84 thoughts on “Sandpit

  1. @John Foster

    Footnote 4

    UNFCC (2010) Cancun Accord. Cancun: UNFCCC.

    is inadequate or is there a misunderstanding;

    In other words, which Agreement, or Decision identified

    “… CO2 emissions cuts of 80% [4], to maintain political, social, fuel and climate security.”

    I thought Cancun just recognised that we need to keep 80% of fossil fuel reserves in the ground.

  2. Prevailing forms of energy production need to change and that is independent of style of governance. I think the primary problem with respect to climate action isn’t the state of mix in mixed State and Market economies but of the capture of the State by vested interests – interests that decide where they stand on such an issue according to how it impacts near term competitiveness and profitability, not the quality of the expert advice on longer term climate and it’s responses to human activities. Whatever the system those holding offices of trust and responsibility need to act responsibly and currently, on this issue they don’t. And it seems to me the shorter term considerations, including pervasive political influence as well as their personal advancement and remuneration, seems to require that they don’t.

    We have legal systems that should, in theory, be able to assign responsibility where activities have harmful consequences – normally I would expect those in positions of trust and responsibility to take the expert advice available seriously at risk of charges of criminal negligence. I suspect much of the high value of credentialed maverick expert voices willing to misrepresent the work of their professional peers and provide more agreeable expert advice is in providing a ‘reasonable’ justification for ignoring mainstream advice and carrying on regardless, more even than the bamboozling the general public. Having a confused public and the option to spin the issues such that their short term decisions can be construed as in the public interest eg keeping profitable, royalty paying mines operating, keeping jobs in the fossil fuel sector secure etc, provides further justification.

    Realistically we can’t expect the common law system to protect us because it is, like the advocacy services of political parties and governments, something that can be made to bow to wishes of the highest bidders. Not to mention the multi-generational nature of the climate problem makes assigning fault or responsibility problematic within a system that works best with issues where the consequences are more immediate and directly attributable, where assigning responsibility strongly discourages similar activities. It will take legislation rather than lawsuits for assigning responsibility to get ahead of the game and divert the decision making.

    I think we have the civil mechanisms in theory but in practice a kind of broadly sanctioned corruption in support of those who have economic power pervades our systems of governance – and I’m not sure that’s an issue of capitalism vs socialism; it applies to them all.

  3. @Tim Macknay

    It may be that my own description of capitalism and some of its possible alternatives is incoherent. However, I consider that the basic definitions of capitalism which I quoted were coherent. Certain other commentators also thought the quoted definitions I gave were coherent enough to understand and said so.

    I also made a point (which has a philosophical basis), about the modus operandi of demanding over-simplistic definitions, and over-simplistic definitions only, for complex system phenomena and then complaining when said over-simplistic definitions are not entirely clear and/or do not cover all cases and all relations. Quite frankly, this is an unreasonable and unproductive way to conduct a debate about complex ideas. Indeed, it functions to stop debate which is probably its precise purpose.

  4. @Ikonoclast

    I also made a point (which has a philosophical basis), about the modus operandi of demanding over-simplistic definitions, and over-simplistic definitions only, for complex system phenomena and then complaining when said over-simplistic definitions are not entirely clear and/or do not cover all cases and all relations. Quite frankly, this is an unreasonable and unproductive way to conduct a debate about complex ideas. Indeed, it functions to stop debate which is probably its precise purpose.

    I don’t disagree with this point, but I think what your interlocutors were doing was responding to your habit of making sweeping remarks that such-and-such a problem is caused by capitalism or cannot be solved without getting rid of capitalism, without adding any further context. Invoking complex and fuzzy concepts in such a sweeping way is also, I think it’s fair to say, “an unreasonable and unproductive way to conduct a debate about complex ideas”.

  5. @Ikonoclast
    Fair enough. Personally I don’t object to you making statements (sweeping or otherwise) concerning capitalism, although I admit that I do occasionally find some of them less than informative. But I imagine you feel the same way about many of my own comments and remarks. 🙂

  6. @Tim Macknay

    To expand on why I said “We’ll have to agree to differ.”

    I have on many occasions on this blog added further context, often by links and quotes. So, I don’t agree that I have simply been “fuzzy” and “sweeping” in my various criticisms of what I and others term “capitalism”. However, we will clearly have to agree to differ in the sense that you apparently see the accumulated evidence I offer as “fuzzy” and “sweeping” and I do not. I see it as empirically valid. Perhaps the following passage from the paper “Capitalism’s Environmental Crisis—Is Technology the Answer?” by John Bellamy Foster will provide an example of the kind of evidence and analysis which I consider indicates that capitalism is not the system to provide the solutions to the problems it has caused.

    “Still, it would be wrong to see this (the climate crisis) as a mere technological problem or one of fuel efficiency, since the technologies that would allow us to avoid such a rapid buildup of carbon dioxide in the atmosphere have long existed. If we take transport, for example, there have long been modern means of transportation, particularly public transit, that would vastly reduce carbon-dioxide emissions compared to a transport system built around the private automobile, and that would actually be more efficient in terms of the free and rapid movement of people as well. Instead, the drive to accumulate capital pushed the advanced capitalist countries down the road of maximum dependence on the automobile, as the most efficient way of generating profits. The growth of the “automobile- industrialization complex,” which includes not simply automobiles themselves but the glass, rubber, and steel industries, the petroleum industry, the users of highways for profit (such as trucking firms), the makers of highways, and the real-estate interests tied to the urban-suburban structure—constitute the axis around which accumulation in the twentieth century largely turned (Sweezy, “Cars and Cities,” Monthly Review, vol. 23, no. 11, April 1972).”

    And

    In Paul Baran and Paul Sweezy’s Monopoly Capital, which was heavily influenced by Schumpeter’s business cycle theory (in addition to the theories of Marx, Veblen, Keynes, and Kalecki), the authors argued that as a historical system, capitalism has always been dependent on epoch- making innovations. These are the kinds of innovations that alter the entire structure of production and the geography of production on a massive scale and around which the bulk of investment comes to cluster.

