Europa Devouring her Children.

"Saturn Devouring his Son".
Francisco de Goya (between 1819 and 1823) [A]

" 'Traitors! Collaborators! We're Greeks. You're beating up your mothers and your sisters.' " (See here)

This is the true face of capitalism: evil, madness, horror, death and poverty.

"The trouble with historical metaphors is that they can obscure the present: what's really at stake here is not Greece's identity but Europe's. All eyes are fixed on Athens, but the way out of the crisis requires a choice about what kind of Europe we want. The one we have now, with its deep structural inequalities and its rigid adherence to a failed economic ideology, protects neither democracy nor human rights. Stiff-necked and punitive, it prefers to eat its children." (Emphasis added)

Image Credit:
[A] "Saturn Devouring his Son". Francisco de Goya (between 1819 and 1823). Wikipedia.

Bits & Pieces: RBA's Infallibility.

Moses with the Tablets of the Law.
Rembrandt (1659) [A]

An opening note for overseas readers: for diverse reasons, a favourite Australian pastime is to predict when the RBA will change official interest rates.

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A few days ago SMH's Jessica Irvine published a piece on why economic forecasters engaging in this "hobby" often get it wrong. Read it here: it's a good read.

The piece was motivated by last week's surprise RBA decision to keep official interest rates unchanged. Bank economists (plus journalists, and commentariat) forecast a reduction, almost unanimously.

Don't get me wrong, Irvine makes a good case: it's these economists' job to make forecasts and they make them using imperfect information. They are vulnerable to confirmation bias, too.

Irvine: "The problem is, these economists are only human".

Fair enough.

She also mentions journalists: "And then comes the media, which, it must be said, doesn't deal well with uncertainty (a human trait)".

Again, fair enough. I have no objection.

Irvine doesn't mention the sundry commentary one finds in the blogosphere, but one could assume similar reasoning applies to the best of it: an all-too-human tendency to over-simplify and follow the leaders.

In contrast, "the Reserve, for its part, feels under no compulsion to fall into line with this game calling. Its board members have the privilege of waiting until all the data is in before acting", said Irvine.

This is much less reasonable.

Irvine implicitly assumes that the RBA's decision was right. This is most obvious in the preceding quote, but you can perceive it in the whole text.

I object to that assumption. The RBA is as much under pressure to make a decision, as the forecasters are to second-guess it in advance. It's the RBA's job to make decisions under pressure.

To make these decisions the RBA uses information, which is publicly available. Therefore, is not clear the RBA has any substantial advantage over forecasters in this regard.

Furthermore, the board members and staff preparing the RBA's board briefs are as susceptible to confirmation bias as any one else. Despite the RBA's mystical aura of infallibility, it's staffed and directed by humans.

In other words, the situation is probably much more symmetrical than Irvine's account suggests.

Asymmetry do enter the situation when one takes into account the consequences of a mistake, which Irvine didn't do: most likely a red-faced forecaster, in the case of a bank economist.

If the RBA makes a mistake the consequences would be more serious. And, at least in this occasion, it is not trivial the decision was right.

Image Credit:
[A] Moses with the Tablets of the Law. Rembrandt (1659). Wikipedia.

Rationality = Methodological Individualism.

I wasn't planning writing on this, but Robert Viennau came up with a very interesting post on decision theory.

In the comments to his article, Viennau mentioned favorably a piece by Mario Rizzo. Upon reading it, I agree with Viennau: although I have a problem with a few secondary points, the piece is indeed quite thoughtful (readers could find it rewarding reading it).

After arguing the limitations of decision theory, Rizzo reached the conclusion:

"What are we to conclude from this? Are we to say that the behavioralists are right after all? The behavior illustrated here is not rational. It certainly is not rational in the sense meant by those who espouse the standard axiomatic version of rationality. But since it is quite plausibly rational in a broader sense of the term why should the failure to conform to the axioms bother us?  It might bother us if our only task were to explain or predict behavior. The model does not do the job". (Emphasis added).

As it happens, I agree with the conclusion.

So, what's the problem?

The key here is the implications one is to derive from the conclusion: how one answers the question posed (i.e. "Why should the failure to conform to the axioms bother us? It might bother us if our only task were to explain or predict behavior").

In other words, if the narrow neoclassical formal (i.e. axiomatic) model of human individual, micro behavior is deemed to be faulty, what is the alternative?

Most of economics is based on the notion of methodological individualism: the aggregate, macro phenomena are to be explained and predicted from purposeful individual, micro behavior (that is, action, in Misean terminology).

If the current model is inadequate, one answer is to replace it with an informal broader model of human individual, micro behavior. This is what Austrians already do (at least Austrians in the Misean variant), who base their model on the action axiom:

Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego's meaningful response to stimuli and to the conditions of its environment, is a person's conscious adjustment to the state of the universe that determines his life. Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement of commentary. (See here)

In my opinion, this is a false way out, because it gives the analyst the role of ultimate arbiter of what is rational behavior: the analyst "rationally" determines what the rational behavior is, on an ad hoc basis.

An altogether different answer, that I favor, is the abandonment of methodological individualism, at least in its most extreme forms.

Update:
12/02/2012. Although Bill Mitchell doesn't mention methodological individualism, at least one of his posts ("Fiscal austerity – the newest fallacy of composition", 06/07/2010) seems complementary to the views just exposed.

Mitchell starts by claiming that mainstream macroeconomics is largely affected by a form of the fallacy of composition: assuming what is rational for individuals is necessarily rational for the collective of individuals.

