Slightly behind the pack, it seems, I’ve suddenly started hearing about “ergodicity economics”, presented as an alternative to expected utility (EU) theory. Commenter James asked me about it here, and I also received from a colleague a copy of a paper in Nature, by Ole Peters, who appears to be the main developer of this idea. The essential idea of ergodicity is that the long-run distribution of outcomes for a dynamic process should match the uncertainty of the process at any point in time. You can get something more precise in Wikipedia. Expected utility starts with preferences over uncertainty at a point in time. Peters argues that things are better understood in terms of evolution over time. I haven’t followed all of the details of this argument as yet.
What piqued my interest is that the discussion involves a lot of discussion of probability weighting and particularly the idea that extreme low-probability outcomes may be overweighted. The most famous expression of this idea is the cumulative prospect theory put forward by Kahneman and Tversky in 1992. Their original prospect theory applied the same weighting function to all events, which raises a number of difficulties. These were resolved using the idea of rank-dependent probability weighting which I proposed in a paper in 1982 (under the name ‘anticipated utility’ and now usually called rank-dependent utility or RDU) .
The underlying reasoning is that, in a dynamic process repeated over time, taking low-probability extreme risks will (very probably) catch up with you. I’m pretty sure I made an argument of this kind in support of RDU back in the 1980s, but I haven’t been able to locate it for now.
This is one of many independent rediscoveries of the rank-dependent approach, with a variety of motivations. I think this reflects the fact that the RDU is, in some sense, the natural generalization of EU.
For decision theory and finance fans, my latest working paper with Ani Guerdjikova https://ideas.repec.org/p/gbl/wpaper/2020-10.html Some difficult math, but there are fundamental implications for financial markets, which will be spelt out later.
The self-explanatory title of my latest piece in The Conversation. I look back at the last time this scare was run in the 1980s. An interesting sidelight is that the term did not, it seems, originate with Lee Kuan Yew as is commonly claimed.
That’s the title of my latest piece in Inside Story, expanding my earlier discussion of intangibles and monopoly to take account of Apple’s startling market valuation of $2 trillion. As I observe, this can’t be accounted for in terms of big profit gains
Admittedly, Apple’s business hasn’t been harmed by the Covid-19 pandemic, but neither has it greatly benefited — earnings in the June quarter were only about 10 per cent higher than in 2019, yet the stock price has doubled in less than six months.
It’s mostly about the combination of secure monopoly power and long term interest rates near zero, which increase the value of any stable source of income, like monopoly rents
I’ve been working for some time on a review of the first full-length text based on Modern Monetary Policy, Macroeconomics by William Mitchell, Randall Wray and Martin Watts. A near-final draft is over the fold
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I forgot to link to this piece in The Conversation when it came out a week ago. Unlike much of what I’ve written lately, it hasn’t been overtaken by events.
The New Daily asked me to write a bit on the question “What should/will the post-coronavirus economy look like?
Here’s what I sent
The Covid crisis has demonstrated the inadequacy of crucial aspects of our social and economic system, particularly relating to employment and unemployment. Before the resurgence of neoliberalism in the 1970s, Australian governments accepted responsibility for maintaining full employment, and provided support for all those unable to engage in paid work, whether through age, disability or unemployment on an equal basis. The full employment goal was not always achieved, but it remained central to public policy.
Over the period since the 1970s, government has passed the responsibility for economic management to the Reserve Bank and required a primary focus on low inflation. The treatment of benefit recipients, except the old, has been steadily less generous and more punitive. Meanwhile governments have focused obsessively on largely meaningless measures of budget balance.
The failures of this approach have been evident for years, but it has taken the Covid crisis to lead to any change. Within a matter of weeks, dogmas that have been in place for decades have been abandoned.
The most important requirement for the post-coronavirus is that we should not attempt to return to a pre-crisis ’normality’ that was unsustainable in almost every respect: social, economic and environmental. Rather, the income support measures adopted in response to the crisis should be maintained, and the government should accept the maintenance of full employment as its core economic responsibility.
ABC Fact Check has a piece looking at a claim by the Young Greens that “making lattes provides more Australian jobs than the entire coal industry.” The detail of the tweet included the claim that there were 86000 barista jobs compared to 52000 in the coal mining industry
The Fact Check Unit observed that the quoted firgure is for total employment in the cafe industry, not just barista. By comparing an estimate of the number of baristas to total employment in coal mining, the Fact Check Unit concludes that the claim is Incorrect.
There is an apples and oranges problem here. There are two reasonable ways to do this comparison
(a) Treat “barista” as shorthand for “someone who works in a coffee shop”. Then compare employment in the coffee shop sector, including “permanent, part-time, temporary and casual employees, working proprietors, partners, managers and executives within the industry” with employment in the coal mining sector, including managerial, professional and clerical staff, general trades workers and others.
(b) Define “baristas” to refer to the occupation of making coffee, and “coal miners” to refer to the occupation of “Drillers, Miners and Shot Firers”, that is, people whose occupation is extracting coal from the ground. Based on the proportion for mining as a whole, the latter is about 20 per cent of total employment in the mining industry.
Either approach, applied consistently, would imply that there are more baristas than coal miners. The fact check uses the first, broader definition for miners and the second narrower one for baristas. This is an apples and oranges comparison, and should be corrected.
Blackrock, the world’s largest asset manager has announced some big steps towards divestment from thermal coal. As I observe in this article in The Conversation, Blackrock’s shift marks the point at which divestment has become the norm for financial institutions, and continued involvement with coal a choice that must be justified in the face of the evidence.
As has already happened with Adani’s Carmichael project, thermal coal miners and power station developers will soon find it impossible to get external finance except from government and government-backed sources, such as China’s Belt and Road initiative. The Australian government is already pushing in this direction.
That brings us to the next step in divestment: government bonds. The Swedish central bank has already dumped Australian government bonds in protest against our climate vandalism. As with earlier rounds of divestment, this is a small start that is likely to accelerate quickly. A large-scale divestment from Australian government bonds would lead to the loss of our AAA rating, and an increase in interest rates across the board, including home mortgage rates. That might finally shock the quiet Australians into realising how disastrous the choices they’ve made have been.
That;s the headline for my latest piece for Independent Australia Obviously, costs like ecosystem destruction and the deaths of millions of native animals can’t easily be put into the framework of the National Accounts. But, even if we stick to the National Accounts, Gross Domestic Product is a terrible measure of economic welfare. As I always say, there are three reasons for that; it’s Gross, it’s Domestic and it’s a Product.