Things You Don't Learn if You Don't Go to Eton

According to Keynes, in the General Theory, classical general equilibrium theory is proleptic.

From Dictionary.com:

pro·lep·sis
n. pl. pro·lep·ses
adj. pro·leptic or pro·lepti·cal

1. The anachronistic representation of something as existing before its proper or historical time, as in the precolonial United States.
2.
a. The assignment of something, such as an event or name, to a time that precedes it, as in If you tell the cops, you're a dead man.
b. The use of a descriptive word in anticipation of the act or circumstances that would make it applicable, as dry in They drained the lake dry.
3. The anticipation and answering of an objection or argument before one's opponent has put it forward.

The problem is thus:

Individual knowledge and perceptions of time are essential concepts for any micro-behavioral theory, and yet knowledge is limited and perceptions of time and knowledge are socially constructed by macro-level social processes. Economic processes occur in real time, with frequently substantial time lapsing between economic decisions and the realization and evaluation of the outcomes of such decisions. This problem is particularly salient for the question of savings and investment, wherein economic agents defer present consumption with the expectations of increased future consumption/returns. Herein lies the paradox:
a) the future state of the economy which will reify individual expectations is determined by the aggregate of individual choices made at present (and some random chance).
b) The simple act of individuals choosing changes the future on which they base decisions at present.
c) At present, the information sufficient for individuals to make optimal decisions does not exist.

Classical (and neoclassical) economic theory pretends this problem doesn't exist by assuming things like rational expectations, and that individuals can make very sophisticated, perfectly accurate forecasts and solve very complicated multivariate intertemporal optimization problems. But even if people had such knowledge and cognitive processing capacity (by the way, clinical experiments suggest this is not how people behave, duh), it is epistemologically impossible to make such optimizing choices.

Hence, proleptic. American public schools let me down again.

Zoellick Going Wall Street Way?

That, according to FT.com and Bloomberg.

Zoellick has been Bush's key internatinal economic policy con men.

Man, I gotta get me one of these cabinet posts. Just a couple years in and you get the Wall Street golden parachute, corner office overlooking Manhattan, private jet, etc., etc., all for just hanging around and schmoozing.

I Get More Letters

Peter Ireland of Karavans, a clearinghouse for information on sustainability issues and green entrepreneurs, writes me:

I run Karavans.com and was wondering if you can recommend any books/articles that deal with the how-to of economic survival in a depression?

I have been anti-globalization since the mid 1980s. A lot of economic news today points towards a collapse of the dollar and a possible depression. So I'm trying to build a resource of articles and books on the subject.

(Of course anyone who knows of any articles is welcome to send them here; and of course there are many books on my Beyond Economic Globalization reading list that probably don't answer the question posed here, but are nonetheless great to peruse).

I respond:

I'm probably on record as saying this before but, just to clarify, I am not "anti-globalization." If you define "globalization" as the movement of goods, ideas, people, etc., around the world, then this process has been going on for millenia and is simply a part of human civilization. The notion that this could be stopped or reversed (leaving aside the question of whether it *should* be stopped) strikes me as fanciful. I just finished a book by two French economists, Dumenil and Levy, called "Capital Resurgent." They had this to say: "May material, intellectual, cultural, and emotional exchanges be extended from one end of the planet to the other. May people and resources circulate for the greatest well-being of all. But neoliberal globalization is no way to accomplish this." In other words, the problem with what is happening now is a political one--a political choice of institutions and rules governing this process--an increasingly globally-integrated economy and society--that determines who bears the costs and who reaps the benefits of global socioeconomic restructuring. This is also directly related to issues of sustainability on which your website focuses as the institutions result in an externalization of the costs leading to unsustainable depletion of the environment (and a maldistribution of the environmental costs).

In regards to your question, I presume you are referring to what individuals can do in terms of personal finance to insulate themselves from the potential (and probable) deep recession ensuing from an eventual correction of US economic imbalances. Whether a more gradual, orderly reversal is still economically possible is fundamentally unknowable, however it is plain to see that the alignment of interests and ideologies make such a dream politically near impossible.

