13 ms·

Economists effectively assume that capitalism is unnecessary

45 points by carsongross 11y ago

carsongross 11y ago
Steve Keen is a very interesting hetrodox economist that I highly recommend to HN. He is very difficult to categorize: he is a liberal Australian academic who is an admirer of both Keynes and Hayek, and has built upon and synthesized both of their work. He does a lot of computer simulations of economies using real-world behaviors (e.g. mark-up pricing) and has generated results and opinions that are guaranteed to annoy pretty much everyone. He blogs at Forbes (which is funny, given his politics): http://www.forbes.com/sites/stevekeen/ http://www.forbes.com/sites/stevekeen/ And has a great book out that takes on classical economics: http://www.amazon.com/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926 http://www.amazon.com/Debunking-Economics-Revised-Expanded-D...
- latj 11y ago
  I had never heard of him but the title of this article is beyond a literary device- it is bait-and-switch. It is dishonest. You expect this from from shifty clickbait websites hawking beauty tips and lists of top 10 ___ "they" dont want you to know about. But you cannot take anyone serious who writes an article like this.
  - carsongross 11y ago
    The title is a joke. Yes, it's provocative, but give the guy a break: he's a small time economist at a second-tier university in an island nation who is saying some of the most interesting things about economics in the world today. You would be doing yourself a disservice not reading his stuff based on a blog post title.
    - latj 11y ago
      Well, your description of him hits a little too close to home so I guess I have to give him a second chance. Also I wrote "hawking". haha.
  - dang 11y ago
    Yes, clearly a baity title. We changed the HN title to better reflect what the article argues. The argument itself is interesting, so let's all focus on that now.
- dredmorbius 11y ago
  If you're going to mention Keen, you should note that his true hero and influence (reflected in the name of his analytic software) is Hyman Minsky, a rather underappreciate 20th century economist (not to be confused with the AI researcher Marvin Minsky, whom I'd initially referenced, since edited): https://en.m.wikipedia.org/wiki/Hyman_Minsky https://en.m.wikipedia.org/wiki/Hyman_Minsky Yes, Keen does abstract from both Keynes and Hayek (who's among the less-strident Austrian School types), but neither are his primary focus.
  - carsongross 11y ago
    Thank you for mentioning that, I should have pointed it out in my initial comment.
    - dredmorbius 11y ago
      To be fair, Keen neglected to mention it in the entry as well. Interesting, as he frequently does. And he did conspicuously mention Hayek.
dmfdmf 11y ago
You might as well conclude that freedom is unnecessary because that is the implication.
- carsongross 11y ago
  You have to read the article, the title is a joke (in the literal sense.)
  - Albright 11y ago
    I'd like to, but the link just sends me to Forbes' paywall. =/
    - carsongross 11y ago
      I believe you just have to wait it out, you should get redirected after a few seconds. No?
- api 11y ago
  Freedom is unnecessary for Capitalism. Look at China.
  - ashark 11y ago
    I believe you'll find that many who would consider freedom to (more or less) equal capitalism have settled on definitions of all relevant terms that cause "freedom = capitalism" (for their definitions of both terms) to be a tautology. "Freedom", "capitalism", "coercion" and others will have been stretched in some places and narrowed in others, nuance and odd corners trimmed off until it all fits together, nice and neat, pleasing to the eye in its simplicity and certainty.
roymurdock 11y ago
The necessary sub header from the article: Actually they’ve done no such thing. But they do effectively assume that it’s unnecessary all the time. This article is just a short rant about how simple, traditional, econ 101 models from the 19th century assume purely rational actors whereas the author has decided that not everyone is a "Nostradamus" with infinite knowledge and wisdom. Nobody believes the rational agent assumption to hold at the individual level, but it is sometimes a useful approximation that can build the foundation of a macroeconomic model that sometimes makes sense. It's also a necessary stepping stone on the way to more complex models. An unnecessary article with a clickbait title. That said, his book Debunking Economics is very good and I'm glad that he's advancing the state of modern economics by relaxing traditional assumptions and building better models based on more realistic heuristics. But I don't think this should be getting voted up HN.
- exelius 11y ago
  Incorrect assumptions are still useful for determining what happens most of the time. That's the reason we have assumptions: we know they're technically wrong, but the assumption is true often enough that we state it up front. It also is basically a sign that says "This model will not tell you anything about what happens when market actors are acting irrationally." Assumptions are the "buyer beware" notice on a mathematical model. They are informative because they limit the scope to which the model applies, not because the assumptions themselves are correct.
  - jedharris 11y ago
    So you are saying the representative agent assumption limits current models to 100% centrally plannable economies? If that is not the implication, please tell us what limits this assumption implies. Careful buyers want to know.
    - exelius 11y ago
