A number of people are linking to this reprinted critique
of the work of the late Paul Samuelson. I could point out that the
critique thoroughly misunderstands what Samuelson was saying about
international trade, factor prices, and all that. But there is, I
think, an interesting point to be made if we start from this complaint:Can
it be “scientific” to promulgate theories that do not describe economic
reality as it unfolds in its historical context, and which lead to
economic imbalance when applied?Actually, there was a time when many people thought that institutional economics,
which was very much focused on historical context, the complexity of
human behavior, and all that, would be the wave of the future. So why
didn’t that happen? Why did the model-builders, led by Samuelson, take
over instead?
The answer, in a word, was the Great Depression.
Faced
with the Depression, institutional economics turned out to have very
little to offer, except to say that it was a complex phenomenon with
deep historical roots, and surely there was no easy answer. Meanwhile,
model-oriented economists turned quickly to Keynes — who was very much
a builder of little models. And what they said was, “This is a failure
of effective demand. You can cure it by pushing this button.” The
fiscal expansion of World War II, although not intended as a Keynesian
policy, proved them right.
So Samuelson-type economics didn’t
win because of its power to cloud men’s minds. It won because in the
greatest economic crisis in history, it had something useful to say.
In
the decades that followed, economists themselves forgot this history;
today’s equation-mongers, for the most part, have no idea how much they
owe to the Keynesian revolution. But in terms of shaping economics, it
was the Depression that did it.
Michael responded to Krugman's post with this reply which I share with you:
Krugman
criticized my criticism of Samuelson {1}, referring readers to the UMKC
reprint of my Counterpunch article. So I wrote this in response.I
have recently republished my lecture notes on the history of theories
of Trade, Development and Foreign Debt {2}. In this book I provide the
basis for refuting Samuelson's factor-price equalization theorem,
IMF-World Bank austerity programs, and the purchasing-parity theory of
exchange rates.These ideas were lapses back from earlier
analysis, whose pedigree I trace. In view of their regressive
character, I think that the question that needs to be asked is how the
discipline was untracked and trivialized from its classical flowering?
How did it become marginalized, taking for granted the social
structures and dynamics that should be the substance and focal point of
its analysis? As John Williams quipped already in 1929 about the
practical usefulness of international trade theory, I have often felt
like the man who stammered and finally learned to say "Peter Piper
picked a peck of pickled peppers", but found it hard to work into
conversation {3}.But now that
such prattling has become the essence of conversation among economists,
the important question is how universities, students and the rest of
the world have come to accept it and even award prizes in it!To
answer this question, my book describes the "intellectual engineering"
that has turned the economics discipline into a public relations
exercise for the rentier classes criticized by the classical
economists: landlords, bankers and monopolists. It was largely to
counter criticisms of their unearned income and wealth, after all, that
the post-classical reaction aimed to limit the conceptual "toolbox" of
economists to become so unrealistic, narrow-minded and self-serving to
the status quo. It has ended up as an intellectual ploy to distract
attention away from the financial and property dynamics that are
polarizing our world between debtors and creditors, property owners and
renters, while steering politics from democracy to oligarchy.Bad
economic content starts with bad methodology. Ever since John Stuart
Mill in the 1840s, economics has been described as a deductive
discipline of axiomatic assumptions. Nobel Prize winners from Paul
Samuelson to Bill Vickery have described the criterion for economic
excellence to be the consistency of its assumptions, not their realism
{4}. Typical of this approach is Nobel Prizewinner Paul Samuelson's
conclusion in his famous 1939 article on "The Gains from International
Trade":
In pointing out the consequences of a set of
abstract assumptions, one need not be committed unduly as to the
relation between reality and these assumptions. {5}This attitude did not deter him from drawing policy conclusions
affecting the material world in which real people live. These
conclusions are diametrically opposed to the empirically successful
protectionism by which Britain, the United States and Germany rose to
industrial supremacy.Typical of this now widespread attitude is
the textbook Microeconomics by William Vickery, winner of the 1997
Nobel Economics Prize:
Economic theory proper, indeed,
is nothing more than a system of logical relations between certain sets
of assumptions and the conclusions derived from them ...The validity of a theory proper does not depend on the correspondence or lack of it between the assumptions of the theory or its conclusions and observations
in the real world. A theory as an internally consistent system is valid
if the conclusions follow logically from its premises, and the fact
that neither the premises nor the conclusions correspond to reality may
show that the theory is not very useful, but does not invalidate it. In
any pure theory, all propositions are essentially tautological, in the
sense that the results are implicit in the assumptions made. {6}Such disdain for empirical verification is not found in the physical
sciences. Its popularity in the social sciences is sponsored by vested
interests. There is always self-interest behind methodological madness.That
is because success requires heavy subsidies from special interests who
benefit from an erroneous, misleading or deceptive economic logic. Why
promote unrealistic abstractions, after all, if not to distract
attention from reforms aimed at creating rules that oblige people
actually to earn their income rather than simply extracting it from the
rest of the economy?Michael Hudson
Links and Notes:
{1} http://krugman.blogs.nytimes.com/2009/12/18/why-economics-is-the-way-it-is/
{2} http://www.amazon.com/exec/obidos/ASIN/3980846695/counterpunchmaga
{3} John H Williams, Postwar Monetary Plans and Other Essays, third edition (New York: 1947), from page 134.
{4}
I have surveyed the methodology in "The Use and Abuse of Mathematical
Economics", Journal of Economic Studies 27 (2000):292-315. I earlier
criticized its application to international economic theorizing in
Trade, Development and Foreign Debt (1992; new edition, 2009),
especially chapter 11.{5} Paul Samuelson "The Gains from
International Trade", Canadian Journal of Economics and Political
Science, Volume 5 (1939), page 205.{6} William Vickery, Microeconomics (New York: 1964), page 5.