I don't have any readings that really address this issue, and I'm afraid I don't think there is really much that individuals can do. The text book answer to your question is that individuals should diversify their portfolios, preferably with assets that are "perfectly negatively correlated" with asset prices in the US. That is, when US asset prices fall, these other ones go up so the porfolio maintains its value. This is conventionally held to mean foreign assets. But the nature of the global imbalances make the prospect of foreign assets' performance rather dubious. The form of globalization that has been pursued over the last 25 or so years is characterized by anemic growth in most parts of the world (owing to a number of structural contradictions built into the institutions of global neoliberal capitalism--PDF). The areas that are growing are growing by exporting to the US, which is only sustained by American consumers' willingness to accumulate debt and their willingness to lend. When the US goes into recession and interest spike to prop up the dollar, their export markets will disappear (because they will become much more expensive in $ terms and people will lose access to credit, etc.).

When this thing blows up, its going to take the whole world (or a lot of it) down with it. Imagine a bank on the precipice of failing that calls in all its loans to cover its liabilities. The firms who borrowed from the bank could be profitable, but need that bridge loan to pay operating expenses. All of the sudden, they can't pay, so the bank can't pay, so the whole thing collapses. China, Japan, and some other Asian countries that hold most of the world's official dollar reserves will be the big losers when the dollar plunges. (This has led some to argue that they won't let it plunge, and thus the imbalances are inherently sustainable, though I don't buy it).

What can an individual do at a micro level? Not much, I'm afraid, as the environment in which individuals operate are forged at the macro level. (This is excepting the VERY rich who have access to financial and physical mobility, and financial services and instruments that regular people like us can't even fathom). There was a big push in economics in the late 1970s to very recently to "micro-found" macroeconomic theory. This is based on the idea that the big picture is nothing more than the sum of all individuals' behaviors (making saving, investment, and consumption decisions, say). While a great number of important insights were gained from this, it obscured from a very important principle: humans are social beings, and their motivations, behaviors, and preferences are socially constituted. In other words, there is also a macro-foundation for micro-behaviors: social structures create an environment in which individuals develop and operate. In this micro-macro dialectical system, I believe that the dominant causality runs from macro to micro.

So, why can't individuals diversify their way out? The reason is that it is fundamentally unknowable how assets will perform in the future. This is the principle contribution of Keynes to economics (though a lot of economists miss it because they never bother to actually read "The General Theory"). Individuals don't know what the future holds--even less so in a period of crisis like the potential one you worry about. Thus it is impossible to know the true probability distribution of potential future states. Risk-reward scenarios, expectations of returns on investment, etc., are only meaningful conditional on stable conventionally formed (i.e. widely held beliefs, coordinated by macro-structure) expectations of the future. Investment behavior, etc., which will determine the individual's portfolio value in the future depends upon one's confidence that their expectations of the future are true, knowing that the true probability distribution is fundamentally unknowable, and hence impossible from which to derive scientific statistical inferences. This conventional expectation formation will most certainly break down when the US experiences twin balance of payments and financial crises. Anyone who claims to know a magic investment that will save you from this mess is selling a lump of fool's gold (don't be fooled by the gold bugs--precious metals, too, posess little inherent value and are subject to the same kind of conditional valuation as stocks or bonds).

Not Quite Capitalist Yet

I've been on a Xinhua news kick of late. Yes, it is the propaganda mouthpiece of the Chinese regime. It needs to be taken with a grain of salt, of course, and its difficult to distinguish between 'news' items and 'opinion.' Nonetheless, the picture that emerges is not necessarily one of unabashed capitalist roots cracking the concrete foundation of the socialist state--the dominant view in the West, particularly in the business press.

Take for example this article on capital taxation in China. The Deputy Director of tax research at the Ministry of Finance, Liu Shangxi, had this to say:

"Interest tax plays a role of narrowing residents' income gap by using the collected money to improve low-income people's lives," said Liu....China launched interest tax on Nov. 1, 1999, in a bid to expanddomestic consumption.

Contrast that with Republican mantra, summed up in the WaPo:

Republicans hope the legislation, which extends existing tax cuts on dividends and capital gains as well as changes to the alternative minimum tax, will give their party a boost heading into the midterm congressional elections in November.

Yes, contradictions abound in China's political-economic system. Wait, maybe that does make it capitalist after all.

