Gyroscopic Investing

Keen claims that several neoclassical assumptions are empirically unsupported (that is, they are unsupported by observable and repeatable phenomena) nor are they desirable for society at large (that is, they do not necessarily produce either efficiency or equity for the majority). He argues that economists' overall conclusions are very sensitive to small changes in these assumptions.

.... he argues that neoclassical economics is a degenerative research program, not generating new knowledge but growing a belt of protective auxiliary hypotheses to shield its core beliefs from critique.

There is madness in their method  Chapter 7 of Steve Keen (2001).Debunking Economics

“Economics as a discipline arose at a time when English society was in the final stages of removing the controls of the feudal system from its mercantile/capitalist economy. In this climate, economic theory had a definite (and beneficial) political role: it provided a counter to the religious ideology that once supported the feudal order, and which still influenced how people thought about society. In the feudal system the pre-ordained hierarchy of king, lord, servant and serf was justified on the basis of the ‘divine right of Kings.’ The King was God’s representative on earth, and the social structure which flowed down from him was a reflection of God’s wishes.

“This structure was nothing if not ordered, but this order imposed severe restrictions on the now dominant classes of merchants and industrialists. At virtually every step, merchants were met with government controls and tariffs. When they railed against these imposts, the reply came back that they were needed to ensure social order.

“Economic theory—then rightly called political economy—provided the merchants with a crucial ideological rejoinder. A system of government was not needed to ensure order: instead, social order would arise naturally in a market system in which each individual followed his own self-interest. Smith’s phrase ‘the invisible hand’ came along rather late in the process, but the notion played a key role in the political and social transformations of the late 18th and early 19th centuries.

“An essential aspect of this market social order was equilibrium.

“From the outset, economists presumed that the market system would achieve equilibrium. Indeed, the achievement of equilibrium was often touted as an advantage of the free market over any system where prices were set by fiat. Equilibrium was therefore an essential notion of the economic defence of capitalism: the equilibrium of the capitalist market would replace the legislative order of the now defunct feudal hierarchy.

“More importantly, whereas the feudal order endowed only the well-born with welfare, the equilibrium of the market would guarantee the best possible welfare for all members of society. The level of individual welfare would reflect the individual’s contribution to society: people would enjoy the lifestyle they deserved, rather than the lifestyle into which they had been born.

“If, instead of equilibrium, economists had promised that capitalism would deliver chaos; if, instead of meritocracy, economists had said that the market could concentrate inequality, then economists could have hindered rather than helped the transition to capitalism (though they more likely would have been ignored).

“By the middle of the 19th century, the transition to capitalism was complete: what was left of feudalism was a mere vestige. But rather than the promised equilibrium, 19th century capitalism was wracked by cycles and enormous disparities of wealth. A major depression occurred roughly every 20 years, workers’ conditions would improve and then rapidly deteriorate, prices rise and then fall, banks expand and then collapse. New ‘robber barons’ replaced the barons of old. It appeared that, while promising a meritocratic equilibrium, capitalism had instead delivered unbalanced chaos. A new political challenge arose: that of socialism.

“Once again, economics rose to the challenge, and once again equilibrium was a central tenet. This time the defence was mounted by what we today call neoclassical economics, since classical economics had been turned into a weapon against capitalism by the last great classical economist, Karl Marx.

“In contrast to the hand-waving of Smith, the neoclassical economists of the late 19th century provided a substantive mathematical analysis of how equilibrium could be achieved by an idealised market economy, and how this equilibrium could be fair to all. However, unlike the earlier classical championing of capitalism, this technical edifice provided very little in the way of libertarian slogans for the battle against the ideology of socialism. Instead of arming capitalism’s defenders with rhetoric to deploy against socialists, it gave birth to the academic discipline of economics.

“Capitalism eventually transcended the challenge of socialism, with little real assistance from economic theory. But while the economics had little impact upon capitalism, the need to defend capitalism had a profound impact upon the nature of economic theory. The defensive imperative, and the role of equilibrium in that defence, cemented equilibrium’s role as a core belief of economic theory.

