How was Homo Economicus manufactured? What's his shelf-life?

The design engineers in the manufacture of Homo Economicus.

1. David Hume
2. Adam Smith
3. Auguste Comte
4. Jeremy Bentham
5. James Mill
6. David Ricardo
7. John Stuart Mill
8. William Stanley Jevons
9. Leon Walras

Hume reminded everyone of the is-ought distinction (the difference manifested itself as political economy - Ricardo - versus moral science -  Malthus).

Smith centred economics on the understanding of human action - how we weigh choices and decide when engaged in economic behaviour.  That is, economic theory comes out of a general model of human choice-making.  In "The theory of moral sentiments", the self-interest motive was one of many - and certainly not the most important -  dimensions along which he considered man to operate.  Those other dimensions included other psychological facilities, and also the historically specific institutions which each economic agent finds himself in.  Smith's methodology amounted mostly to the advice - be empirical, be systematic; in particular he sometimes applied deductive arguments, sometimes inductive ones.

At the dawn of the nineteenth century, a kind of physics envy set in, resulting in an emphasis - by people like James Mill, David Ricardo, Jeremy Bentham - on the logico-deductive style of rhetoric and methodology.  At the same time, Auguste Comte was promoting a view of scientific methodology which categorised the sciences in relation to one another, in particular in relation of the more fundamental ones, the most fundamental of which was mathematics.  J. S. Mill cemented the concept of 'economic man' as a purely self-interested utility maximiser, no doubt helped by the preponderance of numbers and measures in economics (as opposed, say, to anthropology).  People like Ricardo Jevons, Walras contributed logical and mathematical rigour to the models of (self-interested) human action.  Then there was a move back out from an analyis of 'man in an economic setting' to a sociological view of man.   This movement was driven interestingly forward out of the domain of man-as-consumer - i.e. from the strict economic domain of interest - and into the human sciences generally by people like Wilfredo Pareto all the way to Gary Becker.  Here the key elements of the (neo-)classical approach:- 

1. a mathematocal or rigourous logical model
2. motivation reduced to pecuniary self-interest
3. a deductive reasoning style with an ahistorical flavour

James Mill and Ricardo were also responsible for promoting self-interest as the canonical human sentiment to use as the ideas-machine to generate their increasingly mathematical models.  We moved from a rich theory of moral sentiments of a single-minded soverign consumer in the space of a generation.  Ever since, economists have chosen where they stand with respect to how far the single-minded model gets you (rational expectations, efficient market theory, CAPM, Modigliani-Miller, Paul Samuelson versus John Maynard Keynes, Robert Shiller, Daniel Kahneman.)  The most amenable to numbers of all the human motivations is the one where we look to minimise costs and maximise our financial return.  It allows you easily to apply calculus and compounding to a tiny region of ideal human reasoning.  No wonder this became so popular a style of economic modelling - just like the drunk man looking for his keys under a lamppost since that's where the light is.  Actually, that analogy is perhaps too harsh.  Why blame this approach when it was clearly a decent avenue to pursue.  But something happened along the way - it changed from being a decent avenue to being the exclusive methodological approach to economic modelling.  And that is surely wrong.

J.S. Mill draws a distinction between a social statics and a social dynamics approach to human agency.  Comte, he claims, was strong on the latter, weak on the former.  It is the former which includes the domain of modelling which sees humans as financial maximisers, since this is generally considered to be more or less permanent (in the context of the last 13 thousand years of human history).

I've read Fiedman's famous "The methodology of positive economics" and I don't think it actually adds anything to the debate, which I consider essentially a philosophy of economics one.

Allen Oakley has a fantastically well written book, "Classical Economic Man", which is a history of the construction of the idea itself.  Specifically, he focuses his attention on Adam Smith and J.S. Mill and how the concept of economic man developed between these two great classical economists.  Likewise, Keynes's father wrote a book, quoted favourably at the start of the Friedman classic, which captures the methodological state of play as it stood at the end of the nineteenth century.

