Yanis Varoufakis is a Greek economist who currently heads the Department of Economic Policy at the University of Athens. From 2004 to 2007 he served as an economic advisor to former Greek Prime Minister George Papandreou. Yanis writes a popular blog which can be found here. His treatise on economic theory ‘Modern Political Economics: Making Sense of the Post-2008 World’, co written with Nicholas Theocrakis and Joseph Haveli is available from Amazon.
Interview conducted by Philip Pilkington.
Philip Pilkington: In the book you talk about how humans are extremely hard to model – you go as far as to call them a ‘radical indeterminacy’. Now, some of this comes back to the classical theory of value that we already discussed. That theory of value seeks out the basis of value in the human capacity for labour – essentially putting humans out front and centre when modelling is undertaken. But the neoclassical theory of value – that is the marginal theory of value – also relies on humans to build models, in that it concentrates on their consumption preferences and derives so-called laws from these. Could you talk about this a little?
Yanis Varoufakis: We are coming closer to the heart of the problem. Classical value theory is anthropocentric; as it ought to be. In a world of robots, there will be no value. There will be function, even economies; but no value. Consider a watchmaker, or an artificial intelligence engineer. They have no reason to speak of the ‘value produced’ by some cog doing its thing in a watch, or by some machine that is embedded in a system of machines. They will, I suggest, speak of the cog’s or the machine’s function, properties, energy input or output. But of value? It would be senseless or, at best, metaphorical.
Humans, on the other hand, have a unique capacity of creating value. Starting with John Locke (who argued that property rights emerge when human labour is blended into a piece of land, thus producing property rights over the latter), classical economists (Smith, Ricardo, Malthus, Marx) also assumed that labour breathes ‘life’ into things, turning them from ‘things’ to ‘valuable things’. Then they asked a series of organic or systemic questions: How does this value determine the relative prices of these things? How is it distributed across society? How does it grow? Under what circumstances can it go into reverse (recessions and crises).
When the marginalists arrived on the scene some time in the 1870s (who later turned neoclassical, with the exception of the Austrians who resisted that ‘transformation’), they treated the notion of value with contempt; as a relic of romantic hocus pocus. In its place, they put another notion: utility. All human activity was to be explained not in terms of the value that labour breathes into things but in terms of the satisfaction of some well-defined preference ordering of human consumers. The main and profound difference between them and the classics was their ambition to pose self-contained models of the individual. (This is why they fell in love with Robinson Crusoe and his one-man economy.)
But to have a self-contained theory of the person, they needed mathematically to close their model of Jack without any reference to Jill. Which meant that Jack’s actions (including his labouring) had to be modelled as a constrained optimisation problem; i.e. an attempt by Jack to be Robinson; to choose his actions in order to maximise his ‘utility’ index given his constraints.
Now, whereas Robinson’s constraints involved the scarcity of tools and materials that he salvaged from his ship, Jack’s constraints involve prices that are, at least initially, taken to be exogenous. The end result was a theory of what Jack will do based on the prices he faces (e.g. the price of the bread he buys or of the labour he hires out to an employer). Lastly, the marginalist economist would ‘close’ the model by finding the prices which ensured that that which Jack wanted to sell Jill would want to buy (also known as general equilibrium theory).
From the last paragraph it is evident that value is designed out of this analysis. There is utility and there are prices, which reflect relative scarcity. You say that marginal-neoclassical models of this sort maintain human beings at their heart. Not really. For the model of Jack and Jill that we end up playing with are well and truly dehumanised. Indeed, once we have a snapshot of their preferences, and a list of their constraints, we do not need them anymore. We can, effectively, jettison them. To see this from another angle, Jack and Jill, in this analysis, cannot possibly do anything. There is no process of creation in that model of things, ideas…
Production in marginal-neoclassical theory is a black box story. You describe the inputs and presume a function (the black box) into which the inputs go and from which the outputs emerge. In the absence of time! For, as I have explained already, to ‘close’ these models mathematically, we cannot afford to allow the clock to tick.
In short, marginalism-neoclassicism confine the idea of value to the dustbin but, to have something to say about prices and quantities, they end up with a model in which only cardboard versions of humans ‘live’ a series of instantaneous lives (without any theory of how they proceed from one snapshot to the next; it is what economists euphemistically refer to as ‘comparative statics’).
PP: You’re right, I think we are getting to the heart of the problem. It seems to me that the neoclassicals’ ‘snapshot’ or ‘static’ model of humans does not allow for any creative change. But it is clear that in the real world such change is needed in order for the economy not to fall into stagnation (perhaps the old Soviet economy provided an example of such stagnation). My impression from your work is that if such dynamic change were allowed into the analysis the economists’ models would fall apart. Could you talk about this a bit and maybe indicate what it might mean for thinking economically?