      No, but there is an assumption that the representative agent is actually representative of the "average" of the agents participating in the market. So when we apply a model with this assumption to real world data, we are making an assumption that the "representative agent" described in the model is truly representative of the market participants. This causes a range of potential error in the outcomes predicted by the model (based on how representative the "representative agent" might actually be) on top of any error introduced by the model itself. In many circumstances, this amount of error is acceptable, and thus the model is useful even if the assumptions are incorrect. If you want to reduce the error further, come up with a series of categories (or multiple representative agents) to describe the behavior of the buyers participating in your market. There's always going to be some margin of error on predictions though, because the future isn't predetermined and events can happen randomly.
jedharris 11y ago
Multiple commenters say "The title is a joke" -- but Keen is just reporting the direct implication of the Arrow Debreu theorems which economists regard as foundational for economic theory (not practice or empirical analysis). So maybe a literal title would be "Economists prove that Economic Theory says Free Markets are Unnecessary". The joke is on mainstream economic theory.
- bruu_ 11y ago
  Yeah. If you read the article, it is not asserting "Capitalism is Bad", it is saying that the rationality assumption implies that we don't need the market. If everyone was perfectly rational, we would all coordinate without the market.
  - sharemywin 11y ago
    I read it more as you need all knowing agents to make capitalism work which is the same requirement for a command economy.
devereaux 11y ago
No they don't. And there are many school of thought in economics. For Austrians, the knowledge problem lies at the core. A lot of individuals, each with limited knowledge and limited processing power try to do their best. An emergent feature is capitalism. This is Adam Smith "invisible hand", because it is an emergent feature of a complex system. You can't observe it directly, but it works. The article correctly quotes Hayek, but shows a poor understanding on why Hayek said so in the socialist calculation debate, or its later work, or other schools of thought. You don't need people with 100% clarity, only that they do their best, and act upon what they believe is true. That is called purposeful action, in Mises' human action. We all make mistakes, but we also revise our opinions when proved wrong, and when replaced by the next generation!! And entrepreneurs make big bucks when mistakes persist for too long, and an opportunity remains unexploited. You can basically see profit as a reward for helping everyone.
- s_dev 11y ago
  Completely Irrelevant: How do you have 2,000+ karma when your account was created nine days ago and have two comments and zero submissions?
  - devereaux 11y ago
    Because I had an anonymous account so I did not contribute under my name. I asked if that could be corrected and it was. Many women in IT chose to contribute anonymously. Recent articles on HN about the place of women and the lack of role models decided me to act. If you have read the first comment I posted under my name, you already know :-) As you were a bit puzzled by that, I added that piece of information to my account to avoid similar questions in the future. EDIT only to realize my comment had now been downvoted. Still, I intend to participate under my name. Sorry for the irrelevance of this, I only wanted to answer your honest question.
    - saurik 11y ago
      (I just accidentally downvoted this comment. I doubt from the timing that I am the person you are referring to who downvoted your comment, as there was likely no way you could typed an edit after having seen that result quite that quickly, and you may have been talking about another comment, but FWIW: my accidental downvote happened when I went to click on your username on my iPhone to see your earlier first comment, and missed the target :/.)
moomin 11y ago
Someone demonstrated a while back that the perfect market hypothesis is equivalent to P=NP. In other words, the "rational actor" so beloved of classical economics is, at best, not possible with current technology.
- chrisdevereux 11y ago
  Which is a actually sort of related to why markets are useful: Providing an approximation of a solution to the problem of allocating resources where an optimal solution is unfeasible due to complexity.
  - jedharris 11y ago
    But has anyone proved that markets actually do approximate the (intractable) correct allocation? They could be a very poor approximation or even be actually computing something we don't want. Furthermore if the point is to approximate an optimal allocation we should be designing them with that in mind. Auction design and a few specialized solutions such as medical residency assignment do this. But given your argument we should be applying this kind of design throughout the economy.
    - chrisdevereux 11y ago
      You're right, I really meant to point out that there's an interesting relationship between markets and computational complexity (and that it's odd for the efficient markets hypothesis if it assumes that P=NP) rather than advocate for markets being an unqualified good (I'd probably describe myself as some kind of Marxist, fwiw). > But has anyone proved that markets actually do approximate the (intractable) correct allocation? They could be a very poor approximation or even be actually computing something we don't want. > They could be a very poor approximation or even be actually computing something we don't want. Well, it would be wrong to take the market allocation to define the desired outcome, but assuming we have some other understanding of what our desired outcome, we can at least assess whether it performs better or worse at the computation than some other approach, right? It's interesting also that markets seem to share properties with other sub-optimal approaches to computationally hard problems. Getting stuck in local maximas, for example.
tmaly 11y ago
Mises anyone?