Bruce Mazlish also examines the idea of positivism in nineteenth century intellectual thought in a way that shows just how crucial this period was to all current economic work.

Jonathan Aldred and Justin Fox each provide a well reasoned modern critique of the idea and how new economic approaches are set to flourish post credit-crunch.

To say that the deductive model, with humans as exclusively self-interested - a mode eminently amenable to mathematical analysis - has been a productive direction is surely true.  It has opened up for us whole worlds, new instruments, new sciences, new industries.  It has surely transformed us too, as Donald MacKenzie clearly shows.  But is it now time to return to Smith, to a broader conception of economics based on a fuller range of human sentiments.  And surely we can find a way to mathematically, algorithmically, logically model these too?  Perhaps this will allow us to re-engage with the important institutions of economics, which have been denigrated and under-modelled for a long time.

Demand management of ideas with verbal inflation

A person is not likely to be a good political economist who is nothing else.

J.S. Mill

The master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man's nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.

John Maynard Keynes 

Pursue attractive models, don't self-analyse

Aesthetics of scientific model choice

What criteria should the positive scientist consider when building a model, according to Comte in J.S. Mill's book?

1. respect the facts and relationships as currently observed

2. give as much satisfaction to the essential inclinations of our intelligence as we can afford collectively

Mill unpacks these "essential inclinations" to mean:

1. our instinctive predilection for order and harmony and classifying phenomena systematically (Levi Strauss makes a similar point about the essence of the human spirit)

2. our aesthetic feelings

So Comte is saying that model choice is also partly an aesthetic choice.  Mill doesn't like this one little bit.  But I think Comte is right.

Dislike of introspective psychology

Interestingly Comte is the father of behaviourism since he claims that you can't have a positive psychology; You can however have a study of moral and intellectual processes as a branch of physiology.

Hence he's the father of a materialist theory of mind.  He unfortunately wants to reuse the word phrenology here, while throwing away the pseudo-science of phrenology as it

existed in Comte's time, to describe what we would now call neuro-biology.  Despite the poor word choice, he again is proved right, though, again, Mill seems displeased.

This wonderfully expressed Mill-on-Comte critique foreshadows twentieth century psychology's great arguments between its famous schools - phenomenological, behaviourist,

cognitive behavioural, neuro-biological.

Positivist negatives

I mentioned in a previous post that I didn't think Comte's name choice was very good in describing the three main stages of development within a science.  Well, I've been reading J.S. Mill's "August Comte and Positivism"  and he also thinks the name choices are a bad idea.  He makes some revealing alternative suggestions, namely: the personal, the ontological and the phenomenological (rather than theological, metaphysical and positive) - this captures a lot more of the influence of Kant on all this (read noumenal for ontological).  And it shows how this Kantian distinction makes its way through Comte into philosophies of science as diverse as Husserl's and those of the Vienna Circle. In the personal approach to explaining nature, everything happens not through invariable law, but because some being (spiritual or otherwise) makes it happen like that.  The approach tries to tease out the workings of these various beings.

The next development in scientific methodology involves the realisation that there just doesn't need to be a being effecting all of these relationships; instead one talks of an occult power or a force which achieves the same result.  The approach to science has been de-animated and the objects of scientific enquiry are Aristotelian final causes, or plastic forces, or vital principles.  Nonetheless this is still weird, and said forces reside in the noumenal.