Michael's criticism is one that will strike a methodological note with
many economists who feel that the discipline has moved too far into the
realm of irrelevancy as economists look to formulate sound theorems
based on "mathematical rigor" instead of theories based on basic social
observations of human nature.
I believe that behavioral finance was a response to addressing many
gaps that we readily observe in economic theory. Having completed a
Master's in Economics at McGill University, I passed those mathematical
courses, but I was always attracted to questions of economic
methodology. My courses in philosophy taught me to question everything,
including economic theorems.
Economics is an evolving field. As
Isaiah Berlin would say, there is inherent beauty in diversity. Let
there be mathematical modeling but let there also be more open debates
on what is really going on in the economy.
My practical
experience in the investment world taught me to be weary of
quantitative models that claim to measure all risks. This is pure
nonsense. Just a few years ago, everyone was claiming we "tamed risk
once and for all", and then "BOOM!", 2008 humbled the sharpest minds on
Wall Street.
The economists who were tracking the bigger macro
trends - including the net issuance of CDOs and other securitized
products and the trillions flowing to hedge funds and private equity
funds - knew that the global financial system was heading for a hell of
a collision.
Those of you who want to read more on this subject, should read this testimony from David Colander which was submitted to Congress in early September:
The Failure of Economists to Account for Complexity
This is an excellent summary, well worth reading.
EXCELLENT Speech! Thank you!
Key points for those who don't take the time (it's worth it to read all)
-
Some non-economists have blamed the financial heart attack on economist’s highly technical models. In my view the problem is not the models; the problem is the way economic models are used. All too often models are used in lieu of educated common sense, when in fact models should be used as an aid to educated common sense. When models replace common sense, they are a hindrance rather than a help.
---
The incorrect training starts in graduate school, where in their core courses students are primarily trained in analytic techniques useful for developing models, but not in how to use models creatively, or in how to use models with judgment to arrive at policy conclusions. For the most part policy issues are not even discussed in the entire core macroeconomics course. As students at a top graduate school said, “Monetary and fiscal policy are not abstract enough to be a question that would be answered in a macro course” and “We never talked about monetary or fiscal policy, although it might have been slipped in as a variable in one particular model.” (Colander, 2007, pg 169).
----
* Increase the number of researchers trained to interpret models
The second is a proposal to increase the number of researchers trained in interpreting models rather than developing models by providing research grants to do that. In a sense, what I am suggesting is an applied science division of the National Science Foundation’s social science component. This division would fund work on the usefulness of models, and would be responsible for adding the warning labels that should have been attached to the models.
This applied research would not be highly technical and would involve a quite different set of skills than the standard scientific research would require. It would require researchers who had an intricate consumer’s knowledge of theory but not a producer’s knowledge. In addition it would require a knowledge of institutions, methodology, previous literature, and a sensibility about how the system works. These are all skills that are currently not taught in graduate economics programs, but they are the skills that underlie judgment and common sense. By providing NSF grants for this work, the NSF would encourage the development of a group of economists who specialized in interpreting models and applying models to the real world. The development of such a group would go a long way toward placing the necessary warning labels on models, and make it less likely that fiascos like a financial crisis would happen again.
----
FYI - The second proposal is what I have devoted the past year of my life to.
Thanks for bringing Professor Hudson to every one's attention Leo. CounterPunch readers are quite familiar with Professor Hudson's posts. He is without a doubt marginalized for his analysis...
Which I would summarize as excessive debts, rents and oligarchies kill economies. Hudson is absolutely correct that those in power only fund the research that reinforces their view or to their profit. We have seen relevant criticism that since the regional Feds fund a lot of economic research, academic economists parrot Fed positions... otherwise kiss your grant money good-bye.
We see this throughout academic research. If you go off the corporate, government backed, pro military industrial approved tracks of research... your research will not see the grant funding light of day.
Does anybody wonder where true innovation has gone? It has been quashed by reaction. Meet the Laws of Diminishing Returns. Under these conditions you are not going to get much marginal benefit out of the next dollar invested in this systemically corrupt society and its financial systems.
Professor Hudson is unpopular but correct. As my freind Chuck would say: "About as popular as a turd in the punch bowl." Chuck had a way with words...
One of the principal problems with economics is that it is used to justify banking and usury. These institutions create NOTHING. They are parasitical in nature.
Economics does not pay attention to the real world. The infiniteness of the system's growth capability is assumed.
At what point did ANY macroeconomic theory "anticipate" something like an oil or helium production peak? No, it was the opposite, that the sudden drop in supply against rising demand would somehow always cause someone using sufficiently stimulative interest rates to go out and find more supply to fill the demand.
Economics is a pseudoscience, nothing less and nothing more.
We are now in a conundrum where the monetary base needs to grow but the real economy cannot and will not. Consequently, there is little demand for money except for leveraged speculation. Interest rates will not rise as some expect except in the case of individual countries, because interest rates have to roughly match the profitability of economic behavior in the aggregate.
As EROI slides to unity and we see nothing but debt as far as the eye can see, who would want to borrow? Governments will self-fund by speculative borrowing from banks and the CBs to buy the sovereign issues, making a nominal spread against a mountain of leverage. Then they will try to translate these paper profits into real things. This is why prices keep creeping upwards, because the quadrillions of leverage in the system seep out into the economy despite depression conditions in the form of banker and leveraged speculator profits.
Read Calvin Elliot's A Thesis on Usury, worth the time.
And as for macroeconomic models calling for a peak? Yeah, it's called Peak Oil :)
"Such disdain for empirical verification is not found in the physical sciences. Its popularity in the social sciences is sponsored by vested interests. There is always self-interest behind methodological madness."
I would like to point out that the pure sciences are also sponsored by vested interests. The same flaw (the human flaw) exists in both.
Al Gorerhythm
"Current economists attempt to describe Human Action in a free market when it is not a free market."
^This,
Its hard enough to describe Human Action as it is but ontop of that we are doing so in the context of a system that we do not fully operate within.