YV: Let me give you an example, one that is close to my heart as it marked my long term engagement with game theory (perhaps neoclassicism’s highest form). Consider a human activity that is full of drama, strategies, cunning, beliefs, threats, pleading, niceties etc: bargaining and negotiations for the purpose of averting explicit failures to exploit mutual benefits (e.g. between trading parties, employers and unions etc.) or out and out conflict (e.g. between neighbours, states, corporations).
Imagine now that we want mathematically to model this bargaining process on the assumption that the bargainers are rational (for otherwise it is impossible to model their behaviour). Now, consider this proposition:
If we could have developed a brilliant theory of conflict, then the possibility of conflict between rational agents withers (i.e. it tends to zero).
Let me now argue that this proposition is inescapable: Let’s call this brilliant theory of conflict T. T, by definition, predicts the negotiating tactics of each rational party. For example, it predicts how long each one of them is prepared to hold out; i.e. to delay agreement, at a cost, in order to achieve a better outcome. But if the parties are rational, and T is unique, then they must work out what T predicts. Thus, to the extent that disagreement and delay is costly to each of the bargainers, they will agree immediately. To see this, think that if we can both predict (even within a range of commonly shared predictive error) how long our conflict/disagreement will last before we settle, and we can also predict (more or less) what that settlement will be, then why not settle now for the same outcome without the costly conflict?
In this sense, if we assume that there exists a unique theory T that produces these predictions, and we also assume that rational people can (just like the best theory) work out what T predicts, there can be no conflict. Have you noticed the paradox? If a uniquely brilliant model of conflict were to exist, then there would be no… conflict (while we should be able to predict the outcome of negotiations between rational parties).
This paradox means that if you set out to write down the equations of a ‘closed’ model of bargaining, then (i) you may well succeed in ‘discovering’ a uniquely ‘rational’ agreement and (ii) you will denounce all instances of conflict as a failure of rationality [since according to the last sentence in the previous paragraph there can be no conflict if there exists a uniquely brilliant theory of bargaining].
The above illustrates nicely the economists’ tragedy: The ambition to create the ultimate model results in a theory of human behaviour which cannot hold unless the humans populating the model operate like inanimate algorithms following slavishly a particular script. The moment you introduce creativity and a capacity to subvert the rules that supposedly govern our behaviour, the whole theoretical edifice collapses. To illustrate this further, take again theory T.
Suppose Jack and Jill are negotiating and both are rational enough to know T. So, Jill expects Jack to expect her to behave according to T. Because she is human (i.e. not an automaton) she has the ‘right’ to ask a ‘subversive’ question that no algorithm can ask: “What will Jack think if I behave in a manner that T has not predicted (something I can do since I know what T predicts)? Is there no significant probability that Jack will panic, thinking that I am irrational (since I have diverged from T), and choose to yield to some of my demands more readily?”
There is, I wish to argue, nothing irrational about this question. Which means that it is possible that Jill will rationally diverge from the bargaining behaviour that theory T prescribes as the uniquely rational behaviour of Jill. But this is another, more ruthless, contradiction:
Theory T supposedly prescribes Jill’s uniquely rational bargaining behaviour while, at the same time, Jill can rationally contradict theory T.
In summary, as you say, introducing dynamic change and genuinely human capacities for rational subversion into the analysis causes the economists’ models to fall apart.
(*) You may wish to note that this paradox was the starting point of my 1991 book Rational Conflict, Oxford Blackwell
PP: I can’t help but note that the more I look at these arguments the more I detect a strong sense that they are shot through with problems that we generally refer to as ‘sexual politics’ (and I mean that in the colloquial sense of the negotiations that daily take place between the sexes rather than anything to do with feminism) – but I think to go in that direction would be a whole different, if perhaps interesting, discussion.
Personally, I’ve long thought that social science – and in this economics is only one example – should simply banish determinism when it is applied to the individual (‘situational determinism’, I believe it was called by Spiro Latsis). I’ve also long thought that this would mean the liquidation of microeconomics as a discipline. Would you agree with these sentiments? If not, what would you consider worth salvaging from the wreckage?
YV: Yes, I do. The problem with economics is that, at best, it can offer an interesting theory of what an economy populated by algorithms will look like. A type of Matrix economy (here I am referring to the Wachowski brothers flick) in which machines produce other machines, and the ‘stuff’ that keeps them going, on the basis of complex but given instructions, or algorithms. In such an economy two things are impossible: (a) value creation and (b) rational behaviour that is premises on the subversive question “And what if I do not behave according to the rules that ought to govern my behaviour?” Such economies can be modelled mathematically. Human economies, in which value is produced because the human imagination is irrepressible and unbounded (and thus capable of subversive thoughts and ideas that bamboozle even the smartest algorithmic computer), cannot be similarly modelled. In the end, it is as simple as that.
