Economists effectively assume that capitalism is unnecessary | Hacker News Reader

Economists effectively assume that capitalism is unnecessary

forbes.com

45 pointscarsongross42 comments

Steve Keen is a very interesting hetrodox economist that I highly recommend to HN.

He is very difficult to categorize: he is a liberal Australian academic who is an admirer of both Keynes and Hayek, and has built upon and synthesized both of their work. He does a lot of computer simulations of economies using real-world behaviors (e.g. mark-up pricing) and has generated results and opinions that are guaranteed to annoy pretty much everyone.

He blogs at Forbes (which is funny, given his politics):

http://www.forbes.com/sites/stevekeen/

And has a great book out that takes on classical economics:

http://www.amazon.com/Debunking-Economics-Revised-Expanded-D...

I had never heard of him but the title of this article is beyond a literary device- it is bait-and-switch. It is dishonest. You expect this from from shifty clickbait websites hawking beauty tips and lists of top 10 ___ "they" dont want you to know about. But you cannot take anyone serious who writes an article like this.

The title is a joke. Yes, it's provocative, but give the guy a break: he's a small time economist at a second-tier university in an island nation who is saying some of the most interesting things about economics in the world today.

You would be doing yourself a disservice not reading his stuff based on a blog post title.

Well, your description of him hits a little too close to home so I guess I have to give him a second chance.

Also I wrote "hawking". haha.

Yes, clearly a baity title. We changed the HN title to better reflect what the article argues.

The argument itself is interesting, so let's all focus on that now.

If you're going to mention Keen, you should note that his true hero and influence (reflected in the name of his analytic software) is Hyman Minsky, a rather underappreciate 20th century economist (not to be confused with the AI researcher Marvin Minsky, whom I'd initially referenced, since edited):

https://en.m.wikipedia.org/wiki/Hyman_Minsky

Yes, Keen does abstract from both Keynes and Hayek (who's among the less-strident Austrian School types), but neither are his primary focus.

Thank you for mentioning that, I should have pointed it out in my initial comment.

To be fair, Keen neglected to mention it in the entry as well. Interesting, as he frequently does.

And he did conspicuously mention Hayek.

Multiple commenters say "The title is a joke" -- but Keen is just reporting the direct implication of the Arrow Debreu theorems which economists regard as foundational for economic theory (not practice or empirical analysis).

So maybe a literal title would be "Economists prove that Economic Theory says Free Markets are Unnecessary". The joke is on mainstream economic theory.

Yeah. If you read the article, it is not asserting "Capitalism is Bad", it is saying that the rationality assumption implies that we don't need the market. If everyone was perfectly rational, we would all coordinate without the market.

I read it more as you need all knowing agents to make capitalism work which is the same requirement for a command economy.

No they don't. And there are many school of thought in economics.

For Austrians, the knowledge problem lies at the core. A lot of individuals, each with limited knowledge and limited processing power try to do their best. An emergent feature is capitalism. This is Adam Smith "invisible hand", because it is an emergent feature of a complex system. You can't observe it directly, but it works.

The article correctly quotes Hayek, but shows a poor understanding on why Hayek said so in the socialist calculation debate, or its later work, or other schools of thought.

You don't need people with 100% clarity, only that they do their best, and act upon what they believe is true. That is called purposeful action, in Mises' human action. We all make mistakes, but we also revise our opinions when proved wrong, and when replaced by the next generation!!

And entrepreneurs make big bucks when mistakes persist for too long, and an opportunity remains unexploited. You can basically see profit as a reward for helping everyone.

Completely Irrelevant: How do you have 2,000+ karma when your account was created nine days ago and have two comments and zero submissions?

Because I had an anonymous account so I did not contribute under my name. I asked if that could be corrected and it was.

Many women in IT chose to contribute anonymously. Recent articles on HN about the place of women and the lack of role models decided me to act.

If you have read the first comment I posted under my name, you already know :-)

As you were a bit puzzled by that, I added that piece of information to my account to avoid similar questions in the future.

EDIT only to realize my comment had now been downvoted. Still, I intend to participate under my name. Sorry for the irrelevance of this, I only wanted to answer your honest question.

(I just accidentally downvoted this comment. I doubt from the timing that I am the person you are referring to who downvoted your comment, as there was likely no way you could typed an edit after having seen that result quite that quickly, and you may have been talking about another comment, but FWIW: my accidental downvote happened when I went to click on your username on my iPhone to see your earlier first comment, and missed the target :/.)

