Zombie Economic Theories

[nicomachus]

An interesting article on five economic beliefs that are consistently being proved wrong, but which many people cling to for personal and political reasons:

www.foreignpolicy.com/articles/2010/10/15/five_zombie_economic_ideas_that_refuse_to_die?page=full

I could add that taken together, the death of these five ideas indicates the failure of free market capitalism and the collapse of post-enlightenment economic theory in general.

Perhaps it is time to rethink economics.

[verrip1]

Talk about what people cling to for personal and political reasons! This article epitomizes a closed minded writer. It is long on unsupported personal opinion and sprinkled with a few anecdotal, isolated examples.

However, I'm sure folks who like Krugman will voraciously slurp it up.

[Virgil Showlion]

I'll agree with Mr. Quiggin that HFT killed off the Efficient Markets Hypothesis, and that the assumptions built into the 1980's-1990's versions of DSGE models were woefully unequipped for "irrational" market dynamics.

What the article fails to acknowledge is that most analysts (and I do know a few to talk to) have long since abandoned the old DSGE models for market-specific behaviourist models that factor in facets understood about predictable irrationality. Much of the fresh literature in the field of economics is concerned with how to integrate the existing DSGE with learning models of market behaviour.

[neohguy]

I thought it was a thoughtful article. It may have been somewhat critical of existing policy and theory but it provided good examples why.

[traelin0]

I take issue with his anti-privatization rationale. Adam Smith said it best, that there are three and only three important purposes to govt.: 1) National defense; 2) Administration of justice/rule of law; 3) Provision of public goods not otherwise profitable for the private sector.

[nicomachus]

Aren't national defense and the administration of laws more than profitable for the private sector?

And isn't health and road construction better administered by government?

I don't recall Smith's argument for this, at least not in Wealth of Nations, but, to say the least, until I see an argument for it I find it hard to accept.

[The Virginian]

And isn't health and road construction better administered by government?

NO!!!!! Mr. Obama - they are not!!!

[nicomachus]

At the very minimum, the government has to fund such things. Perhaps a better example would have been space exploration, or the administration of public libraries. Neither of these has any chance of being possible if the state restrict itself to Smith's suggestion.

Regarding the management of health care, every British subject I have known (which is quite a few) have preferred the UK's NHS over the American "system" (if we can be said to have one at all). Personally, I prefer the Canadian model, which is divided into twelve private-sector single payer systems.

Either way, the article makes an argument that privatization has failed. No counter-argument (except an appeal to authority, and an ancient one at that, without any argument) has been presented to suggest that it is flawed.

[traelin0]

Jan 12, 2011 4:01:13 GMT -5 @nicomachus said:

Aren't national defense and the administration of laws more than profitable for the private sector?

And isn't health and road construction better administered by government?

I don't recall Smith's argument for this, at least not in Wealth of Nations, but, to say the least, until I see an argument for it I find it hard to accept.

Defense today is profitable for the contractors because they are mooching off the taxpayer. And you can't rely on the private sector to administer the law impartially, for example, in cases of private property rights.

Health is absolutely not better administered by govt. All you need to do is look at Medicare and Medicaid as perfect examples of how govt. runs healthcare. As for roads, I don't see why the private sector couldn't build roads. Certainly they'd maintain them better than the public sector. Our transportation system is falling apart.

[traelin0]

This message has been deleted.

[traelin0]

Jan 12, 2011 12:21:55 GMT -5 @nicomachus said:

At the very minimum, the government has to fund such things. Perhaps a better example would have been space exploration, or the administration of public libraries. Neither of these has any chance of being possible if the state restrict itself to Smith's suggestion.

No, they don't, because their funds come from the taxpayer, and govt.'s primary purpose is to protect our liberties, not infringe upon one group's liberties to benefit another's. Healthcare is an economic service and mandating I pay for someone else's is at best a negative liberty.

Virgin has better space shuttles than NASA BTW. And libraries are funded by states and municipalities. There is a difference between what can be federally funded as stipulated in the Constitution, versus what can be funded by states. The 10th Amendment is pretty clear on this.

Jan 12, 2011 12:21:55 GMT -5 @nicomachus said:

Regarding the management of health care, every British subject I have known (which is quite a few) have preferred the UK's NHS over the American "system" (if we can be said to have one at all). Personally, I prefer the Canadian model, which is divided into twelve private-sector single payer systems.