The Establishment pays it's slaves to
-Mine the metals
-refine them
-forge bars and make links and shackles of them
-join the links together into chains
-shackle and enslave each other
All sepereate occupations. All done to earn a diminishing return to pay an increasing debt. Few considering the final outcome of their active participation.
We enslave each other with the encouragement of the Establishment through the exploitation of the weaknesses of our mortality ie:emotions, ignorance, greed, prejudices and indebtedness.
All achieved* through the control and scarcity of jobs, money and abundance of debt.
We are all the gears, rods, wheels, engine and coach that drive and animate the beast onwards.
I wish I could call for a workers day off- We are way off course-where is our directive, what is the objective, mission statement ? Theres an elephant in the coach that has some honest splainin to do.
Yes.
As I mentioned earlier in this thread, we need a psychological revolution rather than a change to the system. What we think is 'wrong' or 'right' at the moment isn't accurate because we're thinking of the conflict as it relates to us as individuals. We as a people (Americans, Europeans, humans...) need to realize we are crushing ourselves, our sense of value is severely distorted, and we need to change as a group rather than planting new leaders.
"that has turned the economics dicipline into a public relations exercise for the rentier class"
When economies don't grow the rent seeking becomes more apparant. It should be noted that corporations are now the rentiers and 'owners' of capital. At any rate the term free market in America is now functionally defined by rent seeking or otherwise seeking to recover or at least justify sunk costs. Nothing is more sacred than giving investors a positive return and that is now the very essence of freedom. Rent seeking is freedom.
The major difference between Krugman and Freidman is that Krugman seeks to find ways to attuneate ever so slightly the freedom of corporations in order to direct some income to niggers. Niggers being anyone with a negative net worth. Always a high crime in America and something now defined as facism. Thus when Krugman calls for monetizing 2 trillion he envisions some of it going to the niggers. Where as the Freidman fans want to hold off on the two trillion until the corporations need it.
From Wiki....about Krugman
According to Krugman, his interest in economics began with Isaac Asimov's Foundation novels, in which the social scientists of the future use "psychohistory" to attempt to save civilization. Since "psychohistory" in Asimov's sense of the word does not exist, Krugman turned to economics, which he considered the next best thing.[18][19]
.......................................
Very simple....
Krugman should not be allowed in public....
Only behind the walls of "protected academists".....paid indirectly by those who do REAL work....
This isn't new news. Many academics play a paper publishing game that doesn't reflect reality much. The crisis in macroeconomics dates to the late 1970s, when their models failed miserably during a period of stagflation. The failure of demand-side created a void filled by the partial truth of supply side economics. Thirty years ago, academics published plenty about irrationality, but the fundamental principle of rationality and free markets weren't punctured.
Economics is simple. It's all can and can't. It's all have and have not. The economists have a yes we can attitude about using a fake bullshit fractional reserve economics system. The people don't haev a yes we can attitude about raping, burning, killing, maming, slaughtering, sitting in your fucking house killing anyone who tries to kick you out of it, bitch slapping, murdering, exploding attitude about the people who have a yes we can attitude.
It's time to cut the limit on some peoples action expression card for some and take out a new credit line of take this in the fucking ass line. The better people clearly define what is acceptable and what will get you hurt the better off everyone will be. Because some people don't want to understand exactly what "possible" means. Click click boom motherfucker.
+'clickety-clack'
Of course Bernanke knew what was coming, as did Greenspan. Or, more accurately, they knew very well where their criminal malfeasance would lead absent divine intervention or the occurrence of some unspecified black swan lucky event to pull their bacon out of the fire. The notion that they didn't is absurd, though they and all their minions continue to propagate with straight faces.
A little research will turn up numerous instances in which Greenspan was cautioned by other economists, including in one instance a former fed governor. Month after month when he left rates dangerously low after the economy had recovered from the 2000-2001 recession Stephen Roach got progressively more disturbed by his gross recklessness, and his commentary became increasingly more ominous in it's warnings of the future to ensue.
Dean Baker warned of the stock market bubble around 1998 and a year or two after the crash he started warning of both the housing bubble and the trade deficit and the likely consequences of their continued neglect, Greenspan by this point having established that he was quite capable of ignoring potential disasters in the making.
Ignoring the potentially catastrophic results of your actions doesn't equate to ignorance of those potential results however. In Greenspan's case it merely confirmed what he demonstrated back in 1982 in his audition for the job of fed chairman, when he chaired the committee Reagan appointed to 'reform' Social Security. Greenspan delivered what they wanted - an increase in the payroll tax which the Congress then proceeded to squander over the next twenty years or so, devoting the proceeds to such laudable causes as offsetting further tax cuts for the wealthy at the expense of the lower and middle class.
Yeah, Greenspan had the right stuff and he got the job, and then continued to politicize the office of fed chairman by seeing to it that his policies furnished economic cover for whatever variant of voodoo economics the charlatans fronting for the Republican party trotted out every year to justify further capture of the economy and the regulatory agencies by their clients.
There's no question that they understood the risks. In fact, the warnings were so clear and the potential consequences so clear and inescapable that I sometimes wonder if it wasn't intentional.
So, if it's intentional, what do you see as their end game?
Thanks for the post Leo. Hudson is an interesting guy and one of the few out there who has a clue as to what is going on with this mess. We are headed for feudalism if this is not handled properly.
Hudson understands, and more importantly details, the dynamics of the current crisis more lucidly and accurately than any other economist I've encountered whose work is accessible on the internet. Tectonic financial and economic shifts have suddenly drawn attention to a restructuring of our economy to favor and institutionalize the interests of the rentier class which has been going on for years.
