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Thursday, May 05, 2016

Book of the Week + Brainstorm

As I mentioned previously, tomorrow night will be the much-anticipated Brainstorm with Dr. Steve Keen, one of, if not the most, significant economists working today. The event is open, it will take place on May 06, 2016 at 7:00 PM  Eastern, and you can register for it here.

As I was going over the second edition of his book, Debunking Economics, (which is also this week's Book of the Week) in order to prepare a few questions, I was struck by the way in which his key observation, that demand is not stackable, completely demolishes the foundation of modern economics. I'm not entirely sure even Dr. Keen fully grasps the consequences of his revolutionary mathematical - and logical - observations. From the section entitled Don't tell the children:
For many years, the leading text for Honors, Master’s and PhD programs was Hal Varian’s Microeconomic Analysis (Varian 1992). Varian ‘summarized’ this research so opaquely that it’s no surprise that most PhD students – including those who later went on to write the next generation of undergraduate textbooks – didn’t grasp how profoundly it challenged the foundations of neoclassical theory.

Varian started with the vaguest possible statement of the result: ‘Unfortunately […] The aggregate demand function will in general possess no interesting properties […] Hence, the theory of the consumer places no restrictions on aggregate behavior in general.’

The statement ‘no interesting properties’ could imply to the average student that the market demand curve didn’t differ in any substantive way from the individual demand curve – the exact opposite of the theoretical result. The next sentence was more honest, but rather than admitting outright that this meant that the ‘Law of Demand’ didn’t apply at the market level, he immediately reassured students that there was a way to get around this problem, which was to: ‘Suppose that all individual consumers’ indirect utility functions take the Gorman form [… where] the marginal propensity to consume good j is independent of the level of income of any consumer and also constant across consumers […] This demand function can in fact be generated by a representative consumer’ (ibid.: 153–4; emphases added. Curiously the innocuous word ‘generated’ in this edition replaced the more loaded word ‘rationalized’ in the 1984 edition.)

Finally, when discussing aggregate demand, he made a vague and reassuring reference to more technical work: ‘it is sometimes convenient to think of the aggregate demand as the demand of some “representative consumer” […] The conditions under which this can be done are rather stringent, but a discussion of this issue is beyond the scope of this book […]’ (Varian 1984: 268).

It’s little wonder that PhD students didn’t realize that these conditions, rather than merely being ‘rather stringent,’ undermined the very foundations of neoclassical economics. They then went on to build ‘representative agent’ models of the macroeconomy in which the entire economy is modeled as a single consumer, believing that these models have been shown to be valid. In fact, the exact opposite is the case.
The modern replacement for Varian is Andreu Mas-Colell’s hyper-mathematical – but utterly non-empirical – Microeconomic Theory (Mas-Colell, Whinston et al. 1995). At one level, this text is much more honest about the impact of the SMD conditions than was Varian’s. In a section accurately described as ‘Anything goes: the Sonnenschein-Mantel-Debreu Theorem,’ Mas-Colell concludes that a market demand curve can have any shape at all, even when derived from consumers whose individual demand curves are downward-sloping:

Can [… an arbitrary function] coincide with the excess demand function of an economy for every p [price …] Of course [… the arbitrary function] must be continuous, it must be homogeneous of degree zero, and it must satisfy Walras’ law. But for any [arbitrary function] satisfying these three conditions, it turns out that the answer is, again, ‘yes.’ (Ibid.: 602)

But still, the import of this result is buried in what appear to the student to be difficult problems in mathematics, rather than a fundamental reason to abandon supply and demand analysis. Earlier, when considering whether a market demand curve can be derived, Mas-Colell begins with the question: ‘When can we compute meaningful measures of aggregate welfare using […] the welfare measurement techniques […] for individual consumers? (ibid.: 116).

