Tag: economics

Steve Keen, sell-out

Professor Steve Keen, possibly the greatest economist of our time and Castalia House author-to-be, admits that he is a sold-out member of no less than FOUR grand conspiracies:

How I sold out to the Putin-Soros-Murdoch conspiracy to destroy Western civilization

I was delighted to find myself in the Top Ten (alright; top 15) of the European Values list of 2,326 “Useful Idiots” appearing regularly on RT shows, and thus legitimizing Vladimir Putin’s attempt to destroy Western civilization as we know it.
Why delighted? Because it completes the set of conspiracies to which I can now be accused of belonging. They include:

• The Putin Conspiracy, since I am regularly interviewed on Russia Today (and even worse, I now get paid to write for RT!);

• The Soros Conspiracy, since my research, has been funded by the Institute for New Economic Thinking (INET) which he established;

• The Murdoch Conspiracy, since I appear every week on Sky News Australia with Carson Scott, and I used to get paid by News Ltd to write a weekly column; and

• The Alt-Right Conspiracy, since I’ve signed a book contract with Vox Day’s publishing firm Castalia House.

I can confirm the latter. We have the privilege to be publishing what Steve describes as his “magnum opus”, a work that I have reason to believe may prove not only significant, but utterly revolutionary. As for the others, I fear we shall have to settle for taking his word on them. Speaking of economics, it might interest you to hear that I am writing a piece addressing free trade and nationalism for a first-rate anthology that will appear next year from another publisher.

I will be doing a Voxiversity variant of it for our third video, after #001 Immigration and War and #002 Comics and Culture War.

But back to Steve:

So not only am I a “useful idiot,” I’m a useful idiot for four contradictory conspiracies. Does that make me a double-double agent?

No, it makes me someone who’s quadruple pissed off with people who attempt to understand the world from the perspective of conspiracy theories in the first place. I don’t deny the existence of conspiracies: in fact, far from it, because they’re everywhere. What I do deny is the implicit assumption that the conspirators understand the system they’re attempting to manipulate.

For example, I’ve heard plenty of conspiracy theorists assert that the 2008 financial crisis was caused by the Federal Reserve/George Soros (Hi George!)/Hedge Funds/Academic-Economists-Who-Peddle-The-Efficient-Markets-Hypothesis, and “they” profited from it.

This implies “they” knew what “they” were doing. Pardon me, but I’ve met many of these protagonists—and in the case of academic economists, I’ve worked with them for 30 years. “They” don’t have a clue (except George). Even those that were actively conspiring—like many hedge funds during the subprime bubble were doing so on the basis of utterly deluded theories about how the system they were trying to game actually worked. Where apparent conspiracies did work, like Soros’s punt against the British Pound decades ago, they did so because a CSP (Clever Sinister Person) bet against the conventional wisdom of others who thought they understood the system (and did not), rather than because the CSP set up the whole thing in the first place.

I used to work out with a guy running a very large global corporation. And by large, I mean annual turnover measured in the billions. He disabused me of any notion that the central bankers were smart; after returning from one meeting with the Bank of England’s Court of Directors, he said something about hoping the directors were somebody’s puppets, because if those bozos were actually running anything, the global economy was doomed.

Another case against free trade

Steve Keen, arguably the most important economist alive today, turns his formidable guns on David Ricardo, specialization, and free trade.

David Ricardo extended Smith’s vision of specialization within a given industry to specialization between industries and nations, and made the argument that two countries can benefit from free trade even if one country is absolutely less competitive in both industries than the other. In his hypothetical example, Portugal could produce both cloth and wine with less labor than England. If England specialized at the industry it was comparatively better at (cloth, obviously) and Portugal specialized in wine, then the total output of both industries would rise.

This concept of the advantages of specialization became the core insight of economics, and it continues to be ingrained in and promoted by economists today. Lionel Robbins’s proposition that “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”3 is the dominant definition of economics. It implicitly emphasizes the importance of specialization, so that those “scarce means which have alternative uses” can be efficiently allocated to achieve the maximum level of output.

This belief in the advantages of specialization lies behind the incredulity with which economists have reacted to the rise of populist politicians like Donald Trump in the United States, as well as the United Kingdom’s vote for Brexit. They have, at their most self-righteous, blamed the rise of anti-globalization sentiment on the public’s irrational failure to appreciate the net benefits of trade. Or, more commonly, they have conceded that perhaps the electorate has reacted negatively because the gains from trade have not been shared fairly.