Which brings me to your final question: What can be salvaged from the theoretical wreck that is economics? My answer is: The process of discovering the limits of analytical reason. By studying critically all models, we end up none the wiser about quantitative outcomes but much, much smarter about the complexities of really existing capitalism. Our exploration of economics may take us, in the end, right back to the point we started: Not having a clue about when the next crisis will hit, what sectors will dominate, whether the stock exchange will pick up soon or not. But, while we shall not have a determinate model of prices and quantities, we shall be much more appreciative of capitalism’s motivated irrationality, its penchant for surprising even the powers that be, its capacity to create incredible wealth and untold suffering by means of precisely the same process. Or, as T.S. Eliot once wrote:
We shall not cease from exploration
And at the end of all our exploring
We will return to where we started
And know the place for the first time
– Little Gidding, one of T. S. Eliot’s Four Quartets
PP: Right, well that certainly takes care of a certain type of theoretical economics, but my understanding is that this sort of economics is based mainly on microeconomics. It seeks to explain behaviour at the level of the individual or the firm. The contradictions are so replete I have to agree with you: the only point in studying it is to understand how limited it is.
But what about macroeconomics? This wasn’t really dealt with in the book, although it was used in an applied manner in the non-theoretical part of the book. What do you think of the research potential for macroeconomics and its ability to solve problems? I’m alluding specifically to those schools that claim that the Keynesian revolution in economics was aborted by shifting the focus to the microeconomics that we’ve been discussing. Might this not be a fruitful path of study?
YV: It is perfectly true that, sometime in the 1970s, macroeconomics was replaced by a microeconomic model of some Robinson Crusoe-like ‘representative agent’ whose microeconomic behaviour was assumed to mimic that of a complex capitalist economy! In effect, the distinction between microeconomics and macroeconomics was eradicated, with the former occupying the driver seat. At this point it is worth remembering that macroeconomics was first ‘invented’ by John Maynard Keynes in a bid to understand the Great Depression. In essence, macroeconomics was a child of the midwar Crisis, one not too dissimilar to the one our generation ‘entered’ courtesy of the Crash of 2008. What was Keynes’ main contribution? How did he carve macroeconomics out of the preceding micro-based marginalist economic analysis?
Keynes’ central idea was that two markets behave differently to the rest: the market for labour and the market for money (or capital). Whereas in the vegetables market a price fall will eliminate an excess supply of cabbages, when the economy slumps a fall in the wage, i.e. in the price of labour, will not reduce the excess supply of labour (i.e. unemployment). And, similarly, a fall in the price of money, i.e. in the interest rate, will not reduce the excess supply of savings (i.e. it will not stimulate investment).
The failure of these two markets (labour and money) to operate along the lines of microeconomic thinking (i.e. a reduction in ‘price’ leading to an increase in ‘sales’) meant that the ‘laws’ of a macroeconomy are different to the laws that apply to firms and households. And what laws are these? The main idea is that macroeconomies have a tendency to stumble and fall; to produce crises (nothing new here, as Marx was the first to make the point). However, Keynes added that, after the Fall, macroeconomies may stay ‘fallen’ for a long time, unable to pick themselves up, dust themselves down and grow again. Once caught in an equilibrium of negative expectations, capitalism is perfectly capable of staying depressed. At that point, it needs a boost. And since interest rate reductions will not do the trick (and are anyhow impossible once interest rates are lingering near zero), the only thing that we can do is have the government take over the role of, at least temporarily, investing.
This is a simple, logical insight for which one has no need of models or determinism. Indeed, one way in which we can sum up Keynes’ major insight is by means of the statement: We are damned if we know! The point here is that, indeed, we have no way of predicting when crises will hit, or even to know why they occurred (not even ex post). In a Socratic twist (“I know one thing; that I know nothing”), Keynes’ wisdom entailed a major concession to indeterminacy followed by a recommendation (government investment) of how simply and efficiently to deal with the consequences of the inevitable, yet utterly unpredictable, crash.
The problem with Keynes was the… Keynesians. Especially those who, beginning with Paul Samuelson, decided that the thing to do is turn the great man’s insights into… models. These models turned out to be extremely naïve and to give the false impression to two generations of young economists that the truth about crises, slumps and fiscal policy is to be found within the confines of these models (which, paradoxically, tried to turn Keynes’ great insight, that we are damned if we know, into a… geometrical model). So, when the collapse of the first post-war phase came in 1971, giving rise to an historical discontinuity (e.g. stagflation), it was ever so easy to show that the Keynesians’ models were wrong. At that point, the baby (Keynes) was thrown out with the bathwater (the Keynesians’ models). Macroeconomics thus, effectively, ceased to exist – returning back to its pre-1929 ways. As a result, the current crop of mainstream economists are just as ill equipped to deal with this Crisis as President Hoover’s lot were in 1929.