He then proves that this can be done when there is ‘a fictional individual whose utility maximization problem when facing society’s budget set would generate the economy’s aggregate demand function’ (ibid.: 116). However, for this to be possible, there must also exist a ‘social welfare function’ which: ‘accurately expresses society’s judgments on how individual utilities have to be compared to produce an ordering of possible social outcomes. We also assume that social welfare functions are increasing, concave, and whenever convenient, differentiable’ (ibid.: 117).

This is already a case of assuming what you wish to prove – any form of social conflict is assumed away – but it’s still not sufficient to generate the result Mas-Colell wants to arrive at. The problem is that the actual distribution of wealth and income in society will determine ‘how individual utilities are compared’ in the economy, and there is no guarantee that this will correspond to this ‘social welfare function.’

The next step in his ‘logic’ should make the truly logical – and the true believers in economic freedom – recoil in horror, but it is in fact typical of the sorts of assumptions that neoclassical economists routinely make to try to keep their vision of a perfectly functioning market economy together. To ensure that the actual distribution of wealth and income matches the social welfare function, Mas-Colell assumes the existence of a benevolent dictator who redistributes wealth and income prior to commerce taking place: ‘Let us now hypothesize that there is a process, a benevolent central authority perhaps, that, for any given prices p and aggregate wealth function w, redistributes wealth in order to maximize social welfare’ (ibid.: 117; emphases added).

So free market capitalism will maximize social welfare if, and only if, there is a benevolent dictator who redistributes wealth prior to trade??? Why don’t students in courses on advanced microeconomics simply walk out at this point?

I surmise that there are three main reasons, the first of which is banal. Mas-Colell’s book is huge – just short of 1,000 pages – and lecturers would cherry-pick the sections they teach. I doubt that most students are exposed to this statement by their instructors, and few are likely to read parts that aren’t required reading for pleasure alone.

Secondly, the entire text is presented as difficult exercises in applied mathematics. Students are probably so consumed with deriving the required answers that they gloss over English-language statements of these assumptions which make it blatantly obvious how insane they are.

Thirdly, by the time students get to this level – normally in PhD programs – they are so locked into the neoclassical ‘assumptions don’t matter’ mindset that I discuss in Chapter 8 that they don’t even worry if an assumption is insane.
If you followed that, then you can understand why this is critically fascinating material that is almost shockingly ignored by nearly everyone who should know better.

Labels: ,

64 Comments:

Blogger Noah B May 05, 2016 5:58 PM  

Garbage in, garbage out.

Blogger Jack Ward May 05, 2016 6:15 PM  

I suspect, strongly, that after this Brainstorm event, I will be purchasing Mr. Keen's book.
Or, even before said event.

Anonymous Leonidas May 05, 2016 6:19 PM  

Out of all the brainstorms I've missed (which is most of them), this one is probably the most disappointing.

Anonymous VFM #6306 May 05, 2016 6:31 PM  

This does explain, however, how "just so" economics can produce false positives with enough frequency to "seem right," and thus self-perpetuate. It's not even wrong.

After all, if - for example - Boom-Bust is only a theoretical model and does not actually operate like that in the real world, it is pretty obvious that the "nadir" of a Bust isn't being properly calculated, and therefore the "trailing" correction's effect can't possibly be determined to be on time, behind, or ahead of schedule or even disruptive or effective in any way.

Wait...

Am I reading this correctly?

Blogger Salt May 05, 2016 6:39 PM  

This is already a case of assuming what you wish to prove ... and there is no guarantee that this will correspond to this ‘social welfare function.’

Square peg, meet round hole. Perhaps Chaos Theory has it right, and economic theory simply cannot handle the size and scope upon which the butterfly operates.

Chaos: When the present determines the future, but the approximate present does not approximately determine the future. - Edward Lorenz

Anonymous Dave May 05, 2016 6:50 PM  

I'll be most interested in the Vox Populi effect on the demand curve for a $29.99 Economics Kindle ebook.