Our healthcare system is a marriage of corporation and state, and govt. has done everything it can to stifle true competition. They have chosen special interests over the free markets nearly every time via over-regulation, which only the biggest corporations can afford to adhere to. Quite frankly, any healthcare system without this fascist/corporatist model is probably better. But it does not follow that those socialist systems are better than privatized systems.

Jan 12, 2011 12:21:55 GMT -5 @nicomachus said:

Either way, the article makes an argument that privatization has failed. No counter-argument (except an appeal to authority, and an ancient one at that, without any argument) has been presented to suggest that it is flawed.

First we have to have privatization in order to prove it doesn't work. We don't have free markets in this country because we don't have free markets in money, banking, healthcare, food, or anything else of import.

[itstippy]

Jan 11, 2011 18:39:10 GMT -5 @traelin0 said:

I take issue with his anti-privatization rationale. Adam Smith said it best, that there are three and only three important purposes to govt.: 1) National defense; 2) Administration of justice/rule of law; 3) Provision of public goods not otherwise profitable for the private sector.

It is in the interpretation of these 3 governmental purposes where Adam Smith's tidy philosophy breaks down. Here are a few Devil's Advocate examples:

1) National Defense.
Apparently we need a trillion-dollar cabinet-level Department Of Homeland Security in order to defend the American Way. We can't stop tons of cocaine & marijuana from entering our country's borders, or thousands of illegal aliens, but our new DHS will somehow stop a vial of anthrax. All we need to do is fund it with 1 trillion dollars. Further, "Global Economic Unrest" has been declared the #1 threat to National Security. Anything we do to prevent "Global Economic Unrest" is therefore justified. Bring on the global banking bailouts!
We could easily spend 200% of our GDP on "National Defense". Lots of Nations have over the years.

2) Administration of justice/rule of law
We pass a law that everyone who works for a living must pay the health care costs of everyone who doesn't work for a living. It's then up to the Federal Government to enforce this rule of law, and bring any scoff-laws to justice.

3) Provision of public goods not otherwise profitable for the private sector
Define "public goods". Is health care a public good? National Parks and Wildlife Refuges? Gasohol? Public housing? Food pantries? Locks and levees? Solar panels? Anti-smoking ads? The potential list is endless. Who gets to decide what constitutes a "public good"? Adam Smith?

[traelin0]

Jan 15, 2011 14:53:37 GMT -5 @itstippy said:

It is in the interpretation of these 3 governmental purposes where Adam Smith's tidy philosophy breaks down. Here are a few Devil's Advocate examples:

1) National Defense.
Apparently we need a trillion-dollar cabinet-level Department Of Homeland Security in order to defend the American Way. We can't stop tons of cocaine & marijuana from entering our country's borders, or thousands of illegal aliens, but our new DHS will somehow stop a vial of anthrax. All we need to do is fund it with 1 trillion dollars. Further, "Global Economic Unrest" has been declared the #1 threat to National Security. Anything we do to prevent "Global Economic Unrest" is therefore justified. Bring on the global banking bailouts!
We could easily spend 200% of our GDP on "National Defense". Lots of Nations have over the years.

2) Administration of justice/rule of law
We pass a law that everyone who works for a living must pay the health care costs of everyone who doesn't work for a living. It's then up to the Federal Government to enforce this rule of law, and bring any scoff-laws to justice.

3) Provision of public goods not otherwise profitable for the private sector
Define "public goods". Is health care a public good? National Parks and Wildlife Refuges? Gasohol? Public housing? Food pantries? Locks and levees? Solar panels? Anti-smoking ads? The potential list is endless. Who gets to decide what constitutes a "public good"? Adam Smith?

itstippy, Adam Smith's philosophies work fine in a society with morals and obedience to the Constitution. The above are perfect examples of why we are completely screwed. Common defense must be put into the same context as defense of a Republic. In other words, if you invade us, we defend ourselves. Prior to 1903 we had state militias which could be federalized upon times of common defense. When the Militia Act was passed, the state militias were wrapped up into the National Guard and became anything but a National Guard.