To conclude, let us by all means reinstate Keynes’ macroeconomics to its rightful place. But let us, at the same time, ditch the Keynesians’ naïve belief in modelling the weird, wonderful and ultimately un-modellable workings of the labour and the money markets. Then and only then will we be granted a glimpse of really existing capitalism(s).
PP: This seems to all come back to the interpretation of Keynes and the ISLM model – which, I think, is what you mean by the dominant Keynesian school in the post-war era. But, as I’m sure you know, there are schools of thought that completely rejected the ISLM approach. Certainly the post-Keynesians, like Minsky, rejected such an approach. This school seems to have focused almost entirely on monetary operations and how money-flows enter the economy. This seems to me a fantastically interesting and down-to-earth approach. Do you have anything to say about it?
YV: Not much, for the simple reason that I agree with you. The IS-LM model symbolises the bastardisation of Keynes. Whereas Keynes’ greatest insight was about the special nature of labour and money markets, which makes these markets recalcitrant and unable to auto-correct via drops in price (when there is an excess supply of labour or savings; i.e. a Crisis), Samuelsonian ‘Keynesianism’ tried to squeeze the great man’s insights into a neat piece of geometry. But of course, if it could be so squeezed, then the ‘problem’ with these two markets could also be dealt with by means of some technical solution (since the geometry implied that restoring equilibrium and full employment was only a matter of adjusting certain parameters). But Keynes’ significant point was that things were not that simple. That ‘animal spirits’ are fickle and indeterminate, and no amount of ‘tweaking’ of interest rates and government expenditure could reliably restore full employment.
The small band of Keynesians who refused to bastardise Keynes, authors like Leijonhuvfud and Minsky, continued to say sensible things at the time when IS-LM Samuelsonianism was bandied about as… Keynesianism. In this sense, economists of the Samuelson ilk set up a straw man version of Keynesianism which, unsurprisingly, was blown over by the first gust of the 1970s stagflationary winds. Alas, at that point the Samuelsonian ‘Keynesians’, instead of admitting that Leijonhuvfud and Minsky had got it right, chose to defect to neoclassical modeling instead. They became the equivalent of Reagan-Democrats: Neoliberal-Samuelsonians.
So, to wrap up, it seems to me that once one’s mindset identifies economics with modeling, the urge to keep modeling overcomes any philosophical, ideological or analytical commitment to an economics that retains any link to really existing capitalism.
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If economics rejects the scientific method, it should not be called a science! A subject matter that revolves wholly around numbers without math? This is a sly attempt to insert shamanism as an acceptable scientific methodology. It would be much better to call economics “magic” (some did) and the economists “magicians” and be done with it.
The economic system is created by regulations and to declare our own creations unimaginably inconceivable is an attempt to hide ignorance or malice behind occultist demagogy.
The vast majority of today’s economic problems come from misallocations caused by trade imbalances – that’s the US, the EU, the currency wars, housing devaluation, budget deficits, etc. A few regulations favoring balanced trade could fix that without any difficulty. That would also make the economic developments a lot smoother, faster and predictable.
Economics can’t achieve the status of science without investigating in detail the effects of regulations – with all of their loopholes, conflicts of interest and so on – which currently dominate. If that environment is chaotic or corrupt so will be the economy.
Crises are not “open-ended phenomena”, they are consequences of specific regulations. Many knew well in advance about the banking crisis of 2008, check Dorgan”s speech at the repeal of Glass Steagall, given in 1999. Only the economists didn’t know… Regulation quality is the key.
I think you’ve misunderstood the points made in this interview. I do not wish to speak for Philip or his interview subject, but I believe they were not saying economics is magic and we might as well throw up our hands. They were showing that closed-system modeling is inherently paradoxical. Closed-system modeling has been the abettor of the neoliberal onslaught that has decimated sound regulation, allowed for the growth of monopolies in almost every industry, and allowed for those seriously imbalanced trade flows you so detest. These horrendous and foolish models “prove” that regulation is unnecessary, markets equilibrate themselves, and government just needs to get out of the way for all that magic to happen — in short, what has passed for economic policy in the US (and all of the western world) since roughly 1980.
Unfortunately, the voices of sanity are like cries in the wind, while all of what passes for leadership is still, despite the disaster that erupted in 2007-8, in complete thrall to these economics modeling tinkerers with their Victorian-era “insight” that complex economies are like the innards of a watch.
If anything, neoclassical economists are like some luddite mad “inventor” sitting in his basement, refusing to apply any scientific, engineering or social insight post-1890 to his “work”… except many of them head massive institutions with slick corporate offices, impressive salaries, titles, perks, and all sorts of prestige.