(should've grabbed rankings 2 days ago, oh well)
Amazon Best Sellers Rank: #145,714 Paid in Kindle Store
#85 in Kindle Store > Kindle eBooks > Business & Money > Economics > Theory
#133 in Kindle Store > Kindle eBooks > Business & Money > Economics > Economic History
#301 in Books > Business & Money > Economics > Theory

Blogger Ceasar May 05, 2016 6:51 PM  

"Thirdly, by the time students get to this level – normally in PhD programs – they are so locked into the neoclassical ‘assumptions don’t matter’ mindset that I discuss in Chapter 8 that they don’t even worry if an assumption is insane."

BINGO!!!!!!! At some point with all the time, effort and money spent on their Phd, these students just want it over with and are willing to regurgitate anything.

Anonymous Dave May 05, 2016 6:58 PM  

Sorry "Popoli"

Uh-oh falling rankings: #156,118 Paid in Kindle Store
#97 in Kindle Store > Kindle eBooks > Business & Money > Economics > Theory
#143 in Kindle Store > Kindle eBooks > Business & Money > Economics > Economic History
#355 in Books > Business & Money > Economics > Theory

Anonymous Freestater May 05, 2016 6:58 PM  

Jack Ward the book is excellent if you have an interest in Economics in general or of you just want to know more than a few reasons why modern Economics built on Keynesian and classical economics has so many problems. The only real problem for the book in my opinion is that there are several very technical mathematical sections that will turn off even the above average intelligent reader. Even if you skip over the technical math sections there is a lot of good info within however.

Anonymous EH May 05, 2016 7:11 PM  

Agent-based microeconomic simulations with each agent having different amounts and types of property and perceptions of interests would be interesting. If the distributions of agent attributes matched that of people in the real world, and familiar macroecomomic patterns emerged naturally from the simulated transactions of the agents, then that would validate the economic theory used to model the decisions of the agents. I expect that economic simulations will go wrong pretty quickly even with today's best simulation techniques, though.

Blogger tz May 05, 2016 7:15 PM  

Aggregate Demand is cemented in concrete. (how many will get this?)

Blogger Thomas Davidsmeier May 05, 2016 7:15 PM  

Even if they are PhD students currently, they are most likely coming from a background that has such a fractured approach to mathematics that they don't understand the significance of assumptions that underlie models.

Our education system almost never directly touches upon the idea of creating intellectual/mathematical models any more. And, we certainly don't go into depth and practice it in such a way that students would leave our classes with a questioning attitude, let alone the firepower to dig into assumptions and think about their implications.

Blogger tz May 05, 2016 7:17 PM  

Discussing assumptions on the feast of the ascension confuses Jesus with his mother.

Blogger John May 05, 2016 7:27 PM  

I thought Keynes ruled modern economics. Sounds like Ricardo is the real king.

Anonymous A Paradigm Is More Than Twenty Cents May 05, 2016 7:27 PM  

"Thirdly, by the time students get to this level – normally in PhD programs – they are so locked into the neoclassical ‘assumptions don’t matter’ mindset that I discuss in Chapter 8 that they don’t even worry if an assumption is insane.”

So PhD econ students are easy prey to the sunk cost fallacy?

This is my surprised face.

Blogger praetorian May 05, 2016 7:36 PM  

If you followed that, then you can understand why this is critically fascinating material that is almost shockingly ignored by nearly everyone who should know better.

Everything I thought I knew about economics is a farce.

Anonymous Napoleon 12pdr May 05, 2016 7:39 PM  

Assumptions always affect the results. I'm an aerospace engineer...and one of the first things you learn is to understand what assumptions were made, and to know the conditions under which they apply.

Anonymous Cassie May 05, 2016 7:40 PM  

tz wrote:Aggregate Demand is cemented in concrete. (how many will get this?)

LOL

Anonymous Roo May 05, 2016 7:43 PM  

@9 Did you even read the book?
The author specifically avoided using math symbols to avoid the "Mine eyes glaze over effect"
Definitely visit the authors website as well, there is plenty of overlap between the book and articles available in the book

Anonymous Nunzio May 05, 2016 7:54 PM  

Aggregate Demand is cemented in concrete. (how many will get this?)

