What key determinants are responsible for a graduate’s starting wages?

The following is a report I compiled with two friends to determine which factors had the greatest impact on a college graduate’s starting wages. Though the calculations are sound, the report has not been edited for grammatical errors or clarity. Our data was based on publications from 2010.

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American Inequality

A Case for Economic Equity and Long-Term Growth (Draft)

Abstract

Macroeconomic policy issues, as well as the theoretical assumptions underpinning their conclusions, must be considered within a political Liberalism framework that ensures and upholds the democratic values of freedom and equality inherent to the constitution. The complexity of economic development requires a holistic empirical approach that accounts for the historical, political, sociological, and business factors contributing to the makeup of society when crafting and recommending economic policy.

For this paper we will assume that economic growth is the aim for society. Inequality is a product of increased bargaining power resulting from increasingly powerful institutions in the business, financial, and governmental sectors (Kumhof 2011; Barnhizer 2004; Argyres 1999). Research has repeatedly confirmed growing inequality globally and domestically (Hisnanick 2011). Inequality, manifested as widening income and wealth disparity, contributes to domestic and global account imbalances, consumer debt, and economic stagflation, i.e. inflation and unemployment (Kumhof 2012; Rajan 2012). In addition, inequality is linked to key social variables such as political stability, civil unrest, democratization, education attainment, health and longevity, and crime rates (Thorbecke 2002). Greater economic equality always results in greater long run economic prosperity for the whole. (Wilkinson 2009)

The thesis explored in this paper is that bargaining power inequalities causally contribute to economic and socioeconomic inequality due to path dependency, organizational inertia, and habit formation. Bargaining power inequalities increase proportionally with capital accumulation, concentration, and centralization. This paper will show that the restoration of equal bargaining power will rectify financial and labor market imperfections and spur economic growth. In addition, this paper argues that US economic growth over the past several decades has been vastly overestimated due to increases in financialization.

Executive Summary

In order to determine the best policy for rectifying inequality and spurring economic growth, this essay provides an overview of current economic and socioeconomic conditions within the US and abroad, identifies problems within those conditions, and details the contributing historical economic policies that shaped them. It then examines the systemic causal mechanisms contributing to current US economic conditions, present potential policy solutions that seek to address these underlying causal mechanisms, and lastly interpret and rank their theoretical effectiveness. This paper addresses the following areas:

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The Coming Collapse of the House of Cards: Tech, Education, Health

I just read the article titled Disruptions: With No Revenue, an Illusion of Value that discusses the overvaluation of tech companies. 

This article is so intuitive, yet so refreshing. It’s incredible that people aren’t discussing another eminent collapse.

Let’s talk about money and value.

Money represents a denominated value; it represents purchasing power. What does it mean to be worth something? It must possess utility, and that utility must be great enough, must possess enough value, that you would be willing to trade something else you value equally for it.  But what if the value of what money is representing is actually valueless?  What happens when the value attached to the dollar don’t reflect the value attached to the object? What happens when the dollar is worth significantly more than the object? You simply won’t exchange your money for the object, and suddenly it’s value decreases and disappears.

What if someone told you that a company was worth a billion dollars, but you actually believed it was worth nothing? I think of Instagram, Facebook, Twitter, Groupon. How do these companies generate revenues?  How much value are people willing to give up to use these services?

The problem is speculative valuation. The question of whether these tech companies will actually deliver the advertising dollars is still out. A valuation is only as good as its assumptions. Valuations based on discounted cash flows rest on some limited tentative assumptions, specifically: basing projections that the past will be like the future, variable discretionary capital expenditures, as well as the uncertainty of discount rates and growth rates. What if the market suddenly decides that companies like Instagram are no longer “cool” and stop using the product? What’s going to happen to that billion dollar valuation?

The tech industry is experiencing a speculative bubble, similar to the one witnessed preceding the real estate bust and the resulting financial crisis. What is the real value of information technology? I know it increases efficiency, it provides us with superficial pleasure as we peruse the internet, look at Facebook pictures, and the like, but what happens when we no longer derive value from these things? What happens when suddenly Instagram is no longer cool? The value will disappear along with everyone’s money.

I also believe that the education system, specifically higher education, is experiencing a boom and will eventually bust. What is the real value of going to college? You accrue massive debt that you can’t ever escape, your income is increased marginally, and there’s no guarantee you’ll get a job. What happens when people simply decide that the price tag isn’t worth it, they don’t want the loans, they don’t think college is worth it? The value disappears.

What other industries are suddenly thriving? Health care? Is health care an over valued industry?

As this article mentions, and I believe and have said for a long time, that our economy’s worth is built on distorted valuations. The financial industry is over 21% of our economy. That’s right: twenty-one percent. What value are they actually producing? Financialization leads to decreased real asset investment, so I argue they produce no value. Instead, financialization increases speculation, risky investment, decreases private savings, and increases debt, among other things.

Our economy is a house of cards. Where is the real value?  What things possess real utility? When shit hits the fan and people have no more money, no more surplus income, no more savings: what will they be spending their money on? What good or services will people include to satisfy their necessary consumption for sustenance?  Will people prefer to spend their money on services or goods? I suspect real-asset goods. Is technology a good or service? It is intellectual capital, but does it possess any tangible value? No.  If people are broke, you think they’ll spend money to use Instagram? I bet not. And what if Instagram decided to use advertising? And what if those people are so broke that they don’t buy what they advertiser is offering? Why would a company advertise with Instagram, or Twitter, or Facebook, or similar companies?

Service industries are the result of past increases in productivity that lead to equal distributions of rising income which created a larger middle class; this middle class created a demand for services that were previously only available to the upper class; but as income distribution widens and wealth accumulates at the top while everyone else gets poorer, people will not be able to afford services. They won’t spend money on luxury goods. They won’t go out for dinner as much anymore.

But this will only occur when people can no longer borrow on credit. At present, debt is solely responsible for our sustained domestic demand and aggregate output over the years. Financial liberalization (cheaper borrowing through regulation) has allowed consumption to remain relatively stable as real wages stagnanted and inflation rose.

Only when lenders can no longer extend credit will our country experience massive stagflation (high inflation, high unemployment), eventually leading to a massive economic collapse.  We may be witnessing the beginning of such a stagflationary period.