    For Baran and Sweezy, three epoch-making innovations had come into play in the history of capitalism—the steam engine, the railroad, and the automobile. What distinguished the automobile in this respect is that it served as an epoch-making innovation twice—in two stages of automobilization. The first was the expansion of automobile production in the period up through the 1920s, including the beginning of the building of highways. The second was the massive buildup symbolized by the construction of the interstate highway system, the destruction of rival forms of public transit, and the accelerated rate of suburbanization that occurred immediately after the Second World War. It is not too much to say that the dominance of the automobile was associated with an entire regime of production and consumption, which has underpinned and still underpins accumulation in the advanced capitalist states.*

    It is this automobile-industrial complex that is at the heart of our dependence on petroleum today and that accounts for the largest portion of carbon-dioxide emissions. At the time of the Gulf War with Iraq, President Bush told the population of the United States that the purpose of the war was to defend “our way of life.” Everyone knew what this meant: petroleum. Jevons had called coal the “general agent” on which the entire British industrial system depended and the economical use of (or cheapness) of coal as what allowed industry to thrive. Today petroleum plays an equally dominant role in our industrial system.

    The capitalist class is divided when it comes to reductions in carbon-dioxide emissions to slow down the rate of global warm ing. A significant part of the ruling class in the United States is willing to contemplate more efficient technology, not so much through a greatly expanded system of public transport, but rather through cars with greater gas mileage or perhaps even a shift to cars using more benign forms of energy. Efficiency in the use of energy, as long as it does not change the basic structure of production, is generally acceptable to capital as something that would ultimately spur production and increase the scale of accumulation (leading to the Jevons Paradox). But a very large and powerful segment of capital in the United States is not willing to accept even this, because greater gas mileage points generally to smaller engines and smaller cars. Auto producers today, more than ever, are making the bulk of their profits from the production of large vehicles, with the growth in the market for sports utility vehicles and minivans. Henry Ford II’s well-known adage that “minicars make mini profits,” is still the governing principle. As for the petroleum interests, their vested interest in promoting the demand for oil is obvious. Viewed from this standpoint, it is scarcely surprising that there were virtually no votes to ratify the Kyoto Protocol within the US Senate.

    At every point, meanwhile, capitalists and their acolytes have blocked the implementation of solar power alternatives, some of which are entirely feasible at this stage. Corporations have sought to take over solar power from the grassroots movement, not in order to promote it, but in order to hold it in abeyance. Under capitalism, it is those energy sources that generate the most profits for capital—of which solar power is certainly not one—that are promoted, not those most beneficial to humanity and the earth. This story has been told by Daniel M. Berman and John T. O’Connor in Who Owns the Sun?

    None of this, of course, should surprise us. Thorstein Veblen, who might, along with Rudolf Hilferding, be considered one of the originators of the theory of monopoly capitalism, emphasized the fact that capitalism, although it promoted a certain narrow kind of bottom-line efficiency, nonetheless represented a system of prodigious waste from any rational-planning perspective such as that of the engineer. He characterized the oil industry as one of “clamorous waste and mishandling” that led inevitably to “big business and monopoly control” (Absentee Ownership, 200-201). For Veblen, the whole industrial system under monopoly capitalism (or, as he called it, the system of “absentee ownership”) was permeated by reckless and useless consumption of human and natural resources, associated with the dominance of pecuniary goals over rational production. “The distinction between workmanship and salesmanship,” he observed, “has progressively been blurred…until it will doubtless hold true now that the shop-cost of many articles produced for the market is mainly chargeable to the production of saleable appearances” (Ibid., 300).

    The sales effort has so penetrated into production itself that the use value criteria for commodities has been undermined and transformed by the needs of exchange value in quite radical ways. From this it is a small step to the Galbraithian “dependence effect”—that what we consume is dependent on the nature of production, rather than the reverse, as assumed in the “consumer sovereignty” hypothesis of neoclassical economics (Galbraith, The Affluent Society, chapter 11). Control over production, coupled with the force of modern marketing, has given capital the power to manufacture “needs” (i.e., desires) along with products. In fact, “product development” in the giant corporation is usually seen as a subdivision of marketing. Journalists never tire of pointing to the love of the automobile in the United States. But such “love” is more often than not a kind of desperation in the face of extremely narrow options. The ways in which cars, roads, public transports systems (often notable by their absence), urban centers, suburbs, and malls have been constructed mean that people often have virtually no choice but to drive if they are to work and live. Under these circumstances the car (or minivan), which consumers seem to crave, also becomes a kind of prison, made more tolerable (if only barely) by the introduction of cell phones and other gadgets. Meanwhile the social costs pile up. “Capitalism,” as K. William Kapp declared in The Social Costs of Private Enterprise,

    must be regarded as an economy of unpaid costs, ?unpaid’ in so far as a substantial portion of the actual costs of production remain unaccounted for in entrepreneurial outlays; instead they are shifted to, and ultimately borne by, third persons or by the community as a whole (231).

    In such a system, it makes no sense to see possibilities for sustainable development as limited to whether or not we can develop more technological efficiency within the current framework of production—as though our entire system of production, with all of its irrationality, waste, and exploitation has been “grandfathered” in. Rather, our hopes have to be pinned on transforming the system itself. This means not simply altering a particular “mode of regulation” of the system, as Marxist regulation theorists say, but in transcending the existing regime of accumulation in its essential aspects. It is not technology that constitutes the problem but the socioeconomic system itself. The social-productive means for implementing a more sustainable relation to the environment within the context of a developed socioeconomic formation are available. It is the social relations of production that stand in the way.” – John Bellamy Foster.

  7. @Ikonoclast
    Oh, so by “agree to differ” you actually meant “continue to argue”.
    The quotes in your comment seem to come from a book by John Bellamy Foster from 2002. Has anything changed since then that might be relevant to his thesis? Patterns of US automobile consumption and use? Greenhouse gas emissions?

    To be honest, I’d prefer to stick with “agree to differ” than continue to argue with you, but I feel I should set out (again) part of my response to your claim over on the Parallel Universes thread that anyone supporting what you called “moderate left” approaches to climate change were really just ideological apologia for capitalism. As I said on that thread, I think that:

    – Getting societies to reduce greenhouse gas emissions is clearly difficult. However, the plethora of policy and technology tools to address global warming, and modelling that indicates they can be effective at moderate cost, lend themselves to the view that it can be done;
    – there is no reason to suppose that a transition to socialism will make addressing the issue any easier*;
    – there is no plausible strategy for a transition to socialism in the short to medium term; and
    – global warming needs to be dealt with in that time frame.

