Neoclassical economics: what is it good for?

Michael Leunig says the tough economic times will plant seeds of change and happiness.I sent the passage below to my friend Alex Coram noting “I like this post from Brad Delong – though you may not”. Alex, you see, has a deeper understanding than me of these things. I was right – he wasn’t that impressed – but for reasons that I also agreed with and might have offered if I were not a thirsty man in a desert.

I think that modern neoclassical economics is in fine shape, as long as it is understood as the ideological and substantive legitimating doctrine of the political theory of possessive individualism. As long as we have relatively self-interested liberal individuals who have relatively strong beliefs that things are theirs, the competitive market in equilibrium is an absolutely wonderful mechanism for achieving truly extraordinary degree of societal coordination and productivity. We need to understand that. We need to value that. And that is what neoclassical economics does, and does well.

Of course, there are all the caveats to Arrow-Debreu-Mackenzie:

  1. The market must be in equilibrium.
  2. The market must be competitive.
  3. The goods traded must be excludable.
  4. The goods traded must be non-rival.
  5. The quality of goods traded and of effort delivered must be known, or at least bonded, for adverse selection and moral hazard are poison.
  6. Externalities must be corrected by successful Pigovian taxes or successful Coaseian carving of property rights at the joints.
  7. People must be able to accurately calculate their own interests.
  8. People must not be sadistic–the market does not work well if participating agents are either the envious or the spiteful.
  9. The distribution of wealth must correspond to the societal consensus of need and desert.
  10. The structure of debt and credit must be sound, or if it is not sound we need a central bank or a social-credit agency to make it sound and so make Say’s Law true in practice even though we have no reason to believe Say’s Law is true in theory.

An adequate undergraduate economics major will spend due time not just on the excellences of the competitive market equilibrium, but on these 10 modes of market failure, and in so doing become, effectively, a history and moral philosophy major as well.

A first-rate undergraduate economic major will also spend due time on government failure and bureaucratic failure, and thus reach the very economic conclusion that there are substantial trade-offs, and we must pick our poison among inadequate and imperfect alternatives, even in institution design.

In any event Alex disagreed in terms that I completely agree with as below: Continue reading

The power and passion of privatisation

Grossly offensive political ads about the alleged dangers of Chinese purchase of electricity “poles and wires” during the last week of the New South Wales election campaign say much more about the Labor-affiliated unions who placed them than they do about the Baird government’s privatisation plans. It seems that Richo’s “whatever it takes” political philosophy remains alive and well in the ALP.

As for the power privatisation policy they were seeking to demonise, my own attitude is succinctly summarised by Ross Gittins:

I’m never sure who annoy me more, the business types who are certain every business is better run if privately owned, or the lefties who oppose every sale of government-owned businesses on principle.

As a general rule, privatising a natural monopoly is a dumb idea, because the monopolist will extract monopoly rents and prices paid by consumers almost inevitably rise. However, as Gittins points out, the situation is different with power in Australia because of the tight regulatory regime surrounding the industry:

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Yanis Varoufakis’s latest blog post

I remember being excited when Barack Obama was elected, but largely because he was such a fine orator and black and reasonable. I didn’t hold out very much expectation that this ‘change’ that we were supposed to be believing in would be all that exciting, though of course politics is full of surprises, and so I was intrigued and didn’t entirely prejudge the possibility that he might be able to change politics in some way that we might look back on as being transformative. But I didn’t know what that would look like and I didn’t rate it as much of a chance.

As it is, I think he’s done pretty well achieving health reform in an increasingly dysfunctional political culture, and have been pretty frustrated with his penchant for ‘negotiating with himself’ as Paul Krugman calls it – his tendency to begin negotiating with The Stupid Party by doing the initial negotiating for them and presenting them with an entirely reasonable proposition which they then denounce as socialist and treat as an ambit claim.

I’m more genuinely excited by Yanis Varoufakis. That’s not because I share his worldview. I’ve read most of his book The Global Minotaur and while I enjoyed being reacquainted with big picture painting of the evolution of the global financial architecture after the Bretton Woods system was established in the late 40s, I found a lot of it unconvincing with conspiracy claims (about how the Americans were controlling things) many of which were interesting and worth considering particularly in the 1950s, but many for which little evidence was presented.

