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Archive for the ‘Economics’ Category

You can’t sit on millions and millions of additional unemployed people and not look like you’re helping them.  Eventually, they’ll decide they have nothing left to lose.

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Two articles off the Big Picture, both discussing the S&Ps downgrade (which, by the way, seriously?  You guys rated toxic waste CDS compiled from fraudulent RMBS AAA, which then proceeded to blow up the economy, and have the gall to rate the United States of America lower?).  This one and this one.  Both assert the US funds itself via taxation, which is equivalent to asserting a bank funds itself through reserves and is equally false.

Banks do not fund themselves through reserves, and governments (especially currency issuing governments) do not fund themselves through taxes.  Banks acquire reserves in order to shore up capital reuirements for liabilities already issued; governments tax for a similar reason.

This shouldn’t be that confusing, though I guess we’re all mostly still bogged down with the notion that you lend money to a bank which then lends it back out ad infinitum through “fractional reserve lending”.  What hogwash.  Why would any banker tether themself to such a system?  Think about that for a bit.  In the meantime, go read this guy.  While he’s more MMT and I lean to the Ciruitist reading (I find Circuitist systems to be more theoretically sound, and consider MMT to be a specific application which describes a more limited set of models than a Circuitist mode), he’s nevertheless incisive and refreshing.  And contrarian.  Always listen to your naysmiths.

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When markets tank, investors start looking to re-distribute their capital allocations…unloading high-risk and medium-risk  assets in favor of low-risk investments…because the risk premium just collapsed.

And just when that’s happening, the government is looking at reducing spending and therefore cutting into bond sales, reducing supply for one of the best risk-free options on the table.  That will will cut into yields, which will in turn cut into private investment cash flows.

And wouldn’t that reduce the floor under the risk premium?  I think so.  Gold, by the way, becomes a dangerous option when liquidity dries up in the face of demand.  As long as people are buying into gold in order to hold it, and doing so faster than the rate of supply, the price will continue to grow…but the volume of the actual gold market will decline.  As liquidity declines, price volatility tends to increase (because relative supply and demand compresses…this tends to increase the impacts of price shifts).  If this is driven by growing problems in other potential assets, as soon as those other assets stabilize, investors will exit gold.

That will undercut the price, potentially drastically.

Bear in mind that gold is a poor investment, generally, for a very simple reason: it offers no cash flow.  It is poor as capital.  I’m not saying don’t use it as an investment hedge; do that, please!  It is a way to hedge against outside factors impacting the value of currencies, for instance.  However, as a straight-up capital or financial investment, its fundamentals are poor in a healthy economy, as it produces no cash flow.

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I was skimming through this article on Naked Capitalism (yeah, yeah, lots of links from there), and I realized that the article refers to markets as…predators.  Then I noticed this is a common reference, that markets are thought of as a sort of parasite, sucking the capital from an area until it dies, and scurrying for cover.

Except markets don’t do that…market players do.  See, if there’s something for a part of the market to feed on, then another part of the market is offering that for sale.  And it says something that we consider the predators to be doing the right thing, while the prey, who the predators have by the balls, can get shellacked and it’s their fault.  They shouldn’t have played ball with the big boys.

But how, exactly, do you escape the Hobbesian state of a Global Market place (which by definition is rather inescapable)?  And what’s left when the hyenas have cracked the bones and suckled the marrow from even the meanest of suckers?

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Utility Maximization

Normally, I wouldn’t take the time to defend Neoclassical Economics.  It’s a generally silly way of looking at economic behavior; however, WHY it is silly is actually rather important.  For this reason, it’s sometimes necessary to point your intellectual guns at the people attempting to broadside it from the wrong direction.  I’m a fan of saving what is worth saving, as it were.

Which brings me to this article I found on Naked Capitalism (a great site, btw).

The initial thrust of the essay is to attack the notion of “rational actors” by pointing out the obvious: people act irrationally!  Mr. Pilkington offers up a few simple examples of this, provides one possible counter-argument from neoclassicals, and then neatly skewers it.  Interestingly, “acting rationally” remains completely undefined…it seems to be taken to mean acting in such a way as to perfectly maximise utility, which would indeed be an absurd property to assert is held by beings who are also asserted to be lacking tremendous amounts of information.

However, that is not what is meant by serious economists talking about a rational actor.  Mr. Pilkington quotes an economist on this, and then proceeds to more-or-less completely misunderstand the what the quote is saying:

The hypothesis of rational expectations means that economic agents forecast in such a way as to minimize forecast errors, subject to the information and decision—making constraints that confront them. It does not mean they make no forecast errors; it simply means that such errors have no serial correlation, no systematic component.

