Sign in to follow this  
Followers 0
AndersB

The economy is far too important to be managed by economists – it requires the combined wise judgement of politicians to really stuff it up

15 posts in this topic

New blog post: http://upstreamview.com/

The field of economics is under heavy criticism these days. During the 2008 financial crisis Queen Elizabeth gently asked academics at the London School of Economics: why did nobody notice the “awful” financial crisis earlier? It took four years before she got an answer: lack of regulations, they said.

Last month Mark Buchanan and Noah Smith fired a broadside salvo in a Bloomberg article, demanding new thinking for macro theory. One of their stated peeves was the fixation on general equilibrium models. Well, chief among those models is Dynamic Stochastic General Equilibrium (DSGE). Sounds like an oxymoron, doesn’t it? A bit like “random changing stability”.

Further criticism could also be levelled against “trickle-down economics” where some bright spark thought that greasing the top end of town would then stimulate investments and job creation. Instead it just made the top 0.1% richer. Somehow, these greedy individuals had direct access to politicians and convinced them that such policy would be just what the Dr economists ordered to fix the ails of the economy.

I agree that we need new thinking for macroeconomics. But perhaps finding this new thinking will be found by going back to the future. Already in 1898 Thorstein Veblen came up with the concept of “evolutionary economics”. According to this theory economies develop in an evolutionary manner – like a Darwinian process.

Intuitively this makes sense. Clearly, before economists were invented and before money was coined, there were human species and societies that functioned in economies. And just as there was evolution of species and societies, there must have been evolution of associated economies. Evolution never stops, however, and hence, economies continue to evolve.

So perhaps the answers to better political policies for economies are found by throwing out the outdated idea of managing for equilibrium, and instead look at making the evolutionary economic processes more efficient.

Let’s take Ricardian Comparative Advantage as an example. According to this theory all countries should specialise their production and then freely trade among themselves. By specialising on producing the good that has the lowest opportunity cost, overall consumption can be boosted by importing other goods – even if you can produce the imported goods cheaper domestically.

This thinking makes free trade an economic religious article of faith. But what if we look at trade from an evolutionary framework? Then we could see that external shocks would make such specialisation vulnerable. What if a country has specialised in making wagon wheels for chariots and the domestic economy has no adaptive capacity? The danger is that such a country could be heading for economic extinction.

Just like financial investments require diversification to minimise idiosyncratic risk, I think there is merit in governments taking action to diversify economies to strengthen adaptiveness and resilience. More investments into innovation and entrepreneurship could meet this objective. Exploring that topic will have to be another blog post.

Share this post


Link to post
Share on other sites

IMO, it is part of the natural cycle for economies to have a booms&busts where they grow and then have a period where excesses are quickly purged before the next growth period begins. Governments should stop manipulating the economy expecting that they have full control and can keep the party going endlessly only resulting in a bigger bust (like the GFC). In its extreme form of control (ie. communism), like the old USSR,China,Cuba, it shows the damage that government control can have on an economy and the individuals that interact in it.

I'd suggest a bit more Adam Smith, with a smaller government that concentrates on items such as ensuring competition, corporate tradings laws, consumer protection (anti-shonk laws) and restrict non-investment expenditure to ensure balanced budgets (or preferably a surplus).

Share this post


Link to post
Share on other sites
5 hours ago, cobran20 said:

IMO, it is part of the natural cycle for economies to have a booms&busts where they grow and then have a period where excesses are quickly purged before the next growth period begins. Governments should stop manipulating the economy expecting that they have full control and can keep the party going endlessly only resulting in a bigger bust (like the GFC). In its extreme form of control (ie. communism), like the old USSR,China,Cuba, it shows the damage that government control can have on an economy and the individuals that interact in it.

I'd suggest a bit more Adam Smith, with a smaller government that concentrates on items such as ensuring competition, corporate tradings laws, consumer protection (anti-shonk laws) and restrict non-investment expenditure to ensure balanced budgets (or preferably a surplus).

You bring up a good point, cobran20 - and there are a lot of economists that think along the same way. Basically, the idea is that markets are efficient and governments should get out of the way.

The problem I have with this view is that there are 2nd order effects of market behaviour (and 3rd, 4th, and so on). This means in some cases that externalities are being paid by those with less power in society. Examples of this is anarchy and tribal warfare in some developing countries, and the exploitation of child labour in British coalmines in the 1800's. We also see the questionable practices of Wall Street banks when regulators are asleep at the switch.

Further, I also believe that it is vitally important that legal systems minimise contract risk. If a business deal can never be trusted because of a weak or corrupt judicial system then the outcome is far less business activity and investments.

In an evolutionary sense (in my view), forms of governments, institutions, culture and society are all part of the broader definition of economy. Competitive societies need high quality institutions.