But what’s exciting about Varoufakis is firstly his remarkable style with the media. This is important to me because, as I argued earlier on Troppo, we live in an age of such domination of the style of communication that it takes great insight and skill to cut through with a different approach on the media.

Secondly the message he has is the simple response of economic orthodoxy to the VerySeriousPersonOnomics that has Europe in its grip. Indeed it’s hard to see what’s so left wing, what’s so radical about his most recent post most of which I reproduce below. Yes, he omits some of the other side of the debate – represented in this comment on the post – as most people putting a case do. But it’s compelling stuff IMO.

So the change Varoufakis wants us to believe in is the commonsense of economic orthodoxy (before the VSPs got hold of it in or around 2010). #WTNTL?

Of course there is the question of Varoufakis’s chances. Well as another commenter on his blog mentions, they seem pretty slim and Robert Preston in this BBC column (make sure you read the associated letter from Tsipras to Merkel) makes seem slimmer still.
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Housing bubbles…

Joe Hockey has received a lot of flack after his ‘thought bubble’ that first home buyers could be permitted to withdraw from their superannuation accounts to fund their home purchase. From the housing perspective, many have warned that faced with a fixed supply of housing, an increase in purchasing ability for first home buyers will just translate into a ‘first home sellers subsidy’. From the superannuation side, many, including Paul Keating and Malcom Turnbull, have protested that such a change would undermine the very concept of superannuation.

But I like Joe’s bubble – and would like to add one of my own.

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Debt and deficit emergency half-full glass

That Tony Abbott should have been forced this week to concede defeat on fiscal reform by declaring partial victory over “debt and deficit” (“the glass is half full”) is both ironic and fitting. As I discussed in a fairly recent post, Abbott was responsible for bringing to destructive perfection the toxic mix of “small target” strategy and relentless negativity that both major parties now employ when in Opposition. Tony has now been hoist with his own petard, brought undone by his own success in convincing the electorate to believe erroneously that governmental debt and deficit are universal evils that can never be justified. He finds himself just as helpless to achieve a budget surplus in the foreseeable future as his ALP predecessors, and for essentially the same reasons: unexpectedly slow recovery of revenue in the wake of the Global Financial Crisis; progressive collapse of iron ore and coal prices; and a recalcitrant Senate with an opportunistic Labor Opposition gleefully intent on being just as relentlessly negative towards Abbott as he was towards them.

Peter Hartcher had quite a good article in yesterday’s Fairfax media (which I can’t now find) outlining the recent history of tit-for-tat political bastardry that has brought Australia to our current situation of almost complete governmental paralysis on fiscal policy. However, the cycle of retaliatory fiscal mischief goes back decades. I would date the phenomenon back at least to Paul Keating’s cynical and unprincipled demolition of John Hewson’s Fightback policy in the lead-up to the 1993 election, a tactic that Keating pursued relentlessly notwithstanding that he himself had advocated a GST only a few years previously and that John Howard by contrast had had the guts and integrity (not words that most on the Left would associate with him) to support most of the Hawke/Keating government’s necessary deregulatory, market-based reforms over the previous decade.  The gloves were off on fiscal policy from that moment on.

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Our ABC: some great Radio National listening

