Heterodox Economist

Bad Science for the Day

Finally I understand my daughter:

I want you to know that I love evolutionary psychologists, because the ideas, like “girls prefer pink because they need to be better at hunting berries” are so much fun.

From Bad Science.

Good Post from Up North

A good post on current trends in orthodoxy from Relentlessly Progressive Economics.

Introduction to John Milton

Our understanding of the work of Karl Marx is enhanced by a consideration of John Milton's Paradise Lost.

John Milton (1608-1674) lived--and participated--in interesting times.

Milton participated in the English Civil Wars (1642-1651) and the political conflicts during the Cromwell years. Milton's weapon, of course, was the pen rather than the sword. But what a mighty pen it was. He acted as advocate, provocateur, and apologist for the Protestant/Parliamentary side weaving together theological and political arguments to justify the taking of state power, the subsequent execution of the King, and the actions of Cromwell's government.

His arguments impressed many. (Milton's writings reappeared translated into French in the years leading up to and following the French Revolution.)

Unfortunately for Milton, his method of addressing political and social questions was soon rejected in favor of that developed by his contemporary Thomas Hobbes. Few students today read Milton's polemics in favor of divorce (1643-5), his defense of free speech (Areopagitica, 1644), or his argument in favor of popular government (Tenure of Kings and Magistrates, 1649). Instead, students today read Hobbes' argument (Leviathan, 1651) in favor of an all-powerful King.

Although Milton's political/social agenda is much more acceptable to modern folks than Hobbes', Milton's method often relied on using Christian scripture and/or invoking classical Greek and Roman writers. Hobbes rejected all of that: he famously deduced his arguments from materialist assumptions and on a social contract between individuals. Modern social science starts with Hobbes; Milton was the last of the great pre-Hobbesian social thinkers.

Something was gained and something was lost in the move from Milton to Hobbes.

After his service to the English Revolution, Milton was arrested and imprisoned after the Restoration in 1660. He was soon given his freedom.

Between 1658 and 1664 Milton wrote Paradise Lost. The poem sought to "justifie the wayes of God to men." In particular, Milton gave his version of the Fall of Man (snake, apple, etc) and presented his argument that the ejection of Adam and Eve from the Garden was, in fact, a glorious moment and a gift of God.

More broadly, Paradise Lost develops Milton's Christian theory of history. Standing at the center of Milton's history is a collision between free will and determinism. Milton struggled to reconcile the two, but I don't think that even Milton thought he was completely successful.

Two centuries later, Karl Marx--in his theory of history--also attempted to reconcile free will and determinism. It is unclear whether Marx was more, or less, successful than Milton in this effort. In some ways, Milton and Marx confronted similar problems in their respective theories of history.

But to understand the nature of Milton's effort, and Marx's later effort, we have to take a side trip into the world of Christian theology as it was played out in Europe during the Reformation.

(Both Milton and Marx also addressed "the problem of evil" in their respective work, but I'll ignore that for now.)

To be continued...

Wacky Way to Start the Week

I just finished rereading Karl Marx’s Wage Labor and Capital. Of course, Marx's essay falls short of John Milton’s Paradise Lost as an imaginative work. That much is obvious. But Marx's essay has more in common with Paradise Lost than readers might think. 

Isn't it a bit wacky to mention Marx's essay in the same sentence as Milton’s epic? Paradise Lost is, after all, The Greatest Poem Ever Written In The English Language.

Not wacky at all.

Most important of all...By writing the above I’m forced to write a series of posts about Milton's Paradise Lost and Marx’s economics. What could be more fun!

Econophysics: a Brilliantly Colored Sock for the Same Old iEcon?

Barkley sees econophysics as an important development in economies. As far as I can tell, econophysics uses sophisticated mathematical tools developed by physicists to study the economy. Or, more accurately, it uses these tools to study the exact same objects, problems, and data studied by orthodox economists.

The famous economist Paul Samuelson is said to have simply borrowed the math models developed by physicists in the first part of the 20th century to do his economics; the econophysicists seem interested in simply borrowing the math models developed by physicists in the latter part of the 20th century to do economics. I guess that's progress.

My first college major was physics. But I switched to English Literature because the issues addressed in the humanities seemed more important than those addressed in physics. My lack of enthusiasm for econophysics might be related to that. Econophysics seems more like a new sock for an iPod than something really new.

But I'm just one--perhaps misguided--particle.

Brilliant Economists

Tom Toles:

RosaSpeak, You Listen!

Dean Baker says,

There is no general public interest in having the government assist the Wall Street crew in their efforts to dump their debt on less informed investors. They profited on the upside, they absolutely deserve the losses that stem from their failure to exercise good judgment in their investment decisions.

Mark Thoma responds:

... a rate cut or other interventions, if they were to occur, are to address general macroeconomic conditions and protect people who had nothing to do with bringing about the mortgage mess, not to bail out the mortgage industry in particular.

Both are right: Wall Street should take a hit but good macroeconomics reasons can be found for the State to intervene in ways that bails out Wall Street.

I'm not saying what I think should be done. I'm merely articulating the "structural dependence of the state on capital" theory.

Rose Luxemburg's Reform or Revolution proposed that capital has power over which no formal institution (state or otherwise) can prevail. Regardless of what institutions exist--or who fills the positions within these institutions--the danger of a "capital strike" gives capital veto power over what these people and institutions do.