How can someone prepare for a bubble collapse? Where should they invest their money? Commodities? How can someone bet against the market? Which goods will be in higher demand as incomes continue to drop and inequality worsens?

I’ll be posting a massive paper on inequality within the next few days and I’ll elaborate in depth on how  inefficiencies within various channels lead to economic inequalities that reduce socioeconomic equity and decrease economic growth.

Labor Unions: Thoughts

Capitalism functions because of exploitation. You can’t make profit without a level of exploitation, i.e. labor must be compensated less than the value that the work produced to yield profits. The degree of profits yielded in proportion to the value produced is a good indication of whether exploitation is occurring. If you look at profits, productivity, and real wages, you’ll see that severe inequalities exist.

I use the word “exploitation” because it doesn’t sugar coat the reality of what’s going on: unequal bargaining power leads to income, wealth, and opportunity inequalities. Unions exist to restore bargaining power from the management/ absentee ownership. It’s when unions possess greater bargaining power than their employers that inefficiencies arise.  The decline in unions is a major reason why inequalities have risen over the years.

The US works more than any other country. We have the least vacation days of any other industrialized/ OECD nation. We have the least paid vacation days. I don’t think it’s fair to compare inequalities between developed and undeveloped nation. It’s all relative. So you think we have it pretty good in the US, that $7,25 isn’t too bad? You are forgetting that $7.25 is meaningless without a context, i.e. the cost of living, CPI/ inflation has continued rising despite stagnating wages making it increasingly difficult to save and live comfortably, especially for those in the lowest income brackets. Poverty levels are artificially low due to the credit boom– which, since its bust, has led to increasing poverty levels. The Gini coefficient has rising consistently since the 70’s, which I attribute to the coinage act of 72/ introduction of fiat currency which instituted federal monetary policy.

Also, the vast majority of worker representation has been the direct result of union organization. People should appreciate the value of unions and why they’ve been vital to our progress. You can thank unions for: the 40-hour work week, overtime pay, vacation pay, sick days, workers compensation and a living wage. Union decline is mostly do to corporations becoming increasingly ideologically opposed to them: It’s all about shareholder profits.

As resources become monetized and increasingly scarce through the process of capital accumulation, concentration, and centralization, there will be an inevitable rise in exploitation and inequality. US economic data points to this trend. After looking at history, throughout all civilizations, you’ll see that man’s natural tendency is to exploit as a consequence of his natural will to power/ dominate. I do not think any nation, especially the US, is immune to this tendency. Slavery is very real. We might not have chattel slavery, but with increasing debt levels and the passing of recent laws preventing the option of bankruptcy, I would argue that we are experiencing the rise of a certain “bonded slavery”. Choosing your wage contract is just an illusion of freedom if someone still owns your labor income. Allowing workers to choose which job they’re best at allows for the efficient allocation of labor. (Recent legislation just made it legal to deduct outstanding debt from paychecks before you receive it)

All I’m saying is that, contrary to what a few politicians spout off, unions are actually a good thing for democracy, equality, and economic progress. Maybe they don’t make us as competitive abroad, but we’re importers, not exporters anyway (International current account imbalances is a separate issue). Ensuring that our labor force is receiving equal and fair distributions of income/ wealth maintains consumption, drives domestic demand, and fuels economic progress. Income inequality and disparate levels of capital accumulation increases financialization, decreases real asset investment, and hampers long term economic growth– and could potentially lead to economic stagflation, which many argue we are seeing the beginnings of.

If you are ideologically opposed to unions, I would like to ask that you explore how unions have been instrumental in improving our economic development and our standard of living as a nation and consider reevaluating your position. They are incredibly important for our long term economic growth. This is a nice read from a non-partisan think tank: Why Unions are Good for the American Economy

You must understand the real utility of unions. Yes, work conditions have improved, I agree. That’s not why I believe they’re so important nowadays (after all, if I worked as a slave making nothing, but the conditions of my job were exquisite, I would still argue there were serious problems). I’m discussing why unions are important for ensuring that increases in income distribution mirror increases in productivity. One of the most important roles of unions is ensuring fair wages. This is why I believe they are important: restoring and equalizing bargaining power.

Yes, there have been massive changes within the labor markets from industrial to technology, but that doesn’t explain why wage inequalities have risen, and why it’s not due to decreases in unions (decreases in collective bargaining power) and increases in corporate/ management bargaining power. Federal monetary policy is a major reason for contributing to this bargaining power inequality. By establishing an arbitrary target inflation rate (NAIRU is bull and the Taylor rule is empirically bogus) and avoiding full employment, they create a surplus of labor which in turn decreases employee wage contract bargaining power that would otherwise increase their wage compensation to fair levels (and eliminate wage stagflation).

Why are individuals leaving unions? I would ask myself, why would they leave when they have better pay and benefits? This doesn’t seem rational. As I mentioned before, corporations make it incredibly difficult to join a union. They’ll import labor from somewhere else in the country before they’ll accede to union demands. It’s simply not advantageous to join a union when you could risk losing your job (especially when unemployment is high/ artificially inflated– they could simply hire someone else).

Politics (and the role of lobbying) play a very significant role for this decline.

Another article detailing how politics have reverses the role of collective bargaining, and how that has negatively impacted income distributions and growth.

Here is a study showing that decreases in unionization are responsible for a third to a fifth of all increases in inequality.

This study shows that unions have a direct positive impact on labor’s share of income, with the decline of unions responsible for about 29% of decreased wages.

Why have wage inequalities has risen over the past decades?

There can be serious problems with unions. I’m not arguing dysfunction can arise. Teacher unions have grown so large and powerful that no realistic progress can be made. It’s silly. I watched Waiting for Superman and it was appalling, but it’s a system that serious serious overhaul. But collective bargaining power is an important feature for preserving equity within the US.

A Case for Economic Equity and Long-Term Growth

Framework: Examine macroeconomic policy issues as well as the theoretical assumptions underpinning their conclusions within a political Liberalism framework that ensures and upholds the democratic values of liberty and equality inherent to the constitution. The complexity of economic development requires a holistic empirical approach that accounts for the historical, political, sociological, and business factors contributing to the makeup of society when crafting and recommending economic policy.