Finally, we leave behind any talk of the noumenal (a move familiar to many Logical Positivists to come) and concentrate in establishing laws between observed phenomena.  Science becomes preoccupied with a method which allows relationships to be posited betweem observed phenomena and no commitment to any noumenal object is needed. To explain the distinction between the positive approach and the metaphysical approach (which I think as a distinction we can credit Francis Bacon and Thomas Hobbes) using modern scientific language, think of how scientists develop a model - perhaps mathematical, perhaps not - and then set about critiquing it through well designed experimentation.  There is no longer any moment where the scientist 'discovers' that the model corresponds to a final ontological reality - instead there's just the possibility of falsification of that model.  The realm of the model is the metaphysical realm, in the sense that we create a set of relationships which are more or less supported by some scientific evidence.  We don't necessarily get the model from phenomena (though models can be refined by experimental results) - we can postulate a model based on an inspiration, a guess, etc.  But the Comtian 'metaphysical' approach to science is tempted to infer the existence of real objects (Platonic Ideals).  I am reminded of Friedman's polemical position paper in economics which follows in this positivistic tradition.  But I am also reminded that economics is performative.  Options prices changed following the Black-Scholes solution was published in the early 70s and as traders started to use the result.  This performativity, if you think about it, can change reality so that it conforms to the model.  This is something totally unknown to Comte.  I'm particularly interested in this point, since Friedman's approach to economic modelling (the model can be simplistic, the assumptions unrealistic, but we prize it if it gets experimental support and proves useful) provided some support to the increasingly held 'rational expectations' view of people's economic behaviour as defined by a homogeneous agent with a simplistic institutional/communicative context (perfectly functioning, perfectly free markets).

Comte claims that each and every science independently goes through these three stages.  This seems plain wrong to me.  Sciences which have been around for quite a while might be exposed to these 2 earlier stages, but if it is a young science I would find it hard to believe that it is born in the modern world and still would have to makes its own way through the stages to reach the positive stage.  I think it'll just short-cut to the more modern conception of science.  Comte I believe didn't cover this possibility, though he did talk about a classification of the sciences.  Mathematics is at the root, physics next, etc.  Each downstream science is a proper superset of the sciences which came before it - and this relation between sciences (a measure, in fact) - corresponds to the experienced evolution of these sciences.  This doesn't seem right at all either.  As he was writing his theory, new branches of mathematics and science were being formed in peoples' heads.  If mathematics itself is changing all the time, how can it be a proper foundation of all the other sciences.  Take also for example the birth of genetics.  As Comte was thinking about and publishing his ground-breaking philosophy of science, Gregor Mendel was inventing the science of genetics.  Here's an example of a bit of so-called metaphysical thinking which was later supported by micro-biological evidence.  The ontological object known as the gene turned out to have a reality based in DNA located in every cell (excluding red blood cells and some skin cells) of an organism.

I think Comte’s stages apply to a couple of eras of science, essentially pre-Greek, Greek, post-Enlightenment.  All new-born sciences will immediately implement post-Enlightenment approach.

I also realise that this philosophy of science is only somewhat Hegelian, since the progress stops once the positive stage is reached.  This is more in line with Bohme than Hegel, who also could see an end point rather than a never-ending process. 

And I doubt that science is always and everywhere progressive and positive in Comte's sense.  I think there is an institutional (politico-cultural) which drives this, and our perception of it.

The phenomenological inviolate laws which comte sees as positive are no more grounded than the metaphysical stage ‘vital forces’ – the same gradation he applies to theological – from sprites to a single god, could equally well be applied to the metaphysical level, where the ‘final’ level is really the mature metaphysical approach – one real vital force which keeps all the laws in check.

If you apply an experimental approach to the various metaphysical  levels, perhaps you can do good science – maybe you’d just be making a lot more ontological (provisional) statements, then retracting them when a better ontological model presents itself.  This is not significantly different from the positive approach.

And the converse is probably true.  Sticking to identifying correlations between phenomena can lead to pseudo-science.  One example which immediately springs to mind is Elliot wave theory.

So what am I taking from Comte?  A certain post-Enlightenment hopefulness is all that's left for me.  Comte was, I think, too optimistic and too simplistic on science arriving at a final destination which would necessarily result in social goods.  He missed the performativity of models.  This might result in a kind of evolutionary inertia around models, as they 'bed in' by making reality conform to them.  This might not be too bad a thing if Comte's other view - that a positive science would necessarily lead to social good.  But I don't think this is the case, which is another way of saying that I think we should be careful about models with demonstrated performativity - we need to challenge them much more than Friedman et. al. would have you believe.   I plan to talk about Friedman's positivism in his approach to economics in a separate posting, so I'll develop that point later.

