

In short, there is no economics besides "voodoo" economics.

Gerhard Adam | 04/12/09 | 15:54 PM

"If one has a model, then one can determine what assumptions went into it, what parameters are used to evaluate it, and what predictions it is intended to make. In this way, we get closer and closer to understanding what is being described and how it can be adjusted to make up for deficiencies. In the absence of any information like this, it really is strictly superstition and ritual."

That's certainly a very logical way of looking at things.

I guess then for my edification - as my current knowledge in many areas is rather crude - what should we consider a 'model'? Are we talking a series of statistical relationships w/explicit parameters & assumptions? Related constructs? A broader theoretical orientation? Does the model come first & then guide our inquiry? Or is it the output of our inquiry? If we can't come up w/a model are we hopeless? It seems like you're referring to the statistical type.

Godel's incompleteness theorem attests to the limits of building models from just logic & empirical relationships. But following Godel we didn't just throw our hands in the air & proclaim that everything's opinion. b/c there's a huge amount of space in between mathematical models & actual knowledge, even that of the scientific type. More often the models - at least I think, maybe I'm wrong - follow the phenomena, not precede them. From a strictly logical perspective, if you first need a model to learn about anything in the world, then how in the world would you ever learn about anything, particularly if models are created by human observation of the world - observations which lack the luxury of being informed by the models that they may later help to create.

I guess the point is that there's more room btwn models & opinions than you seem to be making out. They are not mutually exclusive. Take a dr a who strictly uses only evidence-based procedures vs the one who double-checks his work by his own intuition, which can be considered a messy conglomerate of didactic knowledge ('models') combined w/ other types of experiential knowledge. They've received similar education, have similar experience, only one immensely prefers utilizing peer review over experiential knowledge (he probably has that mentality that if you can't base your decisions on science, then it all comes down to a matter of opinion). As Groopman wrote in the WSJ article above & his recent book, the latter dr. is more often the superior. It's not a question of inadequate models, it's a question of applying all sorts of other types of knowledge to the decision-making process. As a result, Western medicine doesn't just throw up its hands & proclaim that its models are inadequate & that we should all reject evidence-based medicine & turn to alternative medicine. Rather it learns how to better apply such models in the future & maybe not to rely so heavily on them in the future. So it is w/science.

Those portions of Western medicine, of course, that over-relied on 'models' will get burned should their models be turned upside-down, but it should be no skin off of the wiser dr's who used other sources of non-didactic knowledge; the modern-day equivalent in economics is the Keynesians who also over-rely on models (there ought to be a verb for that, like over-modelization).

kerrjac (not verified) | 04/12/09 | 19:07 PM

As Robert Pirsig illustrated so well in Zen & the Art of Motorcycle maintenance, the very usage of models - & your requirement that we use them for everything - implicitly assumes that the phenomena we're trying to describe can in fact be described by mathematical models, & in a useful manner. But at the same time, it's a false assumption to jump to the opposite conclusion by stating that w/o a model we can't proceed scientifically. Once again I would think that medicine illustrates this principle quite well, in the sense that models are used as a heuristic, which aren't given absolute control over treatment, but are awarded various amounts degrees of control relative to their merits. In his autobiography Greenspan depicted a similar practice of using models & data to inform decision-making, but also drawing upon other types of knowledge & less conventional methods of analysis.

It's not a stretch to say that the practice of medicine, economics, & science itself is more of an art than a science. But contrary to many's knee-jerk reaction, this does not disqualify science as science; rather, it helps to put it to it's most optimal usage.

kerrjac (not verified) | 04/12/09 | 19:20 PM

I have to seriously disagree with your use of medicine as an example. You're looking at a doctor, who is actually a technician and not a scientist.

Medical knowledge is based on dozens of models and experiments which are used to validate the processes that doctors can employ. We have the germ theory of disease, detailed anatomy, physiology, biochemistry, etc. etc. It is the distillation of all these theories and models which ultimately results in medical procedures which can then be employed, including all the pharmacalogical data necessary to try and provide supportive treatments.

Without a model, there is nothing since everything is equally plausible. If it can't be reduced to mathematics than what is it? What rules does it follow? What are the cause/effect relationships we're looking for?

For example, we expect to learn about animals by observing them in their natural habitat, as well as performing detailed examinations to discover how they are "architected".

My point in economics, is show me something. Show me that there's been a modicum of thought that provides me a mathematical model, a physical model, some experimental data .... anything that suggests that someone has made some assumptions and drawn some conclusions that can be codified to see if they are valid or need adjustment. Even something as common as "supply and demand" isn't actually a theory as much as it is an assumption about how this relationship should behave. Therefore it is a fair question to ask .... has it ever been tested? What are the boundaries of it's behavior? What are the parameters that direct the supply/demand relationship? What can we expect or predict about the supply/demand relationship?