I gettit.
Tonight Aggregate Demand will sleep with the fishes...

Anonymous Nunzio May 05, 2016 7:56 PM  

Aggregate Demand is cemented in concrete. (how many will get this?)

I gettit.
Tonight Aggregate Demand will sleep with the fishes...

Anonymous #8601 Jean Valjean May 05, 2016 8:02 PM  

Keen is very bearish on China due to excessive private debt to GDP. But is "private" debt really private in Red China?

Anonymous User May 05, 2016 8:24 PM  

Assuming continuous behavior from a set of discrete operations is madness in any event. Climatologists make the converse error with their simulations.

Anonymous Anonymous May 05, 2016 8:43 PM  

At the basis of most incorrect results - are the incorrect assumptions. Economics and finance is plagued by those to an absurd degree.

The welfare maximization logic in particular is laughably erroneous and subjective. Just read Weitzman's dismal theorem, and you pretty quickly get an idea what the theory is used for in practice. Pure pot science...

Can't wait to hear this brainstorm.

Blogger SteelPalm May 05, 2016 8:50 PM  

This is awesome. I will absolutely be there tomorrow.

My only regret as an economist is that I haven't had a chance to read Keen's work beforehand as prep.

Anonymous Darren H May 05, 2016 8:57 PM  

OK, ill admit. I'm confused. What does it mean when you say "demand is not stackable", and can you give me the dumbed down/easy to understand version of what's being said in that extended book quote. If anyone can break it down into simple speak (as simple as possible anyhow), I'd appreciate it.

Blogger S1AL May 05, 2016 8:59 PM  

Am I misunderstanding the premise, or is this simply another example of "the ideal situation doesn't exist (and is usually irrelevant to reality)"?

Anonymous A Paradigm Is More Than Twenty Cents May 05, 2016 9:07 PM  

Now I’ve read the excerpt twice. It is enlightening.

Who knew that Humpty Dumpty from Through The Looking Glass was an economist?

Anonymous A Paradigm Is More Than Twenty Cents May 05, 2016 9:08 PM  

Now I’ve read the excerpt twice. It is enlightening.

Who knew that Humpty Dumpty from Through The Looking Glass was an economist?

Anonymous Anonymous May 05, 2016 9:14 PM  

"OK, ill admit. I'm confused. What does it mean when you say "demand is not stackable", and can you give me the dumbed down/easy to understand version of what's being said in that extended book quote. If anyone can break it down into simple speak (as simple as possible anyhow), I'd appreciate it."

I can attempt it:

By demand being not stack-able, it is meant that the individual demand functions can't be added together to form the aggregate demand function. Same would apply for the supply function.

As for summarizing the text. It basically says that the (neoclassical) economic theory is extremely silly, and relies on garbage assumptions which are not true in the real world.

Blogger 罗臻 May 05, 2016 9:16 PM  

@21 The problem isn't only private debt, it's that the public debt is already very high. The local governments have off-balance sheet borrowings that are being brought on balance with muni bond sales, the banks still have extensive shadow lending through WMPs and trusts, and SOEs are loaded with debt too. A bailout of all this debt cannot be pulled off like in the late 1990s. Back then the banks had lots of NPLs, but also a rapidly growing economy and a clean national balance sheet.

Keen recently posted an Excel file showing how a slowdown in debt causes recession Get ready for an Australian recession by 2017. You can play with the numbers, but what it shows is that when the debt/GDP ratio stops going up, the recession begins.

Anonymous quamuri May 05, 2016 9:24 PM  

Darren, I believe the question VD and Keen are referring to is whether you can aggregate individual demand functions into an aggregate demand functions that will be "well-behaved" - that is, have the same agreeable properties as the original demand functions.