Overview: Economic growth is the aim for any society. Inequality is a product of increased bargaining power resulting from increasingly powerful institutions in the business, financial, and governmental sectors. Research has repeatedly confirmed growing inequality globally and domestically. Inequality, manifested as widening income and wealth disparity, contributes to domestic and global account imbalances, consumer debt, and economic stagflation, i.e. inflation and unemployment. In addition, inequality is linked to key social variables such as political stability, civil unrest, democratization, education attainment, health and longevity, and crime rates. Greater economic equality always results in greater long run economic prosperity for the whole.

Thesis: Bargaining power inequalities causally contribute to economic and socioeconomic inequality due to path dependency, organizational inertia, and habit formation. Bargaining power inequalities increase proportionally with capital accumulation, concentration, and centralization. Restoring bargaining power will rectify financial and labor market imperfections and spur economic growth.

The Problem

  1. Increasing debt, unequal capital accumulation, stagnating wages, and increasing inflation are responsible for the steadily rising economic inequalities experienced the past several decades. The habit formation of conspicuous consumption has compounded the impacts of income inequality.
  1. Inequality has deleterious effects on social well being and long term economic growth, and is the source of a host of cultural ills, affecting education, healthcare, political corruption, etc. It also affects entrepreneurship, creativity, and technological innovation in the long run.

The Cause

  1. Historical monetary policy, financialization, and financial liberalization (deregulation) have directly contributed to exacerbating economic inequality by negatively affecting business cycles through the misdirection of short term economic incentives and failing to consider the long-horizon. In addition, credit market imperfections, due to asymmetrical preferences and institutional constraints, causally contribute to inequality, in both physical and human capital accumulation.
  1. Bargaining power increases with capital accumulation, concentration, and centralization both domestically and globally, establishes organizational inertia in business and legal exchanges, and further compounds the effects of inequality. Avoiding full employment decreases labor demand, in turn decreasing wage bargaining power, leading to wage stagflation.

The Solution

  1. Increasing economic equity yields the highest long term economic growth, improves social well-being, facilitates creativity and innovation, and empowers society to resolve its cultural ills.
  1. Economic equity can be achieved by restoring bargaining power, regulating financial investment activities, incentivizing real-asset investment, and implementing a single structured tax policy on the wealthiest.

Monetary Policy and Inequality: Target Inflation, Wages, and Unemployment

I should describe the human race
as a strange species of bipeds
who cannot run fast enough
to collect the money
which they owe themselves
—Don Marquis

So I was in class listening to a discussion regarding the natural rate of unemployment this week and I had some serious issues I needed to think through. I wanted to question the methodology for determining unemployment’s so called “natural rate”, specifically the use of the Non-accelerating Inflation Rate of Unemployment (NAIRU) analysis for the natural rate of unemployment and the actual accuracy of the Phillips curve, which states  pi = pi_e - b(U-U_n) + v , . In this model π and πe are the inflation and expected inflation, respectively; b is a positive constant; U is unemployment, and Un is the natural rate of unemployment, or NAIRU; v is unexpected exogenous shocks to the world supply. (*See the end of the post for a note on the old model)

Without going into all the details, there are two crucial assumptions built into the concept of NAIRU: first, that inflation is self-perpetuating; second, that unemployment is inversely related to inflation , so that as unemployment goes down, inflation goes up, and vice versa.

The basic NAIRU analysis assumes that when inflation increases workers and employers account for expectations of higher inflation and create contracts that matches the expected level of price inflation to maintain constant real wages. That is, they expect high inflation and counter up their wages to maintain a constant level of real wages. Thus, to prevent ever increasing wages through contract bargaining due to higher labor demand, the analysis requires accelerating inflation to maintain a targeted unemployment level (hence the central bank target inflation rate).

The implicit assumption is that workers and employers cannot contract to incorporate accelerating inflation into wage expectations. However, there is no explicit justification for assuming that expectations or contract structures are limited in this way, aside from the fact that these wage arrangements are not commonly observed. Given a scenario with low unemployment, i.e. a higher demand for labor, why wouldn’t they adjust their wage expectations to reflect accelerating inflation? Why must the wage contracts lead to runaway wage increases and thus self-perpetuating inflation?

I want to challenge these fundamental assumptions. Why is inflation necessarily self-perpetuating? Why does low unemployment necessitate runaway inflation? Why couldn’t inflation rise initially and level off after these increases in inflation are incorporated into expectations?

My greater question is how the use of the Phillips curve (and the Taylor rule) negatively impacts monetary policy decisions. What is the consequence of a target rate of inflation? What is the impact of high employment on real rages? Does increasing globalization and world competition limit the ability of American firms to raise prices, and prevent workers from pushing for higher wages? Maybe this makes up more competitive globally, but what of the real-wage’s impact on domestic aggregate demand? How can we sustain growth if we can’t afford to buy domestic goods?

When I asked my professor about these questions, specifically regarding the relationship between inflation and unemployment, his answer was less than satisfactory. He responded that, yes, inflation is artificially created by the federal reserve, but the major increases of inflation are due to money supply shocks, such as those created by oil shocks. I continued imploring: If unemployment and inflation are linked, how is it that real-wages have not increased in more than three decades? How is this possible that inflation has persisted, that goods have continued rising in price, and that GDP has continued to grow and increase, yet no one has seen a rise in earnings? What’s happening here that I don’t understand?

More plainly, how the hell does our economy continue growing if prices are increasing, yet peoples wages, their buying power, has not?? How are we buying increasingly expensive goods if we don’t have any more money to buy them with? What is fueling our GDP growth for Christs sake?

But my professor wavered, he went on and on about money supply shocks and what not. I actually don’t think he could see the connection I was making, and given that class had been over for ten minutes and his next class was filing in to fill the seats, I could only express my appreciation to him for entertaining and clarifying my confusion which, in the latter case, he did not.

Of course, my convicted intuition is that debt is how, that people have been living on less and less, that necessary consumption has increased and surplus or luxury consumption has decreased. If you look at inflation, debt, and savings rate data, this is clear as day. In my mind, increasing debt and over leveraging have been sustaining domestic consumption for the past several decades. This is the only explanation for how an economy can maintain rising inflation and stagnating wages, yet increase its GDP. This is ALSO why I suspect we’re struggling as an economy right now, why our unemployment is so high and our demand is so low: after the recent recession there was a collapse in the debt market, specifically involving the housing market, and people experienced a massive shock to their balance sheets when the value of their net assets, like tied up in their homes, essentially dried up overnight. The hardest hit were those with large debt balances. Many people were forced to cut back consumption to pay off the massive debt they accrued for a house that’s significantly less valued than when they bought it. In order to get their finances in order and repair their impaired balance sheets households had to cut back consumption. This resulted in the drop in consumer demand we’re experiencing today. Though it’s all interrelated, this may be a little beside the point.