A question which interests me is how such a philosophy, which was quite socialistic, both in Comte and in J.S. Mill, was transformed into the much more individualistic classical economics approach of Ricardo, Walras, Jevons.  Comte talks a lot about how women and the working classes were the most likely to be first convinced by positivism, and he sets himself up in opposition to Marx and communism.

Performativity potentially changes everything – if we are to become what our models predict, then in the absence of certainty that a developed model is necessarily socially good, then model choice becomes somewhat of a politically charged, aesthetically charged, or morally charged activity.

The dead govern the living

Two quotes from Auguste Comte. "The dead govern the living" and "A science is not completely known as long as one does not know its history"

Comte, often described as the father of sociology - a quantitative approach to the study of human beings, as he would have it -  introduced into the new subject of social science the concept that all bodies of knowledge evolved.  Though he died two years before the publication of Darwin's great work, the concept of a kind of progressive evolution - for example as expressed in the works of Lamarck  and Hegel

- was in the intellectual atmosphere. An interesting side note: Hegel was a major participant at that moment in history in applying the idea of the arrow of progress to the world of ideas.  But his own contemporary inspiration for this  (ignoring the undoubted influence of the Greek philosophers for a moment) lay in the work of Christian mystic Jacok Bohme.  The 25 year old Bohme, a cobbler by trade, became transfixed by the beauty of a beam of sunlight shining on a dish and experienced an intense mystical experience which he 'Christianised'.  As a Christian thinker, after meditating on the story of Adam and Eve - the splitting of one into two and the likewise fracturing of good and bad behaviour - and the separation of Lucifer from heaven - Bohem proposed that man himself was destined to experience a separation from God before evolving to new, higher state of unity with God.  God  himself desired this kind of separation and unification as a means to reach full self-awareness.  This idea had its origin in Plato's concept of the soul mate. In a sense, the classic Hegelian thesis-antithesis-synthesis operation of progress is a de-mystified version of an ancient creation myth.  No doubt Comte would have approved with this move.  The idea that God enacts this force in the universe in order to reach a kind of self-realisation has itself resurfaced in a de-mystified form in modern science.  I'm thinking here of the digital philosophy movement, including Wolfram, Chaitin and Fredkin.

Comte thought he'd found the three stages of all forms of scientific endeavours.  He applied the idea of progressive evolution to the world of ideas.  The first stage: in the absence of an effective and disciplined epistemology, indeed in the absence of the possibility of questioning received ways of doing things, we accept the pre-existing body of practical knowledge.  He called this the theological stage (and by it, he meant pre-Enlightenment, though we might jokingly call it the antediluvian approach), though perhaps the structures of power embodied in religion were only the most obvious (and most relevant) ones  to him and his time.  But he would have accepted any structure of power which oppressed the search for knowledge (totalitarianism, cultural strictures).  As each proto-sceince matured,

a questioning, metaphysical stage emerged.- participants began to raise questions about received practice, but they lacked  the mechanisms of a formal science in place to best answer them.  Finally, the freedom to ask questions, no matter where they may lead, together with the institutions and practices of a science resulted in the positive approach to our accumulation of knowledge.  This  positivist and mathematical bent has been with the subject of modern economics ever since.  The intellectual lineage is direct, since Mill was a close intellectual acquaintance of Comte, and of course a student of Bentham, while Mill senior was a close friend of Ricardo.

Since that time, this foundation myth of modern philosophy of science has experienced its own Boehmian degeneration, first through Kuhn (in a sense the Darwin to Comte's Lamarck - i.e. evolution without as dominant a focus on monotonic evolutionary progress) and downward to Feyerabend (epistemological anarchism and no promise of progress at all).  The quote about the dead governing the living has two subtle meanings for me.  One is a point Jonathan Aldred makes concerning the moral justification of the current population imposing higher costs on future generations (a point I'm sure I will return to in another post).  The second sense is the same sense that Keynes meant in his famous quote about economists: "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist"  Perhaps it isn't too far a stretch to imagine that Keynes's quotation is itself an example of the dead (Comte) governing the living (Keynes, at the time he wrote it).  As with science, so too with philosophy - an idea is not completely known unless you know its history.