So, in this regard, I disagree somewhat with your point - yes, competition is critically important (and unavoidable), but it is only one factor of many to create efficient economies.

In contrast, it would be very interesting to look at how efficient evolutionary processes would impact economic development. Instead of managing for steady state economics, or even "predictable" business cycles, what would happen if we actually encourage change and minimise risk of change?

BTW, I am not an economist - just a curious armchair spectator.

Share this post


Link to post
Share on other sites
6 minutes ago, AndersB said:

You bring up a good point, cobran20 - and there are a lot of economists that think along the same way. Basically, the idea is that markets are efficient and governments should get out of the way.

The problem I have with this view is that there are 2nd order effects of market behaviour (and 3rd, 4th, and so on). This means in some cases that externalities are being paid by those with less power in society. Examples of this is anarchy and tribal warfare in some developing countries, and the exploitation of child labour in British coalmines in the 1800's. We also see the questionable practices of Wall Street banks when regulators are asleep at the switch.

Further, I also believe that it is vitally important that legal systems minimise contract risk. If a business deal can never be trusted because of a weak or corrupt judicial system then the outcome is far less business activity and investments.

In an evolutionary sense (in my view), forms of governments, institutions, culture and society are all part of the broader definition of economy. Competitive societies need high quality institutions.

So, in this regard, I disagree somewhat with your point - yes, competition is critically important (and unavoidable), but it is only one factor of many to create efficient economies.

In contrast, it would be very interesting to look at how efficient evolutionary processes would impact economic development. Instead of managing for steady state economics, or even "predictable" business cycles, what would happen if we actually encourage change and minimise risk of change?

BTW, I am not an economist - just a curious armchair spectator.

As I said above I have no problem in governments setting and enforcing the basic rules around competition, banking, trading, consumers. That would include your child labour example above. But I hate when they squander taxpayers monies trying to play god of the economy. What Krudd & Goose did in squandering squillions on wasteful projects post-GFC, sending the budget deep into the red is, IMO, something they should have been hanged, drawn & quartered for! Similar with the grandiose pork-barrelling promises they make at elections, knowing very well that they're unaffordable and then blowing the balance on the government credit card even further.

A current example is the amount they have spent on education and the results they're getting as shown by the performance of Australian students in maths as compared to students from poorer countries with governments on tighter budgets. The solution is unlikely to be on sinking more squillions into education, but a change in teaching attitude towards discipline of students, quality of teachers and a concentration on the basics (the 3 R's as it used to be call). That of course, may require rejecting some modern political correctness, which will undoubtedly be rejected by the leftards!

Share this post


Link to post
Share on other sites

I think we share the same opinion on the mad spending track record of political decision makers.

And your point about rules of competition could very well fit in with encouraging evolutionary change. I'll do some more reading on that.

Share this post


Link to post
Share on other sites

You are both missing the point of recent history. The theoretical optimum you both are espousing leaves behind the uneducated masses. We are seeing the push back from this demographic. Globalisation leaves a lot of people behind. And they still have the vote. And they've got nothing to lose.

Share this post


Link to post
Share on other sites
14 hours ago, staringclown said:

You are both missing the point of recent history. The theoretical optimum you both are espousing leaves behind the uneducated masses. We are seeing the push back from this demographic. Globalisation leaves a lot of people behind. And they still have the vote. And they've got nothing to lose.

There is a rebellion going on because governments have been shoving down the throat major decisions/legislations where the population wasn't given a choice on the matter. I think the old swiss model of regular referendums on major issues, should be implemented worldwide. Like Brexit, the bureacrats are not going to like it but that is one of the joys of direct democracy.

Share this post


Link to post
Share on other sites
On 12/2/2016 at 0:35 PM, staringclown said:

You are both missing the point of recent history. The theoretical optimum you both are espousing leaves behind the uneducated masses. We are seeing the push back from this demographic. Globalisation leaves a lot of people behind. And they still have the vote. And they've got nothing to lose.

Hmm... I probably didn't explain my position clearly. My criticism of Ricardian Comparative Advantage is that it leads to believing in free trade as an article of religious faith - which is unfettered globalism with free trade seen as a virtue by itself.

I think this is causing a lot of dislocation for the middle class as well as working class. I don't think "uneducated masses" is a good term. The US white middle class has been squeezed since 2001, for example.

In Australia it has been said (possibly on this forum) that betting everything on a never ending commodities boom is foolish. There is both a limit on how many hairdressers can be retrained to mining workers, and it causes economic bubbles when demand exceeds supply for many associated trades and goods (including housing in mining towns).

In my view, the inevitable commodities busts causes unnecessary pain and dislocation, unless you have good diversity in the broader economy that can provide alternative employment.