My main contention is this: monetary policy is ruining our country. The federal reserve is operating on behalf of corporate interests rather than in terms of the well being of the citizens at large.

What is the consequences of a target inflation rate of 2-3% in order to keep unemployment at 4-5%? The higher the unemployment, the lower demand for labor, and the lower the wage bargaining power. People can’t demand higher wages if there’s a surplus of workers desperately pandering for the same job: High supply means low demand. If we never allow for low unemployment, never experience a high demand for labor, wages will not increase because workers possess no wage bargaining power; that is, there’s no demand for hiring additional workers, especially at the wages they request to live on. The result? Wage stagnation (WSJ). Familiar?

I have much more to say, and perhaps I didn’t even say my intuitions too clearly here.

I’ll end by saying that I think financial liberalization, inflationary targets, and institutional bargaining power are the cause of wage inequality, debt, and unemployment. Basically all our problems.

I know there’s the whole international competition thing, but I don’t like the assumptions built into the NAIRU and the Phillips curve. I believe they are plain wrong.

*I’ll elaborate and expand on why is this significant later, specifically regarding the use of coefficients: The older Phillips curve, as the long run expectation equilibrium, states [ gP = [1/(1 − λ)]·(−f(U − U*) + gUMC) ] In this model: gp is the price inflation rate; f() function is assumed to be monotonically increasing; U is unemployment; U* is the NAIRU;  λ represents the degree to which employees can gain money wage increases to keep up with expected inflation, preventing a fall in expected real wage, and is presumed constant during any time periods; gPex is the expected inflation rate).

 

Thoughts: Novelty, Education, Society, Theory

I could write for days on end with all that’s been on my mind. But I guess I’ll just dump some random thoughts circulating about at the moment. I apologize if my line of thought appears a bit erratic and nonlinear.

Recent research regarding the genetic basis for novelty seeking behaviors in honey bees parallels that of humans. ADHD is characterized as a novelty seeking behavior, one that thrives off of new stimulation, hence the title Attention Deficit Hyperactivity Disorder. These genes are hardwired to the benefit of the group to seek new enterprises, to explore and discover new directions for growth.

Society is a historical phenomenon, a developmental product of inherited traditions to preserve functional behavioral aspects for survival. Pure theory disregards the empirical element to any social science. The biggest culprit in perpetuating opaque theories in the social sciences is Economics.

I will state that pure theory of any kind breeds a certain phenomenon of necessity by reducing evolving organic elements into statical-atomistic parts, consequently quelling any perspective that accommodates for change. Theory requires assigned values in order to quantify and logically justify its conclusions. Indoctrination is the method that achieves this end.

So long as economics is a practical exercise whose applications deal with and affect the organism of society, it should have no business perpetuating pure theory over historical-empirical observations, which is science. Psuedo-science is pure theory. Recall the utility of metaphysical speculations rooted in pure machinations melded from minds rooted in supernatural causation, totally detached from the socio-material world. Perspective, or rather the amalgam of perspective, is paramount to achieving accurate explanations. Think on the process of peer review.

Necessity breeds slavery, i.e. denies man. The phonomenon of Necessity is a testament, not to its excellence, but its power [sic Ellul]. Necessity is convergent. Possibility is divergent, as is potentiality. Equilibrium is convergent. Evolution is divergent. Preservation is convergent. Adaptation is divergent.

A college degree, and contemporary formal education, is tantamount to receiving confirmation through the Christian church. I reject the value of indoctrination in both.

Have we witnessed a surge towards the value of divergent thinking or convergent? Does our education system reflect valuations of standardization or differentiation? Has standardized testing, formality, rigid class structure increased or decreased? What is our fate?

You cannot stand within and move without: escape bias by escaping context. Transcend perspective by losing it.

That I know myself to be a common man makes me uncommon. Recall the maxim of Thales: “Know thyself.” Recall the wisest tenant of Socrates: “As for me, all I know is that I know nothing, for when I don’t know what justice is, I’ll hardly know whether it is a kind of virtue or not, or whether a person who has it is happy or unhappy.”

Many know the words, few know the meaning. For that we can praise propaganda’s subversive process of inculcation perpetuated by the forceful effect of formal education: memorization, recitation, regurgitation, repeat. Where is Comprehension? Where is dialog? Propaganda ceases where dialog begins.

Economics is a social science. Society is a historical phenomenon. History is an empirical development. Why are we perpetuating pure theory over empirical practice? Let us cultivate the value of individual consciousness, each man’s theory of mind, and marry it with the prevailing practices to yield a praxis of reflection and action that prizes the individual’s contribution to the well being of the social context in which he is situated. To deny the value of a single perspective is to sabotage evolution’s law of accounting for every variable to render a more perfect adaptability.

Where you look determines what you see. Look farther, look wider, look deeper.

“Men must talk about themselves until they know themselves.” Journal reflections. Engage in dialogue. Objectify the subjective; discover its fruits and failings. Dialogue, so long as it is an honest portrayal of your current convictions, destroys propaganda, dispels ignorance, and produces a finer eye with which to feed the mind.

Recent science has reaffirmed the powers of LSD as a means of disrupting habits of thought. This bodes well for the prospect of freeing the mind of man, i.e. addiction, but poorly for a politik aiming to strengthen its control through conformity.

Mental diseases, as diagnosed by contemporary medical criteria, and most notably depression, bipolar, and anxiety, have been associated with great genius and leadership in every domain of society. Contrary to popular belief, recent science has discovered that depression is due to a hyper activity in the brain that leads to potential paralyzation of thought, hence the symptoms of rumination, chronic worry, listlessness and the like.