Tom Friedman's A Douche

And FAIR.org has done the research to prove it:

"The next six months in Iraq—which will determine the prospects for democracy-building there—are the most important six months in U.S. foreign policy in a long, long time."
(New York Times, 11/30/03)

"What I absolutely don't understand is just at the moment when we finally have a UN-approved Iraqi-caretaker government made up of—I know a lot of these guys—reasonably decent people and more than reasonably decent people, everyone wants to declare it's over. I don't get it. It might be over in a week, it might be over in a month, it might be over in six months, but what's the rush? Can we let this play out, please?"
(NPR's Fresh Air, 6/3/04)

"What we're gonna find out, Bob, in the next six to nine months is whether we have liberated a country or uncorked a civil war."
(CBS's Face the Nation, 10/3/04)

"Improv time is over. This is crunch time. Iraq will be won or lost in the next few months. But it won't be won with high rhetoric. It will be won on the ground in a war over the last mile."
(New York Times, 11/28/04)

"I think we're in the end game now…. I think we're in a six-month window here where it's going to become very clear and this is all going to pre-empt I think the next congressional election—that's my own feeling— let alone the presidential one."
(NBC's Meet the Press, 9/25/05)

"Maybe the cynical Europeans were right. Maybe this neighborhood is just beyond transformation. That will become clear in the next few months as we see just what kind of minority the Sunnis in Iraq intend to be. If they come around, a decent outcome in Iraq is still possible, and we should stay to help build it. If they won't, then we are wasting our time."
(New York Times, 9/28/05)

"We've teed up this situation for Iraqis, and I think the next six months really are going to determine whether this country is going to collapse into three parts or more or whether it's going to come together."
(CBS's Face the Nation, 12/18/05)

"We're at the beginning of I think the decisive I would say six months in Iraq, OK, because I feel like this election—you know, I felt from the beginning Iraq was going to be ultimately, Charlie, what Iraqis make of it."
(PBS's Charlie Rose Show, 12/20/05)

"The only thing I am certain of is that in the wake of this election, Iraq will be what Iraqis make of it—and the next six months will tell us a lot. I remain guardedly hopeful."
(New York Times, 12/21/05)

"I think that we're going to know after six to nine months whether this project has any chance of succeeding. In which case, I think the American people as a whole will want to play it out or whether it really is a fool's errand."
(Oprah Winfrey Show, 1/23/06)

"I think we're in the end game there, in the next three to six months, Bob. We've got for the first time an Iraqi government elected on the basis of an Iraqi constitution. Either they're going to produce the kind of inclusive consensual government that we aspire to in the near term, in which case America will stick with it, or they're not, in which case I think the bottom's going to fall out."
(CBS, 1/31/06)

"I think we are in the end game. The next six to nine months are going to tell whether we can produce a decent outcome in Iraq."
(NBC's Today, 3/2/06)

"Can Iraqis get this government together? If they do, I think the American public will continue to want to support the effort there to try to produce a decent, stable Iraq. But if they don't, then I think the bottom is going to fall out of public support here for the whole Iraq endeavor. So one way or another, I think we're in the end game in the sense it's going to be decided in the next weeks or months whether there's an Iraq there worth investing in. And that is something only Iraqis can tell us."
(CNN, 4/23/06)

"Well, I think that we're going to find out, Chris, in the next year to six months—probably sooner—whether a decent outcome is possible there, and I think we're going to have to just let this play out."
(MSNBC's Hardball, 5/11/06)

Bowles and Schor Win Leontief Prize

The 2006 prizes honor two economists whose work has opened new paths for economic theory and policy. In awarding the Leontief Prize to Dr. Bowles, GDAE cited his groundbreaking work as an innovator in microeconomics over the last 40 years. His work on the structure of labor and capital markets and the organization of work has led to the theory of “contested exchange,” demonstrating how markets naturally create persistent inequalities of wealth and power. His current research focuses on the evolution of institutions, behavior, and preferences, and on the causes and consequences of inequality. Dr. Bowles combines empirical and theoretical work in economics and many related disciplines, along with sophisticated mathematical tools, to address questions of broad social and political importance. Now nominally retired from the University of Massachusetts at Amherst, he divides his time between U-Mass, the Santa Fe Institute in New Mexico (where he heads the Behavioral Sciences Program), and the University of Siena in Italy.