    *In my earlier comment I noted that the experience of 20th century ‘actually existing socialism’ afford no reason to suppose that planned economies addressed environmental issues more effectively than capitalist ones. You’ve since clarified that you don’t envisage socialism in those terms, but instead you envisage what you call an organic transition to a system that would be differentiated from the present one in various ways, in many respects subtly, but most significantly perhaps by the fact that economic activity would be dominated by worker-owned cooperatives and state owned enterprise rather than the current ownership structures, and that rent incomes would be abolished. That picture has some appealing elements. There is nothing in it, however, that suggests that a society with those characteristics would necessarily act more rationally or rapidly to address global warming than the current one. And even if it did, for some reason not articulate din your description, the admitted time necessary to undertake an orderly transition would rule out the ability to successfully address global warming once that system was in place. Global warming would need to be addressed first in any case, while the system was still capitalist.

    Those are the reasons why I regard the insistence that global warming can only be addressed by getting rid of capitalism to be a red-herring. I certainly don’t dispute that addressing it under capitalism is difficult. But whether capitalism is to be gotten rid of or not, it appears to me that global warming needs to be addressed whether or not, and almost certainly before, socialism arrives.

    One other thing – I didn’t accuse you of being ‘fuzzy’, I said that capitalism was a fuzzy concept. After all the definitions, caveats, clarifications and such that have flown back and forth, surely you don’t dispute that?

  8. @Tim Macknay

    I do still dispute a considerable number of things but as you point out I broke my own offered “truce”, so I will add no more now on this thread. 😉

  9. Hi all, this thread mostly seems to be dealing with climate change and mitigation etc. Ill try not to mention capitalism. Im an economics neophyte, however Im doing some reading and thinking about externalisation of costs (EOC), particularly in regards to Australian power generation companies. How is that the EOC is not seen, talked about or measured as an impact? Well that is how it seems to me. Thanks for your time and apologies if I am derailing anything.

  10. @Xevram

    That concept certainly gets talked about from time to time on this blog. When I talk about it, I use the terminology “negative externalities”. I guess the two are approximate synonyms but I am no sort of trained economist either. Whether EOC is talked about or not probably depends on who is doing the economic analysis. Some sectors of the economy have a vested interest in sweeping EOC under the carpet.

    You can write about anything in a sandpit so you don’t have to worry about derailing anything. There is some tendency for a sandpit to to stay on the topic of the first post but it’s not a hard and fast rule so far as I know.

    Feel free to talk about capitalism in a sandpit if you wish. Beware of mentioning it too much in other threads like I have. 😉

  11. Ernestine Gross,

    There are a couple of typo corrections in this repost.

    A while ago, I spent a little time pondering Piketty’s formula;

    r GT g or Return on capital greater than growth. Of course, he is saying IF that happens then certain results follow (increasing inequality). Further, he says that this r GT g might be a “norm’ to which we have returned (based on the empirical data).

    I developed a simple thought line that;

    (1) Physics equates physical quantities e.g. Kinetic Energy equals half M times V squared.
    (2) Pure maths (and accounting) equate nominal and/or imaginary quantities.
    (3) Economics, in part at least, seems to equate nominal/imaginary quantities to real quantities.

    We could argue that r is a nominal quantity (being measured in nominal units) and that real economic growth is a real quantity (more of physically quantifiable goods and services). We could then question the validity of equating nominal quantities to real quantities. Does this create a maths or a calculation which has validity? However, in turn it can be argued that we convert the real quantities to a value in a nominal base (money) and thus the equation does equate nominal to nominal.

    Taking a pragmatic view (which I believe fits nicely with empirical views ), we can say that if this method of equating has practical value in producing useful or usable insights or outcomes then it is a valid and worthwhile procedure. To me this arena of the equation of the notional or subjective to the real is an interesting part of economics (of any type) and illustrates a problem area within it. There are practical uses to the procedure but it also contains real dangers both intellectually and practically.

  12. @Ikonoclast

    Part I:

    Piketty used ‘nominal’ data as found in accounting data, including national accounts. Nominal data means monetary values. Hence “r” and “g” are growth rates, one per period, of nominal variables.

    You may recall I once mentioned Piketty’s work does not take ‘real’ resource constraints into account. This is also the case in all macro-economic models I know but not in general equilibrium models. (I am talking about theoretical models not econometric models.)

    In macro-economic models, the term ‘real growth’ means ‘inflation adjusted’ growth (Go to Wiki and search for ‘real versus nominal values’ and ‘GDP deflator’ ). But, you may recall from discussions about ‘asset price inflation’, the resulting ‘real’ values aren’t all that realistic for people in daily life. For example, many if not most young people in Sydney find they can’t buy a house or a unit at the same age as their parents or at all. Real estate has become too expensive, relative to their income and wealth. The RBA has an interactive inflation calculator website: http://www.rba.gov.au/calculator/ . I found this web-site to be a useful tool to play with. I put in a number for a weekly expense for food and grocery items from around 1974 and then asked to give me the corresponding value for 2015. The resulting number was roughly comparable to actual costs in 2015. I put in a number for the cost of a specific house in 1993 and asked for the value in 2015. The resulting value was off by almost 1million. Even after allowing for improvements, repairs, ‘financing costs’, the resulting value was still off by about 1/2million. The estimates are good enough to illustrate the enormous change in relative prices (groceries versus housing) in Sydney, which, by implication means using the ‘consumer price index’ to calclulate ‘real wages’ in Sydney is effectively meaningless once housing is taken into account.

    While many commentators focus on the relationship between r and g in Piketty’s work, IMHO, this relationship is not all that interesting except for macro-economic stability. Piketty relates income to wealth. Again using nominal values (ie monetary values), wealth consists of ownership of physical assets (eg a house) and financial securities (eg shares, bonds, deposits). By asking, how many years of income (a monetary value) is required to ‘equate’ to the monetary value of wealth at a particular point in time (a version of a pay-back period calculation in finance), he is able to show an increase in income inequality between ‘capital’ (ownership of assets) and ‘labour’ (wages). [I hope I didn’t simplify his method too much.]

    End of Part I.

