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Tuesday, November 28, 2006

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Gabriel M.

*Someone* carefully omitted the fact that Hayek was a big looser in the '30s and '40s business cycle research, that his own students, Hicks and Kaldor, showed his theory to be untenable. Oh, well.

Lafayette

Keynes: “I conclude that the duty of ordering the current volume of investment cannot safely be left in private hands." But Hayek sharply disagreed. He believed that there are inherent limits to knowledge in human social and economic systems which no amount of intellect can overcome.

Interesting juxtaposition of arguments are shown (pro- and contra- state intervention). The debate is alive and well and the economic experiments of post-war Europe are there to support some conclusions. Europe was almost totally deconstructed after WW2 and subsequently was almost entirely rebuilt. The gamut of economic policy options has been run, many times.

The prime motor of reconstruction was the Marshall Plan, the essential element of which (and the reason it succeeded) were the funds distributed by the newly formed national governments since, obviously, they knew best where to employ them. No intervention from the American government was made, notably, to influence policy. That venue was elsewhere, in NATO.

The Marshall Plan was the foundation stone of European “statism”, which has endured to this day in various forms across Europe. Ministries, and therefore men, took control of the disbursement of reconstruction funding thereby creating the vast complex of state intervention. The concentration of power to decide and implement in the hands of politicians cast firmly the model of European political governance for the following half century.

Keynes, a brilliant economist, believed in “dirigisme”, the exercises of decisive power by a central authority. He believed that only educated males in three piece striped suits coming from top universities knew best what needed to be done and that it was the state that should do it. It was elitism at its worse, but what else can be expected from a “Cambridge luminary” (and not Cambridge in Massachusetts) of the inter-war époque.

The debate still smoulders - between those who feel that only the “men in gray”, with all their data mining techniques, can best understand economic policy and those who instinctively believe (since there is little formal proof) that the “invisible hand” and the freedom of choice can be shown the map but must not be guided.

The truth, I suggest, is somewhere in between, on a wire upon which economic policy must seek an equilibrium between the two. The fate of a nation, and its people, is in the balance.

Unfortunately, in either model of governance, that is, little or much state intervention, it appears that citizens submit to the consequences rather than influence them. This, I suggest also, is the next development in democracy - the accommodation of citizens in the decision-making process.

The analogy of the Town Council meeting, where key decisions are taken by popular vote, can be expanded to a national level by means of referendums that citizens themselves can engender. Referendums do both good and bad, depending upon the issue and prevailing voter sentiments at any given moment.

But, given the wide-spread disaffection with republican (representational) legislatures, both in Europe and the US, why not give it a try? Can it do worse? The consequence is that politicians must go to greater lengths to convince citizens of their policy making decisions, because the backlash is a referendum that revokes laws that the citizenry does not abide.

What better functional democracy is there than that?


Alex M Thomas

Well, If it werent for Keynes, Friedman and Hayek, Economics as a discipline would not have developed. And there cannnot be a single person taking the credit of the growth of a discipline. Many intellectuals have improved on the subject and it would not be good to say, that only one contributed or only one is significant.

Lafayette

"Many intellectuals have improved on the subject and it would not be good to say, that only one contributed or only one is significant."

Quite right. It is a composite body of work and none of it has (yet) become an unquestioned dogma.

Einstein was once heralded as a genius and, with subsequent theories of quantum physics, parts of his work have come into question. Does that make Einstein any less of genius? Or Keynes?

ChrisA

"behavioural and experimental economics confirm that, for the most part, decision-makers reason poorly and act intuitively rather than rationally. Theoretical models in which actors have very limited, or even zero, understanding of how their environment operates are having striking success in explaining a wide range of phenomena."

I don't believe that individual actors usually do act as irrationally or emotionally as suggested above, if you examine a particular industry the actors in that industry usually have a deep understanding of that industry and where the economic advantages are. When presented with an opportunity such actors are, in my experience, quick to take advantage. Take a chemical factory for example, the owners are constantly looking at ways to increase efficiency and investing on that basis.

There are many problems with centralised control (corruption or lack of accountability being the greatest one) but not that humans are irrational.

Lafayette

ChrisA: "I don't believe that individual actors usually do act as irrationally or emotionally as suggested above"

I couldn't agree more. Whilst we/I might rail about their compensation packages, given the high turnover of CEOs, if they make a mistake they pay for it. This rule separates the chaff from the wheat very quickly in commerce/industry.

My experience being in industry, I can confirm that directors DO make an effort to choose correctly. But, the information base is rarely at 100% of what one would want. That is, one needs to make a decision (often very quickly) based upon too little information. It's a shot in the dark, but it has to be made.

When there is no "retribution" for wrong thinking, as often happens in government function, then bad decision making can become abundant. People don't care, because they sense either that they won’t be caught out or they will have moved on long before the decision will have been found to be wrong. (Rumsfeld is the exception that proves the rule. He got caught out by popular vote.)

An MBA program employs "case studies" that teach business decision-making in an empirical fashion. That is, a case study will explain how, in a given circumstance given decisions had a particular result. Unfortunately, the circumstances are not always the same. They repeat themselves but always in a different way. There is a heavy element of randomness in the facts surrounding a decision.

So, decision making is very much intuitive and, frankly, I cannot see how any plausible model of this can be derived.


Matt

Hayek got the big question right. It doesn't matter if people act rationally or irrationally, the point is that some guy in an office even 1 mile away doesn't know what is going on inside your head. As they say, one man's trash is another man's treasure. The decision of what is trash and what is treasure should be left to individuals, not determined by a central actor who dictates the value of things. Even if he can alter the balance (say through taxation), he can not change an individual's true desires. He may get me to change my behavior, but I won't like it. Therefore, Lafayette, we don't need to vote on anything. We just need the legislature to step away and allow each individual too make his or her own decision. A dictatorship of 51% is as bad as any other.

