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Monday Message Board

September 22nd, 2008

It’s time once again for the Monday Message Board. Post your thoughts on any issue. Civilised discussion only. Please avoid snarks and trolling and strictly no coarse language.

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  1. September 22nd, 2008 at 12:40 | #1

    thanks much, brother

  2. Joe
    September 22nd, 2008 at 17:46 | #2

    I reckon that one of the effects of the current crisis will be an increase in the number and influence of the “free market think tanks”. It used to be that if the facts were disastrously awry with the theory (eg the 1930s), we would change the theory. But now that Economics ‘is at Last a Science’, that is no longer an option, so it must be the “fifth columnists” causing all the trouble. They know who you are, Quiggin, Gittins, Thoma, Galbraith…

  3. swio
    September 22nd, 2008 at 19:53 | #3

    I know some economists have been warning about the risks of the present financial crisis for some time. But it must be said, that on the whole, economics as a profession has basically missed this one.

    Imagine if meterologist predicted hurricanes as poorly as economics predicted the current financial crisis. No one would take them seriously.

    When Physcists faced “Newtonian” failures they didn’t declare them an anomaly and then carefully avoid examining the implications on their own understanding. They got cracking and came up with the theory of relativity and quantum theory.

    Its time economics stopped talking about “market failures” as if they were a failure of reality rather than a failure of market theory. When theories fail in science people get excited because it means there is something they don’t understand which means there is something to learn. Economics seems unable to take this approach.

  4. chrisl
    September 22nd, 2008 at 20:25 | #4

    Swio. I keep thinking of the number of economists and mba’s working in some of these businesses working out creative ways of lending money. And a wise old farmer/small businessman saying ” How are you going to pay that off son?”
    Debt is debt no matter how you slice it or dice it.

  5. Ikonoclast
    September 22nd, 2008 at 20:26 | #5

    I won’t wade too far into comment number three except to start by saying that there are many definitions of the term “market failure”. The term means different things to different theorists.

    Rather than turn to the theorists (in the first instance), my own rather colloquial definition would be based on taking a practical approach and roughly equating a “market failure” to an “engine failure” in a car or a “structural failure” of a bridge. Namely, that a specific designed and engineered system or structure has failed under certain given conditions.

    The failure does not mean all engines are failures or all bridges are failures. A failed engine, bridge or market has simply been designed poorly, maintained poorly or subjected to stresses outside its design parameters. In the case of the current market failure, I would say it’s all three.

  6. Mr.H
    September 22nd, 2008 at 20:28 | #6

    A few days ago I was listening to the google CEO Eric Schmit on the radio. He wants to partner up with GE (General Electric) with the intention of making US 100% reliant on electricity supplied from renewable sources of energy. Someone should drag Kevin747 to the party. Where does he get his 19 century coal ideas from?

  7. Ikonoclast
    September 22nd, 2008 at 20:53 | #7

    I perhaps should have added to my post at 5 that the notion of “market failure” is relative to what
    you think the market ought to do. What job(s) do you believe the market is designed to do or ought to be designed to do? By this question I refer rhetorically to what the market is intended to do by its “designers” and “strong players” or what the general public hopes or democratically expects the market to do.

    Notions of market failure generally include;

    1. Distortions of market power (eg.monopoly);
    2. Excessive Negative Externalities (eg. current CO2 emissions);
    3. Failure to provide adequate Public Goods and Social Equity (eg. if we let the poor elderly starve by providing no pensions);
    4.Failure to ensure macroeconomic stability (eg. creating a huge housing bubble/debt crisis and then throwing trillions at the problems in an attempt to save the system.)

    Market failures can often stem from political failures; ie a failure to govern and regulate properly. In a democracy, the people are in turn at fault for failing to demand and elect better governments.

  8. September 22nd, 2008 at 21:05 | #8

    “In a democracy, the people are in turn at fault for failing to demand and elect better governments”.

    In a genuine democracy (if such could ever be) that would be tautologically true, but in the systems now going by that name it is false because those who control the agendas never put meaningful choices of that order before the people.

  9. observa
    September 22nd, 2008 at 22:07 | #9

    “I know some economists have been warning about the risks of the present financial crisis for some time. But it must be said, that on the whole, economics as a profession has basically missed this one.

    Imagine if meterologist predicted hurricanes as poorly as economics predicted the current financial crisis. No one would take them seriously.”