Friedman was mostly wrong about almost everything but the kernel of wisdom conveyed in the epigram "There is no free lunch" was accurate. But since Dr. Friedman only invoked it subject to the constraints of his strict ideological bias he failed to see what's now become obvious: Restructuring an economy to favor the interests of the rentier class necessarily progressively encroaches upon and displaces the productive economy as it sucks income from production at an accelerating rate. So the free lunch exists after all, but like most parasites it eventually kills it's host, and hence destroys itself.
This can take years though, with the host appearing healthy and normal until the the parasite grows so large that it begins to require a level of sustenance that exceeds the host's carrying capacity. In this later stage of the parasite's life cycle the host is increasingly debilitated, eventually becoming unable to support his own energy requirements under the parasite's load, and dies.
But it's a spectacular and thrashing death, and it's proceeding very much the way Hudson has described it in his work.
It wasn't inevitable, but the tender attentions of the administration are about as therapeutic as jumping up on the examining table and attempting to strangle the patient. So we pretty much know how this will end.
You know what economist didn't see it coming? The economist in charge of seeing it coming. BS (Ben Shalom) Bernanke.
So he (B.B.) says.
Does not make it true.
?
The Problem with Economics?
Easy. Most "economists" ignore the Austrian school.
/thread.
Krugman is an economist? No shit!
I want to scream.
Understand, I am not upset with what you have written Mr. Kolivakis, I am upset with the absolute excision of the theoretical concepts laid out by the individual who designed the system, Irving Fisher. What I find even more laughable is that I had never heard of Samuelson until today, and now, having learned of his name and read his background, I will easily ignore the larger part of his works since they came very much after the depression. In fact, I am quite sure they have nothing to truly add to my understanding of Central Banking since the system was fully designed and operational before the depression.
The claim that the system failed ignores the other key claim that is made by critics of the system, namely, the crash was the effect of directed outside influences. I originally pursued economic theory with the intent of understanding what happened, but when I came across the conspiracy theories, I followed those quite closely, looking for the errors and faulty logic... there was plenty, but the overwhelming evidence, even as discussed by Bernanke, pointed to large outflows of gold during the mid 1920's. Other considerations include the lack of intermediate term financing through short term notes (i.e. less than 10 years), the procedure was not introduced until December of 1929 ("Why the U.S. Treasury Began Auctioning Treasury Bills in 1929 - http://www.newyorkfed.org/research/epr/08v14n1/0807garb.html)
Perhaps the greatest crime is that Fisher is immediately judged (and forever will be unfortunately) by his claims that the market was fairly valued after the original crash (in fact this claim was later verified in a Fed research paper written by Prescott, another Noble prize winner - http://www.minneapolisfed.org/research/SR/SR294.pdf) and that they had reached a new plateau. That one quote destroyed any professional reputation and provided the impetus for many to disregard his work, despite the continued plagarism that carried on for the next 70 years (In fact, in 1973 credit was restored to Fisher for having discovered the Phillips Curve in the 1920s, Phillips released his work in 1958, Samuelson modified it and made the explicit connection between Inflation and Unemployment in the 60s - http://en.wikipedia.org/wiki/Phillips_curve). There are several more examples of this, but that can wait for another time.
The economists who truly laid the foundations for the theory of macroeconomics had done so on a microeconomic basis, these economists whose names you barely know or have been "incidently" directed to ignore are the true titans; Cournot, Walras, Jevons, Wicksell, Pareto and quite a few others) Fisher carried that to the macroeconomic level, which at that time was incredibly difficult to manage due to the complexity and the slow pace conversion of data took place (you perform the valuation of 10 bonds by hand and you'll understand why, actuarial mathematics can be painful and tedious in today's age, let alone without even a simple calculator). People who think that Behavioral Economics is a "new, comprehensive and connecting evolution of Economic theory" are sorely mistaken, but you don't have to take my word for it, take Richard Thaler's words that "he [Fisher] should also be considered a pioneer of what I will call 'Modern Behavioral Economics'." - http://faculty.chicagobooth.edu/richard.thaler/research/Irving%20Fisher.pdf
I could go on, but understanding will not come in only a few sentences. I've often wondered why it is that so many economists seem unwilling to go beyond Mises, Hayek, Friedman, Keynes, and Smith. The mathematical formulas are taught completely independent of their theoretical basis and formation and an understanding of a comprehensive ideology was limited to a rather small scope of academics, all of whom were trained during the new golden age of Central Banking and quite definitely financially dependent upon those who adhered to those views. Indeed, this reminds me of the words of Reinhart and Rogoff in their exceptional paper (and now book), The Aftermath of Financial Crises (http://www.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf) "One would be wise not to push too far the conceit that we are smarter than our predecessors." Indeed it would seem critical that we should not dogmatically hold the view that our teachers are always correct as well.
I mean no disrespect to any economist out there, my words are not meant to ridicule, but instead challenge them to look beyond the textbook. I warn you though, it is tedious, I have read the same concepts over and over, restated by different academic authorities. However, I have found this to be a boon, for I am rarely unprepared to dissect an alternate opinion, since I read the works of the many forefathers who understood it over a hundred years ago.
And I haven't even gone into the problems of the mathematical understanding... oiy.
----------
Added later to clarify what might be considered trite. Fisher designed the banking system, not the economic system. However since the banking system controls the rate of interest, the entire economy is beholden to this one individual facet.
Another reason for the depression might be traced to the debts of World War I, taken out at high rates.
When I say that Fisher used the works of prior economists, he did so in a manner that aggregated the general principles of the micro and moved them to the macro, but only in relation to the impact of banking methodologies.
When I say look beyond the textbook, I mean only to convey that we should look at the source of the knowledge. The child's game "Pass the secret down" where one whispers a sentence to the one closest by, who then passes it to the nearest to them, highlights this all too clearly. Very rarely is information enhanced with perfect clarity, a copy of a copy of a copy will rarely be the same as the original. Even in biology this law is observed, take for instance cloning.
