Friday, March 10, 2017

Mark Buchanan — The Misunderstanding at the Core of Economics

The theorem shows -- in a highly abstract model -- that producers and consumers can match their desires perfectly, given a particular set of prices.... 
... it worked only in a perfect world, far removed from the one humans actually inhabit....

This perversion isn’t Arrow’s fault. He merely helped to prove a mathematical theorem, and was no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations of capitalism, and he was prescient in understanding how economic inequality might come to impair the workings of democratic government. 
Perhaps it would be best to use his own words: “In a system where virtually all resources are available for a price, economic power can be translated into political power by channels too obvious for mention. In a capitalist society, economic power is very unequally distributed, and hence democratic government is inevitably something of a sham.”
As I have been saying, capitalism (economic liberalism) is antithetical to democracy (political liberalism).

Bloomberg View
The Misunderstanding at the Core of Economics
Mark Buchanan
ht Mark Thoma at Economist's View


Dan Lynch said...

Agree, thanks for posting this article.

And I would expand on that to suggest that any attempt at "regulated capitalism" aka "social democracy" is likely unsustainable because capitalists will oppose regulations and redistribution.

Scandinavia has proven an exception to my theorem (so far) but 1) they enjoy a current account surplus without which they would be forced into austerity and 2) they have some cultural differences that pre-date their current economic system. I.e., the Northern European countries have respected the custom of Freedom To Roam for hundreds of years. Their social values are fundamentally different than the values of the U.S..

Schofield said...

It's more correct to use the term "market capitalism" and not just "capitalism." The current form of market capitalism is both supportive of democratic process and antagonistic towards it at the same time. The "market" allows an individual. family or institution to "vote" for the goods and services it wants for its "preferred environment." Control over capital by a selfish socioeconomic elite allows it to undermine the democratic process for selecting "preferred environments.

Tom Hickey said...

The "market" allows an individual. family or institution to "vote" for the goods and services it wants for its "preferred environment."

If the consumer has the money to do so.

Distribution by price is income dependent.

The assumption that everyone receives compensation in that corresponds directly to contribution is false owing to the prevalence of economic rent extract through asymmetric market power resulting from a combination of social, political and economic power.

The "vote" is influenced by a playing field that s not level.

Modern capitalism is an extension of feudalism in that it is based on a privilege social, political and economic class.

In this environment, democracy is largely an illusion, and democracy as "government of, by and for the people" is non-existent.

Penguin pop said...

When I think of capitalism as it applies to the US today, I think of the growing merger of corporate power and state power to the point where you can't tell which one is which anymore and where rent seeking is openly encouraged. The regulations on controlling rent seeking are either nonexistent or weakened. That's what happened when Rex Tillerson got a position. You had the fusion of ExxonMobil and their interests with government. What would you think about this, Tom? I've been thinking about this more and more.

Tom Hickey said...

Hard to tell the difference between state corporatism and corporate statism.

Schofield said...

"The "vote" is influenced by a playing field that's not level."


"In this environment, democracy is largely an illusion, and democracy as "government of, by and for the people" is non-existent."

Tom you maybe able to argue your second sentence on a practical basis but you can't argue it on a theoretical basis. The collapse of the Soviet Union was in large measure because of the poor choice in being able to choose ("vote" for) goods and services to meet your optimum or near optimum requirements. The ability for all of the population to have "adequate choosing power" (income) is not proscribed by market capitalism since control over capital is a "rules made decision" by a human society.

André said...


"The collapse of the Soviet Union was in large measure because of the poor choice in being able to choose ("vote" for) goods and services to meet your optimum or near optimum requirements"

I may be wrong, but if I could understand, you are saying that there is a strong relation between vote choices and consumption, as if people voted thinking about their consumption, or as if the elected candidate would have some relevant influence over they future consumption.

But votes are not about consumption. Voting decisions are very complex. People take into account what they believe will make their country and their life better.

Maybe people will vote because they think the candidate will end economic and social inequality, end injustice, create more jobs, end slavery, promote free education and free healthcare. Or maybe they will vote in other direction - for a candidate that will close the economy, deport illegal immigrants, ensure that they rights will not change. Maybe some crazy people will even vote because they are homofobic and racist as their candidate is.

And some people will vote in the candidate that they parents suggest, or they will vote randomly in the candidate that seems good looking.

In all cases, people will not take into account consumption bundles, utility functions or rational expectations. That happens both in american market capitalism or in soviet union's communism.

Also, candidates do not dictate what people will consume. Their influence in future consumption is at best unpredictable.

And "income" is deeply dependent on political institutions created and/or directed by thise in power. They favour feed those who have voted and will vote in them, so there is a lot of feedback. "income" is not a separated matter from politics. It's entangled.