Share this post


Link to post
Share on other sites

I don't know enough economic theory to have a real opinion but it seems to me that if you grant global trade to companies you have to grant global labour movement to people on the same scale for it to be fair.

Seems to me that if the corporate overlords can easily alter their behaviour based on local labour practices but the labour can't alter theirs on the corporate behaviour then you a system where one side can take advantage of the other.

 

Share this post


Link to post
Share on other sites
2 hours ago, tor said:

I don't know enough economic theory to have a real opinion but it seems to me that if you grant global trade to companies you have to grant global labour movement to people on the same scale for it to be fair.

Seems to me that if the corporate overlords can easily alter their behaviour based on local labour practices but the labour can't alter theirs on the corporate behaviour then you a system where one side can take advantage of the other.

Yes, fair point.

There will still be inertia and friction with totally free labour market movements. Not everyone is as mad as you tor, and willing to roam the world for kicks. Hmmm.... pot calling something etc.

There are probably social advantages in having reasonably stable populations. Community building supporting safe environments for growing kids, etc.

Economics treats people as perfectly adaptable and rational decision makers - only in terms of maximising utility in the form of consumption!

With hyperbole: no other human values and desires for the individual are considered in this field.

Share this post


Link to post
Share on other sites

Free labour movement is somewhat in place, you just need to obtain the right visas or have enough $$$ or meet relevant criteria ($$$ again, education levels, age, etc.).

People generally are even more opposed to free movement of labour (in comparison to free movement of capital). You'll have what is happening in Europe with uneducated (and educated) millions swarming developed countries causing divisions in - or fracturing society. The "foreigner took my job"/"foreigner priced me out of buying a home" becomes a larger political problem too when the job is local and not offshore.

But it's a valid point. If you tax capital it flees fairly easily (shell companies, foreign offices, outsourcing, etc.). If you tax people (income tax) it's harder for their labour to flee.

Share this post


Link to post
Share on other sites
On 12/7/2016 at 0:13 AM, Mr Medved said:

Free labour movement is somewhat in place, you just need to obtain the right visas or have enough $$$ or meet relevant criteria ($$$ again, education levels, age, etc.).

People generally are even more opposed to free movement of labour (in comparison to free movement of capital). You'll have what is happening in Europe with uneducated (and educated) millions swarming developed countries causing divisions in - or fracturing society. The "foreigner took my job"/"foreigner priced me out of buying a home" becomes a larger political problem too when the job is local and not offshore.

But it's a valid point. If you tax capital it flees fairly easily (shell companies, foreign offices, outsourcing, etc.). If you tax people (income tax) it's harder for their labour to flee.

It is interesting to observe how perfectly free labour movement works, which is available within each country. The trend is urbanisation and regional brain drain.

If this is a natural consequence of talented people seeking better opportunities, then current mega-cities and opportunity centres, like New York, London, Silicon Valley, etc will see much higher rate of population growth. That will cause severe stress on infrastructure and quality of life in those areas. So, basically - you will find opportunities in those places but still have a poor quality of life unless you strike it mega-rich. Good luck in the super rat race!

The truly wealthy people will be those that have great health, in control of their time, freedom to operate a profitable business from anywhere, while still maintaining good social and family networks.

Hmmm... tor is on to something here...

Share this post


Link to post
Share on other sites
6 minutes ago, AndersB said:

It is interesting to observe how perfectly free labour movement works, which is available within each country. The trend is urbanisation and regional brain drain.

If this is a natural consequence of talented people seeking better opportunities, then current mega-cities and opportunity centres, like New York, London, Silicon Valley, etc will see much higher rate of population growth. That will cause severe stress on infrastructure and quality of life in those areas. So, basically - you will find opportunities in those places but still have a poor quality of life unless you strike it mega-rich. Good luck in the super rat race!

The truly wealthy people will be those that have great health, in control of their time, freedom to operate a profitable business from anywhere, while still maintaining good social and family networks.

Hmmm... tor is on to something here...

I think that would be more appropriate to Australia than a larger country like the US, which is more decentralised. Using IT as an example, Silicon Valley was not created in the middle of San Francisco or LA. Even Microsoft is in Seattle which has a population of about 10% of Washington and even less when compared to NY.

Share this post


Link to post
Share on other sites

Free movement of labour relies on a pull factor. I won't move from Ohio to China for a lower wage in manufacturing simply because I have experience in manufacturing. Aside from the language/cultural barrier the world has changed.

Australian labour won't move from cities and social networks to pick fruit. Supply chain manufacturing means that even US companies that have OS operations may be penalised by Trumps protectionist policies. Witness the $5000 iPhone. It won't compete. Free movement of Labour isn't going to happen for any but those in the knowledge economy.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now
Sign in to follow this  
Followers 0