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    Maxine's Essays

    • 21st Century Regress
      Sometimes it seems like the world is going to hell and there's absolutely nothing a girl economist can do about it.
    • What Exactly Are We Crowding Out?
      The current economic downturn isn't a random draw of a black ball from an urn containing white balls and black balls. There's no sampling distribution. Very specific policies and actions landed us here. Now we must decide not only what policies need to be put in place to prevent it happening again, but also what policies would best drive us out of the ditch faster and sustainably.
    • I Wish It Were Only Butter
      We should be giving up some butter if we must. We should not give up education or health investment (or infrastructure or the environment (hello, BP). They may be the only legacies of any value that we pass on to our children and grandchildren.
    • Rational Health Investment?
      The obvious "market solution" is to improve the long run return on investments in health among the disadvantaged through meaningful and effective publicly funded education. The obvious short run "market solution" is to reduce the costs of investment and the shadow price of health for the disadvantaged by providing health insurance cover and reduced out-of-pocket costs.
    • The Socrates Parameter
      To the extent that our limbic systems respond to such engineering by over-riding the judgment of our frontal lobe and to the extent that our frontal lobe is deprived of the information it requires to make a rationally self-interested judgment, we are not only pigs and fools, we are slaves.
    • The Economic Rewards of Virtue
      If individual virtue tempers our "piggy" desires and conditions our choices to something that is both individually and socially better, then the economic rewards of virtue as embodied in and promoted by societal norms and institutions are far greater than we have ever suspected. As economists, we would do well to recognize this when we teach U max.
    • The Market for Morals
      Markets then are places where more is exchanged than goods and services, labor and product, credit, and interest. They are places where we also develop the personal virtues of temperance and prudence and the social virtues of benevolence and justice. When they function well, they produce trust, loyalty, and sympathy among those who trade there.
    • Post-Modern Applied Economics: It’s the Error Term, Stupid
      Maxine believes it’s time to refocus attention and discussion on the error term. It is often where much of the action is in our models. It is where unexpectedly catastrophic events dwell resulting in fat tails. It is where our animal spirits manifest and cause us to do the right thing or the wrong thing or the thing everyone else is doing rather than the self-interested, fully-informed rational thing. It is where God and miracles and chance dwell.
    • Intergenerational Win-Win: Health Insurance, Education, Environment, Infrastructure
      So when we’re talking about fiscal stimulus packages and we’re borrowing from our grandchildren to finance them, we should be thinking about how to use stimulus monies to create value for those grandchildren AND stimulate our economy.
    • Short-term Private Payoffs, Long-term Social Costs
      The real health reform discussion, the one we should be having, is “What must we do to create a health system that is both efficient and fair?” The answer will almost certainly include relegating the private sector to markets where market forces or regulation are effective at aligning short-term private incentives and goals with long-term societal interests. If such markets are scarce or non-existent in health, then the private health sector will be of limited value.
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    We used to see estimates of the notational value of derivative contracts but I haven't seen an estimate in a long time. Has anyone?

    norman: the notational derivatives are reported by the bank of international settlements quarterly, if you can find i recall, they have been increasing again, after a lull during the height of the crisis...

    i found these:

    from point 2 in this:
    US Commercial banks now hold an all-time high of $203.5 trillion in derivatives.

    i believe the amount held in europe is quite a bit higher...

    Well, I picked up my graduate degree in engineering in 2008 and found there simply weren't any jobs available. So it's more than creating the degrees, it's also having a place to use them.

    As to why:

    we don't make stuff much anymore.


    Other graphs:

    Another aspect of this (or maybe its a related problem) is the damage done by income inequality: Casino-like finance ends up putting some people in a position where they can extract money from the economy in a way out of proportion to the value of the work they do for society as a whole. This is not only unfair, but it distorts career choices. In a more balanced society it might be worth making a little less to do something rewarding like teaching, or research, or green engineering, but in a sharply differentiated society it gets harder to make that choice, especially when to do so might limit the opportunities ones children have to compete in a supposedly meritocratic system increasingly vulnerable to "gaming" by those with money.

    "It will be from two powerful, long-standing price distortions that have distorted the composition of our labor force and the mix of human capital within it."

    Sorry, but I don't get the distinction between the two distortions. They look the same to me. What am I missing?

    Daniel, Yes, I quite agree with you. I've been thinking more and more about it and may well blog on that topic soon.

    Maynard, You may well be right. I was trying to make a distinction between techies ending up on wall street instead of in other private enterprise or in academia and less-technical workers drawn to wall street who might otherwise have ended up in social work and other do-good professions. Probably not an important distinction and I'm not sure I made it very clear. :-)


    I’m no economist; but intuitively, it seems to me there must be a connection between income inequality and casino finance.