    You might like to think of it a bit like climate change swio. The plethora of experts can’t tell you what the weather will be next week but reckon they know where climate is headed overall. That still leaves a fair bit of speculation as to time frames, severity, etc, not to mention some remaining circumspection about causality. Certainly you look at the historical record for clues about patterns, but you may also become aware of some atypical mechanisms at work which you deduce as important too. Many are now calling this the worst crash in a century so you’d certainly look at the 1930s fallout, but note the business world is a much changed place, still full of similar human frailty.

    Perhaps deep down we are roller coaster rather than merry-go-round critters and we like it like that. OTOH, maybe our eternal longing for the merry-go-round life, makes us more prey to the vicissitudes of the roller coaster, if the well intentioned efforts of central bankers is anything to go by. Just like paracetomol for kids might cause more asthma later, or too much hygienic environment weakens long term immunity, penicillin begets super bugs, etc. You’ve got to be an Austrian dad, with a Keynesian wife and mother to understand the constant tension involved, but we dads are usually proven right in the ‘long run’.

    Economically speaking that was much longer than usual this time round with all that monetary expansion, due largely to exceptional demographics. If central bankers threw that sort of dough at a young demographic in the 70s, the inflationary response was swift and obvious, This time round an aging demographic took it and began to ‘invest’ it for retirement. In doing so they continually bid up assets, not least housing to the point where either the kids stayed home, or they had to help buy them a place to move to, if they were to ever get rid of them. Catch 22 really and the ponzi scheme can’t go on forever, although it had an unprecedented run. That length and depth is the huge problem now as it must be unwound. Throwing more public debt at it to ameliorate the crash of such excess, has its own long term problems. Save our super funds only to bankrupt our govt coffers and increase our liability for taxation, or reduce spending. Frying pan and fire stuff really.

    Spengler really nailed it-

    “There is nothing complicated about finance. It is based on old people lending to young people. Young people invest in homes and businesses; aging people save to acquire assets on which to retire. The new generation supports the old one, and retirement systems simply apportion rights to income between the generations. Never before in human history, though, has a new generation simply failed to appear.�

    The last bit was what fooled central bankers for so long and created such huge moral hazard with all that dough. Computer power and globalised finance did the rest as it went looking for more and more dodgy homes, removed from any oversight by its creators. Inevitably something for nothing attracted the usual assortment of spivs and carpet-baggers and here we all are.
    Free money with a demographic twist anyone?

  10. Ernestine Gross
    September 23rd, 2008 at 01:07 | #10

    Re #3: “Its time economics stopped talking about “market failuresâ€? as if they were a failure of reality rather than a failure of market theory. When theories fail in science people get excited because it means there is something they don’t understand which means there is something to learn. Economics seems unable to take this approach.”

    Isn’t it the case that many, if not most people don’t know when a scientific theory fails, even in so-called developed countries? Moreover, isn’t it the case that not all scientists experience the excitement of discovery, including the discovery that one or several related scientific hypotheses have been refuted and the excitement of coming up with a plausible new explanation, a hypothesis or theory in answer to the question: Why doesn’t it work the way ‘we’ thought? I suggest, the answer to these questions is yes. Not all scientists are research scientists and not all research scientists research in the same area.

    This process is also going on in economics. However, in contrast to science, where many people can live quite happily, using no or at most a little bit of high school science in their daily lives , ‘everybody’ hears about ‘economics’ more or less every day, but not necessarily from research economists but from ‘anybody’ who has access to the media. Moreover, ‘everybody’ has a direct interest in ‘economics’ via the famous hip-pocket, employment, taxes, power failures, etc.

    However, I am overstating the difference between the treatment of science and economics in public life – at least in the more recent past. The great debate about global warming is an example where, with the benefit of hindsight, it is clear that politics, economic interests (as distinct from economics) and science got badly entangled, causing confusions in the public mind and a lot of work on part of scientists to clean up. And this is what is happening in economics, too. It seems a lot of people, including influential people, have confused the means to an end (a market, if it works; ie, if the theoretical conditions are at least approximately fulfilled in reality) with the end itself (the welfare of humans).

    The statement: “Its time economics stopped talking about “market failures� as if they were a failure of reality rather than a failure of market theory� seems to me to be evidence of the confusion.