Without these basics, economics is nothing except personal opinion and interpretation. There are plenty of people that will tell you have it's supposed to work, but how do they know beyond expressing what they "think" is the idealized state. How do they even know what such an idealized state is?

It may seem like common sense, but at one point, it was "common sense" to bleed your patients to cure them.

Gerhard Adam | 04/12/09 | 20:02 PM

I'm with you, but I'd go even further. Sidewalks are Socialism. Why should we level the playing field so that a person with a cane and our finest athletes can both walk down the same block?

The problem with your hypothesis about a little bit of Socialism being harmful, is that we have so many glaring examples, like Socialist Holland, which pretty much INVENTED modern Capitalism, that prove you so resoundingly wrong.

Reaganomics is dead. Stop trying to raise it. Let the corpse lie in peace.

Anonymous (not verified) | 05/13/09 | 21:24 PM

In this article, I stated that "the good news is that we are on the same team." The commentary started in this same spirit, then quickly devolved into sometimes almost hosting bantering. We can do better.

Allow me, in a civil manner, to reply to the last post. To say that capitalism is dead is to say that incentive is dead. Really? Is human nature dead? Have we become machines? I don't think so.

A left leaning friend of mine took a shot at me the other day, stating, in a raised voice, "when I vote I don't do it to get more money for myself." What this statement showed me is that he, as someone on the left, believes that Fiscal Conservatives like myself are that way out of selfishness alone, "voting only for their own pocketbooks." For all those on the left reading this, allow me to inform you this is not the case. Fiscal Conservates generally and genuinely believe that redistribution takes from givers and gives to takers, that to do this is morally wrong, and that it results in less production and thus less for everyone. Most Fiscal Conservatives today allow that a bit of a social net prevents social unrest, which is also, of course, good for overall productivity, but nevertheless fight to keep this net within reason.

It is a difference of perspective, and that is all...

Fiscal Liberals believe Fiscal Conservatives are selfish Scrooge-esque types that only care about themselves. But the truth is that they believe that equality of opportunity as opposed to equality of outcome is best for all. They also believe that equality of outcome even in small doses always is at the price of equality of opportunity.

Fiscal Conservatives believe that Fiscal Liberals are simpletons that can't connect the dots between incentive and productivity even though it is in their faces every day. But the truth is that Fiscal Liberals believe that eqaulity of outcome and equality of opportunity are linked, even that they are almost one and the same, and that a healthy dose of equality of outcome is the better system for all.

Thus we are all on the same team, as I stated in the article originally. It is just that our strategies for SUCCESS FOR ALL differ.

In closing:

"Who is John Galt?"

Hawkins (not verified) | 05/14/09 | 09:21 AM

One problem with this .... There is no such thing as a Fiscal Conservative or a Fiscal Liberal. Both sides are simply politicians that are using their position to advance their own agendas and award the taxpayers money to their favorite groups.

As a result, conservatism has been viewed as the group most likely to give money to those that already have it, while liberals are viewed as the group that will give it away to those that don't.

We most certainly are on the same team. We're all being victimized by the same group of individuals (politicians) and we still allow it to continue.

Gerhard Adam | 05/14/09 | 09:41 AM

INCENTIVE is what keeps being missed in these discussions. Without incentive, people don't do things. That is simply the way it is.

There seems to frequently be some simplistic assumption that one can tweak redistribution (tax) rates without any change to production. This is not the case. At an extreme, if one gets nothing for doing something, he or she sure as heck will not do it. More practically speaking, as incentive is reduced via higher redistribution rates or lower profits due to other reasons (more competition, etc.) then some will do less and some will do nothing while some admitedly will continue as before. The end result is a reduction in what people do overall, thus a negative affect in production is realized.

What those on the left frequently completely miss, and regretfully even those on the right are seemingly oblivious to at times, is that INCENTIVE matters. At an extreme, with no incentive, there will be no production. Again, speaking more practically, as incentive is reduced, production will decline. The risk of this is that we could go beyond a point of no return, finding ourselves in an economic/currency tailspin as we adjust to being just another country.

James Hawkins | 08/31/09 | 09:30 AM

At an extreme, if one gets nothing for doing something, he or she sure as heck will not do it.

I realize you're using an extreme example, but this simply isn't true as witnessed by the large number of volunteer organizations and volunteers that contribute tremendously.

The problem with the point about incentives is that there never seems to be any consideration about the boundaries. If a CEO makes $5M/year then there's a presumption that if they make $10M/year that somehow they'll attract better people. That simply isn't a true correlation. The unfortunate reality is that while incentives can attract better people, there simply is no basis for asserting that the best people are the recipients of such incentives.

