Monday, January 9, 2017

Branko Milanovic — Pareto, Taleb and the tails of income distributions

I am reading Nassim Taleb’s Antifragile and then I went back to rereading parts of his extraordinary Black Swan. The Black Swan’s blurb by Daniel Kahneman, “The Black Swan changed my view of how the world works” is fully justified. It will remain one of absolutely indispensable books, a huge epistemological advance. Antifragile is, perhaps, an even more ambitious book because it aims to make systems (including people) antifragile, that is thriving in conditions of (what Taleb calls) “opaque randomness”.  So, it is broader in scope and has a prescriptive part that The Black Swan does not. 
Here I would like to address one of the two themes of Taleb’s that find immediate resonance among people who work on income inequality and globalization: the former one. I leave globalization for another post.

Global Inequality
Pareto, Taleb and the tails of income distributions
Branko Milanovic | Visiting Presidential Professor at City University of New York Graduate Center and senior scholar at the Luxembourg Income Study (LIS), and formerly lead economist in the World Bank's research department and senior associate at Carnegie Endowment for International Peace


lastgreek said...

Tom, Taleb himself is a bit on the wonkish side.

AXEC / E.K-H said...

Income distribution: Market failure or theory failure?
Comment on Branko Milanovic on ‘Pareto, Taleb and the tails of income distributions’

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words: the confused confusers of economics have NO idea what the pivot of their subject matter is.

It is pretty obvious that without the true profit theory there is no true distribution theory.#1 So everybody can know for sure, without bothering much about the insane behavioral assumptions of utility and profit maximization, that the standard marginal theory of income distribution must be dead wrong.

The trouble with distribution theory started with Ricardo who got the distinction between wage, profit, and rent wrong.#2 Then Marx got the class theory of profit wrong.#3 Neoclassical marginal distribution theory, of course, is unsurpassable idiocy, but Keynesianism did not perform much better, and Heterodoxy has actually multiple profit theories that do not fit together.#4

Distribution theory has always been the deepest point in the swamp of economics. Do not expect that orthodox or heterodox economists who spent their clueless lives there will find a way out any time soon. The profit theory is false since Adam Smith#5 and people who call themselves economists talk shop about the relative merits of descripive functions like Pareto distribution or the power law. These folks simply don’t get it.

Egmont Kakarot-Handtke

#1 See ‘Essentials of Constructive Heterodoxy: Profit’
#2 See ‘When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism’
#3 See ‘Profit for Marxists’
#4 See ‘Heterodoxy, too, is scientific junk’
#5 See ‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?’

Joe said...

I still don't see how "the black swan" applies to the financial crisis. Far from being a highly unlikely event, the crisis was inevitable (part of why people could predict it). With the amount of private debt fueling the bubble, low-to-nonexistant real wage growth, and all the fraud in the financial sector, how could the gfc not have happened? It was more like a flock of white swans diving in for a landing on a lake.

Tom Hickey said...

The financial crisis was not a black swan event. The standard models did not include all relevant factors in their parameters so the scope was too narrow to catch the building situation that would finally blow up. The FBI issued a warning about massive fraud in the mortgage industry in December, 2004. Conditions were already beginning to unwind in the Q3 2006. Economists were just looking in the wrong direction owing to assumptions that were too restrictive.

The crisis was not an economic crisis to begin with. It was a financial crisis resulting from Ponzi finance as described by Hyman Minsky, exacerbated by a criminalized financial system which was enabled by a policy of lax regulation and oversight and a relative degree of assurance that even if caught, the perps would pay no penalty personally.

People like Bill Black argues that it was perfectly rational for the conditions leading to crisis would develop given the stakes and odds of being caught and having to pay a price greater than the gain, so that the black swan would be a crisis not taking place.

lastgreek said...

Btw, anyone here ever use the expression "I'm gonna get me some "fat tail"?

It's in reference to trading, of course :)

Matt Franko said...

"it aims to make systems (including people) antifragile, that is thriving in conditions of (what Taleb calls) “opaque randomness”."

He's a stochastic person observing deterministic people... " opaque randomness" is aka determinism....


AXEC / E.K-H said...


The blahblah about opaque randomness is as enlightening as the blahblah about the Invisible Hand ever was and the shop talk about fat tails does not advance distribution theory one iota.

The observed income distribution PROVES that there is a POSITIVE feed-back built right into the core of the market economy.

Because a positive feedback is incompatible with equilibrium the observed distribution is an empirical refutation of equilibrium theory. From this follows that standard economics is false because it has equilibrium built right into the axiomatic foundations. From this is turn follows that about 90 percent of papers published in the AER is scientific rubbish because they are equilibrium models.

It is pretty obvious that neither Taleb nor Milanovic have any clue what the observed distributions really mean. They mean that economics of the last 140 or so years is as thoroughly refuted as the flat earth theory.

Egmont Kakarot-Handtke