ADHD is also characterized by hyperactive brain activity. Individuals with ADHD are in upwards of 2.7 times more likely to simultaneously have depression (Other notable correlations include bipolar disorder, anxiety, and oppositional defiance disorder. See herehere, here, here, here, and here)

Individuals with mild depression, as opposed to those with major depression, are more skeptical and therefore rational than those without the diagnoses. (Listen to this presentation on Optimism Bias)

I posit that the same reason people retain a optimism bias, despite being confronted with contradictory facts, is the same reason people exist in a state of denial. (See here)

“[Michael Shermer’s] latest book, ‘The Believing Brain’, is a fascinating synthesis of 30 years of research on the subject. Shermer’s conclusion, about our belief-forming machinery, is disturbing. Most beliefs are not formed by carefully evaluating the evidence in favor or against a particular claim. Instead, they are snap decisions made for psychological, emotional and social reasons in the context of an environment created by family, friends, colleagues, culture and society at large. Only after the belief is formed, do people try to rationalize it and subconsciously seek out confirmatory evidence which, upon finding, reinforces the belief in a positive feedback loop.”

I can appreciate the evolutionary utility of bias as a means of maintaining inherited beliefs and preserving the status quo, but one needs to dwell on the implications of how this bias can be exploited, specifically by propaganda.

That leads me to another issue that I’ve been giving plenty of thought: the social construction of reality. What got me started thinking on this topic was my development economics course (which I despise due to the highfalutin exaggerations regarding its ability to actually explain economic development). The only piece of information I found valuable at all was the only piece of information it absolvedly claimed to be the single dictator for a society’s developmental economic success: institutions. This struck me as acutely profound, and odd since it was a mere footnote amongst an oceanic backdrop of theoretical constructions and descriptive statistics.

Since then I began to explore the weight of this idea that institutions are the sole determinate of economic development and success. I began asking myself ‘What are these institutions?’, ‘Why are they so important for economic development?’, ‘What makes one institution better than another?’, ‘How are these institutions created and sustained?’, and many others.

Because of this prick to my curiosity, and because of a massive paper I’m developing for a Macroeconomic policy class, I picked up my old History of Economic Thought book and reread about fifty percent of it, trying to uncover a scintilla of insight into what the history of economic thought may have said about this idea of institutions, and I was more than rewarded for these efforts. In addition to accruing a renewed interest in classical economists such as Smith, Malthus and Ricardo, my eyes were once again opened to the oft-misinterpreted and misaligned message of Marx, and futhermore I discovered just the veins of thought that satisfied by curiosities most exactly: Historical Economics and Institutional Economics. Wow.

Due to my interest in evolutionary economics and political economy I previously read books by Galbraith, Schumpeter, Marshall, Boulding and others but I was totally ignorant to the extent at which these involved socio-economics, specifically institutional economics. Moreover, meta-connections between economics, politics, sociology, psychology, anthropology, history, and evolution were made abundantly clear.

My philosophically minded interest in gaining traction in these seemingly disparately domains to gain a broader, fuller, and more comprehensive understanding of the world in which I am situated lead me to my original fascination with power, which I gratuitously thank Nietzsche, Schopenhauer, and Thucydides for instilling within me. Specifically, power as the mechanism for all change: be it in the reality of the natural world or in the phenomenon of the conscious mind. The impetus of power occupies the seat governing change in every domain, from physics and math, to politics and business, and all the cultural manifestations in between, from science to religion. The force and intensity of power can be traced to both intentional and accidental confluences.

At the time I had this revelation in the power of institutions, I just so happened to be reading Veblen Thorstein’s The Theory of the Leisure Class. I picked up his book due to my growing fascination with domestic and current account imbalances (debt) and the wealth disparities they create. Thorstein Veblen just so happened to be not only an economist and sociologists, but one of the original proponents of institutional economics.

Other factors that influenced this fascination was my study of Greek civilization. Being a professed model for American Democracy, I felt compelled to investigate the various factors involved in the production of Greek culture. Greek religion appeared as a marvelous area of study due to my corrected ignorance of its role in shaping the nomos or conventions governing social affairs, rather than solely providing a metaphysical comfort like modern Christianity seeks to accomplish.

In addition, I coincidentally read Peter Berger’s The Sacred Canopy: Elements of a Sociological Theory of Religion for a humanities class in Crisis and Creativity. This sealed the connection between the role of institutions in shaping mass culture and individual psychology.

From here I began studying sociology more intensely.

I’m nearly finished reading Berger and Luckmann’s seminal work, The Social Construction of Reality, on the formation of social knowledge, which they declare dictates our conception of reality more generally. It’s a fascinating read that I recommend everyone pick up. I don’t have time to elaborate on my revelations, insights and comments at the moment. Another time.

Berger’s reading elevated by insight into the mechanisms that create the social consciousness and the social knowledge that accompanies it. As a result of that reading I also began looking into the various apparatuses within society that perpetuate social knowledge. I purchased the book Propaganda: The Formation of Men’s Attitudes by Ellul and this has further reinforced by understanding of the mechanisms driving social behavior.

An interesting, but not surprising, study reveals that “Large numbers of authors of DSM psychiatry ‘bible’ have ties to the drugs industry.” (See here) This reaffirms my conviction that psychiatry is a purely cultural phenomenon. And culture, as I have mentioned, is a product proportional to the authority and power bestowed by institutions within society. While the American Psychiatric Association (APA) is a large institution with vested authority, it is dwarfed in power by the profit motives of the Pharmaceutical industry.

And what dictates the extent of profit motives for big pharma? My thoughts turn immediately to the legal and political realm governed by lawmakers in congress as well as the upholders of that law in the judicial branch and the enforcers in the executive branch.

What motivates these political individuals? The preservation of their power or, at the very least and being most charitable, the preservation of the power of their ideas about the way things ought to be, specifically their values, which are at base purely subjective constructs that reflect a means of preserving their ego.

I could go on but I have other work to due.

Last thoughts. I’m looking forward to reading Thucydides’ The History of the Peloponnesian War as well as Althusser’s Philosophy, Lenin, and other essays. I need to finish reading Das Capital by Marx, something I began reading with great enthusiasm a month or two ago but got distracted with all these new insights.

Other author’s also on my reading list are Max Weber, Kahneman and Tversky, Mitchell Waldrop, Alfred Schutz, Karl Mannheim, Alfred Weber, Max Scheler, Colin Camerer, and Tacitus.

I’ll dump more thoughts later.