45 points by carsongross 11y ago

Steve Keen is a very interesting hetrodox economist that I highly recommend to HN. He is very difficult to categorize: he is a liberal Australian academic who is an admirer of both Keynes and Hayek, and has built upon and synthesized both of their work. He does a lot of computer simulations of economies using real-world behaviors (e.g. mark-up pricing) and has generated results and opinions that are guaranteed to annoy pretty much everyone. He blogs at Forbes (which is funny, given his politics): http://www.forbes.com/sites/stevekeen/ http://www.forbes.com/sites/stevekeen/ And has a great book out that takes on classical economics: http://www.amazon.com/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926 http://www.amazon.com/Debunking-Economics-Revised-Expanded-D...

latj 11y ago
I had never heard of him but the title of this article is beyond a literary device- it is bait-and-switch. It is dishonest. You expect this from from shifty clickbait websites hawking beauty tips and lists of top 10 ___ "they" dont want you to know about. But you cannot take anyone serious who writes an article like this.
- carsongross 11y ago
  The title is a joke. Yes, it's provocative, but give the guy a break: he's a small time economist at a second-tier university in an island nation who is saying some of the most interesting things about economics in the world today. You would be doing yourself a disservice not reading his stuff based on a blog post title.
  - latj 11y ago
    Well, your description of him hits a little too close to home so I guess I have to give him a second chance. Also I wrote "hawking". haha.
- dang 11y ago
  Yes, clearly a baity title. We changed the HN title to better reflect what the article argues. The argument itself is interesting, so let's all focus on that now.
dredmorbius 11y ago
If you're going to mention Keen, you should note that his true hero and influence (reflected in the name of his analytic software) is Hyman Minsky, a rather underappreciate 20th century economist (not to be confused with the AI researcher Marvin Minsky, whom I'd initially referenced, since edited): https://en.m.wikipedia.org/wiki/Hyman_Minsky https://en.m.wikipedia.org/wiki/Hyman_Minsky Yes, Keen does abstract from both Keynes and Hayek (who's among the less-strident Austrian School types), but neither are his primary focus.
- carsongross 11y ago
  Thank you for mentioning that, I should have pointed it out in my initial comment.
  - dredmorbius 11y ago
    To be fair, Keen neglected to mention it in the entry as well. Interesting, as he frequently does. And he did conspicuously mention Hayek.

dmfdmf 11y ago

You might as well conclude that freedom is unnecessary because that is the implication.

carsongross 11y ago
You have to read the article, the title is a joke (in the literal sense.)
- Albright 11y ago
  I'd like to, but the link just sends me to Forbes' paywall. =/
  - carsongross 11y ago
    I believe you just have to wait it out, you should get redirected after a few seconds. No?
api 11y ago
Freedom is unnecessary for Capitalism. Look at China.
- ashark 11y ago
  I believe you'll find that many who would consider freedom to (more or less) equal capitalism have settled on definitions of all relevant terms that cause "freedom = capitalism" (for their definitions of both terms) to be a tautology. "Freedom", "capitalism", "coercion" and others will have been stretched in some places and narrowed in others, nuance and odd corners trimmed off until it all fits together, nice and neat, pleasing to the eye in its simplicity and certainty.

roymurdock 11y ago

The necessary sub header from the article: Actually they’ve done no such thing. But they do effectively assume that it’s unnecessary all the time. This article is just a short rant about how simple, traditional, econ 101 models from the 19th century assume purely rational actors whereas the author has decided that not everyone is a "Nostradamus" with infinite knowledge and wisdom. Nobody believes the rational agent assumption to hold at the individual level, but it is sometimes a useful approximation that can build the foundation of a macroeconomic model that sometimes makes sense. It's also a necessary stepping stone on the way to more complex models. An unnecessary article with a clickbait title. That said, his book Debunking Economics is very good and I'm glad that he's advancing the state of modern economics by relaxing traditional assumptions and building better models based on more realistic heuristics. But I don't think this should be getting voted up HN.

exelius 11y ago
Incorrect assumptions are still useful for determining what happens most of the time. That's the reason we have assumptions: we know they're technically wrong, but the assumption is true often enough that we state it up front. It also is basically a sign that says "This model will not tell you anything about what happens when market actors are acting irrationally." Assumptions are the "buyer beware" notice on a mathematical model. They are informative because they limit the scope to which the model applies, not because the assumptions themselves are correct.
- jedharris 11y ago
  So you are saying the representative agent assumption limits current models to 100% centrally plannable economies? If that is not the implication, please tell us what limits this assumption implies. Careful buyers want to know.
  - exelius 11y ago
    No, but there is an assumption that the representative agent is actually representative of the "average" of the agents participating in the market. So when we apply a model with this assumption to real world data, we are making an assumption that the "representative agent" described in the model is truly representative of the market participants. This causes a range of potential error in the outcomes predicted by the model (based on how representative the "representative agent" might actually be) on top of any error introduced by the model itself. In many circumstances, this amount of error is acceptable, and thus the model is useful even if the assumptions are incorrect. If you want to reduce the error further, come up with a series of categories (or multiple representative agents) to describe the behavior of the buyers participating in your market. There's always going to be some margin of error on predictions though, because the future isn't predetermined and events can happen randomly.