Cannonical Casts

Imagine you're starting from scratch with the goal to model human behaviour scientifically.  How would you go about it?  Would one aspect of that behaviour be easier than another to model?  Would you want to build mathematical models?  Would you build models only of certain dimensions of human behaviour?  For example, economic models, political models or ethnological ones?

I'm asking this so that I can understand the move in classical economics which resulted in the more or less formal model of the optimising individual, the rational economic agent, Homo Economicus.  I want to see what drove the original economics to postulate such a model of economic behaviour, especially in light of subsequent criticisms of those models and their effects (from the merely performative to the destructive) on our world.

 These criticisms started to gain traction in the 1930s, as a consequence of the great depression, a worldwide phenomenon, and have again received attention following the more recent credit crisis.

I want to articulate the main elements of this approach, as I see them, and identify what is still good about the approach, what may change.  The best place to start is by imagining the simplest possible useful economic model.  

We will always in any model need actors who interact with each other.  My first question : how many different kinds of actor?  My second question : how constrained are the interactions?  What I'd like to achieve in thinking about these two questions is an framework which simultaneously represent classical/neoclassical (Jevons, Walras, Fisher), institutional (Veblen), Austrian and  Keynesian approaches.

The kind of framework I have in mind is the cellular automaton.  I think here we can strip down all the main kinds of economic approach as variants of cellular automata. 

This is not to say that cellular automata are the best, or even useful ways of modelling economic phenomena.  What I am saying is that thinking of all of the approaches to economics as fitting into this framework might be a useful exercise in understanding their relative strengths and weaknesses.

 

My contention will be that with cellular automata, there are two equally essential structural parts - one defining the repertoire of behaviours of the actors, the other defining the range and complexity of signals which can be emitted and received by these actors.  All forms of economic modelling can be re-framed as kinds of cellular automata, with varying kinds of actor, varying kinds of signal.  The signalling architecture of these models corresponds to a kind of institutional constraint.  Jevons and Walras were right to begin their analysis with the simplest kind of model of economic behaviour - one where the only institution in place was a competitive market, processing and re-distributing price signals to all participants instantaneously and evenly.  Those very participants are following the same rulebook - they're a family of mathematically identical little John Stuart Mills - brought up on a strict 

regime of Benthamite utilitarianism. 

However, economics is performative, and this initial model, with its most basic institutional element, together with a doctrinaire utilitarianism, began to have efefcts in the real world.  This kind of performativity can act as a drag on the speed with which new economic world views can be synthesised.  But before I take this investigation any further, I want to read some more on the intellectual transformations which take us from what is essentially the socialist agenda of Auguste Comte and J.S. Mill to the more familiar model of the optimising, self-interested economic agent.

Flogger Radar

A blogger can write about anything.  A monetising blogger might include links to products they reference in their blogs; for example Amazon books.  Bloggers can cover the spectrum from excessively optimistic right the way through to excessively pessimistic, through either psychological predisposition or through a consciously adopted blogging persona, or some mixture thereof.  Ceretis paribus, you might think fortune favours the optimist, since they tend to say positive things, hence encouraging a putative audience to do more purchasing.

It is therefore in the audience's interest to identify genuine enthusiasts from performance enthusiasts, the fluffers of the blogging world or floggers.  Assume you can divide your potential audience into pessimists, optimists and in-betweeners.  Ignore the possibility of a need for the audience member to adopt a persona for now.

Assume furthermore that audience members like to give reign to their tendency to confirmation bias, hence audiences should stratify with optimistic readers consuming optimistic blogs and pessimists reading pessimistic blogs.