  11. MH
    September 23rd, 2008 at 08:18 | #11

    I will take a contrarian view on market failure and argue there has in fact been no failure of the market with respect to the current financial mess in the United States. The market is working fine as far as I can tell,markets are not necessarily orderly and sometimes they are chaotic and so now they are chaotics and there is just not unlimited liquidity (money) to keep the current buyers and sellers of financial products operating on a constant growth curve using past practices and providing previous product offerings. The Paulson Bernanke put is a doomed effort to shore up capital holdings to merely allow what was a ponzi scheme in finance operating, only this time they are hoping to operate in reverse for a while. Seems we may have discovered the basis of the infamous ‘dark matter’ after all. If I was an American taxpayer I would be very very unhappy at being asked to take on the collective debt of the very rich so they can keep shirts and then continue to make money, as I may have said some time ago, the very nature of the words used ‘sub-prime’ was spin to blame the poor for the excesses of the rich and nothing in between has changed my view of that.

  12. Ernestine Gross
    September 23rd, 2008 at 09:11 | #12

    Re #11. MH, how would you describe the fundamental research question of economics?

  13. Ernestine Gross
    September 23rd, 2008 at 09:24 | #13

    Today I found this beauty in the business press:

    “It is a fair call that, had ASIC not stepped in and canned shorting, big offshore hedge funds may have turned their attention to Australia, and to Macquarie in particular which has already attracted the focus of foreign funds including famous Wall Street short-seller Jim Chanos. But US and UK regulators had only banned shorting in financial stocks, so why didn’t we?”

    Source: http://business.smh.com.au/business/a-step-too-far-20080923-4lxz.html

    The effect of the US and UK regulations would have had the same effect w.r.t. the financial stock ‘Macquarie Bank’ as the Aussie regulation. Am I missing something?

  14. MH
    September 23rd, 2008 at 12:01 | #14

    Ernestine, depends on your political-economic value system, ergo how you distribute scarcity efficiently within agreed norms.

  15. Ernestine Gross
    September 23rd, 2008 at 14:20 | #15

    Re 14: MH, I have to disagree with you. I am quite sure my political-economic value system regarding the distribution of scarce resources is not what drives economic research.

  16. MH
    September 23rd, 2008 at 16:43 | #16

    Ernestine, I would not disagree with you either however I learnt a valuable lesson a long time as an undergraduate in another discipline before moving on to economics that being able to identify your own bias or internal value system was very useful way of being able to examine hypotheses and theory as objectively as you can. It depends therefore where you stand in time and history. Adam Smith was interested in special interests perverting the market, Marx in the unequal distribution of income, Keynes in unemployment etc. Each theory arose to understand the circumstances of the day and each writer argued that they had arrived a new general or unified theory.

    The grand delusion of the past fifty years is that the problems identified by Smith, Malthus, Marx, Keynes were solved and we had entered a golden age and if I recall a similar view was expressed by Fisher in the 1920′s. There has been a long running argument in Australian economic academe about pure economics versus political economics, LSE v American Neo-classical, both deal with the same problem from a different part of the spectrum. So I will state my personal value upfront; I am inclined to the Herman Daly view of economic possibilities, but I am also drawn to notion that biology and chemistry may hold some interesting insights ala Darwin’s theory of selection and thermodynamics. Perhaps you would like to email me and we could have the discussion off line and not clog up JQ’s blog.

  17. Ian Gould
    September 23rd, 2008 at 17:20 | #17

    Does anyone have any figures on the cost, relative to GDP of various past bail-outs and market crises?

    It’d be interesting to see how, for example, the S&L bail-out and the Hong Kong Tracker fund compare with the current bail-outs in those terms.

  18. Thersites
    September 23rd, 2008 at 18:14 | #18

    “When Physcists faced “Newtonianâ€? failures they didn’t declare them an anomaly and then carefully avoid examining the implications on their own understanding. They got cracking and came up with the theory of relativity and quantum theory.”

    Am I wrong in my understanding or are relativity and quantum theory not contradictory so that both can not be correct? However I will need at least another half bottle of Pinot Noir before I can determine if there may be any significance in that to the debate ……

  19. swio
    September 23rd, 2008 at 22:26 | #19

    Economists seem to feel that market failures are not actually examples of economics at all. Describe a situation as a market failure and no economists will feel the need to predict how it will play out. It is almost as if the word “economics” has come to mean the study of nothing but theoretical markets that have neatly assumed away all the problems of reality.

    But imagine studying ballistics while assuming away the far more difficult problems of aerodynamics. It would be much easier, with neat and clean theoretical answers, but of little value in the real world.