Please don't think I'm being disrespectful, I am just unwilling to accept any individual as an authority, especially when he is merely restating the opinion of another and even more so when he does not give proper credit to he who influenced him.
phaesed:
Thanks much for your post. I do agree that problems are not really with known economic theory but with the misuse of what is known. Risk in statistics can be determined but the practitioners must accept reality.
Phased:
Thanks much for your post. I do agree that more important than the unknowns in human behavior, the which can be which normally be limited in consequence, are confusions from even competent people seeking to establish their own turf or elaborate on nuances of the real world facts
Maybe I'm out of my league here, because my simple understanding of economics and money is based on and limited to, my experiences as a saver over time. The management of my savings have always been left in the hands of "experts", those steeped in the mysteries of macro and mirco this and that. They utilized all manner of theories, models, al gorerhythms, (couldn't help myself) and the flim-flamery of central and fractional reserve banking (amoung others) to qualify their position. We left them to it. They were the experts, right?
On retirement, I discovered that these army of "experts", divisions of economists, Nobel Laureatses, Phds, Princeton professors and Secretary Treasurers, Congressmen and Senators, collectively couldn't protect the purchasing power of my savings. Their global record of fulfilling their mandates to maintain the purchasing power of the dollar, to coin money, has been one of abject failure. Their balance sheet is the only statement needed for me to make a full assessment of the supposed science of economics. The only criteria I need to assess their economic abilities is their record in maintaining purchasing power of my savings. Anything short of 100% and their theories are made redundant. Just theories.
The economic model that I employ to protect my savings is called The Mona Lisa Model and it works like this: The model recognizes the economic value of The Mona Lisa as a constant. Why? There is only one of them, her value maintained by a simple and transparent accounting process, i.e. she is on display and readily authenticated. If, however, another was found and recognized as having been produced by the same hand, the value of the original would be adjusted by the market, mathematically inversely proportional to the supply. Supply doubles 2:1, value halves, 1:2.
Extrapolate that to 3, 4 or 1000 new discoveries and the correlation between the supply of something and the value of it, becomes patently evident. 3:1, 1/3. 4:1, 1/4. 1000:1, 1/1000th the original value. Construct a line graph of supply and of value, over time, and the lines produced are shown as mirror images of one another, one rising, the other falling, both at the same rate. Add in rate of growth as a percentage over time and the exponential values of both skyrocket and plunge, again inversely proportionally to each other. Even 2% growth becomes frightening in a short (40 years of work) period of time.
It was on discovery of the destruction of my savings that the questions; "What is Money?" and the next; "What gives it value?", invaded my tranquil retirement. The ties between supply and value became obvious.
Using my experience, (which anecdotally, is not unusual) then yes, the nominal amount as calculated and predicted by the "expert" retirement planner was in my account at retirement, but the value of each unit of savings had been undermined by the incessant additions to supply. Using M3 as measure of supply, one becomes nauseous at the realization of the deception. It was pointed out by the "expert" at the start of the savings plan that, "You will be able to buy 5 houses with that amount when you retire!" I couldn't buy one. The nominal amount had lost its purchasing power. My $ wasn't a $ any more, yet the houses were the same, providing the same utility.
My model shows that the reproduction of and increased supply of something, decreases its value. The Fractional Reserve banking model proves the point. The fractional reserve model has a mathematical inbuilt self-immolation clause. It's in the fine print.
Over the years, the units of value that the banks and government encouraged me to save, were being devalued by the very same entities that produced them.
Phaesed, you want to scream? Is that all you got? Man, I want to see blood. I've been mugged and I'll gladly attend any line up screening. I didn't see it coming but I got a good look at the pricks!
*sigh* Al, I appreciate your point, it is exactly what a vast majority feel. But you make the mistake that all do, the simple explanations provided by economists as dogma completely ignore reality. But these explanations serve to placate the questions that are not at all understood in the minutia.
We knew that the value of the currency affected the real value of items, but instead you hear "supply and demand". Inflation is too much money chasing too few goods, but why do liquidity panics come at the top of the market when goods are plentiful and everyone has all this money? You hear lower interest rate and the cry is "They are printing money!" while everyone knows that they don't actually print money, they create an entry in a ledger. But, the actual distinction is glossed over as trivial. You, and everyone else, are wrong.
There are countless number of noble prize winning economists who got it wrong as well.
It's usually the things which everyone can clearly see and grasp as plain as day that are near impossible to understand in pefection. Look at the circle.
While I understand a lot, why am I one of the few who willingly admit that I DONT KNOW THE FUCKING ANSWER AND
IT'S NOT THAT FUCKING SIMPLE.
Everyone extols Austrian Economic theory, the answer is base the currency on an asset and let the free market decide the interest rate. Oh really, how do the mechanics translate to a balance sheet? What do we do with our current debt? How often do banks value their assets since they must use the rate of interest? Weekly? Daily? Hourly?
People keep saying the same shit I already know and keep pointing to people who peddle easy solutions to complex problems. Stop offering answers and test the logical precepts of your theories and determine their implications in application.... Oh wait, that would require using numbers eh? Guess some people are fucked.
Sorry man, when people tell me they have the answer, my first question is: What is the present value of a AA+ rating on a corporate bond with a 3% default risk maturing in 6.4 years with a 5% coupon and the market rate of interest is 2.33 for the 5 year, 2.88 for the 7 year t-bills?
If you can't answer that, then how can you possibly understand the implications? And guess what, I can answer that and I don't have the solution. Sorry, no false pride here, just complete honesty to myself and to the gravity of the situation.
As always, nothing personal.
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Two side notes on Austrian Theory. Carl Menger told Fisher that the Austrian school would provide the logical interactions and it would be his work to carry it to the application. Menger, the undisputed father of Austrian Theory, approved of mathematics.
People say to read Prices and Production by Hayek, but his opus is truly The Pure Theory of Capital. Funny thing though, Hayek uses geometric interpolation in the production cycle.
The purpose of any "science" is to explore all interpretations, but yet there are some who would throw away an entirely valid perspective and limit the extent of their contributions.