  13. @Ikonoclast

    Repost of Part I (without one web-link)

    Part I:

    Piketty used ‘nominal’ data as found in accounting data, including national accounts. Nominal data means monetary values. Hence “r” and “g” are growth rates, one per period, of nominal variables.

    You may recall I once mentioned Piketty’s work does not take ‘real’ resource constraints into account. This is also the case in all macro-economic models I know but not in general equilibrium models. (I am talking about theoretical models.)

    In macro-economic models, the term ‘real growth’ means ‘inflation adjusted’ growth (Go to Wiki and search for ‘real versus nominal values’ and ‘GDP deflator’ ). But, you may recall from discussions about ‘asset price inflation’, the resulting ‘real’ values aren’t all that realistic for people in daily life. For example, many if not most young people in Sydney find they can’t buy a house or a unit at the same age as their parents or at all. Real estate has become too expensive, relative to their income and wealth. The RBA has an interactive inflation calculator website. Search for RBA inflation calculator). I found this web-site to be a useful tool to play with. I put in a number for a weekly expense for grocery items from around 1974 and then asked to give me the corresponding inflation adjusted value for 2015. The resulting number was roughly comparable to actual costs in 2015. I put in a number for the cost of a specific house in 1993 and asked for the value in 2015. The resulting value was off by almost 1million. Even after allowing for improvements, repairs, ‘financing costs’, the resulting value was still off by almost 1/2million. These estimates are good enough to illustrate the enormous change in relative prices (groceries versus housing) in Sydney, which, by implication means using the ‘consumer price index’ to calclulate ‘real wages’ in Sydney is effectively meaningless once housing is taken into account.

    While many commentators focus on the relationship between r and g in Piketty’s work, IMHO, this relationship is not all that interesting except for macro-economic stability. Piketty relates income to wealth. Again using nominal values (ie monetary values), wealth consists of ownership of physical assets (eg a house) and financial securities (eg shares, bonds, deposits). By asking, how many years of income (a monetary value) is required to ‘equate’ to the monetary value of wealth at a particular point in time (a version of a pay-back period calculation in finance), he is able to show an increase in income inequality between ‘capital’ (ownership of assets) and ‘labour’ (wages). [I hope I didn’t simplify his method too much.]

    End of Part I.

  14. Ernestine Gross
    While you are explaining Piketty to us, perhaps you could explain to me how Piketty’s hypothesis of high returns to wealth in recent decades relates to the current situation where real interest rates are low or even negative. Wouldn’t low or negative interest rates lead to a reduction in inequality according to Piketty? But the reverse is happening. What have I missed?

  15. Preference-whisperer Glen Druery may be on the lookout for new work now that the Senate reforms have gone through. Someone should be keeping an eye on Leyonhjelm, in case he goes postal.

  16. @John Goss

    Where is there the data showing that “the reverse is happening”?

    How does it correlate with low or negative interest rates?

    Lower returns to capital should boost labour’s share so a change in inequality may arise. But where is there the evidence?

  17. @Ikonoclast

    Part II.

    General equilibrium theory (and the extension to agent models) and real resource constraints.

    First a few preliminary remarks. Over time and with the help of reading comments on this blog-site, I’ve come to believe there are two totally incompatible notions of ‘general equilibrium theory’. First, there is what I call the blind belief version, which goes something like this: Market prices will equilibrate supply and demand and this is a good thing. Markets should be ‘free’ to do this. There is ‘freedom of choice’ (‘economic freedom’?) and this is ‘right’ for a ‘free society’. This blind belief version seems to underly ‘neo-classical’ (or classical, don’t know for sure) macro-economic models as found in textbooks. Second, there is a huge body of literature, which uses pure mathematics (and, more recently, computational methods but not including the ‘dynamic stochastic general equilibrium’ model, which is a macro-econ model) to generate theoretical models of economic systems. It is easy to describe the belief version in words because it amounts to regurgitating words. The math-econ version is more difficult to describe- at least for me. Will I be able to find the right words without being misleading? I’ll try.

    Using a broad brush, these math-econ theoretical models do have a few things in common but it is certainly not the above mentioned belief. The driving question is: Under which conditions on ‘the elements’ of ‘an economy’ do we get what type of ‘equilibrium’ (solution), what are the properties of the solution and how stable is the system. All concepts are represented by mathematical objects to facilitate checking for logical consistency.

    The rudimentary elements of ‘an economy’ are people and natural resources (as understood by various branches of natural science) and an ‘institutioal environment’ (how a society is organised). In recognition of economic theories not covering all aspects of human life, the term ‘agent’ is used as the ambrella term for various types of decision makers (eg ‘consumer’, producer’, ‘government’). Note, it is not ‘the’ insitutional environment but ‘an’ institutional environment and it is not ‘the’ economy but ‘an’ economy. Theoretical models differ by the assumption made about the institutional environment. None of the theoretical models which have something to do with ‘market economics’ and ‘prices’ I’ve come across, including my own, has ‘market clearing’ as the only condition of ‘an equilibrium’. All of them have ‘resource feasibility’ as another condition (in contrast to macro-models) and, all of them have a conditon on what constitutes each ‘agent’s’ optimal choice. The entire set of conditions constitute the definition of ‘an equilibrium’. The definition of ‘an equilibrium’ is not independent of the institutional environment (eg complete markets, partially segmented markets, incomplete markets) and the theoretical properties of the solutions differ, too.

    To some extent, the description of an ‘agent’s optimal choice is the same as in micro-economics, which you call ‘neo-classical’. One important difference is that micro-economics typically doesn’t check whether the model builder or presenter has assumed that each consumer has the necessary wherewithal to make the market transactions consistent with the (postulated) optimal choice (ie what looks like a theoretical result is actually a postulate) and the phrase ‘freedom of choice’ is empty (or should I say more precisely, not proven to be non-empty).

    In terms of the outlined GE (market) models, the wherewithal is the ‘market value’ (more on that later) of what a consumer owns. It is called wealth. This could be stuff which empirically (and in applied areas) is called physical assets, financial assets and skills that can be sold in the ‘labour market’ segment of the entire market. So, there is no a priori class distinction between ‘capital’ and ‘labour’. The conceptual framework is so general that, subject to one proviso, it applies to societies where there is empirically a class distinction in the sense that some people own only assets and do not work (difficult to achieve in practice because the owner has to at least hire accountants and advisers and this may be considered ‘work’), while others do not own any assets but sell their skills (difficult to achieve in practice because owning a toothbrush, which lasts longer than say a day, would be considered ownership of an asset, etc, etc), and, the predominant ownership scenario in contemporary countries like Australia where most people own some assets and sell their various types of ‘labour’.