There is, however, another explanation for why anti–free trade sentiment has risen: the gains from specialization at the national level were not there to share in the first place, for sound empirical reasons that were ignored in Ricardo’s example. That ignorance has been ingrained in economics since then, as Robbins’s definition—dominant and superficially persuasive, but fundamentally limited—gave economists a starting point from which they could not properly perceive either the advantages or the costs of globalization.

Deus Sine Machina

Robbins’s definition codifies arguably the most egregious oversight in economic theory. It omits a realistic treatment of resources that do not “have alternative uses,” by which the great wealth of modern society has been created: machines. Today, with 3-D printers, increasingly adaptable robotics, and the beginnings of AI, we can contemplate the eventual creation of a single machine that could be deployed across a range of industries. Yet for the foreseeable future, most machines are tailored for specific tasks in specific industries and are useless in any others, as was also the case in the distant past when the theory of comparative advantage was invented. Smith acknowledged the need for specialized machinery in pin production (and attributed the development of that specialized machinery to the division of labor itself, though it can just as easily be argued that the specialization of machinery is what gave rise to the specialization of labor):

A workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty.

Ricardo also acknowledged the need for machinery. But in considering not one industry but two, Ricardo assumed a crucial and false equivalence between physical machinery and monetary capital that has bedeviled economics ever since: he treated the specialized machinery in different industries as if it were equally as liquid (and so could be as easily repurposed) as the money with which it had been purchased.

The gain from trade arose, Ricardo asserted, because of different production technologies in different countries (whether that was due to different labor skills, different weather, or different machinery). These differences could not apply within one country, but did apply between them, so that “the produce of the labour of 100 Englishmen may be given for the produce of the labour of 80 Portuguese, 60 Russians, or 120 East Indians.” The reason for this difference between domestic and international trade was, he claimed, because capital moved easily within a country, whereas it was effectively immobile between them.

This is a confusion of monetary capital (which Ricardo, as a stockbroker by trade, knew intimately) with the physical machinery in factories (about which he knew very little). Yes, monetary capital moves easily in search of a profit—today, even internationally. But machinery is specific to each industry, and the crucial machines in one industry cannot simply “move” to another without loss of productivity.

The archetypal machines for cloth and wine manufacturing in Ricardo’s time included the spinning jenny and the wine press. It is stating the obvious that one cannot be turned into the other, but stating the obvious is necessary, because the easy conversion of one into the other was assumed by Ricardo, and has been assumed ever since by mainstream economic theory.

In fact, the relative mobility which Ricardo assumed for his ubiquitous concept of “capital” is the opposite of what applies to machinery. Machinery designed for one industry simply cannot move to any other, even in the same country; but machinery in one industry can (and frequently is) shipped between countries.

This is a conceptually devastating critique of comparative advantage, which, in combination with my labor mobility argument, should suffice to convince even the most enthusiastic free trader that free trade is intrinsically and inherently disadvantageous in certain specific circumstances, many of which happen to be applicable to the USA today.

Free trade is not always and inherently inimical. The important point is that, contra Ricardo and his mindless adherents, it is not always and inherently beneficial either.

The economic socialism of Nazi Germany

These observations – they can really only be considered “arguments” by the ignorant – are not new, but date back to the 1940 publication of Human Action, when Ludwig von Mises not only acknowledged the differences between Russian socialism and German socialism, both of which predated Hitler and the Nazi Party, but explicates them with his customary attention to relevant detail.
It’s particularly informative in light of the fact that Mises identified German socialism with Hindenberg, not Hitler. And it’s somewhat remarkable that the defenders of the false and ahistorical notion that the National Socialists were of the Right attempt to dismiss the whole subject as mere “economics”, when economics is merely the more scientific-sounding title for “political economy”, and the entire foundation for all socialisms is, and has always been, economic in nature.