“At the beginning of the 3rd millennium, there is no competing social system against which capitalism must prove its superiority. Feudalism is long dead, and those socialist societies which remain are either socialist in name only, or bit players on the world stage.

“Today, most economists imperiously dismiss the notion that ideology plays any part in their thinking. The profession has in fact devised the term ‘positive economics’ to signify economic theory without any value judgments, while describing economics with value judgments as ‘normative economics’—and the positive is exalted far above the normative.

“Yet ideology innately lurks within ‘positive economics’ in the form of the core belief in equilibrium.[3] As previous chapters have shown, economic theory has contorted itself to ensure that it reaches the conclusion that a market economy will achieve equilibrium.[4] The defence of this core belief is what has made economics so resistant to change, since virtually every challenge to economic theory has called upon it to abandon the concept of equilibrium. It has refused to do so, and thus each challenge—Sraffa’s critique, the calamity of the Great Depression, Keynes’s challenge, the modern science of complexity—has been repulsed, ignored, or belittled.

“This core belief explains why economists tend to be extreme conservatives on major policy debates, while simultaneously believing that they are non-ideological, and are in fact motivated by knowledge rather than bias.

“If you believe that a free market system will naturally tend towards equilibrium—and also that equilibrium embodies the highest possible welfare for the highest number—then ipso facto, any system other than a complete free market will produce disequilibrium and reduce welfare. You will therefore oppose minimum wage legislation and social security payments—because they will lead to disequilibrium in the labour market. You will oppose price controls—because they will cause disequilibrium in product markets. You will argue for private provision of services—such as education, health, welfare, perhaps even police—because governments, untrammeled by the discipline of supply and demand, will either under or oversupply the market (and charge too much or too little for the service).
“In fact, the only policies you will support are ones that makes the real world conform more closely to your economic model. Thus you may support anti-monopoly laws—because your theory tells you that monopolies are bad. You may support anti-union laws, because your theory asserts that collective bargaining will distort labour market outcomes.

“And you will do all this without being ideological.

“Really?

“Yes, really—in that most economists genuinely believe that their policy positions are informed by scientific knowledge, rather than by personal bias or religious-style dogma. Economists are truly sincere in their belief that their policy recommendations will make the world a better place for everyone in it—so sincere, in fact, that they often act against their own self-interest.

“For example, there is little doubt that an effective academic union could increase the wages paid to academic economists. If economists were truly self-motivated—if they behaved like the entirely self-interested rational economic man of their models—they would do well to support academic unions, since the negative impacts they predict unions to have would fall on other individuals (fee-paying students and unemployed academics). But instead, one often finds that economists are the least unionised of academics, and they frequently argue against actions that, according to their theories, could conceivably benefit the minority of academics at the expense of the greater community. However ideological economists may appear to their critics, in their hearts they are sincerely non-partisan—and, ironically, altruistic.

“But non-partisan in self-belief does not mean non-partisan in reality. With equilibrium both encapsulating and obscuring so many ideological issues in economics, the slavish devotion to the concept forces economists into politically reactionary and intellectually contradictory positions.

“Of course, if economists were right that equilibrium embodies the best possible outcome for the greatest number, then their apparently ideological policy positions would be justified—if the economy always headed back to equilibrium when disturbed from its Nirvana. In the next chapter, we’ll put aside the critiques which establish that the building blocks of equilibrium are invalid, and instead ask whether economic equilibrium, as defined by economic theory, is in fact stable.”?

Pointedstick wrote: Criticizing Neoclassical economics is like arguing against Marxism. It's an obvious target that's easy to attack because of its obvious logical holes and flawed assumptions. I think most serious thinkers have moved beyond both.

“If you believe that a free market system will naturally tend towards equilibrium—and also that equilibrium embodies the highest possible welfare for the highest number—then ipso facto, any system other than a complete free market will produce disequilibrium and reduce welfare. You will therefore oppose minimum wage legislation and social security payments—because they will lead to disequilibrium in the labour market. You will oppose price controls—because they will cause disequilibrium in product markets. You will argue for private provision of services—such as education, health, welfare, perhaps even police—because governments, untrammeled by the discipline of supply and demand, will either under or oversupply the market (and charge too much or too little for the service).