First the pessimists.  Now, there are many books out there which are critiques.  It may be possible that the pessimistic blogger might be just as inclined to review and rate these critiques, but that just doesn't feel like the whole story.  Just as likely, I think, is the possibility of an unfavourable review of books.  Unfavourable reviews tend to lead to fewer click-throughs.

Now the two kinds of blogging optimist, the psychologically enthused and the adopted persona of optimism.  The optimistic audience ought to be aware of the distinction in order to favour the former and avoid the latter.  It isn't that there's no value in the simulacrum of optimism, since part of what the optimistic audience seeks out could be satisfied that way; it is just that the satisfaction will also be present, and I assume in equal measure, with genuine enthusiasts. But with genuine enthusiasts, you are less likely to be taken for a ride. Common sense and being aware of the distinction ought to be a good start in developing your flogger radar.

I say this because I'm a monetising blogger who's psychologically disposed to optimism and have no intention of ever becoming a flogger.  This ought to become obvious to you over time through reading my reviews, which will be a decent balance of enthusiasm and honesty.  If your very motive for writing is based on a form of dishonesty, then discerning audiences ought to shun you, and rightly so.

This is a problem with all media, old and new.  Sometimes they will shamelessly fluff (Total Film, Empire, New testament), occasionally less so (cahiers du cinema, Old testament, Michelin guide).

A common technique by content providers is to highlight the ratio between best and the universe of consideration.  You implement this by giving top grades scarcity value in your system of measurement and/or by including only the best to begin with, while highlighting the size of the universe of consideration.  From an information theoretic point of view, these gradings have high information content  If you were to model it mathematically, you'd assume every item in the universe would get graded.  The Michelin guide is mathematically a measure.  The Egon Ronay guide is a measure too.  As is the Which? good food guide.  Some better than others.  Good measures will probably have certain properties.  I would imagine the grading system would have a power law distribution.  There are probably many reasons for this, not least of which is great institutions often exert orders of magnitude more effort in the consistent manufacture of their product.

Wilkins Micawber and Charles Ponzi are two versions of Homo Economicus. Vaguely right, or precisely wrong?

Dickens's Wilkins Micawber gets a bit of a mixed press.  I'd like to examine that in the context of economics and thought it might be interesting to do that by comparing him with Charles Ponzi. I'd like to end up examining the validity in economics of discounting future value, at the individual, corporate and national level and I point out some inherent difficulties in valuing a long time into the future, difficulties around the issue of the degree of certainty we might have concerning those valuations.

First of all, all too often you see the quotation "I'd rather be vaguely right than precisely wrong" inappropriately attributed to Keynes.  This is itself vaguely right but precisely wrong.  It first appeared in print in 1920, by the Cambridge logician/philosopher Carveth Read. Read overlapped with Keynes in Cambridge, when Keynes was doing a lot of work on logic and probability.  Their shared intellectual heritage would have included Mill, Comte, Herbert Spencer, going further back to Leibniz, John Wilkins and Francis Bacon.  Read wrote this now famous line in a Cambridge world which was pre-Tractatus but post Wittgenstein waving his hot poker at Popper.  You can get a sense of the tradition Read was following in the first line of the chapter in his book which delivers the 'vaguenes' line: "Precision of thought needs precision of language for the recording of such thought and for communicating it to others".  He goes on to say:

"The terms of ordinary language fall into the same classes as those of science: they stand for things, classes of things, parts, or qualities, or activities of things; but they are far less precise in their signification. As long as popular thought is vague its language must be vague; nor is it desirable too strictly to correct the language whilst the thought is incorrigible. Much of the effect of poetry and eloquence depends upon the elasticity and indirect suggestiveness of common terms. Even in reasoning upon some subjects, it is a mistake to aim at an unattainable precision. It is better to be vaguely right than exactly wrong. In the criticism of manners, of fine art, or of literature, in politics, religion and moral philosophy, what we are anxious to say is often far from clear to ourselves; and it is better to indicate our meaning approximately, or as we feel about it, than to convey a false meaning, or to lose the warmth and colour that are the life of such reflections. It is hard to decide whether more harm has been done by sophists who take a base advantage of the vagueness of common terms, or by honest paralogists (if I may use the word) who begin by deceiving themselves with a plausible definiteness of expression, and go on to propagate their delusions amongst followers eager for systematic insight but ignorant of the limits of its possibility."