Lafayette

Matt: "Therefore, Lafayette, we don't need to vote on anything. We just need the legislature to step away and allow each individual too make his or her own decision."

In general, this is the correct formula for a functional market economy. Otherwise, it’s kinda stupid.

Because market economies, to be rational, need not be entirely "free", which is a necessary but insufficient condition. Unregulated economies (where a Central bank connives with politicians to simply maintain the status quo) simply leads inevitbaly to chaos, meaning even sharper recessions.

Which is what the dot.com bubble of 2001 and the recent housing bubble (both stateside) should have taught us. Both were caricatures of markets printing money out of speculation to create a "wealth affect" or "feel good factor", by which consumers fueled aggregate demand.

Government policy should be to maintain an economic climate that permits growth and THEREFORE job creation (since populations are always adding workers to the work force). But, this has NEVER happened autonomously in recent history in modern, developed economies. (And anyone who thinks it does is self-delusional.)

Meaning simply this: Too much state intervention is just as bad as too little. The debate is about the "tipping point", where one becomes the other. It's a balancing act, and some political leaders are better economic gymnasts than others. Most cannot look beyond thier next election.

Lafayette

"The burgeoning areas of behavioural and experimental economics confirm that, for the most part, decision-makers reason poorly and act intuitively rather than rationally."

I did not finish this thought.

If politicians are thinking constantly of their re-election, which would seem rational, then it is the introduction of the referendum, an election of sorts, that changes the political dynamic.

Politicians, who have a majority in a legislature, will pass a law that they think is consonant with their political ideology. But, only a referendum can corroborate whether it is or is not.

Not every matter of importance need be put to referendum. In the Swiss model, for the citizens to react to a law that they feel in incorrect, they must gather a petition of some percentage of voters. (The lists submitted are verified.) It is therefore no small matter for citizens to provoke a referendum and takes great work.

But, the tool is there to be used when necessary. And, it is a "check & balance" mechanism that could not be more limpid as regards voter sentiments regarding an issue.

The Swiss vote between 10 and 30 times a year and, yes, the turnout is sometimes miniscule ... depending upon the subject. But, is this frequency too much to "pay" (in time and effort at understanding matters) to have a functional democracy?

I doubt it. And, it certainly is better than massive downtown demonstrations, often riotous, that are a field day for the TV-news.

Matt

I wasn't really making an economic argument. Elections become so contentious becuse of the stakes involved. Town meetings are good, but they can also be quite tyrannical as a majority runs wild. The problem isn't what politicians are deciding, it's that they're deciding at all. Retirement, health care, and education are heavily controlled by the state in the U.S. Just take the debate over evolution as an example. It is a huge battle because the winner takes all. The question of the success of any system is really what power does the government have over the people? What are the Swiss deciding with those votes?

I don't see how you can call an economy where the central bank and politicians maintain the status quo is unregulated. That's a totally regulated economy. Unregulated economies allow winners and losers to form on the basis of market forces. The job of the central bank is to provide a currency that maintains it's value.

Arthur Eckart

A person with more information may perceive a person with less information as irrational, while a person with less information may perceive a person with more information as irrational. However, both may be rational. Also, the job of the U.S. central bank is not to provide a currency that maintains its value. If that were the case, the U.S. central bank is a failure, because the dollar has lost a great deal of purchasing power. However, if the central bank allocates the optimal quantity of dollars, then the value of income will be maximized.

Lafayette

Matt: "The question of the success of any system is really what power does the government have over the people? What are the Swiss deciding with those votes?"

You have suggested outcomes that happen, admittedly, but rarely. If there is a tyranny of the majority (as you call it) then democracy imposes that tyranny. Such tyrannies, if wrong, last until the next election, where they are thrown out by the majority of citizens voting.

Democracy is not an insurance policy against tyranny. It assures nonetheless that a tyranny does not install itself durably. (Tyranny = Cruel or oppressive rule.) Most democracies tend towards a balance of political thought, but that may take time – and in some countries a great deal of time. It’s a learning process.

The Swiss have been voting (in multiple referendums throughout the year) on local and national matters for over 150 years. The referendums have been known to correct decisions made by administrations and voted by lawmakers. This happens rarely, but it happens.

Meaning this: Administration and lawmakers know full well that any law they propose can be revoked by the general population. (Which isn't an easy thing to accomplish, mind you. It really takes an effort to get a referendum established by popular will of the electorate. Getting the required signatures of voters on a petition is NOT an easy accomplishment.)

But, that fact does condition the political dynamic. Politicians think twice about the laws they make and often propose them for a referendum vote. This means that, even on the most minor of subjects, a vote can be taken.

The consequence is obvious: How often have you heard the headlines break out with news about political upheaval in Switzerland? They must be doing something right. If you want to know how well it works, go to Switzerland and see for yourself.

For sure, it requires a "mature voting population" who delve into the details of a subject in order to develop an opinion. They don't wait for TV commercials to propose the options as if selling soap powders. (That circus is mostly for an immature American population, anyway, that let's itself be gullibly manipulated by the medias.)

But, is that too high a cost for democracy, that citizens be asked to think carefully about matters that affect their way of life and even their destinies?

I don't think so. It is the essence of democracy, to my mind.

Republican democracy, that is, representation at a legislature, has hit a wall ... that of human weakness. One cannot risk that politicians, particularly those that make a career of politics, not be tempted by the many opportunities that are offered. Or, that many fall into a "modus operandi" that becomes inbred.

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Education is a progressive discovery of our own ignorance.

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