    The proviso is the minimum wealth condition (each consumer has enough wealth to be able to buy at least a little bit of what is on offer – a much stronger condition than the idea of a safety net.) Wealth inequality is possible but only up to a point. (A sociologist might interpret this condition as providing social cohesion – preventing a class structure of ‘rich’ and ‘destitudes’)

    So, how is ‘market value’ (wealth) defined? Money is not a necessary feature of the institutional environments considered, but (normalised) prices are. We call it a ‘price system’. A price system is essentially a list of exchange ratios at which the list of ‘stuff’ can be traded (the list of exchange ratios can be ‘normalised’ in the sense that their sum is equal to 1). It is relative prices that matter. Hence if, the relative price of a particular skill, ‘owned’ by an individual, then, by selling this skill this individual is just as well of as someone who has a bundle of assets which result in the same wealth.

    End of Part II

    PS: I haven’t proof read the above. Apologies in advance for any typos or other errors.

    One more to come.

  18. @Ernestine Gross

    Thank you for taking the time to write those parts (with one to come). I appreciate it. Already, it gives me a better idea of the type of economics you do. It sounds like cutting edge stuff even though its foundations do go back decades. It kind of parallels the development of complex systems theory in the sense that complex systems theory also started a number of decades ago but only really took off in the last 15 years or so.

    Standard economics textbooks, as you implied, tend to be bowdlerised, simplified and indeed more ideology than genuine substance. Books for the layperson will be even worse in many cases. Your research program area, I guess, is still developing too fast to be laid down in a general readership book yet, even forgetting the problem of rendering maths down into language explanation.

    With those caveats, I am getting a general idea of what you do. If I can write more specific comments which I hope are intelligent, I will write them after the third part. In general though, I am very encouraged and feel, quite frankly, that such an approach in a number of ways is, in spirit if not method, more cousin to a Marxian – Veblenian tradition and to complex systems thinking than it is to neoclassical economics or Australian “economic rationalism”. I don’t know if this is the kind of plaudit you will welcome.

    But let me look at a statement like;

    “The proviso is the minimum wealth condition (each consumer has enough wealth to be able to buy at least a little bit of what is on offer – a much stronger condition than the idea of a safety net.) Wealth inequality is possible but only up to a point. (A sociologist might interpret this condition as providing social cohesion – preventing a class structure of ‘rich’ and ‘destitudes’).”

    This indicates a strong strong social democratic, or even dare I say a “socialist”, orientation in the research program. An interesting question for me to ponder is whether this a “pre-assumption” as it were or a necessary part of the set of parameters to make markets work completely. If it is the latter, it is a potentially system-changing discovery. That’s if we want a system which is efficient, fair and sustainable.

  19. @Ikonoclast

    I first must make one correction in Part II. Please replace the sentence “Hence if, the relative price of a particular skill, ‘owned’ by an individual, then, by selling …” with Hence if, the relative price of a particular skill, ‘owned’ by an individual, is high enough then, by selling …

    Part III

    I believe what is left is for me to comment on:

    “(1) Physics equates physical quantities e.g. Kinetic Energy equals half M times V squared.
    (2) Pure maths (and accounting) equate nominal and/or imaginary quantities.
    (3) Economics, in part at least, seems to equate nominal/imaginary quantities to real quantities.”

    (1) No comment
    (2) I am not sure I understand this statement. I can say financial accounting (the theoretical model) assumes the existence of a monetary unit (nominal, as identified in a previous part). I am talking about the contemporary financial accounting system (based on ‘double entry’) which takes its origin in Luca Pacioli’s work from the late 15th century (accounting scholars have more to say about the history). Pacioli was a monk. (Except that pure mathematicians may be underpaid in monetary terms, relative to other people, I can’t see how pure math is related to ‘nominal’)
    (3). I am not sure I understand this statement. Here the major problem is the word ‘imaginary quantities’.

    If I were to interpret the term ‘imaginary quantities’ as the subjective relative valuation of lists of ‘stuff’ by individuals (‘preferences’, which may differ among individuals) then yes, some parts of economics (eg GE theoretical models) do relate (rather than equate) quantities of physical objects with the preferences and relative wealth weighted valuation of these things ‘in the market’, ie via prices.

    IMHO, Ikon, it is the minimum wealth condition together with subjective valuations (individuals’ preferences – wants) which are the components that are compatible with the notion of democracy. Economists take preferences as given when constructing these abstract theoretical models (mental road maps if you like) without asking how do people form their preferences – social science is larger than economics after all.

    The End

  20. John Goss :

    While you are explaining Piketty to us, perhaps you could explain to me how Piketty’s hypothesis of high returns to wealth in recent decades relates to the current situation where real interest rates are low or even negative. Wouldn’t low or negative interest rates lead to a reduction in inequality according to Piketty? But the reverse is happening. What have I missed?

    Well, I could have spellt out something more clearly. Consider the concept of wealth I introduced in my posts to Ikonoclast. Piketty separated out wealth due to labour services from wealth due to physical and financial assets.

    Call physical and financial assets ‘capital’ (following Piketty). If physical and financial asset prices rise faster than labour service prices (in aggregate) then there is an increase in wealth inequality between ‘capital’ and ‘labour’. Note however, since Piketty uses aggregates, it is easily possible that some people who sell ‘labour type services’ earn more income than other people who own capital.

    I wouldn’t talk about Piketty’s “hypothesis”. His work (the big book) is an empirical study.

    I am confident you can work out why low or negative cash rates are not reducing wealth inequality. Wealth is not cash. Wealth is the market value of things owned by people, including labour type services.

  21. @Ernestine Gross

    Again, I take heart from a statement like;

    “it is the minimum wealth condition together with subjective valuations (individuals’ preferences – wants) which are the components that are compatible with the notion of democracy.”