There are two patterns for the realization of socialism.
The first pattern (we may call it the Lenin or the Russian pattern) is purely bureaucratic. All plants, shops, and farms are formally nationalized (verstaatlicht); they are departments of the government operated by civil servants. Every unit of the apparatus of production stands in the same relation to the superior central organization as does a local post office to the office of the postmaster general.
The second pattern (we may call it the Hindenburg or German pattern) nominally and seemingly preserves private ownership of the means of production and keeps the appearance of ordinary markets, prices, wages, and interest rates. There are, however, no longer entrepreneurs, but only shop managers (Betriebsführer in the terminology of the Nazi legislation). These shop managers are seemingly instrumental in the conduct of the enterprises entrusted to them; they buy and sell, hire and discharge workers and remunerate their services, contract debts and pay interest and amortization. But in all their activities they are bound to obey unconditionally the orders issued by the government’s supreme office of production management.
This office (The Reichswirtschaftsministerium in Nazi Germany) tells the shop managers what and how to produce, at what prices and from whom to buy, at what prices and to whom to sell. It assigns every worker to his job and fixes his wages. It decrees to whom and on what terms the capitalists must entrust their funds. Market exchange is merely a sham. All the wages, prices, and interest rates are fixed by the government; they are wages, prices, and interest rates in appearance only; in fact they are merely quantitative terms in the government’s orders determining each citizen’s job, income, consumption, and standard of living. The government directs all production activities. The shop managers are subject to the government, not the consumers’ demand and the market’s price structure. This is socialism under the outward guise of the terminology of capitalism. Some labels of the capitalistic market economy are retained, but they signify something entirely different from what they mean in the market economy.

Note that the Reichswirtschaftsministerium, originally Reichswirtschaftsamt, was the German Government’s Ministry of National Economy, and was established in 1917, two years prior to the creation of the German Worker’s Party, the predecessor of the National Socialist German Worker’s Party. The ministry was abolished in 1945.
What will likely strike the reader as ominous about this is the fact that the digitalization and bureaucratization of American corporatism is increasingly reminiscent of this German pattern of socialism that was adopted by the National Socialists in lieu of the Russian model. It’s also worth noting that just as the German political battle of the 1930s was fought between the Russian and German socialisms, the Chinese civil war of the 1940s was fought between Chinese and German socialisms. National socialism was a different socialism than the international socialism of the Marxists, but it was a competing socialism that was neither conceived nor defined by Adolf Hitler.
But since Mises is seldom read by anyone today, being much too difficult for the average individual, his observations are often forgotten. Which, no doubt, is why George Reisman attempted to spell the concept out more slowly for the benefit of those incapable of deciphering Mises’s words 12 years ago.

