4 ms·

It would be a good thing because following the principal of maximizing profits is what is most socially beneficial, in the absence of externalities. And jobs a

by swatow 12y ago

It would be a good thing because following the principal of maximizing profits is what is most socially beneficial, in the absence of externalities. And jobs are not an externality. You have only calculated one side of the equation. You haven't considered how investors would have reinvested that money, and the jobs that this would have created. We can and should develop a theoretical framework that allows us to predict both sides of the equation. Such a framework exists and is called general equilibrium theory, which predicts that profit maximizing companies maximize social utility.

jsprogrammer 12y ago
Does the framework predict monotonic utility growth? Does profit maximization occur instantaneously? Does it provide any guarantees on the timeframe required to experience maximal social utility?
- swatow 12y ago
  >Does the framework predict monotonic utility growth? I don't understand that question. I know the language of economics very well, but you're not using the terms in way that has an obvious meaning. >Does profit maximization occur instantaneously? Time is not really an issue in general equilibrium theory. E.g. the assumptions can be interpreted as saying that all companies make the decision that, at that time, given all information available, maximizes the expected value of the companies future time discounted dividends. >Does it provide any guarantees on the timeframe required to experience maximal social utility? Social utility is timeless. E.g. it can be restated to say that if you were to make a plan (where plan can include contingencies, e.g. if X happens, do Y) to maximize the (time discounted) total social welfare over all future time periods, then this plan would involve instructing all companies to maximize profit (in the sense of my answer above). Basically, general equilibrium theory takes into account time, by adding dynamic programming. But this augmented theory is fundamentally the same as the theory when all consumption, production and trade occurs in one instant. Minus all the econ jargon, I think you may have been hinting at the adjustment costs for the workers involved. There are indeed adjustment costs, but you can't speak about these costs in the same terms as the actual value of having a job. It's like comparing the cost of moving from one home to another, to losing one's home entirely.
  - jsprogrammer 12y ago
    >I don't understand that question. I know the language of economics very well, but you're not using the terms in way that has an obvious meaning. I'm not sure if economics uses the term. Monotonic growth would mean that the dependent value (in this case utility), never decreases as a function of the independent value (time, in this case). In other words, does this framework guarantee that total utility will never decrease, even in the face of events such as 110,000 IBM employees being fired? >Time is not really an issue in general equilibrium theory. Then what use does it have in a universe where time appears to be fundamental? >E.g. the assumptions can be interpreted as saying that all companies make the decision that, at that time, given all information available, maximizes the expected value of the companies future time discounted dividends. Is there any reason to believe that these assumptions are well founded? Companies are likely aware of a tiny fraction of the total available information and they likely can only understand an even smaller fraction of that information. How does the framework respond to grossly misunderstood and sparse information? >E.g. it can be restated to say that if you were to make a plan (where plan can include contingencies, e.g. if X happens, do Y) to maximize the (time discounted) total social welfare over all future time periods, Is it possible to make such a plan? My guess is that any practical attempt would fail for many reasons, including being unable to define what 'social welfare' means as well as not being able to acquire enough computational power to compute across 'all future time periods'. >There are indeed adjustment costs, but you can't speak about these costs in the same terms as the actual value of having a job. It's like comparing the cost of moving from one home to another, to losing one's home entirely. I'm not sure exactly where you're talking about here. What is the actual value of having a job?
dragonwriter 12y ago
> It would be a good thing because following the principal of maximizing profits is what is most socially beneficial, in the absence of externalities. "In the absence of externalities" is a pretty enormous qualifications -- very few real world exchanges have no externalities. > Such a framework exists and is called general equilibrium theory, which predicts that profit maximizing companies maximize social utility. It predicts that, in a market with rational actors (as defined in the rational choice model -- utility maximizers with perfect information) and no externalities, a Pareto efficient equilibrium will be achieved. But Pareto efficiency means that for anyone to do better, someone would have to do worse. This is not the same as maximizing social utility (while it seems obvious that the point of maximum social utility must be a pareto efficient point, it is not clear that all pareto efficient points maximize social utility.) And, of course, the conditions in which it makes those predictions (both the perfect information part of the rationality condition, and the no-externalities condition) don't reflect real world decisions very well.
- swatow 12y ago
  Externalities don't invalidate the entire theory, they just mean that adjustments have to be made in the cases where there are externalities. Hence my emphasis on the fact that a person losing their job is not an externality. I think you read my sentence as "(following the principal of maximizing profits is what is most socially beneficial) in the absence of externalities" where what I meant was "following the principal of (maximizing profits (in the absence of externalities)) is what is most socially beneficial". Classical economics with optimal "Pigovian" taxes can be thought of as a first order approximation to reality. Also, you can produce any Pareto efficient outcome from free markets + redistribution. In practice things aren't quite so simple since redistribution has some deadweight loss (e.g. some estimate that it costs $1.30 to the economy to raise $1.00 in taxes). EDIT: rewrote after a better understanding of the parent. EDIT 2: added more explanation.
  - ThomPete 12y ago
    It is an externality when they don't get it back or loose income to keep it. And that is in reality what is happening.
gjm11 12y ago
> general equilibrium theory, which predicts that profit maximizing companies maximize social utility No, it doesn't. It can't, because "social utility" is visible to the market only through the proxy of willingness to pay. If you assume that the marginal utility of money is roughly proportional to 1/wealth (equivalently, that the utility you get from $X in wealth is roughly proportional to log(X)) then what the economy kinda maximizes is total weighted utility, where every person's utility is weighted in proportion to their wealth. What markets give us (in theory, subject to various conditions) is a Pareto-efficient allocation of resources. And there's a theorem that says that (in theory, subject to various conditions) one can get any Pareto-efficient allocation of resources by doing a bunch of pure money-transfer operations and then letting the market do its thing. That's nice, but it's only equivalent to saying that the market maximizes social utility if you regard those money-transfers as net-utility-neutral. So, suppose I have $1M and you have $1K. Under the logarithmic-utility assumption above, an extra $10 for you gains you about as much extra happiness as an extra $10K for me. Consider a transaction in which I find 1000 people like you and pay you each $10 in exchange for what you consider to be $10 worth of inconvenience or pain; I have lost $10K but will be content if I get what I consider to be $10K worth of convenience or pleasure. So we have a possible transaction to which all participants are indifferent: I get a certain amount of happiness; 1000 people each get a roughly equivalent amount of unhappiness; and some money is transferred between us. If money transfers are net-utility-neutral, then by reversing those transfers we get another simpler "utility-neutral" transaction: X units of happiness for me, X units of unhappiness each for 1000 people. So long as they're 1000x poorer than me. (Is that logarithmic-utility assumption reasonable? Not entirely. I think it's generally held that the marginal utility of wealth decreases faster than that, which would make the factor by which markets weight rich people's utility more important than poor people's utility greater. On the other hand: If we consider the wealth and utility of corporations as well as individuals, we might want to say that a corporation's utility doesn't drop off the way an individual's does. I haven't fully got my head around the right way to think about this so I'll stop at this point.)
- swatow 12y ago
  There is another part of the theory which says that you get back the full set of Pareto optimal outcomes, by redistributing wealth (e.g. through taxes and welfare). Although see my comment above on the limits of wealth redistribution.
disordinary 12y ago
Trickle down effect doesn't work.