If capitalists are not happy with things, they make it clear that it is their ball and unless you follow their rules they are taking their ball home and then no one can play.

Capitalists have near-complete power over production, location, and investment decisions. So the fate of everyone in the economy depends on these decisions. The threat of a capital strike (to stop production, to move somewhere else, or to withhold investment) is, therefore, powerful.

Of course, what is good for Wall Street might be different from what is good for other fractions of capital. And this might be different from what is good for "capital as a whole." And, the set of policies acceptable for capital might be quite large and so the state might have a wide variety of choices it can make (and it might matter for real people who is it that makes the decisions and what they decisions they make).

So, the issue the state faces might not be what is fair, what is just, or should people be responsibility for their own (bad) decisions. The issue the state faces might be "what must be done to keep capitalists (and Wall Street) happy?"

RosaSpeak, You Listen!

Hyman Minsky's 15 Minutes of Fame

Hyman Minsky has recently been invoked in various blog postings and news reports. According to Minsky, the normal functioning of capitalist financial markets creates instability and fragility. As an economy expands, firms take on more and more risky--if not outright speculative--debt, and this can create the conditions for financial spontaneous combustion and recession. The recession "cleans up" the financial system as the much of the debt disappears in bankruptcy.

It's all endogenous: it's not caused by external factors but by factors inherent to capitalism itself.

The proliferation of increasingly risky loans in the USA in recent years seems consistent with the Minsky vision of a growing instability in the financial structure as the economy expands. The recent rumblings in US/World financial markets seems exactly what Minsky would have envisioned as some of this debt seems (after the fact) a bad idea.

Yet once the current financial rumblings fade into the past, so too will public references to Minsky fade. Until the next incidence of unexpected spontaneous combustion.

At other times Minsky's economics will live a furtive existence. Such is the fate of the heterodox.

The Eighteenth Brumaire of Alan Greenspan

"Hegel remarks somewhere that all great world-historic facts and personages appear, so to speak, twice. He forgot to add: the first time as a Volcker, the second time as a Greenspan." Apologies to Karl Marx

"American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed-rate mortgage. ...the traditional fixed-rate mortgage may be an expensive method of financing a home." Alan Greenspan

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Barry Ritholtz, normally a reasonable guy, falls victim to simplistic ethics when he approvingly quotes the following:

In the free market, those that made bad credit decisions must be allowed to pay the price, and only by paying dearly can lessons truly be learned. Borrowers who were unwitting and took on too much debt must learn that there are consequences for their actions.

Many borrowers took well-informed gambles and lost. I have no problem if such folks "pay a price" during a housing shakeout.

But some holders of today's risky mortgages fell victim to a hard-and misleading-sell by lenders who were able to take advantage of the borrower's belief that only by taking a risky mortgage could they ever live "the American Dream." Yes, such borrowers voluntarily took out risky mortgages, but we can conclude little about what they deserve from that fact alone or what is good for the US economy in the future.

Yes, they made a voluntary decision...but not in conditions of their own making.* For instance, Alan Greenspan shilling risk was not of their own making.

Further, I doubt that folks today would have been less likely to have taken out risky mortgages because, say, 15 years ago people unknown to them took out risky loans and fully paid the price in an earlier housing crunch. The claim that today people must "learn their lesson" so that the same thing doesn't happen to other people in the future isn't compelling.

Many people are desperate for jobs and, so, take risky jobs at dangerous work sites because that is the only way these people see to get ahead in life. When an accident happens and one of these workers loses an arm, no reasonable person would merely point to the fact that the worker voluntarily took the job as support for the claim that the worker deserved to lose an arm or worse.

I don't know what percent of holders of risky mortgages today should be given a break if the housing market collapses. But I do know that lumping all holders of risky mortgages together on the basis of some simplistic ethical perspective isn't right.

Added: Paul Krugman (via Mark Thoma) agrees: help for (some) borrowers but no bailouts for the lenders.

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* More precisely, "Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past."

In Which I Lead California to a Golden Age. That was the Plan Anyways.

In 1999 the California State Assembly paid me to write a report, "Incentives to Encourage More Worker Friendly Corporations in California." Not one of the spiffy proposals I offered in my report made its way into law. Imagine that.

The report starts off:

This report describes and analyzes policies that California can implement that will lead to more “worker friendly” businesses in the state. Worker friendly businesses provide to their employees the following: fair compensation, employment security, healthy and safe working conditions, and employee relations that provide basic workers’ rights.

Dream on, you might say. But then comes the hard pard:

As requested, the policies proposed in this report are—for the most part—based on incentives such as tax credits and monetary grants....

Holy Banana! Tax credits and grants to promote "worker friendly" businesses!? That really narrows the policy spectrum; we're marching into new policy ground in this effort.

Just as bad, they wanted everything framed in terms of cost-benefit analysis.

But being a good citizen--and needing the money--I complied.

This led to odd proposals such as:

Union workplaces are worker friendly workplaces. Unions gain for their members higher wages, better healthcare insurance and pension plans, greater employment stability, healthier and safer workplaces, and a higher likelihood of fair treatment from their employer. Unions can be promoted in two ways. First, the state can provide a tax credit to employers who voluntarily accept their workers’ petition for union representation. Second, state tax credits can be made available only to businesses that do not violate existing state and federal labor laws.

Sometimes the world is just not ready for new ideas. ;>