Reading through "Capitalism: The Unknown Ideal"

Michael,

I'll expand upon the Keynes story, but just a bit; I believe that all my facts as presented accounted for how risk-assessment worked its way into modern economic theory.

Bernouli assumes that people employ rational expectations for the assessment of betting situations. In other words, one calculates 'odds'. To this extent, there's a long-term 'strategy' that produces an acceptably close approximation to Pareto Opthomality.

At the same time, the Bacchlier Cycle was assumed to be an adequate model as to how business had its ups and downs. But Keynes was the first to observe that 'the cycle' made no sense. If the cycle dips too low, you go out of business,and don't cycle back up. Not to understand this intuitive truth defines you as 'Austrian'.

Remarkably, Keynes saw the problem as 'philosophical'--how to define 'risk'--and turned to The Three for open discussion.

Hence, Euler, as used now by mainstream everyone, which will not necessarily give Gaussian, log-normality, or a 'cycle'.

Going forward, there's a huge schitz between mainstram academia that put a hypotheses on precisely the concepts that anchor business ideology: a 'natural' cycle, rational expectations...therefore, the adherence to Austrian stuff by said business community.

This persisted until 1997, or so I'm told, at which time the business schools began to use Cauchy and Levi to define performance. In other words, to what extent the pricing data can be said to be 'cyclical' is conjectural. Fourrier series may or may not work.

What  said was that GDP, being a standard of measurement for some 80 years (tweaked from 'GNP'), still serves as a rough outline. For example, refilling a ditch to gain a living is useful if it produces spending power to drive the multiplier forward.

Military adventures are beneficial to the extent that they secure natural resources. Science is said to be beneficial in an indirect sense: are we better off in the future knowing or not knowing how hadrons are put together?

So, indeed, it's well-known that Austrian-school sees such moneys as lost revenue for the business sector. But their model upon which privite-sector moneys are said to be 'more efficient' is false. Al they're left with is a hope and a prayer. Speaking from authority, indeed.

Re Bernstein, I really don't see the point in suggesting that risk assessment without the modern math is not really 'risk assessment'. That most societies belive in a supernatural being that sends messages (omens) is generally understood. Believing, humans are naturally inclined to use the believed as a resource.  

Bernstein simply charactarizes the creators of ancient civ as basically 'superstitious', whose psyco-emotive state precludes ration assessment of risk. Appealing from authority, I'll simply say that he's unread in this regard, and assumes the reader to have the same uninformed ethnocentric bias as he.

Eva

(Edited by Matthews on 1/31, 7:57am)

Eva:

GDP

Defined as political science:

GDP = C + Inv + G  +  (Ex-Im)

Defined as science:

GDP = C1*C +C2* Inv + C3*G  + C4* (Ex-Im)

It is a political science assumption that C1=C2=C3=C4 = constant = +1.0, not a scientific assumption.

To wit:

A secretary at Treasury prints a piece of paper with a 20 and 12 zeros on it.   Someone walks over to Fed window, hands them the piece of paper, says here is future demand on taxpayers, increase my current accounts.    Treasury then goes out into a totalitarian myth called 'the' economy and, via political chutes and ladders, selectively 'spends' 20 trillion dollars willynilly primarily in the service of political payoff.   And if you don't understand how government 'spends' money going after 'value', then you go be a worldwide defense contractor for 15 years and get back to me.

GDP has 'increased' by 20 trillion dollars.  The actual new value in 'the' economies is the artistic value of he secretary's efforts at printing a piece of paper with a 20 and 12 zeros on it.

Would anyone claim that something called 'the' economy had grown by 20 trillion dollars in value?

Because some have claimed exactly that, using that rigged political science definition of GDP-- the one that equates a dollar of C with a dollar of G, using a factor of +1.0 for each.

Meanwhile, there is no evidence that the sign of C1 and C3 are the same. 

You like to mention 'Fourier' in every fourth utterance, in the context of economic analsis. The first time I applied it, as opposed to studied it, which was earlier, was in 1978, at MIT, for a reasonable purpose (recovering signal from noisy dynamic data, by removing 120 Hz superimposed noise.)   Convert time domain to freq domain, filter in freq domain, reconstruct in time domain.     But, that was applied to transient dynamic data of systems that could be safely modeled as periodic.     Throwing Fourier at human economic data is, I suspect, another instance of Cargo Cult science.   On what limited basis do we claim that economic actors and actions are composites of purely periodic functions?  Any finite curve can be modeled that way.. simply apply a linear bias, mate the first point to the last point, and the modifed curve is periodic.  Applying Fourier in that manner brings with it an assumption of not only a highest modeled frequency, but a lowest modeled freqeuncy as well; DC is simply the average of the curve after applying the linear bias.      But based on what principle would it ever be reasonable to apply that to economic actions/actors?  