by swatow 12y ago

jsprogrammer 12y ago

Does the framework predict monotonic utility growth? Does profit maximization occur instantaneously? Does it provide any guarantees on the timeframe required to experience maximal social utility?

swatow 12y ago
>Does the framework predict monotonic utility growth? I don't understand that question. I know the language of economics very well, but you're not using the terms in way that has an obvious meaning. >Does profit maximization occur instantaneously? Time is not really an issue in general equilibrium theory. E.g. the assumptions can be interpreted as saying that all companies make the decision that, at that time, given all information available, maximizes the expected value of the companies future time discounted dividends. >Does it provide any guarantees on the timeframe required to experience maximal social utility? Social utility is timeless. E.g. it can be restated to say that if you were to make a plan (where plan can include contingencies, e.g. if X happens, do Y) to maximize the (time discounted) total social welfare over all future time periods, then this plan would involve instructing all companies to maximize profit (in the sense of my answer above). Basically, general equilibrium theory takes into account time, by adding dynamic programming. But this augmented theory is fundamentally the same as the theory when all consumption, production and trade occurs in one instant. Minus all the econ jargon, I think you may have been hinting at the adjustment costs for the workers involved. There are indeed adjustment costs, but you can't speak about these costs in the same terms as the actual value of having a job. It's like comparing the cost of moving from one home to another, to losing one's home entirely.
- jsprogrammer 12y ago
  >I don't understand that question. I know the language of economics very well, but you're not using the terms in way that has an obvious meaning. I'm not sure if economics uses the term. Monotonic growth would mean that the dependent value (in this case utility), never decreases as a function of the independent value (time, in this case). In other words, does this framework guarantee that total utility will never decrease, even in the face of events such as 110,000 IBM employees being fired? >Time is not really an issue in general equilibrium theory. Then what use does it have in a universe where time appears to be fundamental? >E.g. the assumptions can be interpreted as saying that all companies make the decision that, at that time, given all information available, maximizes the expected value of the companies future time discounted dividends. Is there any reason to believe that these assumptions are well founded? Companies are likely aware of a tiny fraction of the total available information and they likely can only understand an even smaller fraction of that information. How does the framework respond to grossly misunderstood and sparse information? >E.g. it can be restated to say that if you were to make a plan (where plan can include contingencies, e.g. if X happens, do Y) to maximize the (time discounted) total social welfare over all future time periods, Is it possible to make such a plan? My guess is that any practical attempt would fail for many reasons, including being unable to define what 'social welfare' means as well as not being able to acquire enough computational power to compute across 'all future time periods'. >There are indeed adjustment costs, but you can't speak about these costs in the same terms as the actual value of having a job. It's like comparing the cost of moving from one home to another, to losing one's home entirely. I'm not sure exactly where you're talking about here. What is the actual value of having a job?