Example #2 is an example of not adhering to the Constitution. Promoting the general welfare was defined in Federalist 41. James Madison and Thomas Jefferson also addressed these issues in various ways and at different times (e.g., Alien and Sedition Acts nullification, Madison's veto of Calhoun's canal bill, etc.) Nowadays the states don't fight back against unconstitutional laws. Then again, they no longer have representation in Congress due to the 17th Amendment.

Public good example:

faculty.lebow.drexel.edu/McCainR//top/prin/txt/Govch/PG3.html

The problem is not in the definition of public good or private good, but rather in the definition of quasi-public good. And the answer to how to handle them is contained within the Constitution.

[itstippy]

I fully agree.

I've gotten old and cranky and disillusioned over the years. It seems that every level of our society now feels it is their right, as an American, to get more out of our government than they contribute to it.

Occasionally we experience a brief resurgence of collective National purpose (like 9/11), and are willing to make some sacrifices for our Country. At those rare and prized moments, it's our government's turn to let us down. Our patriotic emotions are immediately taken advantage of to pursue some unrelated and dubious enterprise (invade Iraq, relinquish our personal freedoms to the Department of Homeland Security, etc.).

Remember the Maine!

[traelin0]

Jan 15, 2011 23:28:42 GMT -5 @itstippy said:

I fully agree.

I've gotten old and cranky and disillusioned over the years. It seems that every level of our society now feels it is their right, as an American, to get more out of our government than they contribute to it.

Occasionally we experience a brief resurgence of collective National purpose (like 9/11), and are willing to make some sacrifices for our Country. At those rare and prized moments, it's our government's turn to let us down. Our patriotic emotions are immediately taken advantage of to pursue some unrelated and dubious enterprise (invade Iraq, relinquish our personal freedoms to the Department of Homeland Security, etc.).

Remember the Maine!

Along that vein, Remember the Lusitania!

Remember the Gulf of Tonkin!

Remember Operation Ajax and the Overthrow of Mossadegh!

[djrick]

Americans are still not ready to accept that the country is getting poorer, not richer. In real terms. Also, both the political right and the political left share the same delusion: that there is some massive reservoir of wealth to either be released by tax cuts, or redirected through a change in spending priorities.

During normal times, printing this much money and giving to your friends would lead to an inflationary crisis, re Zimbabwe. But during deflationary financial panic, you can get away with it to a point.

This is all about making sure your friends are whole, then watch as they buy up everything at fire sale prices.

[nicomachus]

Regarding a post from above, that "making me pay for someone else's health care is negative liberty," my immediate reaction is: Do you really *want* to be that selfish and greedy? I mean, wouldn't a system where we take care of each other in a co-operative way be much more fulfilling?

[traelin0]

nico,

There is no free lunch. I assure you that I give quite charitably to where *I* feel my money should be spent, and when I actually have it to spare. It is not on govt. welfare programs. It is also unconstitutional. Mandatory redistribution of wealth has never worked.

We as individuals must be moral and charitable where we feel our money would be used most appropriately.

[bubblyandblue]

traelin0, you state that "Mandatory redistribution of wealth has never worked" whereas, coerced redistribution of wealth has failed and non-mandatory redistribution of wealth has failed. Given that supposition, what alternatives have you in mind. Disclosure, I believe a maldistribution of wealth (most with little, some with a lot) is extremely detrimental to a political and economic structure - as all the kings, princes and dictators throughout history, upon reflection, would admit.

[nicomachus]

I'm not sure what is meant by "work" as in "redistribution of wealth has never worked." I would argue that unlimited greed and laize faire markets have never worked.

[sangria]

Uniformed guards protect Sangria's money.







Step away!

[traelin0]

Jan 20, 2011 15:29:13 GMT -5 @nicomachus said:

I'm not sure what is meant by "work" as in "redistribution of wealth has never worked." I would argue that unlimited greed and laize faire markets have never worked.

Free markets cannot correctly function if morals are not also a part. But we haven't had free markets in this country in at least 100 years so it's a moot point...and I doubt we'll be to them anytime soon.

[traelin0]

Jan 20, 2011 13:26:28 GMT -5 @bubblyandblue said:

traelin0, you state that "Mandatory redistribution of wealth has never worked" whereas, coerced redistribution of wealth has failed and non-mandatory redistribution of wealth has failed. Given that supposition, what alternatives have you in mind. Disclosure, I believe a maldistribution of wealth (most with little, some with a lot) is extremely detrimental to a political and economic structure - as all the kings, princes and dictators throughout history, upon reflection, would admit.