My purpose today is to make just two main points: (1) To show why Nazi Germany was a socialist state, not a capitalist one. And (2) to show why socialism, understood as an economic system based on government ownership of the means of production, positively requires a totalitarian dictatorship.
The identification of Nazi Germany as a socialist state was one of the many great contributions of Ludwig von Mises.
When one remembers that the word “Nazi” was an abbreviation for “der Nationalsozialistische Deutsche Arbeiters Partei — in English translation: the National Socialist German Workers’ Party — Mises’s identification might not appear all that noteworthy. For what should one expect the economic system of a country ruled by a party with “socialist” in its name to be but socialism?
Nevertheless, apart from Mises and his readers, practically no one thinks of Nazi Germany as a socialist state. It is far more common to believe that it represented a form of capitalism, which is what the Communists and all other Marxists have claimed….
De facto government ownership of the means of production, as Mises termed it, was logically implied by such fundamental collectivist principles embraced by the Nazis as that the common good comes before the private good and the individual exists as a means to the ends of the State. If the individual is a means to the ends of the State, so too, of course, is his property. Just as he is owned by the State, his property is also owned by the State.
But what specifically established de facto socialism in Nazi Germany was the introduction of price and wage controls in 1936. These were imposed in response to the inflation of the money supply carried out by the regime from the time of its coming to power in early 1933. The Nazi regime inflated the money supply as the means of financing the vast increase in government spending required by its programs of public works, subsidies, and rearmament. The price and wage controls were imposed in response to the rise in prices that began to result from the inflation.
The effect of the combination of inflation and price and wage controls is shortages, that is, a situation in which the quantities of goods people attempt to buy exceed the quantities available for sale.
Shortages, in turn, result in economic chaos. It’s not only that consumers who show up in stores early in the day are in a position to buy up all the stocks of goods and leave customers who arrive later, with nothing — a situation to which governments typically respond by imposing rationing. Shortages result in chaos throughout the economic system. They introduce randomness in the distribution of supplies between geographical areas, in the allocation of a factor of production among its different products, in the allocation of labor and capital among the different branches of the economic system.
In the face of the combination of price controls and shortages, the effect of a decrease in the supply of an item is not, as it would be in a free market, to raise its price and increase its profitability, thereby operating to stop the decrease in supply, or reverse it if it has gone too far. Price control prohibits the rise in price and thus the increase in profitability. At the same time, the shortages caused by price controls prevent increases in supply from reducing price and profitability. When there is a shortage, the effect of an increase in supply is merely a reduction in the severity of the shortage. Only when the shortage is totally eliminated does an increase in supply necessitate a decrease in price and bring about a decrease in profitability.
As a result, the combination of price controls and shortages makes possible random movements of supply without any effect on price and profitability. In this situation, the production of the most trivial and unimportant goods, even pet rocks, can be expanded at the expense of the production of the most urgently needed and important goods, such as life-saving medicines, with no effect on the price or profitability of either good. Price controls would prevent the production of the medicines from becoming more profitable as their supply decreased, while a shortage even of pet rocks prevented their production from becoming less profitable as their supply increased.
As Mises showed, to cope with such unintended effects of its price controls, the government must either abolish the price controls or add further measures, namely, precisely the control over what is produced, in what quantity, by what methods, and to whom it is distributed, which I referred to earlier. The combination of price controls with this further set of controls constitutes the de facto socialization of the economic system. For it means that the government then exercises all of the substantive powers of ownership.
This was the socialism instituted by the Nazis. And Mises calls it socialism on the German or Nazi pattern, in contrast to the more obvious socialism of the Soviets, which he calls socialism on the Russian or Bolshevik pattern.
Of course, socialism does not end the chaos caused by the destruction of the price system. It perpetuates it. And if it is introduced without the prior existence of price controls, its effect is to inaugurate that very chaos. This is because socialism is not actually a positive economic system. It is merely the negation of capitalism and its price system. As such, the essential nature of socialism is one and the same as the economic chaos resulting from the destruction of the price system by price and wage controls. (I want to point out that Bolshevik-style socialism’s imposition of a system of production quotas, with incentives everywhere to exceed the quotas, is a sure formula for universal shortages, just as exist under all around price and wage controls.)
At most, socialism merely changes the direction of the chaos. The government’s control over production may make possible a greater production of some goods of special importance to itself, but it does so only at the expense of wreaking havoc throughout the rest of the economic system. This is because the government has no way of knowing the effects on the rest of the economic system of its securing the production of the goods to which it attaches special importance.
The requirements of enforcing a system of price and wage controls shed major light on the totalitarian nature of socialism — most obviously, of course, on that of the German or Nazi variant of socialism, but also on that of Soviet-style socialism as well.

The only way to raise wages

Is to reduce the supply of labor. American workers can only benefit from the elimination of labor visas, increased limits on immigration, and stepped-up deportation, as evidenced by the response of Maine businesses to a “shortage” of H-2B visas:

Businesses in Bar Harbor, Maine are turning to locals to make up for a shortage of foreign guest workers that normally fill summer jobs in the bustling seaside resort town.

Because the H-2B visa program has already reached its annual quota, Bar Harbor’s hotels, restaurants and shops can’t bring in any more foreign workers for the rest of the busy summer tourist season. Like hundreds of similar coastal resort towns, Bar Harbor has for many years depended on the H-2B visas for temporary workers. The program allows non-agricultural companies to bring in foreign labor if they are unable to find suitable employees domestically.

Now they are coming up with creative ways to attract local labor, reports the Bangor Daily News.

The Bar Harbor Chamber of Commerce will hold a job fair Saturday in an effort to recruit significant numbers of workers from the region. Just about every kind of business in the town is looking for help, says chamber executive director Martha Searchfield.

“All types of businesses — retail, restaurants, the tour boats, all the trips, everything. All types of workers are needed,” she told the Daily News.

The shortage is so acute that companies are sweetening incentives for local workers. Searchfield says some businesses are offering flexible schedules that might appeal to older workers who might be interested in working only a day or two each week. And other companies have gone so far as to offer higher wages to entice locals.