dragonwriter 12y ago

> It would be a good thing because following the principal of maximizing profits is what is most socially beneficial, in the absence of externalities. "In the absence of externalities" is a pretty enormous qualifications -- very few real world exchanges have no externalities. > Such a framework exists and is called general equilibrium theory, which predicts that profit maximizing companies maximize social utility. It predicts that, in a market with rational actors (as defined in the rational choice model -- utility maximizers with perfect information) and no externalities, a Pareto efficient equilibrium will be achieved. But Pareto efficiency means that for anyone to do better, someone would have to do worse. This is not the same as maximizing social utility (while it seems obvious that the point of maximum social utility must be a pareto efficient point, it is not clear that all pareto efficient points maximize social utility.) And, of course, the conditions in which it makes those predictions (both the perfect information part of the rationality condition, and the no-externalities condition) don't reflect real world decisions very well.

swatow 12y ago
Externalities don't invalidate the entire theory, they just mean that adjustments have to be made in the cases where there are externalities. Hence my emphasis on the fact that a person losing their job is not an externality. I think you read my sentence as "(following the principal of maximizing profits is what is most socially beneficial) in the absence of externalities" where what I meant was "following the principal of (maximizing profits (in the absence of externalities)) is what is most socially beneficial". Classical economics with optimal "Pigovian" taxes can be thought of as a first order approximation to reality. Also, you can produce any Pareto efficient outcome from free markets + redistribution. In practice things aren't quite so simple since redistribution has some deadweight loss (e.g. some estimate that it costs $1.30 to the economy to raise $1.00 in taxes). EDIT: rewrote after a better understanding of the parent. EDIT 2: added more explanation.
- ThomPete 12y ago
  It is an externality when they don't get it back or loose income to keep it. And that is in reality what is happening.

gjm11 12y ago

> general equilibrium theory, which predicts that profit maximizing companies maximize social utility No, it doesn't. It can't, because "social utility" is visible to the market only through the proxy of willingness to pay. If you assume that the marginal utility of money is roughly proportional to 1/wealth (equivalently, that the utility you get from $X in wealth is roughly proportional to log(X)) then what the economy kinda maximizes is total weighted utility, where every person's utility is weighted in proportion to their wealth. What markets give us (in theory, subject to various conditions) is a Pareto-efficient allocation of resources. And there's a theorem that says that (in theory, subject to various conditions) one can get any Pareto-efficient allocation of resources by doing a bunch of pure money-transfer operations and then letting the market do its thing. That's nice, but it's only equivalent to saying that the market maximizes social utility if you regard those money-transfers as net-utility-neutral. So, suppose I have $1M and you have $1K. Under the logarithmic-utility assumption above, an extra $10 for you gains you about as much extra happiness as an extra $10K for me. Consider a transaction in which I find 1000 people like you and pay you each $10 in exchange for what you consider to be $10 worth of inconvenience or pain; I have lost $10K but will be content if I get what I consider to be $10K worth of convenience or pleasure. So we have a possible transaction to which all participants are indifferent: I get a certain amount of happiness; 1000 people each get a roughly equivalent amount of unhappiness; and some money is transferred between us. If money transfers are net-utility-neutral, then by reversing those transfers we get another simpler "utility-neutral" transaction: X units of happiness for me, X units of unhappiness each for 1000 people. So long as they're 1000x poorer than me. (Is that logarithmic-utility assumption reasonable? Not entirely. I think it's generally held that the marginal utility of wealth decreases faster than that, which would make the factor by which markets weight rich people's utility more important than poor people's utility greater. On the other hand: If we consider the wealth and utility of corporations as well as individuals, we might want to say that a corporation's utility doesn't drop off the way an individual's does. I haven't fully got my head around the right way to think about this so I'll stop at this point.)

swatow 12y ago
There is another part of the theory which says that you get back the full set of Pareto optimal outcomes, by redistributing wealth (e.g. through taxes and welfare). Although see my comment above on the limits of wealth redistribution.

disordinary 12y ago

Trickle down effect doesn't work.