It is great to see a bit of context around the quote.  Read can write.  I hope to return to the point about spurious certainty later.  But on to Micawber now.

Perhaps his most famous quotation concerns the small (2.5%) difference between happiness and misery and I guess this fame this quote subsequently achieved has something to do with the fineness in the balance between the two outcomes.  By the way, he gets to make some other excellent economics-related utterances.  How about this "a man who labours under the pressure of pecuniary embarrassments, is, with the generality of people, at a disadvantage. That disadvantage is not diminished, when that pressure necessitates the drawing of stipendiary emoluments, before those emoluments are strictly due and payable."  He's at a disadvantage, note.  This is somewhat at odds with his other famous quote: "I have no doubt I shall, please Heaven, begin to be more beforehand with the world, and to live in a perfectly new manner, if -if, in short, anything turns up." The Collins English dictionary is a bit unfair to this character, describing him as a person who idles and trusts to fortune.  Whilst I agree with the portrayal as essentially optimistic about the financial future, I'm not sure I agree he's an idler.  He certainly borrows from his friends and has tax problems.  But he had a succession of jobs, many of which didn't work out.  Charles Ponzi too got to run a bank too for a while.  Unlike Micawber, his defining idea appears to have been an arbitrage play.  A global-macro one, no less, leveraging, as it did, the macro-economic consequences of the post-WWI inflationary waves in Europe and the USA's growing hoard of gold.  Both Micawber and Ponzi then, in a sense, had reasonable ex-ante ideas for using borrowed money to make a profit.  Both had a view on the value of assets (real or imagined) in the future and their discounted present value.  This view was optimistic (perhaps even vague).  I think it fair to say they both were possessed of 'animal spirits'.


Anatole Kaletsky, in "Capitalism 4.0" invokes Micawber's 'something will turn up' at the national level.  He challenges the accusation, often made, that our nation is selling our descendants' inheritance by pointing out that "Our grandchildren will almost certainly be much richer than we are and will have more powerful technologies at their disposal".  So, is this optimism or over-optimism? GDP at the generational scale certainly looks regularly and impressively strong, even aside from occasional recessions.  Is this optimism an implicit bet on the stability of future GDP growth?


GDP growth is a national phenomenon.  But lets imagine we found an equally low variance, long lasting positive return investment opportunity at the level of the individual investor or company.  And we could see that growth theoretically lasting multiple generations (perhaps ultimately limited by a stabilisation in population growth, or the growth in numbers of consumers of some product).  Even if you as a corporation had no intention to do anything productive with the, say, a steady 4% coming in, if you merely paid out 3.95% in distributions to investors, would that constitute a Ponzi scheme?  It may look like a bond scheme, but it isn't, since there the principal goes to a company which can productively use the money.  And is there a justification for claiming the corporate level scheme to be Ponzi while maintaining that, at a national level, it isn't a Ponzi scheme?  At the macro-economic level, is our mere observation of this GDP growth pattern a cause for optimism, or for over-optimism?
The answer to these questions depends on whether you accept a role for Knightian uncertainty as opposed solely to an operationally defined calculus of probability.  Jonathan Aldred, in his book "The Skeptical Economist" does a good job in exploring the limitations of what many economists take for granted - the application of market-driven rate discounting to future cash flows. This is part of a wider critique of the assumptions and model underlying the homogeneous economic agent known as 'Homo Economicus'.  Quantitative assessments of risk are deemed incomplete - we're more likely to become sensitive to a risk in proportion to how involuntary we consider our current situation, how unfamiliar, unfair, etc.; also, the marginal utility of money is greater for poor people.  Just because individuals are impatient for cash (Keynes's liquidity preference), are we  justified in claiming that society ought to be?