Mitchell explains that initial assessment:

"The origins of this logical error lie in the way in which mainstream economics developed. It was largely concerned with microeconomics and started its a priori reasoning from the perspective of an atomistic individual. The single consumer or single firm. I won’t go into detail here but this body of theory soon got into trouble via the so-called Aggregation Problem.
"So to make statements about industry or markets or the economy as a whole, the mainstream had to aggregate their atomistic analysis. Of course this proved to be impossible using any reasonable basis and so they fudged the task and assumed things like the 'representative household' to be the demand side of a product market and the 'representative firm' to be the supply side."

A few comments: what Mitchell calls "a priori reasoning from the perspective of an atomistic individual" is the deduction of individual behavior, from rational individual behavioral assumptions (in neoclassical microeconomics) and what Mises called action axiom (in Misean Austrian economics).

From this individual behavior and according to the principle of methodological individualism, the collective, aggregate, behavior is to be deduced. When a collective, macro behavior can be traced back to individual behavior, it is said to have microeconomic foundations.

The difference between Mitchell's views, as expressed in the quote above, and the views expressed by me here is that Mitchell emphasizes several macroeconomic problems inherent in the methodological individualism programme (what he refers to as the Aggregation Problem) and leaves out of consideration (at least in the text mentioned) the intrinsic difficulty in defining rationality. Therefore, with the caveat expressed that I am scrutinizing this particular text, the methodological individualism/microfoundations paradigm is not necessarily ruled out.

I, at the other hand, implicitly place greater emphasis in the latter aspect (i.e. rationality definition), and leave out the macroeconomic aspects (i.e. Aggregation Problem) altogether, because I consider that macroeconomics can hardly be based on detailed microeconomic behavior, when we are unable to express what rationality is.

Marriner S. Eccles

Marriner S. Eccles during a press conference. [A]

"You create the source of wealth by labor and employment, which is the only source of wealth."

Born in Utah, Marriner Stoddard Eccles (1890-1977) was a Mormon and during his youth did missionary work in Scotland. By the age of 22, he was a millionaire and an economist.

By the age of 43, an established banker and industrialist, Eccles was summoned to a hearing before the Committee on Finance, US Senate (February 13 to 28, 1933).

He had also accumulated an impressive CV, which he proceeded to mention:

1. President of First Security Corporation (Utah and Idaho);
2. Vice president and treasurer of the Amalgamated Sugar Co;
3. President of Sego Milk Products Co (Utah, Idaho, and California);
4. President of the Utah Construction Co;
5. President of the Stoddard Lumber Co (Oregon);
6. Director of 2 chain retail concerns: the Anderson Lumber Co.; the Mountain States Implement Co (Utah and Idaho);
7. Member of Utah governor's executive relief committee;
8. Director of the Salt Lake branch of the Reconstruction Finance Corporation.

Eccles had a reason to mention this to the Committee: "I mention these contacts merely to rebut any assumption that my views are founded upon theory alone".

It would seem, in those days, to claim commercial success, if not wealth itself, could provide some credibility, especially if one held views that went against the mainstream of economics. At the time, such unconventional views were summarily dismissed as wishful thinking (not to mention as the delusions of a feverish and obtuse mind, or, worse, as charlatanism).

Evidently, things have changed enormously in our enlightened times...

In any case, Eccles needed any advantages he could muster: the then head of the Finance Committee, Reed Smoot (Republican, Utah), also a Mormon, had confronted serious challenges to his Senate membership, decades earlier, due to his religion. One could speculate that, per se, the presence of Eccles, another Mormon from Utah, would raise eyebrows among the senators attending the proceedings.

On top, in that hearing Eccles revealed highly heterodox and contentious views on economics. From a historical perspective, the most important subject is arguably his Five-Point Program, which anticipated many of the New Deal policies then newly elected President Franklin Delano Roosevelt would eventually apply with Eccles' help.

"Construction of a Dam". William Gropper (1939). [B]

But this is not what I intend to highlight here. The brief quote opening this text comes from those hearings and suggests that Eccles was not only a Keynesian before Keynes, but he might also have seriously considered the "metaphysical" [1] labour theory of value:

"Senator WALSH of Massachusetts. It [i.e. the Federal Budget] would not be balanced immediately; it would be balanced in the future.
"Mr. ECCLES. I am saying that when that is done it would automatically balance as with an individual or corporation, because you create the source of wealth by labor and employment, which is the only source of wealth."

But, if on account of its brevity, the quote above is not necessarily conclusive, the following, more extended quote, is much more suggestive:

"If our problem is then the result of the failure of our money system to properly function, which to-day is generally recognized, we then must turn to the consideration of the necessary corrective measures to be brought about in that field; otherwise, we can only expect to sink deeper in our dilemma and distress, with possible revolution, with social disintegration, with the world in ruins, the network of its financial obligations in shreds, with the vary basis of law and order shattered. Under such a condition nothing but a primitive society is possible. Difficult and slow would then be the process of rebuilding and it could only then be brought about on a basis of a new political, economic, and social system. Why risk such a catastrophe when it can be averted by aggressive measures in the right direction on the part of the Government?"

Is Eccles speaking of a revolution and proposing his Five-Point Plan as a way to ensure it does not come about? I highly recommend readers to read the transcript, so they can judge by themselves.

Photo Credit:
[A] Marriner S. Eccles. Wikipedia.
[B] "Construction of a Dam", by William Gropper (1939). US Department of the Interior. Wikipedia.

Note:
[1] The "metaphysical" remark is a private joke I share with some anti-Marx progressives who achieved the noteworthy feat of "disproving" Marxism, without knowing anything about it. Other readers can safely disregard the comment.