No wonder why the Fed doesn't give two shits about the Austrians... The approach utilized is straight out of Douglas Adams. 42 dude.
There is no such thing as a 7 year t-bill. T-bills are all sold at a discount. You could buy the corpus of a stripped 7 year bond. Also, the Fed don't give a damn about Austrian economics, because the Austrians are opposed to the Fed and what it represents, which has always been the slight of hand transfer of wealth from the people to those behind the Fed. Also, at one time, a gold rush could create more money chasing fewer goods, but in this day and time it take bank credit. There is no printing of money per se, but instead the acquisition of bank assets or better yet credit against private or human collateral. Steve Keen posted something he found that bank credit always preceeded Central bank printing. There is more to this equation, as credit expansion, once debt gets to the current level involves financing the expansion of principal balances due to compound interest. Goods consuming humans don't necessarily have money or credit and money now chases assets and potential profit producing schemes such as Credit default swaps.
yer right, they're T-Notes, my bad
Phaesed, round and round and round you go.
You lost me at "sigh". Oh, I understand the implications all right. First hand experience, but then I suppose I could just only be "percieving" that my savings were fucking destroyed and all that I need is a good theory and some math wonk's formula, to re-adjust my experience to their model. Sort of like the East Anglia University's climate change model. Figures don't support the models assumption? Easy, don't change the model, change the figures to alter perception. What was I thinking?
Just explain the lost purchasing power of my asset, money! Why should savings have to earn interest to maintain their purchasing power. Why aren't interest rates in banks high enough to maintain purchasing power of the asset that I entrusted to them? Fuck, it isn't that hard to give an answer is it? Money should be risk free. Period. I'm wrong!? AA- this and bbb- that, are valuations given to financial instruments, esoterically valued by some paid off and compromised rating agency. Transparent yardstick?!! Rrriiiggghhttttt. No wonder you seem confused. You don't have a yardstick to make a valid assessment of an item. You don't have a means of quantifying "Financial" risk. "Financial" says it all. Just look who's running the show. Nuff said.
Man, the system was rigged from the onset because too few understood it but were quite willing to use it.
Guns don't kill people, people kill people.
Interest rates do not affect the purchasing power of the dollar, they affect the valuation of assets. These assets are the base that the banks loan off of. Once again, you reach the crux of the argument and then descend into desperation and complaints.
Higher rates of interest = lower present value
Low interest rates = higher present value
As the rate of interest increases, their asset base shrinks.
I could go further into the details, but once again, you don't want to understand the problem, you want the answer, the quick fix. Well your not alone, Zimbabwe Ben quite definitely shares your desires. But then that's not what I was saying in my original post, the purpose was to highlight that precepts being extolled or attributed to certain economists are in fact built upon earlier, more detailed works.
However if you're willing to do some of you own homework about what the dollar is, please read this:
http://books.google.com/books?id=wbvZAAAAMAAJ&printsec=frontcover&dq=irving+fisher&as_brr=1&cd=5#v=onepage&q=&f=false
In the meantime, you don't present arguments to contrast, you deem my points irrelevant and don't attack their foundations. Honestly, I don't have the time to explain or discuss when you don't take the time to learn. Your argument is based on experience, not understanding. I'm playing Poker and you're playing Go Fish.
Phaesed,
I enjoy your posts, and I believe I see your stance.
I don't have the Philosophy background as many on this site have that would allow profound debate and thinking, as I'm only equipped with my mere Accounting degree. That being said, I still ask "why" to everything. From here I apply a basic, logical reasoning to understand the methods and madness of a given topic. I agree whole-heartedly that a task such as fixing the economy or financial system isn't quite as simple as one thinks. Immigration, politics, international relationships, wars, etc. all come to mind in sharing this characteristic.
Whenever we speak of these things over dinner or family get togethers I first offer my disclaimer that I don't have the answers by any means, yet for one to believe that things are fine the way they are feels to me like a crime. All I can do is learn, and learn, and learn some more to increase my perception of reality.
The gentleman speaking of his retirement account being worn away...I feel your pain. You and I are probably on the same page here. We acknowledge the system is fucked, and we've traveled down the rabbit hole enough to see the enemies along with their plan. But how do we correct it? And if we try to implement said correction, what effects will that have? It seems every proposed answer to fractional reserve banking and currency valuation has an opposite arguement. Economics as a social science truly has no constants nor absolutes. It is based solely on the psychology of those in the system, and thus there's no guaranteed resolution. I do think we can amend our current system and takes step in a direction that would be better for society, albeit still painful, but I imagine we'll need some sort of psychological revolution as a people in order to advance on this issue. Which will of course never happen.
Sorry to get off course there towards the end. I have conservative views and support individuals reaping what they sow, but I also realize that system of competition with each other will not allow us to advance as a species. It's a conflict I'm dealing with on my own currently.
Heh, nice name, I like it. Thank you very much for your kind words, I realize I'm extremely rude at times and the rest I'm quite obtuse and I apologize. But all of these events have changed me and the passion I feel about the need to act changed me in so many ways it's insane.
I'm not defending the system, I'm not preaching the virtues of banking, I'm not trying to fix the world. I'm trying to understand the problem, then as a whole with others who are doing the same, some sense might come out of this.
I do want the Fed torn down. I do think of interest as USURY.
I've gone back over 5000 years and read what happened to Babylon. People think this shit is because of abstract economic models, but we had the exact same problems back then and hell, Algebra had not even been re-invented by that point.
This is all a problem of the human condition, they covet.
And as for the revolution? Let's saying I'm praying. :)
From earlier post:
Everyone extols Austrian Economic theory, the answer is base the currency on an asset and let the free market decide the interest rate. Oh really, how do the mechanics translate to a balance sheet? What do we do with our current debt? How often do banks value their assets since they must use the rate of interest? Weekly? Daily? Hourly?