Dr. Juliet Schor has become well known for her work on trends in labor and leisure, consumption, the economics of families, and economic justice. Her first well-known book, The Overworked American, described the time pressures, competition, and consumerism of late 20th-century America. This was followed by The Overspent American, and most recently by Born to Buy: The Commercialized Child and the New Consumer Culture. Her current research interests include the commercialization of childhood, and the environmental sustainability of American lifestyles. Dr. Schor directed the Women Studies Program at Harvard University and taught in the Harvard economics department before becoming a Professor of Sociology at Boston College.

Bowles was my professor last semester (actually, I have an incomplete in his class due to the whole shoulder thing, so I guess technically he is still my professor). Truly brilliant man, and he picks a mean banjo.

The compendium of his work on microeconomics--theoretical and pedagogical--is captured in his "Post-Walrasian" graduate textbook,
Microeconomics : Behavior, Institutions, and Evolution. You can read my review of it here.

Incidentally, many of the microeconomic theoretical innovations in Bowles' work--social preferences, co-evolution of institutions and preferences, and power and contested exchange, for example--are consistent with, if not inspired by, the expository works of John Kenneth Galbraith that Clive Crooks derides in the National Journal: Galbraith's The Affluent Society, The New Industrial State, and The Anatomy of Power.

I Write Letters

When people write nasty columns about great economists.

To the Editors of National Journal:

If one is bold enough to speak ill of the dead, it helps to know what one is talking about. Clive Crook's pan of John Kenneth Galbraith is a case in point ("John Kenneth Galbraith, Revisited," May 13). Crook finds Galbraith an intellectual failure for his "reluctance to concede the ethical and material superiority of the capitalist system." Mr. Crook may be surprised to learn that modern economic theory--which earned many recent Nobel prizes--does not support this view.

Owing to what economists call "information problems" and "incomplete contracts," the very foundations of the capitalist economy are inherently inefficient, that is materially inferior. The markets for labor and credit and the separation of ownership from management in large corporations at the heart of our economic system all suffer this plague. Thus, people who want to work are unemployed even though they could be employed profitably. Less well off people cannot get loans though they have profitable investments to make. And corporate owners and managers face conflicting interests that result in underperformance of the firm.

Inefficiency arises not from burdensome government regulation, but from the structure of social interactions (and not coincidentally afflicts both capitalism and central planning). Some efficiency problems may be solved by one person wielding power over others--a fact that raises questions of “ethical superiority.” Other inefficiencies could be solved if bosses simply redistributed some profits to workers' wages.

Though eschewing mathematical formalization (and so did Adam Smith), many of these ideas in contemporary economics flow naturally from Galbraith's contributions to theories of power and social behavior. Crook derides Galbraith's elitism, but it was Galbraith's expository approach that brought these important ideas into public and policy debates long before they adorned the pages of academic journals on dusty library shelves.

Sincerely,

Globalize This!

How Telling

How telling that China's State Administration of Forgign Exchange--the government agency charged with managing China's global financial integration--should have an image of the Great Wall as its moniker. FYI, it is a good thing by my measure that China keep the option of barriers between its domestic economy and free flowing foreign capital--though much to the consternation of Citigroup, et. al. This is what insulated China from the Asian financial crisis and allows it to maintain its economic policy sovereignty and pursue its own path--rather than that of the IMF, World Bank, or U.S. Treasury--toward economic development. Which is not to say that China's own path is the right one, but certainly the path of the Washington Consensus (PDF) foisted on others who surrendered economic sovereignty is the wrong one for development.

WHO'S WHO IN ECOLOGICAL ECONOMICS

Hmmm, but shouldn't all economics be ecological?

I Get Fan E-Mail

This one in the form of a talking e-greeting.

NEW LOOK

Yes, it was about time to unshackle the fetters of my circa 2003 Blogger template for something more modern. That's how the histortical materialism goes, I guess. This new template is full of all kinds of new bells and whistles and doesn't cause browser crashes when users try to post comments. So we'll give it a go. The only beef I have is the center column is too narrow, and there is a ton of dead space in the right and left margins. Anyone know how to fix/hack this?

"HAPPY" MAY DAY