A Prediction

To pay off our $15.5 trillion national debt the government will continue monetary expansion and quantitative easing, i.e. printing money. Inflation will rise. Prices Increase. Income/ real wages will stagnate and unemployment will increase as businesses look for ways to cut costs. Since businesses possess bargaining power, wage labor markets will suffer. The cost of living will be so great that people will be forced to reign in consumption and cut spending. If you have debt (financed by wealthy private domestic lenders), you will have difficulty paying it off because cost of living has left you with less money to live on. If you can’t pay it off and file for bankruptcy, they will not only repossess your assets, you’ll still be in debt, thanks to recent revisions in Chapter 7 and 13 Bankruptcy laws. What’s left of the middle class will continue getting squeezed until the income disparity is so large that poverty will be the norm. Meanwhile the wealthy will get richer as they continue cashing in on your debt.

A word of advice: get out of debt, fast.

Now, I have to ask myself: if income drops and consumption decreases, and if credit and loans are more difficult to obtain, what will sustain the domestic demand that drives economic growth? Simplified: if 90% of the country has no money, how will they buy things, and how will businesses make money?

Data indicates that our GDP has continued increasing and is back to pre-recession rates.

What if I said GDP is a worthless measure of the economy? What about exponential growth in inequality? What if I said real wages were a better determinant of economic prosperity and success?

Domestic and Global Inequality

Just read the paper Unequal = Indebted by Michael Kumof of the IMF.

It’s a short paper highlighting some of inequality’s effects. Take specific look at the commentary on China’s growing current account surplus. Contrary to popular belief, inequality has been rising just as quickly over there. The reason they aren’t in debt is because of their inefficient financial markets, in contrast to the US hyper efficient financial markets. They save more, despite making less and less, because there aren’t developed financial markets that provide banking services. This excess surplus travels to the US and fuels the debt investment driving our consumption and domestic demand. This type of behavior is driving global current account imbalances.

Democracy and Wealth: Athenian America

The Athenian democracy operated politically and economically as an aristocratic slave owning society. In order to be a citizen you must be male and of Athenian descent, but more importantly, you must possess capital, or tangible assets, usually land, but other times a horse was a sufficient indicator. Business and economy functioned among households, where each home was a corporation with women providing children for labor, but more importantly to inherit the capital assets and business. Slaves and the very poor non-Athenians were the laborers and looked at as nothing more than expensive tools, much like a plow or hammer or, for a more contemporary example, a car, which can serve various functions maintaining the business and household. Most interesting is that Athenian citizens universally considered wage labor to be the most debasing form of work, primarily because of its repetitive mechanical nature which requires no thought. In Ancient Greece it was unthinkable for any self-respecting citizen to ever work for an hourly wage. That was reserved exclusively for the slaves and xenos. Honorable means of income included rent, investment activities, and growing the business, whether it was in manufacturing or mining or crafts.

Some thousand years later John Locke purposed a treatise on government and politics with the sole aim of facilitating human self-preservation. For Locke, the most important and only worthwhile goal of the government was to ensure that property was parceled out and protected fairly among citizens. Locke believed that man’s naturally ordained rights were a healthy life, liberty, and property, all of which were essential for the pursuit of self-preservation. The right to property was a significant aspect to securing the other provisions that aided in self-preservation. Property, or more specifically capital assets, allowed man to retain value and worth, provided him a means of subsistence, and a means of attaining happiness by laboring his land in order to increase his value.

Capital assets, such as land or other hard assets of value, were a fundamental role to being an autonomous, equal, and free member of society throughout history. I ask myself,  what is the current state of the US economy and society, and how do we compare and stand up with the values and realizations that past thinkers and societies valued as paramount to liberalism, that of liberty, autonomy, and equality, that facilitate and ensure self-preservation?

I look around at society and I see many problems: inequality, concentration and centralization of wealth, wild financial speculation or “irrational exubrence” in investment markets, debt and credit, poverty, stagflation, corruption among politicians working for corporations and financial institutions, corporate person-hood that robs individuals of representational power and dignity, and many more. What is the cause of these problems? While I believe the questions and their inquiry are philosophical, the explanation, in my mind, is purely economical, or exists within the realm of political economy.  After all, economics is the study of human interactions within the various ecologies that sustain them. This includes every facet of the human condition, as well as environmental and sociological externalities and considerations.

Unlike many economists, my premises are philosophical and existentially rooted in a singular force that guides and shapes all decisions. This force is the will-to-power. I’ll elaborate more on the nature of this often wildly misunderstood concept at a later time.  But first it’s important to explore some assumptions contained in the prevailing macroeconomic theories, specifically the mainstream economics of Keynes, Friedman, and other monetarists.

I’ll need to explore their basic assumptions in value-theory, decision making and preference theory and their relation to various consumption theories (such as conspicuous, necessary, etc), money, supply and demand, labor markets and employment, wages rates, prices, institutions, investment and saving, economic development and growth, business cycles, the nature of competition and competitive markets, capital accumulation and its role in capital concentration and centralization towards inequality formation, entrepreneurism and technological innovation, government fiscal policies and taxation structures, monetary policies and inflation, banks and financial intermediaries, the wealthy and more. I will also explore assumptions contained within neo-classical and contemporary theories such as ceteris paribus (as well as the associated equilibrium states, atomistic and neo-platonistic conjectures and their ideal, representative variables), real balances and the Real-balance effect, the purchasing power of money, Say’s law, the Fisher effect, the nature of inflation, the liquidity-preference theory and liquidity trap, and the nature of aggregate supply and aggregate demand.

I also want to explore the how we conceive and view the role of various entities and nature of contexts, such as imperfect competitive markets (such as monopolies, duopolies, oligarchies and the like), short-run and long-run outcomes, propaganda and advertising, product differentiation, the affluent society, institutional powers and their countervailing powers, and others.

Lastly, I will examine the methodology for justifying and legitimizing these various claims by looking at various paradigms or frameworks such as those characteristic of empiricism and analyticism, and how they factor into an array scientific and non-scientific traditions like those of historicism, psychology, sociology, biological evolution, and even physics and the metaphysical reflections of phenomenology and its dialectical method.

In sum, I would like to combine understanding from all these aspects to produce a sound, organically rooted, evolutionary paradigm for political economy existing, if at all possible, under the pretext of political philosophy’s liberalism, like that found in the US constitution.