    As income inequality increases, a larger part of the money in a system is held by people with greater personal worth. Now, a family with an income of, say, $25,000 per year probably spends about $25,000 a year. A family with an income of $25,000,000 doesn’t spend $25,000,000 — it looks for ways to invest a large part of that income. And the whole point of investment is to earn money.

    A classic investment earns money because it enables a new business, or an expansion of an existing business, that makes a profit. The owners and the investors share in the profit until the investment is paid back, and everybody wins. That profit, of course, directly or indirectly comes from consumers who buy products. But as more money is concentrated in fewer hands, more capital seeks a profit on an ever smaller proportion of consumer spending. What happens when the amount of money seeking to make money through investment exceeds the “carrying capacity” of the underlying “real” economy?

    Well, you could stuff $25,000,000 in your mattress, but that’s not a very attractive option. And you could invest it in “real” business, except that the pool of good borrowers is shrinking, because there’s not enough demand to support further expansion of consumer-fronting business. Since there is no “real” investment worth pursuing, the gap is filled by speculation — the casino economy.

    I hope I don’t sound too much like an ignorant version of Karl Marx... but it seems to me that if capitalist economies can’t find a way to mitigate this problem, they’re doomed to ever-increasing cycles of boom and bust, until one is so bad that it leads to a total collapse.

    Dear Maxine,

    I think you are right on target with your critique of how the "casino-like" aspects of the current American-style capitalist economies have led to system-level irrationality, even if at the same time they are "individually" rational for some members of those systems.

    I also agree with you that the current training and configuration of American Economics is partly to blame for this state of affairs being acceptable to so many.

    I also think you are correct that a large dose of history, particularly the history of Economics, is a proper inoculating antidote.

    What you say of Keynes, though, while largely true, does not go far enough. He did, as you say, warn of the dangers of casino capitalism. But more importantly, he showed that even unfettered, individually rational, full-information, market systems might not always generate sufficient aggregate demand to employ all of the available work force. To argue otherwise in the 1930s seemed stupid or willfully ignorant to many observers.

    But JMK's great intellectual achievement was that he managed to convince enough of the economics profession of this, when economics seemingly had nothing to offer that would explain the Great Depression.

    Today, when that message is again glaringly obvious to many thinking observers outside of economics, we are in even worse shape. Thas is because the very training you properly excoriate has for the last thirty years abandoned both history and Keynes. Two results: generations of economists hostile and badly informed about history and an economics profession that has not even learned the basics of Keynes's most important message.

    I could not have said it better, Mike.

    I have been thinking recently about the political and economic forces that shaped the abandonment of both history and Keynes within economics. The returns to the "cottage industry" built around non-Keynesian econ that I describe in my original post had something to do with it. I suspect that the emphasis on math over substance in econ may have also contributed. But

    I find myself also wondering if some of this goes back to political forces that peaked in the late 40's early 50's when Joe McCarthy and others were harassing academics. The same forces persisted through the cold war years and have continued to pervade and sidetrack intelligent discourse about the proper role of government in economic growth and unemployment (e.g., Obama's "socialist" health care reform). Some of our tribal elders must have felt pressure to avoid appearing to advocate expanded govt roles in the social safety net and in promoting employment for fear of being accused of being too far to the left. Many of them were writing textbooks, some of which have had continuing influence on how new economists are trained and how they think. As a result, there has been an under-supply of understanding much less useful theoretical work in public and welfare economics IMHO. Speculation on my part, but something I want to investigate and think about this further.

    There is also tremendous peer pressure within the profession itself. It has altered dramatically within the last 18-24 months as more prominent economists have taken Keynesian positions and made Keynesian arguments. But there are still a lot of economists out there who came through the math or physics department. I find myself wondering if they are a bit like the math whiz modelers in the financial sector who ignored the fat-tailed distributions that most empiricists take for granted. Do they lack the historical, philosophical, and empirical perspectives necessary to break new theoretical ground quickly? Will they be resistant to it because if we move away from existence proofs the math is messier, the conclusions murkier, and promotion and tenure may take longer?

    Your thinking is very similar to my own, especially your last paragraph. I'm also intrigued by your fear of sounding like a Marxist. That is the fear that I believe has constrained much of the profession, at least in the US, from contributing in meaningful ways to public discourse about public welfare and the public interest. I've been saying for years that Marx's economics and his dialectical framework are limited, but what he got right was that there is a problem. It matters how income is distributed. Fairness matters. That's why he keeps getting a hearing and it's (again IMHO) why most people recognize his name, but few recognize Adam Smith's name. It's why if, God forbid, the revolution ever comes, his ideas are likely to resonate popularly: they're easier to summarize in 25 word soundbites that evoke strong emotions and, if we continue to become more unequal, they will resonate with more of the people. We need to start paying attention to income inequality and doing something about it within a regulated competitive capitalist framework.

