The General Economics Thread

What a surprise that someone pushing an theory of perfect individual rationality would also enshrine individual selfishness as part of that rationality.

This is where we get the synthesis of Objectivist-Libertarian politics and Austrian-neoclassical economics. If rational self-interest means taking those actions which benefit the self over all others, and those actions axiomatically lead to the best possible outcome for society as a whole, then you now have a perfect justification for being the biggest dick you possibly can and taking everything you can acquire for yourself.

Anyone who pushes for collectivist action in any sense at all is not only wrong, but actively evil for opposing the perfect individualist ideal.

edited 15th Apr '14 4:35:18 PM by Fighteer

The first doesn't work for reasons unrelated to exploiting employees (note that there are ways to reduce production cost without reducing wages). It doesn't work because prices are sticky, so a reduction in production costs will lead to either an increase in worker income (which will lead to increased spending) or an increase in capitalholders' wealth (which does absolutely nothing useful).

Re: Rational actors:

Guys, we have a thing. It's called Behavorial Economics. Not everyone's neoclassical!

I wasn't suggesting everybody was. Only that the idea just refuses to die! And, has far too much influence, considering the flimsy "science" it's based on.

Here's an FT article on Behavioral Economics — Behavioural economics and public policy^note  Let's see if it works.

To read that article, behavioral economics is based on neoclassical; it doesn't even mention Keynesianism or other competing models. Building a magnificent castle atop a foundation of shit just gets you a smelly pile of collapsed stone.

edited 16th Apr '14 4:50:45 AM by Fighteer

I can find plenty of articles talking about behavioural economics and Keynesian ones at once, for example this.

You know what guys, I read and read this thread, and it gets me thinking, if it had some proponent of the Austrian school posting regularly, perhaps they'd stop coming off sympathetically. Heh heh heh.

So can I — in fact here's the Full Text of the article you linked.

edited 16th Apr '14 5:28:05 AM by Greenmantle

Behavioral economics isnt intended to be a complete theory of all economic activity, the way classical theory or Keynesianism is. It's simply an attempt to account for the effect of psychological factors on economic decision making. It's mostly applied to micro-economics, not macro (although it has been used to help explain sub-optimal behavior in markets). Basically, the idea is that there is one best way to maximize your financial gain in any economic transaction, but human beings are observed systematically avoiding this optimal outcome. Why? It's due to various cognitive and emotional biases most people share.

None of this violates the basic tenants of classical economic theory (then again, neither does Keynesianism): It's individuals who are the primary decision makers, the goal of any transaction is assumed to be maximizing return on investment, any deviation from this goal has to be explained as an exception of some kind. Explanations of deviations from maximum ROI due to a lack of information available to the decision maker are referred to as "Bounded Rationality", and explanations that rely on systematic cognitive or psychological effects fall under behavioral economics.

Neoclassical economic theory (a relatively new thing) is an attempt to simplify the classical framework by treating the consumer simply as a passive/reactive agent- one who just buys as much as possible whenever possible given their resources, so that all efforts to develop or grow the economy have to rely on the producers, being the only ones who can strategize their decision making in the long term. Keynes treated consumers as complex agents in themselves, who's level of "demand" therefore can change over time and respond to incentives. Neoclassical economists, like the Austrian school, are constantly arguing that this isnt true but so far history doesnt seem to bear this out.

The neoclassical vs. Keynesian rivalry doesn't actually seem to me to have that much to do with the implications of bounded rationality or behavioral economics, since theoretically I think could apply those implications to the behavior of either consumers or producers. My impression, though, is that neo-classical economists make less use of this research than Keynesians do, perhaps because they dont like the extra complication.

edited 16th Apr '14 5:50:00 AM by demarquis

Well, I'm reading through the larger paper that Greenmantle linked above, and it seems that the subject is more complex than the previous one I read made it seem. There's also a lot of "no fucking duh" stuff in there, like the fact that people are not perfectly rational but utilize numerous cognitive biases and approximation strategies that affect their decision making.