Aldred continues, attacking the blind allegiance to discounting due to its dramatic influence on capital growth.  Small changes in the load/discount rate get magnified via the logic of compounding.

Which brings me back to the point about spurious precision.  If a very long term discount rate is needed (in the order of generations), how reliable would it be?  What would its confidence intervals be set to?   Wilkins Micawber was right - something did turn up - he became a bank manager.  I wonder what kind of credit allocator he became. Perhaps he would have made  precisely the wrong decision to lend to a fictional Ponzi.

Logophilia

Logorama is a 16 minute animation well worth watching. You can, and should, judge for yourself, and you may not like it depending on your political persuasion.  I just wanted to comment on the amount of effort which must have gone into this. And how utterly familiar yet alien - so many brands but without the intent to sell (except selling the creativity of the makers).

I've always felt the urge to resist advertising, especially after reading Commodify your dissent, which I lent to an ex-girlfriend from a long time ago - a Maori who designed underwear for Elle Fashion.  If anybody knows her - there can't be too many -  please ask her to post it back - I hate to lose a decent book.

 I'm a firm believer in the capitalist system as the least worst one we know of, and pay particular attention to the many unfair and creaky parts of it so love subversive acts like this.  Check out Adbusters too if you haven't come across it yet.

But the animation gives me moral permission to enjoy the logos of corporate America and the effort which went into their various designs.  Many billions of dollars probably went into the collective cost of those designs, and this artist has not only made a primary political statement, he's also made an unexpected artistic bond between his own high quality endeavours and those of the many ad men who created these appealing logos.

Given the world's hopefully now finding a litigation-free artistic space, can I suggest a project I've always wanted to do.  Take the Disney film Snow White and throw away the sound-track, to be replaced with a part- philosophical part-erotic dialogue between Snow White and the dwarves.

The hard work would be in scripting it to fit the images to perfection.  Any ideas for a title?

Capitalism 4.0 - Government: It's not how big it is, but what you can do with it that counts

I'm currently reading  Capitalism 4.0 by Anatole Kaletsky.  I've been enjoying it immensely, but I think I might have spotted a flaw in his reasoning.  What do you think?

It is in essence a history of recent Western politico-economic thought (version 1.0 as Adam Smith, 2.0 Keynes, 3.0 Friedman) together with some ideas about what the post-credit crunch future might bring (4.0).  The history part is fantastic - he presents a cogent macroeconomic story which is especially good on the 20th Century.

Also, his prognostications about the future also have a lot of merit.

However, he lays this all out with a kind of Hegelian thesis-antithesis-synthesis analysis.  And furthermore he makes a claim to justify many of his predictions based on the following logic.

Economics, he tells us, is really an adaptive system.  It is messy, pragmatic, experimental.  And so should our theories about it.  This justifies many of his 4.0 analysis and indeed it makes sense of his general criticism of the neoclassical / mathematical approaches within the 3.0 space.

I disagree with the 'should'.  I think it is a permutation of the is-ought problem is ought problem and is also a bit like Gilbert Ryle's category mistake.

Take other chaotic or adaptive systems.  These are usually modelled with mathematical precision or embodied in a running algorithm.  In neither case can you say the piece of mathematics is 'adaptive'.  You've no need or grounds for saying that.  The logistic map properties themselves don't have to be properties of the mathematics of the logistic map.

Given this disagreement, my question is: does it matter?  Under what circumstances does it matter in general, and when doesn't it?  It reminds me of those old exam papers where you had to identify the true primary statement from amongst a selection of statements.  Then you had to identify the true secondary statement from  another list, and finally  you had to work out statement A was true because statement B was true.

What do you think?

The Persistent Struggle

For me the persistent struggle is a struggle for quality in what we do.  I hope it'll cover a wide range of subjects and be of interest to some people out there.  It isn't a vanity project or self-aggrandising soapbox, though opinions will certainly be expressed.  Right now in my life, I have much less time for hanging around with interesting people and discussing ideas freely.  I hope this provides an outlet and that some of you might join me.