    FWIW, I think your logic is right wrt investment versus speculation in an increasingly unequal society, but as I said in an earlier post, I want to think about this a bit more. The wealthy may just be hunting short-term returns as you say, but we have provided them with a narrative in which that is the socially optimal thing for them to be doing. For one thing, we have allowed the word "investment" to be used interchangeably with "speculation" for a very long time. No it's worse than that, we have allowed investment to mean specualation for a very long time. It's possible that if they had a different narrative and understood the long-term risk to their own incomes, they would search for lower longer term returns, i.e., they would develop a preference for investment over speculation. Unfortunately, human nature may be against us in this, but I would still like to see the narrative changed.

    Sorry. That last post should have read "Coises" not "Daniel.

    Thank you for responding, Maxine.

    I have doubts about the “narrative” angle; when narratives and incentives don’t coincide, either the narrative changes, or it becomes a hypocrisy. I don’t think narrative leads to behavior leads to conditions... the order is the reverse.

    At some point — probably around the end of the Bretton Woods system — conditions for investment changed. Speculation became more attractive relative to “real investment,” and the ways in which financial agents used their wealth changed accordingly. As the demand for speculation grew, politicians were pressured to relax the rules surrounding finance, and as part of this process we developed a revised narrative that explained the changes.

    Consider why performance-enhancing drugs are forbidden in competitive sports: were they permitted, the competition would soon cease to promote the things we value (such as the dedication and discipline to develop extraordinary control of ones body) and degenerate into testing which athletes were prepared to take the greatest risks with their health and well-being. Sure, there would be some hold-outs... but they would cease to be competitive, and hence would be soon forgotten. I think the parallels to recent economic history must be obvious.

    Any competition is bounded by rules; some the result of nature, some the result of historical development (there was no need to forbid performance-enhancing drugs at the ancient Olympic games — effective ones didn’t exist yet) and some chosen by people. Always, the net effects of the boundaries of a worthwhile competition must be maintained so that the incentives for competitors ultimately promote the things for which we value the competition in the first place. This is not the job of the competitors, but of those who make the rules.

    I think you’re getting at a similar thought with the idea of “narrative”; but I don’t think narrative replaces incentive in the minds of competitors. Instead, it tends to be a way of distracting people from the frequently politically unpalatable task of assessing how well incentives match the presumed social value of the competition — a fairy tale that explains why everything is as it should be. What’s missing isn’t a good story for the competitors, but realistic evaluation and action, not limited by the competitors’ perspective, from those who make the rules.

    FEMALE Maxine Udall, Ph.D. in economics quick (is she a new Ph.D?) ability to discern the distortions of a planet wide economic view supports my (cabdriver) sociobiological theory that females are able think for themselves -- think in the FIRST-PERSON -- while males (NO MATTER HOW HUGE THEIR IQ'S) cannot; males must by profound evolutionary imperative (PACK hunter) reflexively think in the THIRD-PERSON; must check in with the whole planet before they will discuss a novel approach to a communal problem.

    If the new idea is not found in the planet wide discussion -- it goes in one ear and out the other making no interaction with their brains.

    Maxine gives me a further extension of my cabdriver theory (Ph.D.: NY, Chi, SF): the first to produce a planet wide theory (assuming there is not one) automatically wins -- with males.
    Maxine complains in her essay that America's best brains have been diverted from useful fields to complex and ultimately productivity-less financial strategizing. The true tragedy is that American labor has forgotten all about the need to effectively withhold its contribution from the workplace to get all the market would be WILLING to pay -- which has led to a disappearance of the middle class as the effective and powerful political core in this county which in turn ALLOWED the predominance of finance in the warped political economy. Being a superbly intentioned and educated progressive economist she of course is completely out of touch with everyday labor market life which would have told her that in the clearest terms.

    Now we just have to get some progressive economists to hatch their own bargaining power restoring planet wide theory (THIS WOULD BE THEEE PERFECT OPPORTUNITY WHILE THE OLD THEORIES ARE WANING).

    Myself, corporeally representing impoverished American labor -- I found, discovered, accidentally came upon the perfect modality to re-balance America's labor market about 5 years ago which I could not -- IN MY DESPERATION FOR AN ANSWER -- fail to recognize the moment I saw it -- the answer all around the better paid majority of the OECD world and even places in the second and third worlds: sector-wide labor agreements.

    Maybe we need to pay -- male -- economists half or only a third as much until they see the perfect solution to their own dire need and hatch a perfectly timed new theory for the planet to win the day for it -- with males anyway.

    The comments to this entry are closed.

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