You do a primitive version of this aggregation whenever you make a "demand schedule" for a particular good, i.e. what quantity of the good consumers will be willing to buy at each possible price. But the demand schedule for each good is "ceteris paribus", assuming no changes in demand for the other goods, whereas an aggregate demand function is not. That makes the math sort of headache-inducing unless you make simplifying assumptions and iiuc Keen thinks the assumptions are deranged. Of course, as far back as Mill people have been pointing out that economic data doesn't meet any of the requirements for the application of differential calculus in the first place.

(It's not clear why he links this to the "Law of Demand". There are Giffen goods, for example. The Law of Demand doesn't necessarily hold even in individual demand functions; it's really just a rule of thumb.)

Anonymous Mr. Rational May 05, 2016 9:26 PM  

tz wrote:Aggregate Demand is cemented in concrete. (how many will get this?)
<gives tz a stony look, and in a gravelly voice says "It's going to be a rocky time for you if you keep punning like that.  Cut it out or I'll transfer you to Portland.">

Blogger 1337kestrel May 05, 2016 9:26 PM  

One specific, simplified case of this is "quantity" of demand.

It may not be obvious to mainstream economists who continue to blather that "Demand is too low and needs to be boosted," but demand in the sense that the layman thinks of is infinite. Demand vastly exceeds available supply.

Now when you look at demand as willingness and ability to pay... demand equals supply on a purely quantitative level. Everything that is produced is available to be traded for everything else that is produced.

So, either demand is infinite (I would gladly take possession of all unsold merchandise for a penny a ton), or demand equals supply. Demand can never truly be lower than supply. It can only me mismatched to supply, such that one group is supplying submarginal shoes, while no one is growing potatoes.

Savings reduces demand at one period of time, but also reduces supply at the same period of time.

Only the creation of fiat money and debt-based currency has the needless complexity to totally obscure these basic facts, which Von Mises summarized decades ago.

Now I'll admit to being poorly read in economics. I figure I know what I need to. The way Keen and that other feller mathematically figure it is a broader and more general and probably more useful theory. But the fact that aggregate demand is not the same beast as individual demand is quite clear, in the same way Triton is not the same as an H2O molecule. It has emergent properties like gravity and pressure-induced phase changes, whereas a single molecule cannot be said to have a state. Economists treating the GDP like a household budget are like physicists counting the leftover valence electrons of the Earth's core.

Blogger 1337kestrel May 05, 2016 9:33 PM  

So PhD econ students are easy prey to the sunk cost fallacy?

The Death Spiral Theory of Economics: When studying economics becomes uneconomical, only bad economists will continue studying it, thus making economics less accurate and less economical.

Blogger praetorian May 05, 2016 9:34 PM  

What does it mean when you say "demand is not stackable", and can you give me the dumbed down/easy to understand version of what's being said in that extended book quote. If anyone can break it down into simple speak (as simple as possible anyhow), I'd appreciate it.

At the risk of speaking and removing all doubt: I think he's saying that individual demand curves don't "stack" on top of one another cleanly to form a single aggregate demand curve. The market demand curve, therefore, can have an arbitrary shape unrelated to our intuitive understanding of an individuals demand curve.

So, all those nice clean Supply/Demand equilibria graphs you got in econ 101? Into the trash they go.

Blogger Lazarus May 05, 2016 9:50 PM  

#8601 Jean Valjean wrote:Keen is very bearish on China due to excessive private debt to GDP. But is "private" debt really private in Red China?



Only for the Chinese that are not members of The Party. A lot like the US.

Blogger noland brown May 05, 2016 9:53 PM  

This comment has been removed by the author.

Blogger Stephen Ward May 05, 2016 9:54 PM  

@24 Darren H,

consider an idealized economy of 100 people whose demand for a good G at price P is measured as
A1 for the first person
A2 for the second person
and so forth

if demand were stackable, then the aggregate demand for a good G at a price P is simply the sum of A1 through A100

consider now that G is in a market of 100 goods, whose aggregate demand is measured as G1 through G100.

if demand were stackable then the aggregate demand for the market (measured roughly by GDP) is simply the sum of G1 through G100

thus, when Keen claims that demand is not stackable, he's saying that aggregate demand for a good is NOT necessarily the sum of A1 through A100, and similarily for the aggregate demand of a market.