Any scientist, social or otherwise, who accepts the loving embraced of our corporate overlords ceases to be a credible representative of anything but money. In science, as in art, monetary success is generally not the beginning of anything. It marks the beginning of the end of real insight, expression and relevance, if not the end of the end.
Open-endedness is not science. Period. Next, let’s keep the corporations out of this. They, like the economy, are mere products of LAW.
The use of closed models is NOT a problem… but they won’t work if wrong assumptions are fed into them. So, I see the opinions expressed in this interview as another attempt to hide the real culprit – the unrealistic assumptions adopted by all popular economic schools, it’s not just the neoclassical. It’s not a problem of a particular school but of their common foundation.
Keynes criticized the “classics” for their assumptions but principals he offered ware only a tad more realistic. Then the issue was shelved with the help of some methodological demagogy. The culmination of that is the current appeal to dispense with the last bits of sound science and adopt the magic of open-endedness ; to throw out the baby and keep the dirty water.
The economists assume no monopolies, no conflicts of interests, no regulatory loopholes, no secrecy-driven instability. At present, these effects dominate but economics is willfully blind for them, it assumes them away or in some other convenient way.
Economics leaves out the major driving forces – the exceptionally high incentives to redistribute instead of produce, and the quality of regulation which is supposed to counter this enormous hazard. Without studying that, good results are impossible and economics cannot be called science.
We don’t need a new Delphi Oracle with her absurdly vague and open-ended predictions, which could mean anything you wished. (“hope and change” is a recent example)
I think, you missed my message: Fix the foundations of economics instead of ruining the methodology of science in order to accommodate pagan shamanism.
The economists assume no limits.
“capitalism is perfectly capable of staying depressed. At that point, it needs a boost. And since interest rate reductions will not do the trick (and are anyhow impossible once interest rates are lingering near zero), the only thing that we can do is have the government take over the role of, at least temporarily, investing.
This is a simple, logical insight for which one has no need of models or determinism. “
A government cannot spend what it does not—and will not—have. A billionaire cannot buy a fish when there are no more fish. THIS is the simple, logical insight that even such supposedly “enlightened” economists as seen above choose to ignore, being more content to splash around in solipsistic pools of abstraction.
A citizenry’s only hope for its government is that it has the power to re-direct more-destructive spending towards less-destructive spending. The business community will, by definition, choose the most wasteful and destructive economic activity conceivably possible. Unfortunately, the citizenry does not control the government, if it ever did.
A billionaire cannot buy a fish when there are no more fish. Lidia
Was there a fish shortage during the last Great Depression or was the problem merely a shortage of money in the right hands?
A common mistake made by economists is that they equate the rational choice for the individual with the rational choice for the system as a whole when sometimes the opposite is true: what is best for the system in the long run is clearly devastating for(groups of) individuals in the short run. To put it another way the optimal response for the collection of the individual participants making up a system is not necessarily the optimal response for the system itself. The difference beeing that in the first instance one focuses at a given point in time (the collection of participants in the system) while in the second in the system itself which exists across time.
Sounds like the “Eat-It Theorem” revealed to the world a few days ago on 2/29.
Why Does Economic Yada Yada Never Make Sense?
A Theoretical inquiry into mutual inconsistent optimization methodologies.
by PRofesser D. Tremens, NFL, GED;, Chairman of the Economics Faculty at University of Magnia, Director of the Institute for Contemporary Analysis
Here is the Economic Theory Impossibility Theorem (ETIT) or “The Eat-it Theorem”
I + I + I + I . . . + I(n) will never equal “We”; where I = single individual and We = social unit singularity.
Notice how everyone talks about “our” economy and “our” system and what should “we” do?
That form of language has no inherent logical meaning because of the Eat-it Theorem.
The Eat-It Theorem can also be expressed as follows:
“For any given number of I, such that the number of I = I(n), there will always be a We < I(n) such that the utility maximazation function for We does not equal the summation of all unitary utility maximzation functions for I over all I(n).
QED
You cannot close the models. Its logically impossible. You cannot have a closed model of an economy that has more than one sector AND runs through time. Marx couldn’t do it. Neither could the neoclassicals. Its inherent in the material that they’re attempting to model.
I thought the section on variables describing differences in fall of costs of labor, or capital, differed from supply of commodity-food-costs, was exemplary, at least for me…”markets for labour, markets for capital, performing differently than markets for vegetables”, in terms of eliminating overabundance of supply-costs…
Astrophysics will not predict a catastrophe that might befall the Earth. Likewise, a solid exposition by YV above (to my limited knowledge) does not solve a specific problem. In both cases, theories are extremely valuable and get better with time. Theories should be argued as theories, among mice. How to bell the cat is another matter that deserves more immediate attention.