Tom Hickey said...

The collapse of the Soviet Union was in large measure because of the poor choice in being able to choose ("vote" for) goods and services to meet your optimum or near optimum requirements.

This is the conventional view in the West that would have to be shown.

For one thing, there is almost never a single factor that is responsible for creating something as socially, politically, and economically complex as the USSR. People did not revolt because of lack of stuff to buy and income to buy it with. That's a Western myth based on a simplistic analysis. It's similar to the competing theories about "the cause" of the fall of Rome. There was no "cause." A lot of factors converged over time that weakened the system.

Moreover, citing the USSR as the sole alternative to market capitalism is based on neither fact or logic.

The USSR proves little about economics and a lot about politics. As a matter of fact, the USSR was fabulously successful in bringing a formerly agricultural peasant society to the level of a military-industrial superpower in record time. They were under virtual attack by the Allies as soon as the Nazis were defeated and had to commit resources to military industrial development to survive. Under that scenario, production of consumer goods took a back seat. It was perfectly logical, unlike the military expenditure of the US on "national defense." That spending is for offense to promote global hegemony and maintain the empire.

The economic record of China is also incredible in raising a poor country to the level of a military-industrial superpower in record time. "Red China" was also under virtual attack since 1949.

Although the USSR no longer exists, Russia is still under virtual attack, as is China, with the US military at their doorsteps. One purpose of this is to force commitment of resources to military use, depriving it of consumer use, with the objective of creating domestic unrest that will lead to regime change in Russia and China.

AXEC / E.K-H said...

Economics is NOT a misunderstanding but cargo cultic crap
Comment on Mark Buchanan on ‘The Misunderstanding at the Core of Economics’

Mark Buchanan is harping on one of most idiotic stereotypes ever, that is, that a theory is something that is detached from reality. It is just the opposite. The fact of the matter is that a materially/formally consistent theory is the best mental representation of reality that is humanly possible. The true theory incorporates knowledge and all the rest of human communication is mere opinion, belief, storytelling, wish-wash, gossip, sitcom blather, tautological triviality, commonsensical delusion, or disinformation.

The misleading idea that there could be a conflict between ‘theory and practice’ is very old and immensely popular among laypersons. So much so that Kant bothered to refute it in an essay, first published in 1793, with the title ‘On the Old Saw: That May be Right in Theory But It Won’t Work in Practice.’ Kant exploded the silly saw with the famous punch-line “There is nothing as practical as a good theory.” So Mark Buchanan is 200+ years behind the curve.

It is absolutely irrelevant whether the economist Kenneth Arrow “was a model academic ― brilliant, creative, precise, unfailingly modest.” (See intro) What is alone relevant is whether his economic theory is true or false: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

The fact of the matter is that Arrow’s theory is materially and formally inconsistent. Therefore, his General Equilibrium Theory is forever scientifically unacceptable. It is what Feynman famously called cargo cult science. As methodologists know very well: “At long last, it can be said that the history of general theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin. … General theory is simply a research program that has run into the sands.” (Blaug)

Arrow’s General Equilibrium Theory is inapplicable NOT because it is a theory but because it is a FALSE theory, i.e. it is materially and formally inconsistent. Equilibrium economics has already been dead in the cradle 140+ years ago. The miracle of economics is that the representative economist has until this very day not realized that he is perpetuating proto-scientific crap.

Mark Buchanan is right on one count: “This perversion isn’t Arrow’s fault.” It is the inevitable result of the utter scientific incompetence of economists since Adam Smith.

Egmont Kakarot-Handtke

Tony Wikrent said...

If you cruise the internet and arrive at a place where you can conduct a text search of the U.S. Constitution, and of The Federalist Papers, you will find that they do not contain the word "capitalism" or "captalist" or "capitalistic."

How then can it possibly be claimed that the USA was founded as a capitalist economy?

Well, there are all sorts of historical studies and arguments explaining the shifts from feudalism to mercantalism to capitalism. The interesting point here is that almost none of these studies and arguments include any consideration of republicanism. And it's not like the founders did not write or speak about republicanism - there are many, many explicit considerations and discussions of what a republic is supposed to be.

How this relates to economics? A central principle is always a suspicion of and hostility to concentrated power -- economic, as well as political.

I believe that republicanism is actually quite amenable to some limited form of socialism, and inherently hostile to unfettered market capitalism. Indeed, the ideas of the Chicago School, Ayn Rand, the Austrians, etc., etc., amount to an open attack on the foundational principles of the American republic. E.g., promotion of the general welfare is "the road to serfdom."

Unfortunately, the power of concentrated economic wealth has hobbled and hidden all study and discussion of how the USA was transformed from a republic to a capitalist democracy.