Pilkington claims this asserts people have perfect knowledge, and that any time they make a mistake it’s an anomaly.  That isn’t at all what is being asserted.  What’s being said is that people make decisions in order to maximise their robustness against Knightian Uncertainty.  People confront uncertainty which is immeasurable and unknowable, given their current information constraints, so they try and make it so their actions are as little affected by the unknown as possible.  Since people are making these decisions against a backdrop of absolutely unquantifiable risk, their responses will have a random component to them (guesswork) that will be necessarily inconsistent among actors.  That, in turn, implies there can exist no consistent error to their guesses…unless that error grew out of some background system of responding to unknown factors of a certain kind.

In which case, I would assert there is a reason people act that way, and they are thus being rational.  And I can make that assertion because rationality does not imply making perfect decisions, but rather making acting in a way which is consistent with a set of rules.  We may call an action irrational because it feels to obtain an externally defined goal, but if that decision comes as the result of a set of rules, then the decision was arrived at rationally.

Since in general I think it’s safe to say people make decisions based on rules (known or unknown), they are acting rationally and are therefore rational actors.  They fail to perfectly maximise utility due to their lack of omniscience, but the limits of local knowledge have long been a point of interest in sociology, psychology, and economics.

No, the point where Neoclassical Economics falls down is when they assume that the aggregation of decisions of a mass of actors operating within information constraints cancels out the individual errors, and this is a failure to understand the scope of Knightian Uncertainty in decision making…effectively, Neoclassical Economists think that all risk is quantifiable, even if we haven’t done so yet.  They lack any conception of a absolute uncertainty.

To continue on, Pilkington goes on to lambast the Efficient Markets Hypothesis, which I am happy to depict in the harshest light possible.  Seriously, it is an idea whose scope is so laughably limited in application that its hard to conceive of taking seriously.  The unfortunate problem is that EMH wasn’t really taken seriously; instead, it was used as a sort of idealized model that markets approximate, a notion rather like the relation of Newtonian Gravity to General Relativity.  Assume markets come close to approximating a truly efficient market, open up a single variable to observation, and see how a particular market differs.  It’s actually a pretty solid foundation for experimental economics, but for one problem.

Markets really don’t at all approximate an “Efficient Market”, due to the existence of Knightian Uncertainty.

 

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I’ve had some time to think (finally), and some of that revolved around ISPs.  Interestingly, we have a lot of Republican pressure to deregulate or maintain deregulation over a variety of things, including ISPs.  Into this they throw the whole net neutrality debate and data caps.  The assertion is that regulation destroys competition and, since competition is essential to economic growth, regulation stifles economic growth.

However, there exist situations within markets where various externalities enforce an equilibrium that involves one very large company controlling the entire providence of a single good or service: a monopoly.  Monopolies are not something that happens outside economics; they are quite normal within economies, when certain factors exist.

Let’s consider ISPs.  The capital required to build out a network is simply enormous.  A single cable switching station or DSL switching station covers a 3 mile swath of urban area, meaning that to efficiently make use of such an installation, you’d better be wired into everywhere in those three miles..and they’d better be using you.  So there’s a barrier to entry: cost.  Additionally, adding more infrastructure is increasingly problematic.  Frankly, we don’t exactly want companies continually laying down parallel wires and cables, new wifi towers, etc.  Eventually the benefits are simply nil…and it seems like that saturation point is hit extremely rapidly.

In fact, most companies that exist in the ISP market used existing infrastructure to leverage their way into place.  Cable companies, phone companies, satellite television providers, and cellular providers.  Google is funding a few fiber optics network installations, but consider: these have to be laid in beside networks that already exist.

The result is that any particular way of connecting to the internet is going to lend itself to being in the hands of very few local entities…and those entities have no real urge to compete once they’ve secured their own areas.  They’re not going to want to drop additional wiring in their competitior’s area unless they’re absolutely sure they can lock up the entire locale.  From here, standard consolidation points towards dwindling numbers of competitiors, until one larger competitor just buys them all out.

This is the same problem that affects utilities, which is why we’d tended to make them state run.  Competition simply doesn’t exist on the level that would promote the price stabilization of the more common broad market.

Now, monopolies themselves don’t necessarily lead to poor pricing for the particular good they sell.  A perhaps more dangerous effort of monopolies is their ability to impact nascent markets which would, without their interference, evolve into a competitive equilibrium.  The monopoly serves as an externality, using its dominant position in a related market to defeat fledgling newcomers.

This is the most pressing issue of Net Neutrality; the various ISP monopolies or duopolies in certain areas can use their dominant position to influence another market: the content market.

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Why are unions bad…and businesses are not?  I’ve never entirely understood this.  Or specifically, why is it considered bad for workers to gather as collectives and negotiate thus?  Even a strike: when workers decide to not come in, to protest the actions of a company, it is considered bad by union opposers.  When the same employer fires those workers, it is applauded as “streamlining” (or “maximizing efficiencies”).

Why is this?

 

Obviously, I’m assuming one agrees that unions are bad.  If you don’t, then never you mind this whole question.  I probably have other questions for you.

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