My alternative is to give the people a free market in the medium of exchange, for starters. I agree with your premise that maldistribution doesn't work. So why do we continue to do it in this country? Why do we continue to turn over more and more economic freedoms to govt. via its special interest corporations who buy elections and get bailed out for malinvestment?

[bubblyandblue]

Traelin0,
You wrote:
My alternative is to give the people a free market in the medium of exchange, for starters. I agree with your premise that maldistribution doesn't work. So why do we continue to do it in this country? Why do we continue to turn over more and more economic freedoms to govt. via its special interest corporations who buy elections and get bailed out for malinvestment?

I do agree that the medium of exchange should be just that, and nothing more.
Also, in the current political end economic structure today, it is much cheaper to do wrong than it is to do right.
Potentially, to cure the structural imbalance, we would tax those things that cause harm to the common good, to the point where it is more expensive than what is good for the common good. Maybe regulate those things proven harmfull to the common good, to the point where it is more expensive to follow that path, or, enforce laws on-the-books that make it more dangerous (puts one in jepordy) to do wrong than to do right.

[nicomachus]

Jan 20, 2011 22:48:47 GMT -5 @traelin0 said:

Jan 20, 2011 15:29:13 GMT -5 @nicomachus said:

I'm not sure what is meant by "work" as in "redistribution of wealth has never worked." I would argue that unlimited greed and laize faire markets have never worked.

Free markets cannot correctly function if morals are not also a part.

On that we must agree.

But when greed overcomes ethics, should there be no legal protection?

[itstippy]

This article on Fannie & Freddie got me thinking about Governments' role in the economy. I dug up this thread because we had a pretty good discussion underway on the topic. Please read the article, it's not very long. Here's the part that got me thinking:

"Now is not the time to abandon our government's long-standing commitment to housing," said Bob Nielsen, a home builder in Reno, Nevada and Chairman of the National Association of Home Builders. "Restoring the health of the housing industry is a crucial first step in bolstering job creation and leading the economy to higher ground."

"The federal government must continue to play a role in the mortgage markets to ensure the steady flow of safe and affordable mortgage funding that middle-class consumers need, and only the government can provide that backing," said National Association of Realtors President Ron Phipps, of Phipps Realty in Warwick, R.I.

Here's the article: money.cnn.com/2011/02/09/news/economy/fannie_freddie_future/index.htm

Personally, my gut tells me it's the government's fiduciary duty to go after the banks full-bore and get back every dime the GSE's were bilked out of, plus severe penalties, until the banks are bled dry and the people responsible for defrauding the GSE's are personally pauperized either through fines or legal expenses. I don't care if the banks' shareholders scream bloody murder - they took the risks, they took the profits, they paid these clowns million-dollar bonuses to gamble with their money, now it's blown up, so take the loss and shut up about it. Then we auction off Fannie & Freddie to whatever's left of the private financial sector, and our government washes its hands of this disastrous GSE public/private monstrosity completely and forevermore.

Unfortunately, that's a "nuclear option" that would probably melt down the entire global economy.

Sorry this isn't a better thought-out post, but anything having to do with the GSE's makes me irritated to the point of incoherence. Thoughts? How do the GSE's fit into economic theory?

[djrick]

www.marketwatch.com/story/aig-to-book-41-billion-charge-in-fourth-quarter-2011-02-09

American International Group Inc. said Wednesday it will take a fourth-quarter charge of more than $4 billion to boost reserves on so-called long-tail insurance policies the company’s Chartis property and casualty unit sold.

This time round, the Treasury Department will help AIG cover its reserve shortfall. The insurer said Wednesday that Treasury will let it keep $2 billion from the recent sale of AIG Star Life Insurance Co. and AIG Edison Life Insurance Co.


SCAMERICA

[djrick]

Personally, my gut tells me it's the government's fiduciary duty to go after the banks full-bore and get back every dime the GSE's were bilked out of, plus severe penalties, until the banks are bled dry and the people responsible for defrauding the GSE's are personally pauperized either through fines or legal expenses.

Read more: notmsnmoney.proboards.com/index.cgi#ixzz1DWCQxjzl


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