In fact, this sentence from the 2nd paragraph in the quote "Hence, the theory of the consumer places no restrictions on aggregate behavior in general." means that the aggregate demand for a good can be less than, equal to, or greater than the sum of each person's individual demand for it; similarly for the market.

That's a precise explanation anyway, and hopefully it's clear.

The extended quote basically says that for macroeconomics economists assume that
* everyone owns the same amount of money
* everyone earns the same amounty of money
* everyone wants the same goods to the same degree as everyone else
* everyone likes everyone else
* everyone has the same preferences for the same externalities (i.e. either everyone prefers to have trains that set wheat fields on fire, or everyone prefers to have wheat fields restrict the proliferation of train tracks)

Blogger Jimmy Pacek May 05, 2016 10:05 PM  

It's interesting how often modern theories require a mythos as a foundational assumption. I wonder why that is.

Anonymous Roundtine May 05, 2016 10:07 PM  

Consider: almost all of the key people in government and central banks around the world are fixated on aggregate demand right now, trying to figure out how to end a global depression.

Blogger Unknown May 05, 2016 10:08 PM  

Economic novice here. Austrian economics doesn't use mathematical formula or assumptions and the majority of their theories align with that of neoclassical economics. Thus this article hasn't really done much to change my economic view. Or wait...is this saying that modern MACROeconomics is flawed? If so, I agree.

Blogger Stilicho May 05, 2016 10:10 PM  

Tldr: individual demand curves interact in non-linear ways to form aggregate demand curve. All things do not remain unchanged while the interactions occur.

Anonymous Takin' a Look May 05, 2016 10:12 PM  

Dr. Steve Keen? You've been reading Video Rebel's blog.

Anonymous krymneth May 05, 2016 10:13 PM  

The clickbait portion of the Internet has lately taken to describing every mild retort or slight counterargument as "destroying!" the target, but this is the real deal. Systematic destruction with literally mathematical precision. And I only just finished chapter 3.

So far my only quibble is what appears to be an unjustified leap from "The economy can not be derived from simply adding up individuals" to "it is sensible to use classes to analyze the economy". Perhaps it will be justified later. But just because it is true that we can't start from individuals does not mean that we can meaningfully start with groups, nor does it show that the most useful groups to do it with happen to corresponding to what we would call "classes".

I'd observe that the practical people in the field often use "demographics" rather than "class" for their analysis, which may overlap but are not the same, and I would also question whether it is necessarily the case that groups have to be drawn where people are cleanly placed in one group or another. What if my media consumption is "lower class" but my food consumption is "upper middle class"? (Which is really to say, that class might not be a useful distinction there.)

Again, maybe this is covered later. But it's got me thinking, and that's already a compliment.

Blogger 1337kestrel May 05, 2016 10:43 PM  

Austrian economics doesn't use mathematical formula or assumptions and the majority of their theories align with that of neoclassical economics.

Austrian economics is about reasoning from axioms, rather than developing empirical models like the Chicago School. in that sense it is superficially similar to the classical arguments. It could very well use mathematical formulas and statistics, but it needs a lot more development to get to that point. Ever since the ruling elites realized that Austrianism didn't benefit them, it has been neglected.

I think Austrian calculus would be more similar to set theory or graph theory than algebra.

Anonymous jOHN MOSBY May 05, 2016 10:54 PM  

"This is awesome."
It would be way more awesome if you would drop that Yid stuff and convert to Christianinty.

Anonymous Jack Amok May 05, 2016 11:44 PM  

Demand curves cannot stack with each other for the simple reason that the individual demand curves for each product already account for the existence of other products in the market.

The demand for steaks tapers off as the price goes up because people choose pork chops instead. The demand for cruise ship tickets tapers off as the price goes up because people choose camping in a national park plus a new refrigerator instead.

Blogger praetorian May 05, 2016 11:55 PM  

Thus this article hasn't really done much to change my economic view.