That’s not a problem, that’s an indication of a solution. As long as tens of millions of Americans remain unemployed, there is absolutely zero net benefit to the economy or to American workers from immigration. All immigration accomplishes is to increase income inequality to the advantage of very large US corporations and the financial class that caters to them.

Whenever half-educated midwits talk about the economy and “business profits”, one thing you will note that they NEVER mention is that about one-third of all corporate profits go to the financial industry, which is up from three percent in the 1950s.

In other words, all that this failure to protect American jobs in the name of “free trade” has accomplished is to redistribute income from the working and middle classes to the .01 percent. Of course, there is nothing “laissez faire” about it, it is the direct result of government action. And as we’ve seen, even straight-up communism is better for a nation than this unconscientious corporatism.

AA comments: It’s people taking advantage of high-standards, high-trust society in which to produce and sell their goods, while importing low-standards/low-trust/low-quality laborers to provide their goods.


In other words, it is short-term societal arbitrage, which is the equivalent of strip-mining a society.

Reclaiming our heritage

The God-Emperor comes out swinging hard against free trade and anti-American globalism.

My fellow Americans,

On Monday, I signed a Presidential Proclamation declaring this to be “Made in America Week.”

We believe that our country is stronger, safer, and more prosperous when we make more of our goods and our products right here in the USA.  When we purchase products Made in America, the wealth, revenue and jobs all stay in our country – to be enjoyed by our people.

Since we first won our Independence, our Founders and many of our greatest leaders have promoted that we should afford a special level of protection to the products and goods manufactured within our borders.  They understood that as a nation, we have common bonds with our fellow citizens and common obligations to each other.  Making and buying made in America products brings us closer, and strengthens the ties that link us all together.

For too long, our government’s policies have punished production in America while rewarding and encouraging the movement of production overseas, which is totally ridiculous.  The result has been the loss of numerous industries, the decimation of entire communities, and years of sluggish growth and flat wages.

Throughout American history, our nation’s best leaders have believed in the importance of protecting our domestic industry.  This includes every President on Mount Rushmore.

George Washington encouraged Americans to produce their own goods so that our young nation could become truly independent.

Thomas Jefferson wrote that Americans should choose products made in America whenever possible – and by the way, I’m asking you to do that.

Abraham Lincoln warned that abandoning the policies that protect American industry would “produce want and ruin among our people.”

Theodore Roosevelt stated in his First message to Congress that “Reciprocity must be treated as the handmaiden of protection.”

James Monroe called on our nation to “cherish and sustain our manufacturers.”

James Garfield said of our nation’s manufacturers: “To them the country owes the splendor of the position it holds before the world.”

William McKinley believed that when America protects our workers and industries, we “open up a higher and better destiny for our people.”

And Calvin Coolidge stated that protecting American industry “enables our people to live according to a better standard… and receive a better rate of compensation than any people, anytime, anywhere on earth, ever enjoyed.”

We are now, under the Trump Administration, reclaiming our heritage as a manufacturing nation.  We are fighting to provide a level playing field for American Workers and Industries.  Other countries will cease taking advantage of us, believe me.

We are going to build works of beauty and wonder – with American hands, American grit, and American iron, aluminum, and steel.

No longer will we allow other countries to break the rules, steal our jobs, and drain our wealth.  Instead, we will follow two simple but very crucial rules: We will buy American and we will hire American.

Already, we have created over a million new jobs this year – and doing even better than anticipated.  We are just getting started – believe me, we are just getting started.

For every job that comes back to this country, and every factory that reopens, and every town that is revitalized, we aren’t just restoring American wealth, we are restoring American pride.  We are restoring America’s future – a future where millions will be lifted from welfare to work, where children will grow up in safe and vibrant communities, and where our nation will stand stronger than ever before.

And most importantly, it will be a future in which you – our citizens – always come first.

Thank you, God bless you, and God bless America – we are truly making it great again.

The cost of Black America

If you are a white American, over the course of your lifetime the federal government will, on average and on your behalf, transfer $384,109 of your wealth and income to a single black individual.

According to the data derived from the 2014 federal budget, the average annual net tax/benefit broke down as follows:

  • White: -$2,795
  • Black: +$10,016

Over the course of an average 79-year lifespan, a white individual contributes a net $220,805 to the system, whereas over the course of an average 75-year lifespan, a black individual receives a net $751,200. However, since there are 4.6 times more whites than blacks in the USA, the black share has to be divided among the various contributors to sort out a one-to-one comparison.