    Basically, we agree. We understand each other when we use words that still have currency like “democracy”. We don’t understand each other when I use old-fashioned words like “capitalism”. You are talking my language when you say “the minimum wealth condition (each consumer has enough wealth to be able to buy at least a little bit of what is on offer – a much stronger condition than the idea of a safety net.” It’s just that in my language I would call that socialism… and support it.

  22. @Ernestine Gross

    I have had more time to digest what you wrote. You say that the minimum wealth condition is “a much stronger condition than the idea of a safety net”. How do the models assume, or set by parameters, the minimum wealth condition?

    By your description, the models address markets, agents, institutions and resources. A recent article I read noted that economics concerns production, distribution, exchange and consumption.

    “Production creates the objects which correspond to the given needs; distribution divides them up according to social laws; exchange further parcels out the already divided shares in accord with individual needs; and finally, in consumption, the product steps outside this social movement and becomes a direct object and servant of individual need, and satisfies it in being consumed. Thus production appears as the point of departure, consumption as the conclusion, distribution and exchange as the middle, which is however itself twofold, since distribution is determined by society and exchange by individuals.

    Do you models model production, distribution, exchange and consumption? Let me list them with short explanations (in case we are not using technical terms in exactly the same way).

    1. Production is clear enough. We produce goods and services using labour (mental and physical), machines and natural resources (energy and materials).

    2. Distribution is an interesting concept and may be opaque to those (not you) who ignore fundamental institutional arrangements in our society. In our society, the main distribution can be seen occurring when workers work for a company. Typically, the worker gets a distribution called a wage or salary. The company’s owners get a distribution in the form of possession and control of the goods (or services produced). This is the main form of distribution in our society but social distribution as in welfare is also important.

    3. Exchange is what happens in markets. This is clear enough as a concept though no doubt complex to model.

    4. Consumption is also clear enough. Consumption I assume has to be modeled too so that issues of over-production and under-production (gluts and shortages) could be in turn modeled for their effects on the system.

    Do the models you discuss model these components of the economic system?

  23. @Ernestine Gross

    Is this accurate:

    If physical and financial asset prices rise faster than labour service prices (in aggregate) then there is an increase in wealth inequality between ‘capital’ and ‘labour’.

    I thought Picketty’s “r” was not price but return. Do you have a page reference?

    In value terms – maybe at equilibrium, price = return, but then there would be no further increase in inequality.

  24. @Ivor

    I think E.G. was not directly talking about the formula (r greater than g) at that point. However, what she says is completely consistent with the formula.

    Firstly, as you say the formula is “rate of return on capital is greater than the rate of economic growth”. So, you are correct that r is rate of return.

    Secondly, as per E.G. “if physical and financial asset prices rise faster than labour service prices (in aggregate) then there is an increase in wealth inequality between ‘capital’ and ‘labour’.” This can be realised when any individual asset owner sells an asset for capital gains. This will contribute to the asset owner’s return on capital. Even while the asset owner holds the appreciated asset it can be used for security on a loan which could purchase, for example, more relatively depreciated labour. This again potentially contributes to the asset owner’s return on capital. Relative price shifts like the one E.G. talks about will (in the aggregate) increase the rate of return on capital.

    We certainly shouldn’t conceive of the return on capital as being limited to interest rates paid on certain sorts of accounts. Petty rentiers, such as self-funded retirees, may be hurt by low interest rates if they keep all their money in Pensioner Security Accounts. Large scale capitalists however can potentially borrow at very low interest rates and then find high returns by investing (speculating) in negatively geared shares and the Sydney property market (for examples). As you and I would agree (along with E.G. I think), the current economic conditions encourage speculation but not productive investment. We have an over-capacity of production (globally and probably in Australia) and worker wages are not sufficient (given the importance of their higher marginal propensity to consume compared to the rich) to buy up the produced goods. Capital would rather speculate than invest productively in this phase. The speculation in Australia is further fueled by a set of foolish policies like negative gearing and housing grants.

    Footnote:

    It has to be remembered that r GT g is a conditional equation. It does not say r is greater than g all the time. It only says IF r GT g then wealth inequality increases. Piketty then goes on to demonstrate there were long periods of capitalism where r was GT than g and one significant period where it was not. Then he shows we are again in a prolonged period where r GT g.

    Thus the conditional logical statement “IF r GT g then wealth inequality increases” says something about a fundamental trend inherent in capitalism IF a given condition is met. What would be really interesting would to be find out what conditions the outcomes of “r GT g” and “r LT g”. Piketty does not address this mystery IIRC. He does map out the historical data which show when the two conditions applied. Piketty’s claimed or genuine ignorance of Marxian scholarship is at this juncture (post his work) unfortunate. It may have been felicitous earlier because it induced him to examine these issues in a new non-Marxian, empirical manner (which is not to imply that all Marxian thinking is empirical). Some of his discoveries have tended to vindicate Marxian thinking whether he would agree with this or not.

    A reasonable conclusion is that there are tendencies in crude capitalism and in modern financial capitalism which drive the system towards the condition r GT g. There are obviously also some counter-tendencies as well. This generic or family resemblance in the behaviours of crude or industrial capitalism and modern monopoly finance capitalism induces me to think “capitalism is still capitalism”. That is to say, it is false in my opinion to assess that “capitalism” is an obsolete word or that it does not point to a useful explanation of a real, pervasive and continuing system.

  25. @Ikonoclast

    Re your post #74.

    I’ve got news for you regarding the philosophical ideas represented in math-econ agents models I talked a tiny bit about.

    The minimum wealth condition is found in the Arrow-Debreu GE model (early 1950s). I don’t know whether GE theorists in general would agree with it, but I did identify the philosophical basis of this model to be ‘laissez faire’ and four quite prominent math economists passed it.

    (The role of this condition in these models is to ensure that the phrase ‘freedom of choice’ is not empty (meaningless, undefined, propaganda, sloppy theorising, ….)

    This as well as subsequent models of this type do not model either ‘capitalism’ or ‘socialism’ (or any other ism word).

    By the way, I do not wish to promote these models; they are neither descrptive nor prescriptive, they are, according to some classification systems, analytical. This type of work may overlap with what seems to be called analytical philosophy.

  26. @Ikonoclast

    Re your 71.