In any field there are people that are motivated by money alone, while others love their work. The point isn't to create disincentives, but rather to temper the incentives so that you don't attract only those that are in it for the money. This is becoming a problem in the discussion regarding health care, because it is alleged that doctors will be disinclined to be doctors if their pay is cut. However, I would suggest that it would eliminate those doctors that became doctors because it was a good paying field and encourage those that truly want to practice medicine. (NOTE: I'm not suggesting that they become minimum wage employees, but tempering the income would not likely produce any real negative impacts).

My main point would be that no group should ever have the impression that they have become so important that they can dictate the terms of their employment (professional or otherwise). While they are free to do that within the terms of the free market, they should not be encouraged or supported by systems or institutions that simply give in to their demands (i.e. insurance companies) since that undercuts the free market.

Gerhard Adam | 08/31/09 | 12:21 PM

I found this today on Science Codex:

Hoover's pro-labor stance helped cause Great Depression, UCLA economist says

I don't know how valid the findings are, but it sure is the kind of thing that causes men of conscience to tear their minds to shreds.

Robert H Olley | 08/31/09 | 13:36 PM

Valid or not, it does make me wonder why these people focus on hindsight rather than foresight. I've noticed that there has been a single coherent plan put forth detailing what should be done and the expected impact.

Gerhard Adam | 08/31/09 | 13:49 PM

Gerhard your comments just above are well thought out and communicated. Note, however, that with truly entrepreneurial endeavors, which is where much wealth is created, there is also a risk component, such that one balances risk and effort vs. potential reward. Greater volume implies greater potential reward, but this is largely offset by greater potential risk.

Nevertheless, your comment that "no group should ever have the impression that they have become so important that they can dictate the terms of their employment (professional or otherwise)" rings very true. It touches on the troublesome entitlement culture that had become pervasive in our society. One good outcome of our current troubles would be the breaking of this.

Anonymous (not verified) | 08/31/09 | 16:02 PM

I agree and don't have a problem with entrepreneurial endeavors. My problem stems from those that have become entrenched and are part of the "entitlement culture". Far too many companies don't focus on the markets or on making sensible economic choices as much as they focus on pleasing stockholders. This creates a schism wherein the stockholder is interested in making money as opposed to conducting business.

Coupled with the sense that many companies are "too large to fail", this has created a serious imbalance that should be corrected and perhaps as you suggest, it is a hold that may be broken.

Gerhard Adam | 08/31/09 | 16:11 PM

The idea of stock options seemed like a good idea at first. The probem with them, it seems, is that the appreciation in them became expected, somewhat like a holiday bonus can become expected, such that it is closer to being salary than a bonus (based on performance). Once the appreciation became expected, then repricing began, and then, again, incentive broke down as a sense of entitlement increased. Somewhat like socialism ignores human nature as a variable (particularly that incentive, well, incents) the stock option concept ignored the human nature of employees and how growing equity in options become a form of salary. This in turn created a culture of acceptance of if not preference for manipulating short term prices at the expense of wealth creation. Considering human nature in economic considerations is something that seemingly is not done enough.

James Hawkins | 08/31/09 | 21:02 PM

I work for a company that pays a significant % of compensation as bonus. My bonus payments depend more on luck than effort so they provide a pretty weak incentive.

The marginal utility of pretty much anything declines the more of it you have. Higher tax rates decrease the total amount of money you have. Thus the marginal utility of money increases with higher tax rates. So higher tax rates (less than 100%) may increase incentive.

Argued another way, say you need $40,000 per year to be happy (Marginal utility high below $40,000 and high above$40,000). With zero tax you need to earn $40,000, with 50% tax you need to earn $80,000.

Or from another perspective, really rich people don't need much incentive to do what they do, they love it anyway, so high marginal tax rates on very high income earner don't have much effect on the economy.

Humans are complex don't behave the way socialist or market models suggest. A better approach is to really look directly at why people do what they do, and address that, rather than assuming any particular model. Challenge people, ask for more, reward them well in many ways, notice what is going on and respond thoughtfully.

Brendan (not verified) | 08/31/09 | 22:00 PM

Brendan, there is some truth in what you say, but seemingly not much, if I follow you correctly. You seem to imply that once someone has what they need then they will continue to produce at their maximum regardless if all additional compensation for additional effort/production is taken away from them. This may be true with an exceptionally small percentage of the population, but I would suggest it is exceptionally small, as in negligible to none, and that it is doubtful that it even applies to you. Nobody works for free, incrementally or otherwise. Your particular bonus system sounds as if it is not effective, and instead is more of a "content if you get it resentful if you don't" type plan. It is not valid to refer to the ineffectiveness of a bonus plan that doesn't in fact incent to argue that incentive does not work in society. Instead tell us that you don't need 30% or some percentage of your compensation (as the marginal utility is low or 0) and that you have volunteered a pay cut to your employer. That would be a valid argument.