So, the net cost to the average White American of the average Black American is $384,109. Married? That’s $768,218. Got 2 kids? That’s $1,536,436. 4 kids? Now we’re talking $2,304,654 lifetime.

Diversity is expensive. Now you understand why you won’t have much of an inheritance to leave to your children. Do you really think it’s worth it? And then, those natural conservatives to the south, the Hispanics, will surely improve the situation, right? After all, immigration helps the economy! Well, not so much.

  • Hispanic: +7,298

In fact, because there are more Hispanics in the USA than Blacks, Hispanics are already a bigger cumulative net drain on the economy, $411,950,000,000 to $389,710,000,000. Needless to say, the ongoing demographic change from a predominantly white society to a less productive, less white one can be expected to have even more serious negative effects on the long-term economic prospects of the United States that it already has.

To quote the original author: “The negative fiscal impact of blacks and hispanics is significant. All of this discussion of a “national debt” and “deficit” is primarily of function of blacks and hispanics. Without them, we would be running budget surpluses today, even when keeping the military the same size.”

Mailvox: Free trade and private debt

A college student asks if there is a link between the two:

Over the years in which the US has abolished trade barriers and enacted a multitude of international free trade agreements we have experienced a massive increase in trade deficits, national debt, as well as personal debt. I can see the obvious connection between free trade trade, trade deficit’s and national debt but is there a connection between free trade and the rising PERSONAL debt? If so what is this connection? Furthermore if we had trade barriers in place would Americans not still have rising personal debt as they instead spend the same amount on domestic products rather than international? 

There is certainly a correlation between increasingly free trade and private debt, but I doubt the relationship is a causal one. For one thing, the decline in private debt which began in 2008 was neither caused nor echoed by a similar decline in free trade.

The economic logic also doesn’t support a causal link. Private debt is mostly linked to big-ticket items such as homes and cars. Free trade in goods is mostly neutral on the former and negative on the latter with regards to debt. While the free movement of peoples would tend to increase debt, more people being able to take out more loans, that’s not going to alter the debt per capita rate much, for obvious reasons.

One of the major components of private debt is education-related debt, and that has nothing to do with free trade. So, I would say there is no meaningful link between free trade and private debt.

Kraonomics

It occurs to me that we’re going to need a new name for this debt-based economics that is gradually coming to the intellectual fore. And we’re going to need an introductory book to it, given that Steve Keen’s severing of the link between micro and macro renders almost completely irrelevant all those Robinson Crusoe stories meant to illuminate the first foundations of the microeconomy.

Everything you know about economics is wrong. Also, everything the professional economists know about economics is wrong.


That may sound arrogant. That may sound crazy. It is certainly a very strong statement. Nevertheless, it is true, because math does not lie.


You see, professional economists make one single very important assumption that underlies their entire profession. This one assumption underlies all of their models, all of their statistics, and all of their fundamental understanding of their studies of human action. They assume that demand is cumulative. What that means is that they assume your preferences, and my preferences, and everyone else’s preferences, can be added together to make one giant set of preferences which can then be utilised in their calculations.


Or, to put it in a way that those of you with an economic background will recognize, they assume that all individual demand curves are a) stackable and b) follow the same downward-sloping trajectory.


As it happens, this is not true. What is more, this has been known to not be true since 1974.


Of course, it would be excessively brutal to follow that up by dropping the Sonnenschein–Mantel–Debreu theorem on them without warning and a considerable amount of explanation.

I have elected to call this debt-based economics “kraonomics”, from the Greek χρέος, or chréos, which means “debt, duty, indebtedness”. Why that particular spelling? For one, English-speakers will instinctively read the pronunciation correctly. For two, never use accents when you can avoid it. For three, as Psykosonik fans are aware, I always prefer using a “k” to a hard “c” or “ch”. And for four, it suggests just a hint of the chaos theory that it almost certainly requires.

On a tangential note, I wonder how many people noticed perhaps the most intellectually exciting note of the recent Brainstorm with Steve Keen. The professor mentioned, almost off-hand, that he was currently reading the work of one Robert Prechter. It strikes me that whatever comes out of the meeting of those two brilliant minds is almost guaranteed to be significant, revolutionary, and mind-blowing.