I like this passage in particular, from page 897, or page 7 of the linked document:

Krugman uses this idea extensively in his work.

Krugman has mentioned behavioral economics at least once, from what I've been able to gather.

edited 16th Apr '14 6:51:37 AM by Greenmantle

The idea seems to be that Keynesianism is inherently behaviorist, as compared with the classical assumption that individuals are perfectly optimizing agents.

How that latter ever made it into orthodox thought is beyond me; it seems that someone must have thought it up as an approximation for economic modeling and then some other folks ran with it because it told them what they wanted to hear — thereby exhibiting exactly the sort of biases that their model claimed didn't happen.

@Lord Gacek: We've had Austrians posting here, as we've had reactionaries posting in the U.S. Politics thread, but they exhibit a tendency to engage in intellectually dishonest debating tactics and often get banned.

edited 16th Apr '14 7:00:39 AM by Fighteer

Or as I've thought — Economists Are Lazy.

And the Financial Times frequently posts utter garbage.

Well, let's be fair. Back when classical economic theory was first formulated, the 1800's, assuming that the purpose of exchanging goods and services was to maximize your profit must have seemed a fair assumption. It's still seen as the ideal goal for society itself- that is economists still take a prescriptive approach to economic policy- the best policy is that which rewards people for maximizing their profit- because that incidentally maximizes total productivity, which is seen as an inherent good.

So it isnt laziness per se, more to do with what you think is best for the country as a whole, which has more to do with one's political and cultural values.

edited 16th Apr '14 7:19:22 AM by demarquis

That makes sense, and also ties classical economics of Adam Smith with the slightly later ideas of John Stuart Mill and Classical Liberalism^note  In the British sense of the word, not the US form., not that it damages either of their ideas.

Pfft, I finally finished reading the paper and it concludes with a statement that additional work needs to be done to establish microfoundations consistent with observed macroeconomic effects. Either its authors really believe that or the academic environment is such that they are unable to get a paper published that doesn't contain at least a nod to them. Synthesizing neoclassical and Keynesian ideas is a pipe dream, not because there isn't some possible truth to be found therein but because neoclassicists have no interest in debating in good faith.

The thing is that Smith and many other of the "classic" authors were very critical of the tendency of capitalism to aggregate wealth at the top and create both instability and poor labor conditions, and insisted on intervention to redress these problems. This idea is something that modern "classic liberals" tend to reject as not fitting their concept of ideal markets. So really it would seem like neoclassicism has taken steps backwards, not forwards.

edited 16th Apr '14 7:39:35 AM by Fighteer

Fighteer has pointed out the central weakness in classical economic models: If one person earns all the wealth, the entire economy still "grows" as long as that one person earns more wealth over time. Wealth distribution is not included in the model.

Keynesianism doesnt explicitly include it either, but if you are treating the consumers as active agents with agendas of their own (which is what treating demand and supply as independent variables implies) then one implication is that wealth distribution is an important factor to consider.

One of Keynes' key insights was that marginal propensity to consume decreases as wealth rises, because the wealthy save more than they spend relative to the poor. By simple math, the more evenly distributed wealth becomes, the more of it is spent on consumption.

Sony Entertainment to sell all of its shares of Square Enix.

Makes sense. Sony needs the cash-on-hand and Square Enix has long since ceased to be a special partner of the PS brand (spreading their work quite evenly over the last 8 years or so)

Is this the right topic for this?

No, not really. This is more a topic for a Video Games thread; it has nothing to do with economic theory.

Well, it may be relevant in regards to, for instance, Nintendo apparently has a huge amount of cash on hand. However, this is a problem for Japan: they want firms to be spending cash not hording it.

The key point is, after Sony gets all this cash on hand, what are they going to do with it? If they're going to reinvest it into something that's great. If, however, they just buy the Japanese equivalent of treasury bonds, that's a bad sign.

Although, come to think of it, Japanese corporate structure is a bit different than American corporate structure, what with keiretsu. So there are some important finance issues related to that.

edited 16th Apr '14 7:01:50 PM by TheyCallMeTomu