Legibility, Control and Equilibrium in Economics

Peter Lewin notes that

It is an understanding of the incentivized behavior of human beings that allows us to understand and predict invisible-hand outcomes.
Yet, the complexity problem remains. Can we be certain, as a logical matter, that if certain conditions obtain, certain definite types of outcomes will result from the free market process? It is on this type of thinking that the more sophisticated Keynesians might base their arguments for benevolent and effective intervention in the face of economic crisis.

Both the invisible-hand and the mainstream Keynesian argument implicitly take legibility, predictability and stability to be desirable characteristics of economic outcomes. The Keynesian argument sees the illegibility and uncertainty as justification to put in place a system of control whereas the invisible-hand argument claims that the system is legible and at “equilibrium”. The latter operates in a fantasy land and the former through the very act of stabilisation renders stability all the more elusive.

Kenneth Boulding on Conservationists vs Technologists

One of my favourite economists with a humorous take on the age-old debate:

A Conservationist’s Lament

The world is finite, resources are scarce,
Things are bad and will be worse.
Coal is burned and gas exploded,
Forests cut and soils eroded.
Wells are dry and air’s polluted,
Dust is blowing, trees uprooted,
Oil is going, ores depleted,
Drains receive what is excreted.
Land is sinking, seas are rising,
Man is far too enterprising.
Fire will rage with Man to fan it,
Soon we’ll have a plundered planet.
People breed like fertile rabbits,
People have disgusting habits.

Moral:
The evolutionary plan
Went astray by evolving Man.

The Technologist’s Reply

Man’s potential is quite terrific,
You can’t go back to the Neolithic.
The cream is there for us to skim it,
Knowledge is power, and the sky’s the limit.
Every mouth has hands to feed it,
Food is found when people need it.
All we need is found in granite
Once we have the men to plan it.
Yeast and algae give us meat,
Soil is almost obsolete.
Men can grow to pastures greener
Till all the earth is Pasadena.

Moral:
Man’s a nuisance, Man’s a crackpot.
But only Man can hit the jackpot.

Source

Schumpeter and Kahneman on Intellectual Generosity and Self-Criticism

While reviewing the work of a French sociologist, Schumpeter lamented:

When at long last will the day come that will bring home the realisation to all of us that weapons to cope with the vast mass of facts must first be forged, each by itself? – that this vast mass possesses countless different aspects, demanding countless different approaches? When at long last shall we have learned our scientific craft to the point where we can grasp what our neighbour is doing and calmly till our own field rather than attack him?

He would be saddened to realise that such a day has clearly not yet arrived.

In his excellent biography of Schumpeter, Thomas McCraw notes:

One of Schumpeter’s greatest admirers was Paul Sweezy, a young Marxist economist who served as his assistant in the course on economic theory. Sweezy found it exceptional that in all of Schumpeter’s teaching, he completely omitted any reference to his own work. “I tried to convince him that students often came to Harvard to study under him and that he owed it to them to give an exposition and elaboration of his own theories. He listened sympathetically but never did anything about it.” When people argued that Schumpeter did not try to establish a Schumpeterian school analogous to the German Historical School or the Austrian School, Samuelson responded that “he did leave behind him the only kind of school appropriate to a scientific discipline – a generation of economic theorists who caught fire from his teaching.”

Schumpeter had that “rarest of all qualities in a teacher,” Sweezy wrote. “He never showed the slightest inclination to judge students or colleagues by the extent to which they agreed with him. Keynesians (regularly in a substantial majority after 1936) and Marxists (often in a minority of one as long as I was in Cambridge) were equally welcome in his circle. He didn’t care what we thought as long as we did think.” On the other hand, for those who did not think, Schumpeter could be derisive – often ridiculing the intellectual flabbiness of his fellow conservatives. “When I see those who espouse my cause, I begin to wonder about the validity of my position.”

On a similar note, Michael Lewis touches upon the remarkable humility of Daniel Kahneman:

Twenty minutes into meeting the world’s most distinguished living psychologist I found myself in the strange position of trying to buck up his spirits. But there was no point: his spirits did not want bucking up. Having spent maybe 15 minutes discussing just how bad his book was going to be, we moved on to a more depressing subject. He was working, equally unhappily, on a paper about human intuition—when people should trust their gut and when they should not—with a fellow scholar of human decision-making named Gary Klein. Klein, as it happened, was the leader of a school of thought that stressed the power of human intuition, and disagreed with the work of Kahneman and Tversky. Kahneman said that he did this as often as he could: seek out people who had attacked or criticized him and persuade them to collaborate with him. He not only tortured himself, in other words, but invited his enemies to help him to do it. “Most people after they win the Nobel Prize just want to go play golf,” said Eldar Shafir, a professor of psychology at Princeton and a disciple of Amos Tversky’s. “Danny’s busy trying to disprove his own theories that led to the prize. It’s beautiful, really.”

He called a young psychologist he knew well and asked him to find four experts in the field of judgment and decision-making, and offer them $2,000 each to read his book and tell him if he should quit writing it. “I wanted to know, basically, whether it would destroy my reputation,” he says. He wanted his reviewers to remain anonymous, so they might trash his book without fear of retribution. The endlessly self-questioning author was now paying people to write nasty reviews of his work.

The result of Kahneman’s collaboration with Gary Klein was a fascinating paper that explored the common ground between their hitherto diametrically opposed perspectives.

Hyman Minsky on need for fairness

the measures undertaken to prevent unemployment and sustain output “fix” the game that is economic life; if such a system is to survive, there must be a consensus that the game has not been unfairly fixed.

from ‘John Maynard Keynes’ page 163

The Macroeconomics of UK Austerity

In an excellent post on the macroeconomics of UK austerity, Tyler Cowen makes an important point. There is no coherent mainstream macroeconomic theory that explains why austerity should make things worse for the UK economy. The Bank of England has much greater ability than the Federal Reserve to generate inflation for two very simple reasons:

  • The UK is a small open economy
  • Most UK mortgages are floating-rate mortgages which means that small changes in interest rates have a big impact on household balance sheets and spending.

Recent empirical evidence of consistently higher-than-target inflation also confirms that the UK economy is nowhere close to a liquidity trap. The fact that growth is so sluggish simply confirms that much of the UK economy’s troubles are “real”, not nominal.