Scales of JusticeI drove for the best part of 11 hours over the last few days giving a Do Lecture (would you believe?) which was fun. In any event I listened to some seriously great radio. Inside the drug court I was riveted by three 50 minute docos on the NSW Drug Court. It really is a tragedy that our media overlords have decided that this innovation is ‘soft’ on crime compared with the traditional system. I think it’s much better understood as simply breaking down the interface between prison and out of prison in a more thoughtful way than the traditional system does. The traditional system exercises various sentencing and post-sentencing discretions. All the NSW Drug Court does is design a system of discretion and resources so that the incentives in the prison system actually work in the short term – where we know from research (and commonsense) that stimulus-response mechanisms work much more effectively. The NSW Drug Court operates by suspending the sentences of prisoners and bringing them into a regime where their progress and their liberty is reassessed every week in a court hearing before a judge. This is combined with some counselling resources and drug tests three times weekly. They must attend all appointments on time, and they must self-declare all breaches of their conditions in their weekly court hearing. When they acquire 14 ‘sanctions’ or recorded failures to meet these conditions (and with their chaotic lives they often they acquire several in a single week) they are sent back to prison detox unit for 14 days and so the process goes on until they either graduate to stages two and three which involve progressively less intense supervision after which they graduate altogether. The alternative throughout is that they simply lose their place in the program and complete their prison sentence. As you can see, it’s hardly ‘soft’. Just a sensible adaptation of the prison system and its resources to the challenge which the radio programs show you is an immense one, of rebuilding the life of a person who’s leant on drugs to get them through their life for often at least one, and frequently two or more decades, while their life has fallen further and further apart, while what semblance there was of order in their lives has been thoroughly white-anted, whose whole identity and social network is built on their life on drugs and outside the law. So it’s pretty much out of the fire of prison and into the frying pan of a Skinner box of active operant conditioning. It still struck me how legally based the program still was. I have no problem with the legal architecture. A court hearing once a week might make a lot of sense, but it seemed to me the program, as good as it seemed to be was still crying out for more peer support mechanisms such as those we build in TACSI, in addition to – and probably in replacement of some – of the professional support. The three programs were made over 14 months and take you inside the process and into the lives of four or five people who go through the process. If you don’t have three hours listen to one of the programs. (This is an order from Troppo Headquarters - your internet address has been logged). I found them gripping. You’ll love and despair at some of the characters. The programs, in order are here, here and here. The vagabond Fascinating story of an eccentric Melbourne man who set himself up as The Vagabond, (presumably) Australia’s first ‘embedded’ journalist reporting from the front-line of various institutions of Melbourne that would have been, without him, out of sight out of mind. Here’s the link. Peter Sculthorpe I’m not much of a fan of modern ‘serious’ music and so have not listened to Peter Sculthorpe.  Indeed, after listening to him being interviewed and loving doing so, I’m curious to listen to some of his music which I will, though I don’t have any strong expectation that I’ll even like it. But the moment you hear his voice you can hear that he’s a certain kind of older person. Centred, thoughtful, humble, insightful about his life and the world around him. I love listening to such people. His music wafts beautifully mostly in the background. Here’s the link.   Note: All these programs other than the last are on a new program called Earshot which seems to simply scoop up all sorts of docos on just the kinds of subjects that interest me. It also seems to have absorbed the ABC’s religious program Encounter, which I’ve always liked, though some of the programs I listened to on my drive were pretty disappointing. One on Volunteer Tourism took an awfully long time to get to the point of what was wrong with it beyond vague generalities and the second program in three on Faith, reason and the three Abrahamic religions – on Islam which let radical Islamic spokespeople off way too lightly IMO.  They all claimed to be non-violent and I presume they were, but the scene was set with references to Australian Muslims demonstrating with signs calling for the death of those who ridicule the prophet. The Muslims in the program were not even asked to say what our attitude or policy should be to such conduct or required to confront it as a problem. The episode on Christianity interviewed some very interesting people – like poet Christian Wyman. It offered a reasonable alternative view to schoolboy atheism, but having set up the dichotomy between atheism and belief drifted into a comfortable “we’re among Christians here” mood offering the alternative view without going to the trouble of offering anything that would have any chance of at least slightly unsettling the schoolboy atheists they’d framed the program around (many of whom are readers of this site).

Postscript: the audio of the audio.

How Big Ideas are Built: Rowan Gibson, ‎Innovation Thought Leader gives us the lowdown

How Big Ideas are BuiltOh well I guess snark can be justified as necessary to keeping standards above some rock bottom. Anyway, I did wonder whether this article on the Renaissance and innovation was the silliest thing written on either. Even ignoring the fact that he is about half a millennium out in equating the mediaeval period with the ‘dark ages’ there’s a deeper deliciousness to the way in which he imagines that, by describing a period he has explained it. “It wasn’t just a change of culture that made Western Europe so conducive to innovation at that time. It was also a change of mindset”. Innovation thrived in the Renaissance because of its more innovative culture – not only that but it’s more innovative mindset. The sedative worked because of its dormative qualities.

Anyway, for your delectation it is reproduced below: Continue reading