The downvotes had just started- as you can see, due to further dowvotes it has now reached 0.

It is my fault, I could have prevented the situation by adding the warning to my account. I did not realize it would freak out other commenters that much, or that I would need such a full disclosure.

This escalated quickly! Personally, I only care about things people do, and sharing relevant knowledge. I read what people post, not their profile. Since I had an interest in that topic, I thought I could explain a bit more about such a weird headline that catches everyone eye.

This is an interesting argument but I don't know any proof that it is correct. It seems very vulnerable to "adding up" or aggregation problems, where local optimization clearly can work, but when you have lots of independent local optimization, the aggregate effect is bad.

Have the Austrians proved that large number of actors each doing the best they will reliably aggregate up to global optimality? (That would actually be darned impressive given the well known problems of getting stuck on local optima.)

If not then there's no clear argument against government action to prevent or deal with bad local optima. And without any strong account of how and when markets fail, the scope of government action needed is potentially broad.

By the way, Shrekli is a pretty good example of "profit as a reward for helping everyone."

It is indeed very interesting, however it has not been studied enough. Nothing has been proved. Too much effort goes in mainstream economics, while complex systems and agent based models are where the good stuff is, to answer question such as yours.

Aggregation problems are at the very core of Hayek reflection. I would not say it's bad. Look at his excellent 1945 paper: http://www.econlib.org/library/Essays/hykKnw1.html

There seems to be a lot going in favor. The global optimality depends on what one think is best.

Like, maybe Betamax was really better than VHS, but we humans settle on VHS. They went away with DVD. Then, rinse and repeat with Blueray.

Maybe Betamax and HD-DVD were much better, and maybe in an alternate reality they won. But saying they should have won and imposing that by force would be unfair to all those who chose otherwise in this reality.

And if we argue on a coordination problem, I would disagree- all it takes is something much better, like DVDs were to the VHS, or as streaming is to Blueray.

So being "stuck" on a local optima depends on a) the existence of an alternative only slightly better and b) lack of progress, ie never ever having a clearly better alternative to overcome the smallness of the difference or c) disregarding the opinions or the costs to whoever prefers the alternative.

We may not have proofs, but there is a strong argument. But maybe I am biased, as I would consider myself an Austrian economist.

Personally, I think the best way is leaving everyone free, not forcing anyone to do what they don't want to do, as I don't like the concept of force or violence. I don't care about government action as such - if it was optional, as in a "recommendation". As in saying cigarettes are bad. Not in banning or taxing them.

> If not then there's no clear argument against government action to prevent or deal with bad local optima.

There may not be an economic argument, but there's a political one.

In theory, government can move you from a local maximum to a global one. In practice, though, government moves you to a maximum likelihood of [them] getting re-elected, not to a maximum of any economic utility function.

More bluntly: You worry that the free market is going to produce a sub-optimal solution? Okay; that's a valid concern. But you think Congress is going to make things better? Have you looked at Congress lately?

(And, yes, of course I know that the Ayn Rand unfettered free market is not the answer. We really do need regulation. I get that. But be wary of the assumption that government can do better than the market at optimizing aggregate results. Government is a very blunt hammer, not a fine adjustment.)

The problem is, the Austrians don't acknowledge the true problems the knowledge problem incurs for capitalism, or that any other workaround can do anything about it. They think the only signalling channel available to human beings is prices.

This model of capitalism only produces the best outcome if the people making decisions can observe the costs of the outcomes of their decisions.

Let's say a super powerful alien has planted a bomb on the earth that will destroy the whole planet. It then tells the whole of humanity that certain actions they take will count down the bomb, but the bomb only updates it's counter once every hundred years. The bomb has a quite large counter, so it not really known when doomsday is.

The world's scientists, even politicians, authenticate and acknowledge the alien's message. However, since the true date of doomsday can't be determined, and the connection between actions and the bomb don't update the clock for 100 years, it is hard to convince anyone to change their economic activity.

That is, it is hard to PRICE-IN the new information about the bomb even though the knowledge is available. Thus, even when concrete knowledge is available, people will make time-preference decisions to defer the pricing until later generations when it reaches a crisis rather than amortizing it over time. This is perfectly rational, but it also leads to globally non-optimal solutions.

I consider myself a libertarian and fully believe that capitalism is the best system for free people to optimally allocate resources given a set of constraints.