Phaesed,
Anytime a Federal Reserve Note apologist (aka, modern economist) opens their mouth it is to justify daylight robbery of savers. Savers are required by law to use FRNs to pay their taxes, which then trickles down to be the most liquid form of value in all exchanges. If one doesn't like it, go to jail. Ultimately, if you resist, you will have a gun pointed at you.
The purpose of a central bank is to control and manipulate. The FRN is shamelessly called 'the Dollar'. The FRN is not backed by a tangible asset, and is therefore a fiat currency and tool of oppression. Savers are forced to find ways to maintain/increase the value of their assets because the central bank can increase/decrease the FRN supply to support the wealth-transferring agenda of the plutocracy in which we reside.
Banks shouldn't have assets beyond what is required to provide honest services such as accepting deposits, exchanging currencies, and lending the deposits of customers to credit-worthy individuals. Full reserve, not fractional, banking.
A central bank is the antithesis of the free market. You ask, how do we value assets without a central bank? Well, forgive me for being redundant, but it's the unbridled, unrestricted, unregulated, free market. Let investors decide what they are willing to pay, based on honest competition. These investors would of course offer their own assets in exchange - there would be no fraudulent Federal Reserve Note involved - the buyer and seller would agree on what is fair value, whether it be precious metals, paper backed by a precious metal, or other asset, a night in Vegas, free car washes for a year - whatever the two parties might decide. Now, I'm sure you might even consider me as being condescending at this point - and this is not true - it is more out of explaining my extremely limited viewpoint (never took an economics class) to a wider audience.
History hath shewn us that without a central bank savers could freely decide where to invest their assets, or just squirrel it away for a later day. But a central bank, with the power to inflate and deflate the supply of the 'official' currency, backed by 'law' (remember the gun?), is a daylight robbery of those that choose to 'save' in its Notes. There is no security in a fiat currency - it's value always returns to zero. So how do we value assets? Surely, we remove the grand tool of manipulation, the Federal Reserve Note (shamelessly called, the 'dollar'), and let investors decide the price, in other words, the free market. Doesn't that imply a massive crash of some sort? Yes, as always with the death of a fiat currency, which is always used to manipulate. [Never waste a created crisis.]
So the problem with current debt is that it is valued in a currency destined to return to zero. Where are we right now with that? The Federal Reserve Note has lost something around 95-98% of its value? It's not worth looking up - it will achieve 100% sometime in the future, not even sham Nobel Prize economists know when - or do they? The question is, will it be worse (the inevitable crash and revaluation of assets) down the road if we fail to repudiate it now?
Current economists attempt to describe Human Action in a free market when it is not a free market. How can you properly assess the potential choices of free individuals when they are not truly free? Investing with a gun to your head is not a way to live.
Man.... At what point did I ever claim to support the Fed?
I want it A B O L I S H E D
The point is, if you don't know how it works, you can't rip it out of the system, capiche? :)
We're on the same side, I just don't take the view that it all could be so simple because it can't.
There is nothing inherently wrong with a fiat currency.
The problem is giving the monetary power over to BANKS who lend those fiat notes at INTEREST. This is what creates the compounding growth problem.
Economics is NOT a science; it is a set of assumptions, including that lower rates or more money can *always* cause more growth, that demand causes supply, etc.
Peak Oil pisses in the FACE of economics. There is NO monetary measure which will reverse a physical condition such as this. Interest rate regimes CANNOT affect EROI or net BOE output. These are matters of geology and the real world.
That's too close for comfort WaterWings. Got a seven?
I don't care what the Rainmen say, best money I've ever made in Sin City was at the Go Fish! tables at Caesar's.
Money is a utility which gets treated as an asset in order to persuade people to exchange tangible value for it. The reality is it belongs to whatever entity guarantees its value and is loaned to everyone else. If people understood this, they would be more careful about how much value they convert to currency in the first place and this would be far healthier for society, because other mediums/networks of exchange would have the space to develop, the environment, because natural resources would be left in place longer and the economy, because it would provide a natural break on activity and there would be less froth in growth. A publicly supported currency, such as the Federal Reserve creates, amounts to a public utility. The problem is that its management and profits are still controlled and collected by private banks, which then loan it back out to the society which generated the wealth in the first place. Either we go back to an age when banks issued their own currency, or we develop a bottom up public banking system that would generate profits for the communities which create the value in the first place. Local banks would be shareholders in regional banks and these would be shareholders in a national bank, which would issue currency.
This way, we could restrain the growth of the money supply and the cancerous effects of that growth. Roads are a public utility, but we don't pave more than is necessary.
This is good. Especially cutting the froth out of growth - wise investments in utilities - good description. From the limited 'knowledge' I have gained, a gold or silver-backed currency would be the most liquid, least-manipulable utility - if I use the idea correctly.
The growth idea strikes a chord after seeing all these homes in CA, NV, FL, and AZ, and all the necessary infrastructure, sit empty and off the books. They say the West wouldn't have been developed so quickly and successfully, back in the 19th and 20th centuries, without fiat issuances - and following your comment, the growth would have been far more robust and 'sustainable'.
Huh?
Yup, I'm out of my league. Go Fish.
Here's the short version of everything you need to know about Samuelson.
1. Larry Summers is Samuelson's nephew.
2. Ben Bernanke was Samuelson's student.
My father explained economics in five words. "You can't starve a profit."
Value cannot be drained out of a finite system without it eventually collapsing.
Basically everyone wants more out than they are willing to put in.
The great irony is that those draining wealth out of the economy can only invest it by loaning back to those who don't have sufficient wealth in the first place, whether sub-prime borrowers or overstretched governments.
The people making the stuff have to be able to afford to buy it.
What goes around, comes around.
The economic health of a nation is a product of millions of individual human decisions. Optimism, caution, panic, complacency, and sheer whimsicality are important individual traits. Then there are legislative actions relating to fear, greed, power, warfare, and the timing of elections.