Pointedstick wrote: Believing in the superiority of free markets to central planning does not require a belief in equilibrium, perfect competition, perfect information flows, perfect rational utility maximization, or any of the other nonsense that Neoclassical economics assumes.

I and most other libertarians believe in free markets not because we think they will produce an ideal result with perfect equilibrium and full employment, but because we believe they will produce superior results compared to central planning.

Tearing down Neoclassical economics because it assumes silliness like perfect equilibrium is not a valid critique of the free market in general, which can be supported entirely outside of the Neoclassical paradigm and for different reasons. So I will agree with you and Keen that Neoclassicism is basically bunk, but that agreement in no way implies that free markets do not function or produce inferior results to central planning.

doodle wrote:

Pointedstick wrote: Believing in the superiority of free markets to central planning does not require a belief in equilibrium, perfect competition, perfect information flows, perfect rational utility maximization, or any of the other nonsense that Neoclassical economics assumes.

I and most other libertarians believe in free markets not because we think they will produce an ideal result with perfect equilibrium and full employment, but because we believe they will produce superior results compared to central planning.

Tearing down Neoclassical economics because it assumes silliness like perfect equilibrium is not a valid critique of the free market in general, which can be supported entirely outside of the Neoclassical paradigm and for different reasons. So I will agree with you and Keen that Neoclassicism is basically bunk, but that agreement in no way implies that free markets do not function or produce inferior results to central planning.

Right, but we don't live in a binary world of economic options. We don't have just two choices between "free markets" and "central planning". I think a lot of libertarians (and this is where I get argumentative with them) think that any gov't or social interference into the market is sacrilege. I really think that a nuanced system....in other words some sort of "democratic socialism" is probably the best balance between the two. This isn't a very popular position around these parts...

Pointedstick wrote: Ayn Rand was not a libertarian. She was a hateful anti-communist who endorsed quite a bit of state action, including state-enforced idea monopolies (intellectual property). She wanted to sue the Libertarian Party when it came into being for stealing her ideas.

But I actually agree with you, doodle, that we live in a nuanced world where we have a spectrum of state action and free markets. At a basic level, as moda is font of pointing out, we have the state acting to record and enforce property deeds, and it provides a legal system for adjudicating disputes between individuals or groups. Then at a higher level of state action, it builds infrastructure like roads and dams, and enforces laws of its own that shape the market and individuals' actions. Higher up a bit you get public education, government health care, conscription, building codes, occupational licensure, and so on and so forth, until you eventually get to a fascist/communist dictatorship where the state controls everything, which really nobody wants.

Most libertarians are not anarchists. While they would prefer the scope of state action be reduced, most would stop short of abolishing government-recorded private property deeds and some sort of legal system. So really the debate is not about government vs no government, it's about limited government vs unlimited government. It's about a government-created framework for society to build itself upon (e.g. rule of law, recorded private property, protection from hostile outsiders) vs the government actually building parts of the society itself (e.g. welfare, conscription, state-owned corporations, price and wage controls, transfer payments).

Libertarians believe that the government functions best when it limits its role to providing and perfecting these frameworks rather than actually trying to build parts of the society itself.

doodle wrote:
I still am confounded by debt based monetary systems in general where the majority of people must deeply indebt themselves in order for the economy to operate at its full productive capacity.

MediumTex wrote: I used to read Keen's blog every day back in the 2009-2010 period and enjoyed watching his videos.

At some point, though, I just got bored with him making the same points over and over and moved on to other things.

doodle wrote: I would get bored of having sex and drinking chocolate milkshakes if I did it everyday for a year...and there is no way that steve keens blog could even come close to competing with those. 

doodle wrote:

MediumTex wrote: I used to read Keen's blog every day back in the 2009-2010 period and enjoyed watching his videos.

At some point, though, I just got bored with him making the same points over and over and moved on to other things.

I would get bored of having sex and drinking chocolate milkshakes if I did it everyday for a year...and there is no way that steve keens blog could even come close to competing with those.