Austrians tend to believe in the fractional-reserve theory of banking and money creation. Understanding that credit-money precedes fiat-money (or commodity-money) should change the way you think about things.

Blogger praetorian May 06, 2016 12:00 AM  

krymneth, if you read the linked blog post above:

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

You'll see that he runs simulations using classes and compares the outcomes with what was seen in the past. He admits the simulations are only approximations, but he is able to reproduce very similar outcomes to what we see today (e.g. increasing bank reserves in the face of fiat money expansion) that other theories do not predict.

Blogger LP9 Forever Solidified in Gold! Rin Integra S.I.G. May 06, 2016 1:03 AM  

Incredible reading, making a book a week or book the brainstorm topic is way cool.

But still, the import of this result is buried in what appear to the student to be difficult problems in mathematics, rather than a fundamental reason to abandon supply and demand analysis. Earlier, when considering whether a market demand curve can be derived, Mas-Colell begins with the question: ‘When can we compute meaningful measures of aggregate welfare using […] the welfare measurement techniques […] for individual consumers? (ibid.: 116).

And what appalls me about even my own home economics to national econ to global econ indicators is that people ignore math, and dance around simple math. We cannot math, stats or facts like reality, reality is impossible to manipulate.

OT: Yugge great news of success, Trump's events in Pittsburgh and WV are so fun.

Blogger Ahazuerus May 06, 2016 3:24 AM  

Shepherd Book used to say; if you can't do something smart, do something right.

Economists, having been in large degree captured by imperial court politics, have forgotten their original objective of discovery and long pursued specific outcomes instead.

Hence endless searches for theoretical "reasons" to abandon moral strictures and simply do whatever is expedient.

I realise this analysis is tangential at best, to the opening discussion. It's not given as either refutation or criticism, merely a different path, starting from a different point, that reaches much the same conclusion.

To wit, that the vast majority of economics is now divorced from both it's theoretical and empirical underpinnings.

Blogger JL Domingo May 06, 2016 4:15 AM  

At last, an explanation of why the Catalan regional government was unable to balance its budget - its finance minister was the same Mas-Colell.

Blogger James Dixon May 06, 2016 6:11 AM  

> ...[where] the marginal propensity to consume good j is independent of the level of income of any consumer and also constant across consumers...

Two obviously incorrect assumptions, as neither is the case.

> The market demand curve, therefore, can have an arbitrary shape unrelated to our intuitive understanding of an individuals demand curve.

That's what he saying, yes.

Anonymous RJ May 06, 2016 8:00 AM  

"Thirdly, by the time students get to this level – normally in PhD programs – they are so locked into the neoclassical ‘assumptions don’t matter’ mindset that I discuss in Chapter 8 that they don’t even worry if an assumption is insane."

If a PhD student in economics even mentions that an assumption is insane or that the models don't really model reality, he will be kicked out of the program. Economics PhD programs are more dogmatic than Islam.

Anonymous NotKeen May 06, 2016 9:38 AM  

One especially persisting mistake that is often made in macroeconomics is believing that government is some lever that can be controlled. In fact, this contradicts the very assumptions of the theory. If individuals maximize their utility, the government officials would maximize their utility.

And how would that happen? By enslaving everyone (at least for a short term profit maximizer).

The nature of government is completely ignored by these theories. And it usually doesn't stop there either...

Anonymous It's 2015 + 1 May 06, 2016 9:39 AM  

Just wanting to throw in some anecdotal "evidence" here for people that may not be familiar with commerce and economic education. While I was at one of the top commerce programs in my country (Canada), I noticed a few things about the students in each program.

1. The honours bachelor of business admin minimum acceptance high school grade was approx. 88%. The economics program was much lower, at around 75%.

2. Most schools had it set up so that those in 1st year economics, could transfer over to business admin if they achieved high enough grades (80% +).

3. The failure / drop-out rate of business admin after 1st and 2nd year was around 50% and those people were given the chance to enter the economics program.