This seems to be related to what hosed LTCM.  Sure, math can be abused to put on a pony show and wow folks with money. Mention phase in the imaginary domain, and their eyes will mostly glaze over.   Or, leglift political arguments.   It just doesn't look pretty when done so.

regards,

Fred

Eva:

Oh well, if expectations aren't 'rational' what good is it to say that we really have a workable 'system, after all?

Isn't that only a problem for those claiming to be able to calculate away risk/predict the future and make our systems, plural, controllable?  As in, centrally plan-able?

That's not a problem at all for free-marketeers.   Their beliefs are not based on the ability to calculate away risk/ accurately predict the future; their beliefs are based on the concept that risk can be intelligently and rationally and ethically managed, which is not the same as calculating it away.  It is exactly the remaining uncertainty -- including, the uncertainty in the uncertainty-- that distinguishes economic actors:  the abilty to not know, and to act anyway,  go or no go.      Capitalism results as an ethical consequence.   

Not today's state corporatism, but capitalism.   And the idea of capitalism was destroyed much more so by mediocre American shed risk short cut artists(the unsightly special interest gladhanders behind both parties of power) than it ever was by the gang that can't shoot straight, the fringe American Left(about as influential in this country as the fringe American right.)

But the once ethical idea of modern capitalism was an evolved risk model, as follows.  There were three primary ways to actively participate in the economies(plural.)

1] ROI totally at risk.   Unlimited upside, unlimited downside.  Possible to work for years and end up with nothing but debt, complete roadmeat.   Zero return on investment.  Aka, man in the universe, as it is.

2] ROI guaranteed as discounted wages, working for others.  Guaranteed rate of return for every pull of the pump handle, negotiated in advance.   Possible to lose one's job, but the pump pulling stops as soon as the wages stop, and the balance of the tribe will rush in and support youir claim that you have a cause for action when an employer stiffs you for wages, just like any other act of thievery.   But the ROI is discounted, to reflect the value of the guarantee.  (Employees of businesses that lose money in a given year are still paid every week...for as long as that business has employees.  When the wages stop, the pump pulling stops; no loss of value offered.)  At any point, unsatisfied with discounted wages, individuals free to start a small business and try hand at 1].   Or, free to wait for someone else to manage risk and offer them a job.   Waiting in this universe seldom brings much reward, however.    (Lay on a really nice beach with mouth open and wait for rain and food to fall in, unabetted; the most likely outcome is sunburn, dehydration, and starvation...)

3] Self-modulated exposure to ROI at risk, using 0-100% of available discretionary spending, via equities.   Passive participation in the ROI at risk marketplace at any level tolerated by a given individual, to share in the risk-reward marketplace.

From the earliest history, there was always 1].   In modern times, there is no 2] without 1] and 3],      (There is for sure 1] without 2], I just lived it.)    In the model above,  an individual seeking to participate in our economies can find their own acceptable exposure to unavoidable risk in the universe on an ethical basis; it is not one size fits all.  As well, the results of that ethical model were outstanding, and did lift all boats.  What the nation was able to accomplish in JFK's America and before makes the results ever since look downright embarrassing, and sad.   America is a sad joke today.

What has destroyed modern capitalism, more than anything else, has been exactly the squirming to avoid risk, primarily by criminally shedding it onto others without their knowledge or consent.   There is always criminal fraud, but it takes an activist government to systematically destroy the intelligent management of risk in the markets; that short-cutters actively woo the process from both streets, Wall and K, is just an artifact of the boundary condition, in all regards, that on average we are average.  We are neither all saints, nor all sinners.    But in the arena of risk management, the tribe has meandered into a cul de sac, and the resulting disparities flowing to the risk shedders is making it politically impossible to back out.   That is human nature, too, but with more than a little irony, it is exactly our broken government/political system that must fix itself after allowing itself to become so broken.   The jury is out on whether that is even possible.

I was two corporations for my entire adult working life: one domestic, one Caymans(fully disclosed.)    No employees.  No shareholders.  30 years of signing both sides of my paycheck.    The labor I exploited was my own. ("Neither an employee nor employer be",,, realized early during  Reagan's first term.)  I dealt with a suprising number of others worldwide organized just like I was in the quiet cracks and crevices of commerce.   I did so as a conscious choice made thirty years ago, because I was hearing all these whacky 'labor theory of value' arguments back then, too, stinking up the political winds.   So I took a pass on all that, because I could.    Never a regret.  