“Because she is human (i.e. not an automaton) she has the ‘right’ to ask a ‘subversive’ question that no algorithm can ask: “What will Jack think if I behave in a manner that T has not predicted (something I can do since I know what T predicts)?”
I’m reasonably certain that your example is logically equivalent to Godel’s Incompleteness Theorem (the one that says that in any non-trivial mathematical system there are an infinite number of theorems that cannot be proved true or false).
For what it’s worth, Godel’s Theorem gave a major headache to mathematicians like Russel and Whitehead just when they thought they had figured out all the rules of mathematical logic.
If you really want to know: http://www.myrkul.org/recent/godel.htm
I think that may be part of it, but there’s an added complication of dynamics.
In the case of a Godel problem, the paradox is detectable and can be resolved by jumping out of the system (and into a new one, but nonetheless original one solved).
In the dynamic case, no action can be taken that does not invalidate the question. There is no jumping out of the system.
I don’t know… maybe there is an equivalence.
“I’m reasonably certain that your example is logically equivalent to Godel’s Incompleteness Theorem (the one that says that in any non-trivial mathematical system there are an infinite number of theorems that cannot be proved true or false).”
I think that it is simpler than that. In general, n-person or non-zero-sum games do not have solutions. They may have equilibria, but that is not the same thing. If a game has no solution there is no unique rational strategy for the game.
Thanks for the posting.
Economics is illusion of structure and apparent process while meanwhile creating cover for class based social systems and imperialism.
Exactly right. Economists are our foremost toadying profession. They are the preists in a world which has abandoned God, and they perform the same function, justification of obscene wealth, power, poverty. I cannot read little essays like the main post without wondering why anyone bothers to write them. Analyzing nonsense is a losing battle.
jake, people like you and psychohistorian are why I keep coming back to NC. Thanks for your contributions.
I’ve never been convinced by much social theory beyond a few trite bits such as the need to focus on the material conditions as they change – which we might attribute to Marx. Economics has long been challenged by such as Habermas on the focus on the systemic to the exclusion of the communicative – the latter being more to do with our lifeworld of genuine humanity rather than as cogs in the system.
Much as I would like answers in these terms, my practical view of economics and any social theory is they rely on ‘policing’. Supposed rational argument in the media – which extends to academic text – continually moves goalposts or the index of the conversation (root metaphors in academic coinage). We continually hear (or can with some training) that what is good for the goose is not for the gander. Factories must be efficient, yet financial systems can work efficiently through obviously inefficient methods such as money making money (which merely redistributes work effort to the rich). We must put up with serf wages and conditions, they must have the promise of great riches to get out of bed. We are to be motivated by want, they from the entire lack of it.
Many businesses have had to dodge adroitly to avert cash flow closure and go on to thrive. This situation looks a bit like that, but is not. What we are discovering is what sociologists have been calling ‘the legitimation crisis’ for decades. The question is why we can’t all take advantage of massive productivity rises – the answer is the rich and their economics. If economics was a science it would at least have been asking what economics would be without a rich class. My suspicion is much debate doesn’t even start because of ideological indexing that is precisely what science had to escape, even to the point of throwing oneself off a cliff to see a cannonball travel in a straight trajectory. Economics is still stuck with earth, water, wind and fire, along with reporting to the clowns we elect and impressing them. Why would predicting human behaviour be important, rather than, say, designing the system as a utility for human expression in a world free of want (including mortgage serfdom)? Psychology has its own problems at such levels, documented by critical psychologists – one should be wary of too much trust in this as an underlying discipline. Do we even know if financial innovation is important in the good sense? Or whether oft claimed stuff about the giant brains that have failed us and entrepreneurship and the rest? The answer is no and there is a body of work in contradiction. I’ll only suggest Popper’s statement that it doesn’t matter much who leads but how we can control leadership and say even accounting has published critical perspectives.
Economics refuses to study conflicts of interests for fear of revealing its own origins…
How hard is it to grasp the detrimental effects of unbalanced trade? I would think that no less than 50% of those educated in economics could grasp them. However, instead of simple analysis we get mountains of nonsensical propaganda, the self-contradictions of which are never addressed.
Thom Hartman noted yesterday that between G. Washington and Lincoln administrations, the entire costs of war, and pay of government=Senate, House members, President, were covered by imposition of TARIFFS…on goods coming
to U.S….
Neo-Liberalism has always been based on poor quality reasoning. How for example can the true value of labour be “discovered’ in the marketplace when so many distorting processes are allowed to exist such as out-sourcing, unemployment/inflation rules, allocation of finance through money creation powers and lastly but definitely not least the power by controlling capital to divert value away from labor stakeholders.