    Isn’t a market failure just as much economic phenonmenon as a well functioning market? My complaint is that many economists will feel the answer to that question is no, and of the ones that might say yes almost none will take on the difficult and messy task of predicting how the real world works when their market based models fail (ie a “market failure”. No, i’m not confused by what that means)

    When a theory fails in science they work on a better one. When “market theory” fails in economics, economist look for a different problem. Economics almost defines itself as the study of markets so it can’t solve a problem that is, by definition, beyond market theory. If physics had done the same thing and confined itself to the study of Newtonianism, they would never have been able to move beyond it. Today, economics can’t predict or solve many real world problems because they can barely acknowledge that real world, imperfect markets often work very differently to their highly theoretical models. And they can’t even conceive of the need to provide explainations for economic phenomena that have little to do with markets at all.

  20. Bingo Bango Boingo
    September 23rd, 2008 at 22:42 | #20

    swio, you aren’t taking into consideration the fact that economics is a social science. The scientific method, ie. experimentation, is not really an option. So the neat ‘hypothesis-experiment-analysis’ isn’t applicable.

    I don’t know of anyone who uses the term ‘market failure’ to describe ‘when the world doesn’t fit with my model’. It is usually reserved for inefficiency that arises because of one participants’ market power, or an externality or something. Leftists sometimes use to describe ‘a market outcome I personally don’t like’. In the former case, the ‘failure’ is absolutely a function of economic behaviour. Indeed, that much is acknowledged by mainstream economics. So I don’t know what economists you’ve been talking to.

    BBB

  21. SJ
    September 24th, 2008 at 00:01 | #21

    swio Says:

    Economists seem to feel that market failures are not actually examples of economics at all. Describe a situation as a market failure and no economists will feel the need to predict how it will play out. It is almost as if the word “economics� has come to mean the study of nothing but theoretical markets that have neatly assumed away all the problems of reality.

    You’re trying to generalise too much, here, swio. The problem doesn’t lie in economists or economics, but rather in a particular ideology.

    Ernestine above (in her garbled fashion) has tried to explain that what you’re saying is like trying to blame inaction on global warming on scientists. You yourself know that it isn’t the fault of science or scientists in general, but rather the fault of certain right-wing interests who are able to run an agenda that favors themselves.

    The thing that you perceive as a denial of the existence of “market failure” is part of that agenda. It’s not a central theme of economics, it’s an ideological thing more usually called Thatcherism, Freidmanism, Bushism, Chicago consensus, Nneoliberalism.

    BBB above is one of its proponents, desperately denying that such a thing exists.

  22. Bingo Bango Boingo
    September 24th, 2008 at 00:29 | #22

    Huh? Of course ‘market failure’ exists. It must, since it is merely a term used by some to describe a certain set of circumstances that exist in the real word. It is just a label for a portion of reality. I’m also happy to acknowledge and accept the existence of the labels Thatcherism, Freidmanism, Bushism and Chicago Consensus.

    I do, however, deny the existence of Nneoliberalism.

    BBB

  23. SJ
    September 24th, 2008 at 00:38 | #23

    Whatever. Feel free to argue with yourself at length.

  24. Bingo Bango Boingo
    September 24th, 2008 at 00:42 | #24

    Yeah, like, totally, what-ever dude.

    BBB

  25. Ian Gould
    September 24th, 2008 at 18:48 | #25

    Now for some good news for a change:

    http://www.spacemart.com/reports/CSIRO_UltraBattery_Goes_Global_In_The_Auto_Sector_999.html

    “The CSIRO-invented UltraBattery is set to have a global impact on greenhouse gas emissions after Japan’s Furukawa Battery Company, which has already begun production of the UltraBattery, and US manufacturer, East Penn, signed an international commercialisation and distribution agreement for the technology.”

    “The exclusive sub-license agreement will see the UltraBattery distributed by East Penn to the automotive and motive power sector throughout North America, Mexico and Canada while Furukawa Battery Company will release the technology in Japan and Thailand.

    Previous tests show the UltraBattery has a life cycle that is at least four times longer and produces 50 per cent more power than conventional energy storage systems. The technology is approximately 70 per cent cheaper than the batteries currently used in hybrid electric vehicles (HEVs).”

  26. September 26th, 2008 at 22:15 | #26

    How very curious. The link to the Australian Libertarian site has softly and silently vanished away, no doubt in the ordinary course of maintenance. Although I cannot but wonder if there might be some developments there that might, shall we say, be connected to its now lower priority… So, of course, I shall pay it more attention in future.

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