When I don't believe is that the only way these constraints should be imposed is by purely "natural" means. Like if a fire or asteroid strike destroyed a critical natural resource, the price would rise and Austrians would say the new price is a fine and natural response to the new constraint. But if the government were to impose a tax on the resource to raise it's price similarly in order to limit it's use, somehow that's not ok.

Capitalism has unfactored costs because property rights can't be applied everywhere, or the coordination cost of some property rights are too high. Ergo, these cause distortions in the market. Thus, I favor a mixed economy. A mostly capitalistic society that acts through collaboration to reign in egregious externalities. (BTW, those just don't include environmental externalities, but also externalities that come from human costs, for example, the costs of inequality, poverty, illiteracy, etc)

That so many people find even minimal social welfare or regulation disagreeable I find rather confusing. I mean, if you agree that you should pay for the use of property, and that usage fees should be paid for usage of common infrastructure of property, then why throw a hissy fit over say, gas or carbon taxes? Isn't your car spewing exhaust an initialization of force against me since I have to breath it? Shouldn't you have to pay a usage free to dump into the atmosphere which you don't own? How can it be justified that there should be no regulation of this when tort is impossible against the individual actors?

The necessary sub header from the article: Actually they’ve done no such thing. But they do effectively assume that it’s unnecessary all the time.

This article is just a short rant about how simple, traditional, econ 101 models from the 19th century assume purely rational actors whereas the author has decided that not everyone is a "Nostradamus" with infinite knowledge and wisdom.

Nobody believes the rational agent assumption to hold at the individual level, but it is sometimes a useful approximation that can build the foundation of a macroeconomic model that sometimes makes sense. It's also a necessary stepping stone on the way to more complex models. An unnecessary article with a clickbait title.

That said, his book Debunking Economics is very good and I'm glad that he's advancing the state of modern economics by relaxing traditional assumptions and building better models based on more realistic heuristics. But I don't think this should be getting voted up HN.

Incorrect assumptions are still useful for determining what happens most of the time. That's the reason we have assumptions: we know they're technically wrong, but the assumption is true often enough that we state it up front. It also is basically a sign that says "This model will not tell you anything about what happens when market actors are acting irrationally."

Assumptions are the "buyer beware" notice on a mathematical model. They are informative because they limit the scope to which the model applies, not because the assumptions themselves are correct.

So you are saying the representative agent assumption limits current models to 100% centrally plannable economies? If that is not the implication, please tell us what limits this assumption implies. Careful buyers want to know.

No, but there is an assumption that the representative agent is actually representative of the "average" of the agents participating in the market. So when we apply a model with this assumption to real world data, we are making an assumption that the "representative agent" described in the model is truly representative of the market participants. This causes a range of potential error in the outcomes predicted by the model (based on how representative the "representative agent" might actually be) on top of any error introduced by the model itself. In many circumstances, this amount of error is acceptable, and thus the model is useful even if the assumptions are incorrect.

If you want to reduce the error further, come up with a series of categories (or multiple representative agents) to describe the behavior of the buyers participating in your market. There's always going to be some margin of error on predictions though, because the future isn't predetermined and events can happen randomly.

I don't think this addresses the issue. First, I think multiple representative agents have to be carefully defined to generate an equilibrium solution -- which implies some strong limitation on the space of possible agents.

Second, and more important, you have not described the "Buyer beware" message you claim is implicit here. What limitation does the requirement for representative agents impose on the behavior or range of applicability of these models?

Unless you can get specific about that we have to fall back on our dark suspicions.

You greatly underestimate the depth of the problem. Mainstream economic theory provably leads to economies that are unstable -- they don't converge to equilibrium, and in fact can end up arbitrarily far from equilibrium. This is not due to old or simple models, it is baked into current foundations.

Keen makes fun of the assumptions economists use to avoid that instability -- more the representative agent assumption than unbounded rationality. The representative agent assumption is that all economic actors in the model behave exactly like each other, and like the theory predicts would be rational. Without that, the models would not converge. With that assumption, as Keen points out, we can simply delegate all economic decisions to a central planner. If this is a joke, it is one the economists are playing on us all the time.

"Mainstream economics" moved away from convergence in the 1950s to the Solow-Swan exogenous growth models and more recently the controversial endogenous growth models such as the AK and the R&D models. They allow for differences in savings rates and human capital respectively that determine whether or not different economies will reach a steady state or converge with one another. But this is all academic fluff: I doubt anyone at the Fed is plugging data into any of these simple models that professors use to illustrate high level empirical trends ex post facto.