    I have to disappoint you regarding my work. I am retired for quite some time. My GE work, ‘partially segmented markets with multinational firms’ was done in the 1980s. With the GE models with incomplete markets, the GE type research program (in which there were many people involved) has come more or less to an end by the late 1990s. Cutting edge theoretical research is in computational methods of complex systems and in particular game theory and stuff I am no longer aware of.

  27. @Ernestine Gross

    I understand your caveats, I believe. There is an inherent and good (I think) moral philosophy position in wanting to ensure “freedom of choice” is not just an empty phrase. I am also fine with this statement;

    “This as well as subsequent models of this type do not model either ‘capitalism’ or ‘socialism’ (or any other ism word).”

    However, I do wonder if these models do model production, distribution, exchange and consumption as I described these in my post 75 via quotes and in my own words. It would be my position at this stage, without further education or convincing, that these would be the minimum required modules (each with several or many model-able parameters) for the model. I would expect there to be some “analogical congruence” (my term) between the model and possible real economies. Bertrand Russel would refer to this as “structural isomorphism”. The structural isomorphism would have to be both of an entity kind (agents, objects, resources) and of a processual complex system kind. Meaning by the latter that processes through time are modelled (changes over time to agents, objects, resources, and quantities of any kind).

  28. @Ikonoclast

    Re your #75

    1. “… the minimum wealth condition is “a much stronger condition than the idea of a safety net”. How do the models assume, or set by parameters, the minimum wealth condition?”

    Suppose there are i = 1, 2, …, m individuals in an economy and there are j = 1, 2, …, n physical objects of choice (‘commodities’). A ‘commodity’ is defined by its physical properties, time and location and state of nature where it is made available.

    The minimum wealth condition is fulfilled if
    a) each individual is ‘endowed’ with (owns) a strictly positive quantity of each of the n commodities such that for commodity prices p = p[1], … p[n], and endowment e[i] = e[i;1], … e[i;n], wealth[i] = pe[i] (inner product of two vectors) is ‘big enough’ to allow each individual buy at least a little bit (more) of any of the commodities by selling a bit or all of what it owns according to the individual’s preferences.
    OR
    b) each individual is endowed with a skill (labour type service), s = 1, …, m such that for service prices P = P[1] , …, P[M] and commodity prices p, each individual can buy at least a little bit of any or all commodities, according to his/her preferences by selling a labour service because the market value (wealth) of the service, say P[i]Q[i] is big enough. (An individual may have more than one skill but it can’t sell more than one at a particular point in time. However, with IT technology, a particular type of service can be sold at various locations at the same point in time. I don’t write this out in notation because it gets a bit messy to write and possibly also to read for people like you who tell me they prefer words.)

    OR (if an economy with a financial system is considered)
    c) each individual is endowed with a strictly positive ownership fraction of each of the k = 1, … K financial securities such that the sum of the ownership fractions is 1 and, for security prices z[k], a vector, and an endowment z(i), a vector, i’th wealth z[k]z[i] is ‘big enough’ to buy at least a little bit of each of the commodities j = 1, …, n, according to his or her preferences, by selling some securities.
    OR
    d) a combination of (a), (b), (c), depending on the model considered.*

    Note, no matter what the source of wealth, the notion of minimum wealth always relates to wealth being ‘big enough’ to buy the most preferred bundle of commodities (goods and services). I’ve seperated goods from services explicitly because of the discussion re Piketty. In many models this is not done because the whole exercise reqires only a bit of interpretation of the concept of a ‘commodity’.

    This gives a clue regarding how the efficiency of an economic system as conceived by these models is to be evaluated, namely the allocation of physical resources in relation to the preferences of people.

    * The introduction of financial securities makes a difference though (not only interpretation) because, as Radner observed, in contrast to commodities (including labour type services) where the total supply has a ‘natural limit’ (a person can’t ever work more than 24 hours a day, the total amount of oil is finite), there is no ‘natural limit’ on the sale of financial securities (short selling is unbounded). (‘deregulating’ the financial system as if it had the properties of a fruit and vegitable market or even the mining industry was, IMHO, a big mistake which was or should have been quite obvious since the mid-1970s).

    2. Producers. I deliberately didn’t talk about producers, although I did mention the agent type ‘producer’, in my initial post because I feared it would become too dense.

    In the class of ‘private ownership economy’ models, all producers are owned by individuals via ownership shares.

    As indicated in the above note, the overriding efficiency criteria is the satisfaction of people, given their preferences and total resource constraints. Hence any objective of the ‘producers’ has to be at least logically consistent with the objectives of its owners. This is by no means a satisfactorily resolved theoretical problem.

    It is impossible for me to say very much about this problem on this blog site, no matter how big the brush I were to use. I can illustrate a little bit.

    In the Arrow-Debreu model there is no problem with the objective of producers because there is a ‘complete market for commodities’ and it opens only once. In my model I partition the Arrow-Debreu model into a finite number of local economies and introduce multinational producers. The difference between local and multinational producers is that the latter have the technological know-how on how to produce in at least 3 local economies while local producers cannot, keeping all else the same (setting aside a lot of technical stuff). Well, this little change in a model resulted in the conclusion that there are wealth transfers possible between the local economies, even if all producers are price takers (‘competitive’) and these wealth transfers (real resources) cannot be undone in the same way as they could be undone by local wealth redistribution.

    I hope I said enough to make the distinction between the blind belief version and the theoretical literature on GE clear.

    3. “By your description, the models address markets, agents, institutions and resources.”

    Not quite. The models have common elements, namely agents, resources (natural environment but not quite satisfactorily represented because of the complexity of biological systems) and an institutional environment. In the class of ‘competitive private ownership economy’ models, the institutional environment is ‘the market’, as conceptualised by a price system. In this class of models and focusing only on those which deal with alternative assumptions about the institutional environment, we have ‘complete commodity markets’, sequence of commodity and financial securities markets, partially segmented markets with multinational producers, incomplete markets. Then there are models which have a government agent, represented by the issuance of a currency unit and wealth redistribution. Then there are models where imperfect competiton is considered. (Imperfect markets has two interpretations, imperfect competition and incomplete markets, or, of course both but I don’t know of a model which considers both at the same time, it doesn’t mean there is none.)