Just for starters, it may well be that outstanding private debt is a more useful metric for measuring social mood than the stock markets.

Open Brainstorm with Steve Keen

Last night, we held a Brainstorm with Steve Keen and discussed his new book, Can We Avoid Another Financial Crisis? And his answer was clear: that depends upon what you mean by “we”, kemosabe. TL;DR: in a global context, no, we cannot avoid it, but it should be about half as bad as 2008. And we’ll probably get 6-12 months of warning from his model.


As usual, Professor Keen was brilliant, informative, and entertaining. And now that he’s embarked on a paper relating to David Ricardo and free trade, I don’t think he’ll object to me posting the email he sent me a few months ago when I asked him about the implications for free trade of the demand-based break between micro and macro caused by the Sonnenschein-Mantel-Debreu theorem. Or, as I memorably renamed it last night, Sonnensomething-Niederbopp-Whatever.

In this context the key point of the Sonnenschein-Mantel-Debreu theorem is not the failure to derive a demand curve, but the inability to represent the interests of everyone in a single country using a “Community Indifference Curve”, which is an essential part of the Hecksher-Ohlin model of free trade, which has of course supplanted Ricardo’s original model.

Samuelson’s defence of doing so is frankly comical, and also highlights one of the two key weaknesses of the model: it only works if income or wealth is compulsorily redistributed to equalise the “ethical worth” of every dollar earned/possessed, and he thought this was a reasonable assumption. From “Social Indifference Curves”, Paul Samuelson, 1956

  1. It is shown that the various defenses which have been offered for the use of community indifference curves are all open to some serious questioning.
  2. The Scitovsky community indifference contours are shown to be “minimum social requirements” contours of total goods needed to achieve a certain prescribed level of ordinal well-being for all. The dual properties of the Figures Ia and Ib, relating points in the commodity and ordinal-utility spaces, are demonstrated.
  3. By means of mathematical reasoning or by the demonstration of intersections of Scitovsky contours, a fundamental impossibility theorem is proved: Except where income elasticities are all unity and tastes are absolutely uniform for all, it is proved to be absolutely impossible to solve for unique market price ratios in function of market totals; hence, we must lack collective indifference curves capable of generating group demand.
  4. All this is shown to entail the nonoptimality of any shibboleth rule which once and for all and independently of changes in technology and taste data predetermines the initial distribution of income or endowments.
  5. Since most “individual” demand is really “family” demand, the argument can be made that such family demands have been shown to have none of the nice properties of modern consumption theory. However, if within the family there can be assumed to take place an optimal reallocation of income so as to keep each member’s dollar expenditure of equal ethical worth, then there can be derived for the whole family a set of well-behaved indifference contours relating the totals of what it consumes: the family can be said to act as if it maximizes such a group preference function.
  6. The same argument will apply to all of society if optimal reallocations of income can be assumed to keep the ethical worth of each person’s marginal dollar equal. By means of Hicks’s composite commodity theorem and by other considerations, a rigorous proof is given that the newly defined social or community indifference contours have the regularity properties of ordinary individual preference contours (nonintersection, convexity to the origin, etc.).

This is the key problem from the demand side: free trade is only universally of benefit to a given nation if the gains are shared; this requires redistribution mechanisms in addition to the market, which both don’t exist, and contradict the model of free competition if they were to be implemented.

The key problem for the supply side is easily stated: How do you turn a wine press into a spinning jenny (to use Ricardo’s examples). The standard model assumes the costless reallocation of capital between industries in response to a change in relative prices caused by reducing tariffs. But this is impossible. Capital is physical and attuned to specific industries. Free trade therefore makes obsolete some capital in a protected industry, while making that in a benefited industry more expensive, but not more productive.

The wind blows in my empty wallet

Even if you never go to Japan, you have to love the fact that it exists. Where else would you find a kawaii metal song about low wage rates.

OH SWEET FOX GOD! It only gets better.

Isn’t this a renge spoon for ramen?
YOU CAN SCOOP UP THINGS WITH IT!
What else besides ramen can you scoop?
YOU CAN SCOOP UP THIS WORLD FROM DARKNESS!
Because the world is a bowl of chaos, right?