Yanis is interesting when he implies that labor and money should not be considered markets; they are not modellable as such. The two most human aspects of the economy but neither one self corrects when supply and demand are out of balance. I like allcoppedout’s suggestion above that what is needed is a system of commerce that is “designed as a utility for human expression in a world free of want.” Turn what has been thought of as labor markets and money markets into such a utility. Too socialist for capitalist creativity?
..congruent thought, Susan, IMO…
I think you’ll find ‘Haveli’ should be ‘Halevi’.
Jo Halevi and Yanis were lecturers at Sydney when I studied there, back in the day.
I would argue that the Keynesian revolution can now be seen as a failed attempt to remoralize the capitalist economy.
For Keynes, thriftiness,especially in a depression, is not a sign of health but rather a pathology. But what is capable of bringing about a revival, he believed, does not happen automatically.
The agency of redemption, in a downturn, is the government and its policies of fiscal spending. Thus the state, for Keynes in the early 1930s, was a relatively unexplored resource which supposedly had not been corrupted and was still capable of contributing to the general good.
In 2012 both the state and the market are largely corrupt and it appears that simple policy management from the center will no longer save us from having to more directly confront the issue of moral collapse and what to do about it.
Can cultural constraint be introduced into an economy and and a culture in which there are no longer any limits?
Jim has an excellent post above. That is why economics as a discipline has been diminished without the broader discipline of political economy. Susan the other is contributing some clarity in the labour and financial should not be considered as separate markets for a number of reasons.
It is now that we should do away with economists with a burning at the stake (sic) as the mass mob of better minds can feel satisfied in achieving their goal. What is next? lawyers, accountants, climate change scientists, physicists on Wall Street,…
Please don’t confuse Keynes with the nonsense spouted in his name. Study the real Keynes, if you don’t want to be laughed at.
He was for balanced trade, he proposed the Bancor, an international currency which would make sure the world trade stayed balanced. His idea was rejected and we got Bretton Woods. Naturally, we aren’t yet out of the woods, and will stay there until balanced trade is enshrined in law.
Next, Keynes was for balanced budgets – alternating surplus years in good times with deficit years in bad times. If we followed the real Keynes, we would never see the present economic destruction which started after his teaching were perverted.
Krugman, the Fed, Obama, Romney, etc are further from Keynes than the Andromeda Galaxy. Too many Krugmans name their strawmen “Keynes” taking advantage of the abysmal state of economics education and media in America.
Next, Keynes was for balanced budgets – alternating surplus years in good times with deficit years in bad times. Where? Nobody has found such quotation in Keynes writing. This is something that modern pseudo-“Keynesians” say Keynes said, but it is quite opposed to his actual thought – and reality.
As I said, Keynes supported budget balance over the duration of the business cycle. It’s well documented. Wishing it away is silly.
See here:
1. “The Collected Writings of John Maynard Keynes” volume 27 pages 220-420 or so, eg Keynes vs Meade on deficit financing.
2. EK Brown-Collie and Bruce E. Collier, What Keynes really said about deficit spending, Journal of Post Keynesian Economics, Vol. 17, No. 3, Spring, 1995
Balanced trade is even more important but with regard to it, Keynes record is more accessible… so it’s hard to wish it away, right? Well, he knew what to push harder, that’s all.
Well, then I may be wrong. I’ve seen others say what I said. Can’t see from the preview of the paper whether he explicitly wanted balancing “over the cycle.” I would sincerely appreciate an explicit, unequivocal quote that budgets should balance over the cycle. Keynes certainly wasn’t for aggregate demand-management “Keynesian” spending instead of targetted spending, socialization of investment etc, and he rightly was worried about inflation, but that is not the same thing as balancing budgets, which there is just no non-occult reason for.
Of course Keynes’s views on trade are well known & I have no dispute there. And whatever Keynes’ earlier views were, Abba Lerner’s views were unmistakable and unmistakably correct. Balanced trade & deficits are not things which one should really worry about. While Keynes at first disagreed and publicly criticized Abba Lerner, he eventually acknowledged that Lerner was right about his functional finance.(E.g. Keynes to Meade: “Lerner’s argument is impeccable but heaven help anyone who tries to put it across to the plain man at this stage of the evolution of our ideas.”) (A genuine, tremendous pedagogical mistake of Keynes here – Fortune favors the bold)
And there is no doubt that Keynes said: “Look after the unemployment, and the Budget will look after itself”, which I hold to be more characteristic of his thought. See Billyblog & Rortybomb just recently. Functional finance, MMT, the JG in a nutshell. Followed by a long line of thought – Domar, Lerner (functional finance is sounder than sound finance) to Fulwiller (Fiscal sustainability paper). (Rough) balancing of budgets (and of trade) are natural consequences of good policy, not things which should be targetted for themselves.