James Hawkins | 09/01/09 | 05:40 AM

> You seem to imply that once someone has what they need then they will continue to produce at their maximum regardless if all additional compensation for additional effort/production is taken away from them.

A footballer will continue to try to be a better footballer even once their salary has hit a salary cap. A CEO will work to run the most successful company even without any additional financial incentive above their salary. I think this is uncommon.

> Instead tell us that you don't need 30% or some percentage of your compensation (as the marginal utility is low or 0) and that you have volunteered a pay cut to your employer. That would be a valid argument.

I think you want an example of how incentive is higher with a higher tax rate.

Consider a garbage worker who will work as few hours as possible to meet their (approximately fixed) needs comfortably. Given a flat 0% tax and flat 50% tax, and a very high hourly wage the garbage worker will work longer with the higher tax rate. Long enough to get the money they need in either case. This step function utility is not entirely accurate, but is not way out either.

Brendan (not verified) | 10/13/09 | 23:03 PM

This is an interesting comment that would support a flat tax as opposed to the progressive tax the U.S. has now, which is ironic in that those that want to tax (read redistribute) generally wish to tax only those making a lot of money. Are you Steve Forbes?

I love the national parks, and can't imagine they would have happened without government participation. Thus, perhaps there is a place for some government, at a minimum to create more parks for me to play in. Outside of a narrow list, however, taxation is only redistribution, either soft, as in having the government do something inefficiently so as to employ more people, or hard, as in handing out checks. The only production increasing effect seemingly is that of preventing dischord, if not revolution.

James Hawkins | 10/14/09 | 12:08 PM

Outside of a narrow list, however, taxation is only redistribution,
either soft, as in having the government do something inefficiently so
as to employ more people, or hard, as in handing out checks.

I think that statement is a bit self-indulgent. In the first place, that's what economics is about. The perpetual mixing and redistribution of money, so to suggest that this is something that is "wrong" about government misses the point.

The government is responsible for so many things that have been successful, it is unfair to paint them as some parasite on our backs. Everything ranging from the military, police, fire, to the internal road system and even electrification.

The general safety of our food, drugs, and consumer goods would certainly not be at the level it is if it depended on corporate altruism. The fact that the government can be inefficient is no different than the behavior of any large organization and is quite prevalent in private industry as well.

While it doesn't mean that government should do whatever it likes, neither should corporations. Bear in mind, that if it weren't for government there would be no corporations. After all, corporations are the ultimate socialistic organizations by utilizing the laws of government to gain legal status to protect corporate officers and shield investors, it could hardly be argued that they would even exist if individual responsibility were a requirement.

In addition, every citizen certainly expects the socialistic organizations of the military, police, and fire to protect them. Once again, these would hardly exist if they depended on the free market or private citizens to fund.

All systems can be compromised and perform good or badly. However, there is no "ism" that is arbitrarily wrong. It depends on context and what the objective is, and in that respect socialism also has much to offer. One of the worst things though is the average American's fantasy that they are participating in "capitalism". More appropriately it may be suggested that they are engaged in "proletariatism", since the vast majority depend on a paycheck instead of invested capital.

Gerhard Adam | 10/14/09 | 12:37 PM

> This is an interesting comment that would support a flat tax as opposed to the progressive tax the U.S. has now, which is ironic in that those that want to tax (read redistribute) generally wish to tax only those making a lot of money. Are you Steve Forbes?

It particularly supports it if you believe higher production is always good. You tax people highly, so they have to work 90 hours a week just to survive. Then you spend the money on bombs, which you drop on Afghanistan.

The important thing is to challenge your assumption that small amounts of taxation reduce production. I think your assumptions incentive effects, assume an invalid wealth/utility function. I also think the value expenditure enabled by the taxation, such as shared infrastructure contributes even more greatly to production.

I like all things taxation is about balance, where taxation too low reduces productivity as infrastructure, research and education is lacking, and taxation too high has issues also. I think the conservative focus on the size of government is a mistake, and we should focus on the effectiveness of government as a much more leveraged area where we can improve. We should also look at the effectiveness of the market, where transparency can be greatly enhanced in a wired world.

Brendan (not verified) | 10/14/09 | 19:45 PM

Actually, the experiment has been done. I grew up in Sweden in the 1970's, and socialism worked just fine.

Alfredo Louro (not verified) | 10/12/09 | 10:42 AM

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