The idea that this huge chaotic system, containing billions of variables, can be reduced to a series of simple curves was Samuelson's grandiose conceit. In any serious science, he would have been laughed into obscurity. It is a CHAOTIC SYSTEM, get it? But Hudson is no better, because he has his own set of conceits. And indeed this is the trouble with almost all economists: They reach biased theories which they attempt to prove by selective use of data. At any given time, half of them are wrong. But it's never the same half.
I stopped studying economics at Cambridge University because I concluded that it has nothing to do with science. Subsequently I discovered Hayek, who at least started from a sensible position: By looking at human psychology as a prime factor, probably the biggest factor, affecting the economy. But Hayek of course developed his own set of dogma.
It's interesting that economics and "climate science" (which often doesn't conform with the most basic expectations of science) are both attracting attention at this time. Climate and the economy are both chaotic systems. Both involve variables whose behavior is not properly understood. Both build models that are nothing more than wishful thinking. Both attract poseurs who claim to predict the future. Both tend to influence policy decisions, much as priests in ancient Rome used to issue advice based on the reading of entrails. And the results are about the same.
Many good comments here in what I like to call the fifth estate.
In my only economics course, about, 45 years ago there a concept called "propensity to consume” was included in the subject matter. The importance was, of course, recognition that man is a herd animal with emotional responses that may have nothing to do with inherent value of things.
In science logic, we consider that we first form a hypothesis then move on to theory. If warranted the hypothesis can even proceed to “law” as in a law of natural science.
Standard statistics, as a science, is based upon independent random events. A coin flipped has no communication with other coins in the group are what it did on the last flip. Once upon a time I was in a corporate reliability function, traveling, hotel to hotel in Canada and US, bored and having trouble believing in the binomial theorem; that any series of random outcomes could have any predictive value for future outcomes. I undertook a large sample coin tossing experiment for bedtime entertainment. I am happy to report from my tables of results no deviations whatsoever from the predicted sets of outcomes and from the standard statistical distribution. No need to adjust the “thickness of the tails”.
If you try this, check your tables; the sample has to be large enough. Apply the “Students t”, or other methods to appropriately expand the “thickness of the tails” if you want to use small samples.
So, problem is, I have to say the economists do not yet have a real science. You can’t define risk until you have a distribution. As noted in “When Genius Failed”, Merton was concerned that it might never be possible to truly define “risk”. The guy has been given a Nobel prize for a faulty analysis.
The economists do have a system of working hypothesizes but the presumption of infallibility is necessary for status that they begin to need. And even with the good ones, it is hard to get their view in place with making assumptions about the very real unknowns.
Eliminate too big to fail? Sounds like a good start.
Charles,
Good contribution
Thanks.
Economics is certainly chaotic. Mathematicians who study chaotic systems like the atmosphere have proven, proven that the weather cannot be predicted accurately past 4-5 days. Understand, this is a mathematical phenomenon, it's mathematical fact.
No wonder economists and climatologists are held in such low esteem. Computer-modeled global warming/climate change, Keynes' spending your way out of a recession--these are mathematically impossible. I think these ideas are promoted by impotents, people who have no idea how to work or create wealth, have no common sense, and generally have their hands out for whatever low hanging fruit might drop off the tree.
Here is some common sense:
http://www.youtube.com/watch?v=qtjfMjjce2Y
The left contributes nothing to the political discussion in the US. But what is sadly lacking still is a thoroughgoing discussion of the truth about the Federal Reserve, gold, and perhaps what really happened on 11-22-63 and 9-11-01.
With that view, we'd be stuck back in the 1920's, where they didn't understand that printing more money caused inflation. You might've heard of Weimar Gernmany.
Those are interesting posts. I, too, have to go with Hudson.
Krugman often does exactly what Hudson states: makes real-world recommendations that affect people's lives, then attempts to justify those with a little sketch that would hardly justify the waste of a napkin on which to draw it. He then ignores all other related questions.
An example: recommending massive, nearly unlimited stimulus as a solution to our current recession (depression)... but never stating the theoretical maximum limit of US debt or the carrying costs of the deficit created by such stimulus. Those are real-world questions that do matter. If you don't know them or consider them, you should not be giving free-wheeling advice.
Hudson strikes me as a considerate, reasoning person.
After 30 years of supply side economics which has included numerous savings and loan failures, a market crash, two bubbles, more bank failures (and bailouts), and two more market collapses, I'd say Chicago School economics is worthless shit. Time to get rid of that horrendous fucking economic model and throw it in the shitter. Thanks for wrecking the country, conservatives, now suck my ass.
The real problem with economics is one thing - minor politics. Most economists can agree on the mechanics of how things work. What they can't agree on is how to apply them.
It's like 2 plumbers looking at pipes. Both agree where the leak is and to solve it requires removing the pipe and rerouting it to avoid contact with the item which caused the leak. How you reroute it, however, is the tough part. One plumber, seeking to make it easy to fix in the future will provide one solution. Another, seeking to maximize available tools and do the job quickly will utilize another.
7 times out of 10, they will agree on the solution. 3 other times, they will argue because both will have had slightly different views on how make it work.
When they differ in a big way, it's entirely political. Krugman is clearly a socialist, and really makes little effort to hide his sympathies. He claims Keynesian sympathies, but Keynes didn't want to undermine capitalism for greater government involvement (as Krugman often pushes for).
Krugman would never deny that supply and demand sets pricing. He would argue, however, that sometimes supply and demand get out of whack leading to bizarre pricing anomalies, thus needing greater government involvement to reduce these anomalies.
In truth, most anomalies ARE CAUSED by government involvment (tell me the housing market bubble had nothing to do with low Fed rates, and Fannie/Freddie underwriting of bad debt). Still, the concept that this is a "bad thing" would simply be glossed over by Krugman - it doesn't serve his purposes.