Just to weigh in on ‘what Keynes really meant’…
Keynes primary concern was keeping long term interest rates low, and the international stabilisation required to do so. He was in favour of things like public work’s projects but did not speak of ‘running a countercyclical fiscal policy’ as a matter of permanent policy:
‘In favour of an admixture of public works, but my feeling is that unless you socialise the country to a degree that is unlikely, you will get to the end of the public works program, if not in one year, in two years, and therefore if you are not prepared to reduce the rate of interest and bring back private enterprise, when you get to the end of the public works program you have shot your bolt, and you are no better off.’
Philip, Yanis or anyone
Do you also reject Steve Keen’s efforts at dynamic system modelling on the same basis?
I’d be interested to hear more views on this.
I liked part I but in this interview he seems to throw his hands up in the air and say ‘we have no hope’, which I don’t think is true.
“Imagine now that we want mathematically to model this bargaining process on the assumption that the bargainers are rational (for otherwise it is impossible to model their behaviour).”
What?
I don’t think that rationality would necessarily be more difficult to model, or to conceptualize more generally, than irrationality. (We could argue that the division rationality/ irrationality is not well-formed, but that is clearly not what is being argued here.)
Maybe Varoufakis is thinking that irrationality would be ‘random’ and hence more difficult to model. But I don’t think that holds. If anything, irrationality, particularly extreme ‘pure randomness’, would be much easier to model. Rationality can be nuanced; robots according according to algorithmic logic, not reason.
A couple of observations: game theory (perhaps neoclassicism’s highest form) Game theory was invented by John von Neumann, a great mathematician, who considered neoclassical economics to be nonsense.
macroeconomics was first ‘invented’ by John Maynard Keynes in a bid to understand the Great Depression Kenneth Boulding considered that Keynes & others made great contributions to macroeconomics under the impetus of the Great Depression. But only the word is new, not the field. “There has been a great advance in what used to be called the theory of money, but now is frequently called “macroeconomics”.
[1] Correct about von Neumann, game theory and the neoclassicals.
[2] To start with, in 1950 and 1951 when John Nash published his papers, “Equilibrium Points in N-person Games” and “Non-cooperative Games,” and explained them to von Neumann, the latter dismissively told Nash: “That’s trivial. That’s just a fixed point theorem.”
[3] Furthermore, the application of game theory to macroeconomics by the neoclassicals starting with Arrow and Debreu is inherently suspect — in fact, something of a joke. Here’s why.
Game theory had its initial, most urgent application and development at the Rand Corporation in the 1940s-60s as a means/attempt to manage the monster of nuclear strategy. The most prominent nuclear strategists often began as microeconomists and moved over to nuclear strategy: for example, Thomas Schelling and Andy Marshall aka Yoda, who’s been running the Pentagon’s Office of Net Assessment under a dozen presidents now.
But nuclear strategy between the US and the USSR was a two-player game. And a feature of game theory is that multiplayer (n-player) games increase in complexity exponentially as the number of players increases. In their THEORY OF GAMES AND ECONOMIC BEHAVIOR, von Neumann and Morganstern applied the minimax theorem to increasingly large multiplayer games by dissecting those larger games into sub-games between potential coalitions. In a three-player game, for instance, two players acting together could possibly guarantee themselves a win, cutting the third player out of their winnings. So von Neumann and Morganstern mathematically defined when such coalitions were likely to form, and which players would form them.
Would each weak player, for instance, individually try to ally with the strong player? Would they attempt to gang up against that strong player? Alternatively, could one player sit out a round of play so the two remaining players finished each other off?
Other possibilities exist beyond these. Already, then, in a three-player game quite a few possibilities are viable. For example, if players A and B do team up against player C, the coalition of A and B effectively constitutes a two-person game with a solution guaranteed by the minimax theorem.
By figuring out the payoffs of all the interacting potential two-player coalitions, it’s possible to compute which coalitions most serve the individual interests of players A, B, and C, which then gives a solution to that three-person game. Thereafter, a four-person game is dissectable into two- or three-person games between the potential coalitions there, four-player games can become five-person games, six-person games, and so on upwards.
[4] The point is, again, that the complexity of games, and of the necessary computations, increases exponentially with the number of players.
You can see where this is going. If the global economy is considered as a massive n-player game where n is 6,840,507,003 — the current world population — it’s inherently too complex for any solution to be computed.
So the neoclassicals’ application of game theory to macroeconomics does some serious violence to game theory as von Neumann conceived it.
“That’s trivial. That’s just a fixed point theorem.” Don’t think Brouwer hung out at Princeton around then. But Lefschetz & Leray did. Wonder if JvN would have said that to them. :-)