jedharris 11y ago

Multiple commenters say "The title is a joke" -- but Keen is just reporting the direct implication of the Arrow Debreu theorems which economists regard as foundational for economic theory (not practice or empirical analysis). So maybe a literal title would be "Economists prove that Economic Theory says Free Markets are Unnecessary". The joke is on mainstream economic theory.

bruu_ 11y ago
Yeah. If you read the article, it is not asserting "Capitalism is Bad", it is saying that the rationality assumption implies that we don't need the market. If everyone was perfectly rational, we would all coordinate without the market.
- sharemywin 11y ago
  I read it more as you need all knowing agents to make capitalism work which is the same requirement for a command economy.

devereaux 11y ago

No they don't. And there are many school of thought in economics. For Austrians, the knowledge problem lies at the core. A lot of individuals, each with limited knowledge and limited processing power try to do their best. An emergent feature is capitalism. This is Adam Smith "invisible hand", because it is an emergent feature of a complex system. You can't observe it directly, but it works. The article correctly quotes Hayek, but shows a poor understanding on why Hayek said so in the socialist calculation debate, or its later work, or other schools of thought. You don't need people with 100% clarity, only that they do their best, and act upon what they believe is true. That is called purposeful action, in Mises' human action. We all make mistakes, but we also revise our opinions when proved wrong, and when replaced by the next generation!! And entrepreneurs make big bucks when mistakes persist for too long, and an opportunity remains unexploited. You can basically see profit as a reward for helping everyone.

s_dev 11y ago
Completely Irrelevant: How do you have 2,000+ karma when your account was created nine days ago and have two comments and zero submissions?
- devereaux 11y ago
  Because I had an anonymous account so I did not contribute under my name. I asked if that could be corrected and it was. Many women in IT chose to contribute anonymously. Recent articles on HN about the place of women and the lack of role models decided me to act. If you have read the first comment I posted under my name, you already know :-) As you were a bit puzzled by that, I added that piece of information to my account to avoid similar questions in the future. EDIT only to realize my comment had now been downvoted. Still, I intend to participate under my name. Sorry for the irrelevance of this, I only wanted to answer your honest question.
  - saurik 11y ago
    (I just accidentally downvoted this comment. I doubt from the timing that I am the person you are referring to who downvoted your comment, as there was likely no way you could typed an edit after having seen that result quite that quickly, and you may have been talking about another comment, but FWIW: my accidental downvote happened when I went to click on your username on my iPhone to see your earlier first comment, and missed the target :/.)

moomin 11y ago

Someone demonstrated a while back that the perfect market hypothesis is equivalent to P=NP. In other words, the "rational actor" so beloved of classical economics is, at best, not possible with current technology.

chrisdevereux 11y ago
Which is a actually sort of related to why markets are useful: Providing an approximation of a solution to the problem of allocating resources where an optimal solution is unfeasible due to complexity.
- jedharris 11y ago
  But has anyone proved that markets actually do approximate the (intractable) correct allocation? They could be a very poor approximation or even be actually computing something we don't want. Furthermore if the point is to approximate an optimal allocation we should be designing them with that in mind. Auction design and a few specialized solutions such as medical residency assignment do this. But given your argument we should be applying this kind of design throughout the economy.
  - chrisdevereux 11y ago
    You're right, I really meant to point out that there's an interesting relationship between markets and computational complexity (and that it's odd for the efficient markets hypothesis if it assumes that P=NP) rather than advocate for markets being an unqualified good (I'd probably describe myself as some kind of Marxist, fwiw). > But has anyone proved that markets actually do approximate the (intractable) correct allocation? They could be a very poor approximation or even be actually computing something we don't want. > They could be a very poor approximation or even be actually computing something we don't want. Well, it would be wrong to take the market allocation to define the desired outcome, but assuming we have some other understanding of what our desired outcome, we can at least assess whether it performs better or worse at the computation than some other approach, right? It's interesting also that markets seem to share properties with other sub-optimal approaches to computationally hard problems. Getting stuck in local maximas, for example.

tmaly 11y ago

Mises anyone?