These factors (and having to interact with them in joint econ-lectures) lead myself and a lot of others to notice that our economics program was essentially the Island of Misfits - those that couldn't hack it academically, either in high school or in the relative safe space of our commerce program.

Of course, this is purely anecdotal and I'm sure there were some bright people in the econ program, but given the level of greed in our cultures and media, most of the brightest students always ended up in commerce (where they could strive to be investment bankers).

The last point that I will bring up might also shed some light on the current state of our "corporate world". The VAST majority of students were essentially programmable calculators/word processors. It was very rare that anyone would question some of the false or dubious assumptions that we were force fed. Even rarer was the concept of actual creativity / problem-solving. All of this was only made worse by the fact that we were constantly being told that we were the future leaders and saviours of humanity, and that we alone were capable of making the world a better place.

Sorry for the wall of text, cheers.

Anonymous krymneth May 06, 2016 9:59 AM  

@praetorian: Thank you for the link. If where we're going with "classes" is a more generic mathematical sense of "different sorts of entities", which is what that post does, I'm on board. I just would have considered it a bit of a coincidence if it just happened to be the case that the best tool for modeling the economy happened to be the very definition of "class" beloved by politicians and ideologues today. It wouldn't be completely out of the question, but it would be a bit of a coincidence.

Blogger Aeoli Pera May 06, 2016 10:34 AM  

Garbage in, garbage out.

FTW, that shit is tight.

Blogger Aeoli Pera May 06, 2016 10:39 AM  

Hence endless searches for theoretical "reasons" to abandon moral strictures and simply do whatever is expedient.

I blame the various enlightenments.

Blogger stareatgoatsies May 06, 2016 11:53 AM  

I want to watch the video, but the times don't suit. What are the options?

If I remember correctly a transcript of one for one of the first brainstorms (about Crohns disease?) for 4 or 5 dollars. Will that be an option? I'd pay that again if there's no video available.

Blogger Tim Hopkins May 06, 2016 1:06 PM  

Keen's conclusion is essentially that the free market maximizing social welfare is a myth.
His reason downward sloping aggregate demand isn’t real unless certain unreasonable assumption are made.


It feels from this snippet that he is trying to develop a critique of the market economy from the fact that we over use mathematics to explain economic behavior. But I can’t tell from the extended quote if that is really where he is going or if he is just critiquing the crazy assumptions that have to be made to be the models afloat.

For me the questions the Austrians raised a long time ago are still valid. If the mathematical model is making you make crazy assumptions or coming up with silly answers, then the model is wrong. So that is nothing really new in the economics world. It’s just that no one wants to hear it because with our hyper orientation toward science as only science if it’s just like physics, people like to be able to do show their math.

It could still be the case that different assumptions could save the market as "maximizing social welfare" hypothesis in it’s mathematical form, but really who cars.
From empirical experience, it’s pretty damn hard to argue that free markets do in fact produce higher social welfare on pretty much every indicator you can measure. So if the models do not prove it, that is the problem of the models not reality.

Anonymous Dole May 06, 2016 3:20 PM  

Tim Hopkins.

Not necessarily, how would you know that we just haven't yet developed the correct statist solution?

Based on different assumptions different things work. If human nature is X it's possible that Y works and vice versa. Since we are capable of choosing, the ideal system can in fact even depend on our choices. For example, if everyone simply decides to not pay taxes, then that means everyone must be punished for tax evasion. That would lower social welfare and thus render any government solution ineffective.


Anyway, markets free of coercion seem to empirically work the best from what we know so far. And we seem to be abandoning them. Since we know this much, the only thing economists should be focusing on is how to get back to free markets. We can sort what the ideal monetary system should be later... and preferably in a market oriented way.

To be frank, today's big government think seems to simply be avoidance of responsibility combined with parasitism, among other things. You would have to make crazy assumptions to say this could work.

Anonymous Darren H May 08, 2016 10:00 AM  

Thanks everyone for responses to my question! Much appreciated.

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