Perhaps I was supposed to ignore what I'd been instructed over and over; that, by employing others, I would be unscrupulously squeezing profit out of them.  Perhaps I was supposed to conduct my economic actions in a manner which would employ the most, instead of the least(1, myself.)    I don't know.   It is a purely hypothetical question at this point.   But so is this one: do those in the tribe pushing the idea that employing others is a crime share any of the responsibility for today's economies?  For me, a moot question.   For those they claim they were advocating for, well, I don't know.  What are they doing today?  I mean, other than, watching the Super Bowl on their flat screen TVs?

I sincerely hope it works out as well for those clinging to their theories.    This really isn't a discussion about tribal organization or social justice; the surprising results we see around us is, to me, exactly social justice.

Perhaps, as Time claims, it is time to bring up the 'I' word; inequality.    

No doubt, after all these decades of getting here, time to discuss how we got here.

regards,

Fred

Eva:

That is an interesting interpretation of the action 'calculate.'   For instance, I remember the active participants in the economies once found in the locker-rooms at a steel fab plant I worked at.   It is remarkable to think of their calculus on the subject as 'calculated.'

And, the same can be applied to their calculus when freedom was on the line, and many of those same peers threw themselves into a meatgrinder at infinite risk, while at the same time, in the same peril, Ivy League quants were busy in Georgetown bistros calculating risk.

Our peers have varied and unique reactions to risk depending on context ; much of it visceral, some of it rationally calculated, and not all of it ethical;   shedding risk onto others is also a calculated means of managing risk.

The calculus that drives our peers motivations, plural,  for freedom is not all the same; that is precisely part of what freedom means: the freedom to choose our calculus, as in, not to have that calculus chosen for us by effete Ivy League twits on central planning committees.

regards,

Fred

.

(Edited by Fred Bartlett on 2/04, 6:27am)

Eva:

Basically, you are having a discussion with yourself.

Me, asserting that risk can not be calculated away is not the same as me saying risk cannot be calculated.   It is calculated all the time, just not by all(and certainly, not by all using mathematics-- you really never have been in a factory locker room, have you?)...and that calculation itself includes finite uncertainty.  In fact, the estimation of the uncertainty includes uncertainty.   I'm not sure how many times I have to repeat the same thing.   I would say, I am uncertain about that.

Here is the latest tribal lurch with regard to monkeying with the socialization of risk:  The $1T Farm Bill.

2. Farmers will see less risk; federal government takes on more: The bill dramatically changes 82 years of agricultural subsidies, ending guaranteed payments that farmers receive regardless of their harvest quality or crop prices. But, because those "direct payments" have been in place for generations, many farm values became based on the expectation of government dollars. Ending them could have wide-ranging effects.

To try and mitigate the hit, the farm bill beefs up a different kind of subsidy -- a subsidy for crop insurance. This is complex, but in short, the government will make crop insurance cheaper and it will pay out some benefits at lower levels than previously. That will make farming less risky for some. But it transfers that risk to the federal government, which could be even more on tap if crop prices plummet or if a disaster hits. Good for farmers, risky for the deficit.

The assertion is that all this shed risk is 'good for farmers.'    I suppose in some ways it is.   The question is, is the result good farmers and good farming and a thriving farming industry or is this the latest watering down of the role of intelligent risk management?   As in, after fatfingering education -- and seeing spiraling out of control education costs and an endemic 'crisis in education', and after fatfingering housing, resulting in a financial crisis, and after fatfingering healthcare for decades, resulting in a crisis in healthcare, will anyone actually be surprised that $1T of fatfingering of agriculture isn't going to soon result in a food crisis?   3 for 3 isn't enough, we really need to go 4 for 4?

The key sentence above, to me, is That will make farming less risky for some.

Well, thank God we have experienced Chutes and Ladders, winners and losers pickers at the helm, politically picking those for some.

regards,
Fred

Eva:

Justify risk?   I have no concept of what universe you are talking about.

Risk in this universe does not need to be 'justified;'  it exists and is finite, in spite of the best efforts of world class quants.  See LTCM, I'll wait.  1998.