    Now, you make an interesting point, when you write (at the right time in the discussion) that: “since distribution is determined by society and exchange by individuals.”. On the empirical level, it is the legal institutional environment which largely determines ‘the distribution’, in the sense of corporate law, competition law, labour laws, etc etc. For example, the change in the legal institutional environment from a central wage fixing system, imperfect as it may have been according to some criteria, to enterprise bargaining has huge implications regarding ‘distribution’ of profits and incentives. Why would top managers have to be ‘good’ in whatever sense you wish to interpret it if they can negotiate down wages or reduce the real wage by demanding more productivity to show a profit after all?

    IMHO, it is not discussions about ‘capitalism’ vs ‘socialism’, ‘the Left’ and ‘the Right’, no matter how learned and extensive that bring about improvements in a society. In the end they are only words. It the scrutiny of details of legislation over time that matters. Don’t you think JQ is doing an excellent job in this regard?

    ps, thanks for replying to Ivor on my behalf. Nothing to add, really.

    THE END

  29. @Ernestine Gross

    You say of the minimum wealth condition, “each individual can buy at least a little bit of any or all commodities”. You define it mathematically. This is all consistent with your statement that these are analytical models. I understand in broad terms and I accept the value of doing analytical economics of this kind. It seems a worthwhile research program to me. (Not that my unlearned assessment means much of course.) The only problem with the definition perhaps is whether a “little bit” of elite luxury goods is a meaningful concept. Can a person in the minimum wealth condition get a little bit of a private Lear jet? Does hiring one for day count? Does being able to satisfy this need at a lower hedonic level by going first class in a passenger jet or even by standard “steerage class” count? Overall, this might be a weak objection. I am just wondering how this concept pans out when applied to the real world?

    What I am directly interested in, is how could a functioning real economy implement policies and measures which would result in the minimum wealth condition being satisfied in practice for all? I mean with this happening either in the current general institutional environment or in another imaginable, “transition-to-able” and apparently feasible institutional environment? What are the practical measures and changes we could undertake to get to the minimum wealth condition being satisfied in practice?

    Historically, it seems we have attempted to meet the minimum wealth condition, or something approaching it, in various ways. You allude to this in general. The old fashioned minimum wage concept was one such practical attempt. In an era when welfare for families was, I assume, much less than it potentially is today, the concept was that a single minimum wage should be enough to feed, clothe and house a family of four including enough to educate the children at least to a basic level, albeit in state provided schools. Of course, this functioned in a sexist environment where women were largely excluded from paying work and were financially dominated by husbands or fathers.

    You say: “IMHO, it is not discussions about ‘capitalism’ vs ‘socialism’, ‘the Left’ and ‘the Right’, no matter how learned and extensive that bring about improvements in a society. In the end they are only words. It the scrutiny of details of legislation over time that matters. Don’t you think JQ is doing an excellent job in this regard?”

    You might be right to some extent but this debate gets complex. The statement; “It is the scrutiny of details of legislation over time that matters.” is correct IF it includes under the concept of “scrutiny” direct action by workers as strikes etc.: that is of workers reacting directly to the impact of unjust legislation, unjust worker-owner relations and so on. JQ is doing intellectual economic and social-democratic scrutiny of legislation over time and yes I do think he is doing an excellent job in that regard. It would be enough for any citizen to do this (as an analyst or as a citizen absorbing such analysis and then voting accordingly) if the system were responsive to what we might call enlightened analysis and enlightened voting behaviour.

    However, there is something about the system which renders it stubbornly unresponsive to the above approach. That is all I will say for now. I mean other than to say I don’t view J.Q. as just doing academic work and intellectual economic and social-democratic scrutiny of legislation over time. I would hazard a bet that he has also done much more direct action work and charity work than I have done. So, I set myself way below him in all those senses. Yet, I still presume to criticise him in what I call the political economy arena because I see a system systemically unable to act in the ways necessary to fully promote equality and ecological sustainability.

  30. @Ikonoclast
    You agreed that the notion of ‘minimum wealth constrain’t and the notion of ‘freedom of choice’ are, in principle, compatible with the notion of ‘democracy’ (we haven’t defined in an analytical sense as yet and I’d like to leave it that way for a long time in our conversations).

    You are now interested in how the abstract definition of ‘minimum wealth constraint’ is related to real life societies. This is of course a relevant question.

    Obviously, if one considers the entire ‘world economy’, then one encounters an obvious problem, namely, most if not all of us, everywhere, don’t even know what is on offer everywhere at any point in time. This consideration is enough to realise one has to interpret the condition ‘in context’, not any arbitrary hypothetical context, but the one we have inherited.

    You chose examples (private jet, etc) which are in the actual context of Australia (and similar countries).

    The wealth distribution is such that there are many people in Australia who couldn’t hire a private jet even for an hour or two. This by itself is not cause for a ‘revolution’, IMO. If everybody can at least pay for an air ticket at least once or twice in their life to experience flying and see far away places or whenever they need or want to fly from say a country town to a city in Australia, I would say we haven’t got a problem with a serious violation of the theoretical condition of the minimum wealth constraint. (Having idle private jets seems to me like a bit of ostentatious wastage of resources, but this is only my opinion.) What if some people can’t afford to get a driving licence or can’t afford a cab fare or can’t afford to hire a car for a day or two or can’t even afford a train ticket? Surely, there comes a point where people are excluded from experiencing even cheaper substitutes of modes of travel such that their life experience and their choices regarding other activities is categorically different from that of relatively more wealthy other members of society with the private jet owners on the other end of the wealth distribution. I can’t determine where these critical points are with respect to locally available goods and services and nor can you. We can only express our opinions. In a democratic society, everybody’s opinion should count in some sense. Detailed social research and opinion pieces in the public press or other mass media provide at least some communication channels for establishing, at least temporarily, some social norm as to what is a fair wealth distribution. (The vexed question of differences among people regarding their physical or mental or social abilities, bad or good luck as well as or including their motivation cannot be ignored either.) As an economist with perhaps more than average knowledge about theoretical models of ‘competitive private ownership economies’, I feel my duty is to say to people who talk markets, competition, private ownership and freedom of choice or ‘economic freedom’ that there is this minimum wealth condition. Talk about it. I say the same to people who talk about ‘capitalism’ vs ‘socialism’.

    Ikon, I now want a longish break from our discussions.

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