I’m so excited I’m trembling. My mind is brewing with enthusiasm. I feel like I can see through the noise, the static, perfect problems. I don’t know what the solution is, but I need to articulate the fundamental problems first. My next post will elaborate on the current issues and problems I observe within our country and explain why they exist. Specifically, I will expound on why our fatally flawed economic paradigms are only contributing to these problems.

 

Discontents with Modern Economic Theory

I’ve rambled and wrote before on this topic, but I need to say it again: Modern economic theory is baseless bullshit.

As a philosophy major I like to pride myself on being able to look beyond the obvious, beyond what’s presented prima facie, identify shortcomings of any claims, and ask the tough, pertinent questions. That being said, I’ve spent a lot of time as an undergraduate studying economics and finance and researching  the shortcomings of the various economic assumptions built into the economic theory, their models and methods, and the policy decisions stemming from them, and I find that the vast majority of it is unfounded speculative assumptions.

Fundamentally, modern economic theory is not scientific. It is pseudoscience. While not the first person to call bullshit on the neo-classical economic theorists, Imre Lakatos did a fine job making explicit  the shortcomings of their neo-classical claims in the seventies along with his colleague Spiro Latsis in their paper Situational Determinism. This shed light on the flimsy assumptions grounding their  theories and encouraged other economists, as well as academics from other fields such as psychology, to revise many of their assumptions in favor of a more holistic, organic, and biological representation of economics, resembling a more accurate ecology of evolving human interaction. These minds produced what we now know as behavioral economics, institutional economics, environmental economics, and the most promising and nascent of all, evolutionary economics.

I’m researching a thesis topic for a macroeconomic policy seminar class so I can write a twenty-five page paper that examines and suggests macroeconomic policy. I decided that I’m going to get radical about this paper. I’m tired of holding my tongue when we sit around semicircle in class dithering on about these abstract relationships concerning abstract entities while we posit our way out of real or hypothetical economic problems with totally ad-hoc assumptions revolving around contemporary fiscal and monetary policy. It’s all bullshit.

Economists are bullshit. They are modern day bishops that instruct the quivering masses how the will of god should allot the gold reserves pinched from the pockets of these people, but in this case we have economists who, divinely ordained via their institutional accolades, instruct the blind herd according to the will of Adam Smith’s invisible hand. Which, like god, doesn’t exist.

So I’m trying to figure out a paper topic while using some tact. I’m not trying to offend and piss off my professor who, may I add, is one of the most highly respected professors at Vanderbilt, and one time economics adviser to Reagan.

So…my paper topic. There are a ton of areas I want to address. Most importantly I want to ensure that my research retains a Political liberalism framework like the one inherent to our democratic constitution. I’m not sure this is possible, however, without introducing statism. Whatever the case, I don’t think economics and political ideology can even be dealt with separately, so I’ll at least try. Some of my ideas involve discussing to formation and nature of:

  • Investment: Speculation and bubbles- Prevention policies
  • New Value-added Market Creation, Expansion, and development
  • Capital accumulation: concentration and centralization
  • Manufacturing v. Service industries as value adding enterprises
  • State Capitalism and Free Market Capitalism
  • Market Failures & Financial Regulation– Intervention Policies: Why consistently in the finance industry?
  • Credit and Debt markets: their dangers and shortcomings
  • Economics Schools and their policies: Mainstream economics v Austrian School v Modern Monetary Theorists (Neo-charlatan’s) v Market monetarists
  • Challenge the scientific validity of neoclassical economic models, methods, assumptions and their policies
  • Challenge the validity of Milton Friedman’s Economic theories, including his Free Market Hypothesis. (Also Keynes. And perhaps examine, compare, and contrast with that evil called “Marxism”)
  • Examine modern consumer theory, value theory, theory of productivity: Suggest alternative paradigms and their policies

 

Anyway. I have other things to do, quizzes to take, reading to finish. More thoughts later.

Part I: Commentary on “Adam Carolla explains the OWS Generation”

My motivation for this post arose out of the hoopla I perceived concerning the wisdom attributed to Adam Corolla’s unreflective rant regarding the OWS movement. For the sake of open discussion, I’m going to disagree with some of his premise. I’ll summarize and reply to the two primary premises underlying his arguments in two separate posts.

You can view his rant here.

Argument 1: The 1% own 50% of the wealth. The 99% expect the 1% to pay for them. Carolla believes that the 1%  deservedly earn 50% of the wealth because they have worked harder than the 99%. Because the 1% pay 50% of the taxes, the 99% are lazy and ungrateful, leech off the wealthy tax dollars, and should work harder to increase their share.

My response to argument 1:
The 1% have not earned their 50% of the wealth, so to speak. Possessing wealth does not mean that it was earned “morally”, in the sense that you can earn wealth by exploiting people, which I maintain to be the case, or you can inherit it, in which case it is not earned at all. Furthermore, if the 99% had more of the wealth, they would be paying a greater percentage in taxes. It is not as though the 1% are charitably paying taxes. They pay the portion of taxes they due because of the current graduated tax structure which requires people with greater income to pay more taxes, which I should mention has decreased significantly in recent years.

Continue reading “Part I: Commentary on “Adam Carolla explains the OWS Generation””

Part II: Commentary on “Adam Carolla explains the OWS Generation”

My motivation for this post arose out of the hoopla I perceived concerning the wisdom attributed to Adam Corolla’s unreflective rant regarding the OWS movement. For the sake of open discussion, I’m going to disagree with some of his premise. I’ll summarize and reply to the two primary premises underlying his arguments in two separate posts.

You can view his rant here.

Argument 2:
The OWS movement typifies a society that is self-entitled and narcissistic which has caused envy and shame when they compare themselves to the 1%. Corolla believes this self-entitlement is a result of a society that glorifies being average and treats every individual as special despite their work-ethic and achievements.

Response to Argument 2:
Disregarding the economic reality of potential inequalities, I believe that the denigrating qualities typifying society which Corolla has attributed to the OWS movement are the natural corollary of what happens when the 1% dominates and possesses so much of the power as incarnated in accumulated capital and influence.  In this light the 1% is directly responsible for the values– attitudes and expectations– directing and justifying their behaviors.