The ethical management of unavoidable risk is what justifies capitalist ventures.   It's not just that the form of the risk taking is ethical;  peers living in freedom have the broadeest choices to self modulated exposure to risk under capitalism, but as totally irrelevant icing on the cake, the outcomes are outstanding for those peers under that ethical model.    But go find a utilitarian to care about that argument,  for me, the ethical argument is sufficient.   The reasons, plural, that the outcomes are outstanding is exactly because of the immediacy of the risk model; it brings focus that is not evident in the alternative shed risk models, including state corporatism as well as national socialism, not to be confused with socialism.    (Under free market socialism, those who start a co-op or non-profit are totally free to do so, and bear the fruits of their own no-risk/no-loss/no-profit models of the universe.  It doesn't create systemic failure, as would national socialism.)

As a totally free corollary the same focus on intelligent risk illuminates precisely why the outcomes in the competing models are so abysmal.   Curt Schilling giving it the old college try with over a hundred million of R.I. taxpayers money resulted in Studio 38.   Solyndra and so on.    GM only lost 11 billion taxdollars, and so on.   Risk was shed unwillingly onto others, far over the horizon.   Bad not only for those over the horizon but bad also for those not disciplined by local exposure to their own risk/reward.   That focus is exactly what is missing from the alternative models of shed risk.   There is no subsitute for it.

Yes, humans avoid risk, but not only not equally so, but not ethically so, either.    Shedding risk unwillingly onto others is one means of avoiding risk; a weasely means.   Given current trends, a dominant, popular means.

regards,

Fred

Eva:

The movie '21' is about a bunch of MIT quants who used math to tip the scales of risk in Las Vegas.

For some reason, folks believe that another group of MIT quants pulling off LTCM was fundamentally something different.     I have no idea where that belief comes from, I think it's a hoot.

Well, they were somewhat different; what was described in '21' was a much more honest bit of effort in pulling off a deception.    LTCM was just bamboozling folks with shoddy modeling.   The purpose of the models was to blind the marks.

regards,

Fred

(Edited by Fred Bartlett on 2/05, 2:21pm)

Eva:

Do they do math in factory locker rooms?

You told me that everyone used math to assess risk.   I didn't see much mathematical assessment of risk in those locker rooms.

If I tried to get into a girls soccer locker room, I'd be arrested as a perv.

(Don't ask how I know that...)

Good luck with your finals and papers-- knock them out of the park.  I'm sure you will.

regards,

Fred

Eva:

The poster-boy stuff of Nash (Beautiful Mind) suggests that only by collusion and negotiation --not by free marketeering--will  an aproximation of Pareto Opthomality be achieved.

I can give you a concrete example of a real world example -- one you and I and even Nash  should have been intimately familiar with, where Pareto Optimality is achieved without collusions and negotiation, no matter what is suggested by Nash.   And I will, because it illustrates a kind of ethical economic action that is critical.    Not only is this economic action capable of being 100% Pareto efficient, but it is possible of exceeding 100% efficiency,  which precisely illustrates the ethics.

It is an economic action, undertaken by economic actors, so important to our economies that even free marketers have embraced state action to achieve it. (Not all.)  But by the same measure, not all collectivist/central planners have agreed to leave it alone and perform its function without turning it into a place of political indoctrination.   It concerns the ethical acquisition of the primary tools of capitalism; the secondary tools are all dependent on the primary tools.

There are a room full of 30 students listening to a single teacher.   No matter how much education one of those students takes, he/she does so without diminishing the ability of any of the other 29 students to take theirs.    In fact, the more education that is taken by the remaining 29, the better for all of them in life, which is what makes this economic process have the potential of a Pareto efficiency greater than 100%.

That it does not achieve that efficiency is not the ethical responsibility of either the 1 student who effectively takes his education, and thus, is armed with the primary tool of capitalism, nor is it the ethical responsibility of the teacher nor the state that went to great expense to well offer the opportunity.    No amount of state action in the endless Thirteenth Grade of Life will ever make up for that once deficit.   Education is primarily taken, not given; it is at most well offered by great teachers, and in America, it often is..

regards,

Fred

PS: An anecdote relating to A Beautiful Mind and collusion:  when it came time to cast extras on the Princeton campus, there was a meeting with prospective student/extras in which the movie folks tasked with choosing extras announced they were targeting 'realism' in selecting extras.  They then proceeded to choose only the really good looking young men and women in the room.    There is realism, and then, there is get realism.   The extras in the movie make it look like the campus of FMAU(Ford Modeling Agency U.)

Sort of put the Beautiful in A Beautiful Mind.
 

(Edited by Fred Bartlett on 2/07, 5:39am)

Merlin:

The eyes are the first thing to go, not the Ohs.

regards,

Fred