Ultimately, your comment is much more concise and insightful than the post itself. You get to the heart of the matter: central planning vs. free markets. No organization can know enough about every variable that affects an economy to do a perfect job of governing it. On the other hand, without central planning there is little incentive to build infrastructure, protect borders, provide affordable education and healthcare, and create a place where people (excepting Ayn Rand) generally want to live.

Could we have a better system? Probably. Almost everything in the world can be "improved" in one way or another depending on your viewpoint and agenda. But I think its a bit dramatic to hold the viewpoint that "the economists" (whoever they are) are playing a joke on us all the time. They're fallible humans playing their part in a fallible system just like you and me.

It would have been great to see a careful consideration of the other side's viewpoint and a proposal for a better system rather than a short, click baity rant.

Thanks for the positive words about my comment.

I have a lot of respect for economists who are deeply engaged with empirical research.

My own problem is primarily with hard core "free market" theorists who lack humility and have an outsized role in promoting economic mythology. Keen paints with too broad a brush, but the people he describes do exist and do have way too much influence.

Realistic ways of addressing most of the items on your list (infrastructure, education, healthcare, quality of life) are quite explicitly condemned by these theorists.

This economic mythology depends heavily on ideas about optimality that don't survive the problems with Arrow Debreu, the limitations of representative agents, etc.

The economic profession should be explicit about this. Every respectable economist should agree that (say) "We know free markets can't be generally relied on to produce good results. Government intervention is often required to avoid serious problems." That would help undermine the mythology.

The American Economic Association (and others) should make some kind of official statement along these lines, and should reiterate it whenever the assumption that "the market is better" comes up in policy discussions.

But for whatever reason mainstream economists typically want to avoid making explicit comments about the problems of "free markets".

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

Which is a actually sort of related to why markets are useful: Providing an approximation of a solution to the problem of allocating resources where an optimal solution is unfeasible due to complexity.

But has anyone proved that markets actually do approximate the (intractable) correct allocation?

They could be a very poor approximation or even be actually computing something we don't want.

Furthermore if the point is to approximate an optimal allocation we should be designing them with that in mind. Auction design and a few specialized solutions such as medical residency assignment do this. But given your argument we should be applying this kind of design throughout the economy.

You're right, I really meant to point out that there's an interesting relationship between markets and computational complexity (and that it's odd for the efficient markets hypothesis if it assumes that P=NP) rather than advocate for markets being an unqualified good (I'd probably describe myself as some kind of Marxist, fwiw).

> But has anyone proved that markets actually do approximate the (intractable) correct allocation? They could be a very poor approximation or even be actually computing something we don't want.

> They could be a very poor approximation or even be actually computing something we don't want.

Well, it would be wrong to take the market allocation to define the desired outcome, but assuming we have some other understanding of what our desired outcome, we can at least assess whether it performs better or worse at the computation than some other approach, right?

It's interesting also that markets seem to share properties with other sub-optimal approaches to computationally hard problems. Getting stuck in local maximas, for example.

And if you did have a machine that could optimally solve NP-hard problems, why not just switch to a centrally planned economy?

There would still be the problem of collecting accurate data to permit the algorithm to work. This would be expensive and people could lie to their own advantage.

BUT! Most economic models assume acquiring the necessary information for decisions is free AND they assume your agents always faithfully serve your interests. So once again these modeling assumptions have made the world safe for central planning. Praise the economists!

There's a second problem with a centrally planned economy: when you put all the power in one place, corruption can occur; even if the central planner knows the globally optimal decision, they may be incentivized to choose a solution that is suboptimal, but favors some individuals.

Mises anyone?

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

You have to read the article, the title is a joke (in the literal sense.)

I'd like to, but the link just sends me to Forbes' paywall. =/

I believe you just have to wait it out, you should get redirected after a few seconds. No?

Freedom is unnecessary for Capitalism. Look at China.

I believe you'll find that many who would consider freedom to (more or less) equal capitalism have settled on definitions of all relevant terms that cause "freedom = capitalism" (for their definitions of both terms) to be a tautology. "Freedom", "capitalism", "coercion" and others will have been stretched in some places and narrowed in others, nuance and odd corners trimmed off until it all fits together, nice and neat, pleasing to the eye in its simplicity and certainty.

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