Continue reading “Part II: Commentary on “Adam Carolla explains the OWS Generation””

Evidence Review: Cost Effective Policies for Improving Health and Longevity in America: Education and Maternal-Fetal Nutrition 
Barker-Hypothesis Policies

Introduction
Cardiovascular disease, type II diabetes, and other obesity related health complications are among the top killers of American adults today. As these illnesses have grown increasingly more prevalent over the years they have taken the lead as the greatest contributors to rising health care costs. The aim of this paper is to identify how these diseases develop and address ways for preventing the onset of  chronic illness in order to improve health and longevity as a means of potentially curbing the rising cost of U.S. health care. Citing strong evidence, I posit that the single-most significant factor for improving national health is the proper maternal nutrition during the critical intrauterine, neonatal, and postnatal periods of child development. Additionally, I hypothesize that while maternal education programs may result in positive changes to a mother’s diet during her pregnancy period, it is the cost, availability and ease of access to quality nutritional foods which are tied to a country’s cultural lifestyles, and individuals’ socioeconomic class that primarily influences the success of this education policy.

Continue reading “Evidence Review: Cost Effective Policies for Improving Health and Longevity in America: Education and Maternal-Fetal Nutrition 
Barker-Hypothesis Policies”

City Specialization: The Growth of Nashville’s Health Care Industry

Economic Report on Nashville’s Health Care Industry

I. Introduction
What is this report about?
This report will summarize the growing importance of the health care industry at large as well as within the Davidson County- Nashville area. We will begin by providing an overview of the health care industry by examining broad cultural trends and detailing recent US political and economic events that have contributed to health care industry growth. We will then focus in on the health care industry specific to Nashville, discussing its current scope and trends, and highlighting its particular importance to the city. Continue reading “City Specialization: The Growth of Nashville’s Health Care Industry”

Reflexivity

I’ve always been fascinated by the concept of reflexivity. What is reflexivity? It is the bidirectional relationship of a subject as both a participant (manipulative function) and observer (cognitive function) between “cause and effect”. As an observer I watch a fire burn; as a participant I add fuel to the fire or stifle its flame: my beliefs about the observed fire, if it is growing or dwindling, influence how I engage with it.  Maybe a more accurate example relates to prices: my current willingness to buy a good is influenced by the price I observe and, in turn, the act of buying drives up demand which increases the price and influences my price observations, affecting my future willingness to buy (I’ll work on a clearer example).

While I’m fascinated with the sociological implications, I’m even more fascinated with how these implications manifest within economic decision making. I really need to investigate and read up on behavioral economics more thoroughly.

I’ve been aware of the concept of reflexivity for quite awhile but only recently has it perked my interest in the context of economics and finance. Before that my understanding was confined to the psychological decision making aspects. What really brought these two together was my recent interest in how mass speculation affects the market place. Two books cultivated this interest, specifically “A Short History of Financial Euphoria” and “The Big Short”.

So reflexivity. Karl Popper introduced this idea into social theory, and social theory and economics, as you can imagine, are intimately linked. George Soros, a pupil of Popper, really capitalized on the utility of synthesizing and applying the two concepts to finance. That’s where I want to continue my study.

There are three areas of study that fascinate me at the moment: Evolutionary Economics, Reflexivity and Social Theory, and Disequilibrium States (more specifically, the process of creative destruction as coined by Schumpeter).  I’d really like to apply some philosophy and social theory to economics and come up with a qualitative economic system that capitalizes on the current short comings of neoclassical thought and market structures. Soros has done it, but I’d like to master his ideas and continue progressing with them. There’s gotta be some piece of the puzzle, or pie, that I can really develop and utilize for gain. I found this lil’ power point to be a helpful introduction to some of Soro’s ideas. My next readings will involve the works of Karl Popper (Philosophy of Science), Robert Schiller (Behavioral Economics), George Soros (Reflexivity), and Hyman Minsky (Disequilibrium States).

Soro’s provides a brief introduction to his concept of reflexivity in his book The Age of Fallibility:

”On the one hand, we seek to understand our situation. I call this the cognitive function. On the other hand, we seek to make an impact on the world. I call this the participating function. The two functions work in opposite directions and they can interfere with each other. The cognitive function seeks to improve our understanding. The participating function seeks to improve our position in the world. If the two functions operated independently of each other, they could in theory serve their purpose perfectly well. If reality were independently given our views could correspond to reality. And if our decisions were based on knowledge, the outcomes would correspond to our expectations. But that is not the case because the two functions intersect, and where they intersect they may interfere with each other. I have given the interference a name: reflexivity. . . .”

Here’s a video where Soro’s goes further in depth with his thoughts on reflexivity titled The New Paradigm for Financial Markets.

http://mitworld.mit.edu/flash/player/Main.swf?host=cp58255.edgefcs.net&flv=mitw-01094-sloan-econ-soros-financial-mkts-28oct2008&preview=http://mitworld.mit.edu//uploads/mitw01094sloaneconsorosfinancialmkts28oct2008.jpg

 

Why I think this concept is so interesting is that it incorporates a multitude of qualitative cognitive functions as well as mechanisms that result from enculturation and socialization that guide choice and action.

All that aside, today I read an amazing article on evolutionary economics titled Evolutionary Economics and the Extension of Evolution to the Economy. I’d recommend the read if nothing else but to expand your knowledge on the promising subject of evolutionary economics.

More thoughts later.

I’m never sold on one person’s theory or another’s. My aim is always to understand and synthesize them all into my own unique perspective that I can successfully apply.

Thoughts on Reflexivity

I’ve always been fascinated by the concept of reflexivity. What is reflexivity? It is the bidirectional relationship of a subject as both a participant (manipulative function) and observer (cognitive function) between “cause and effect”. As an observer I watch a fire burn; as a participant I add fuel to the fire or stifle its flame: my beliefs about the observed fire, if it is growing or dwindling, influence how I engage with it.  Maybe a more accurate example relates to prices: my current willingness to buy a good is influenced by the price I observe and, in turn, the act of buying drives up demand which increases the price and influences my price observations, affecting my future willingness to buy (I’ll work on a clearer example).

While I’m fascinated with the sociological implications, I’m even more fascinated with how these implications manifest within economic decision making. I really need to investigate and read up on behavioral economics more thoroughly.

I’ve been aware of the concept of reflexivity for quite awhile but only recently has it perked my interest in the context of economics and finance. Before that my understanding was confined to the psychological decision making aspects. What really brought these two together was my recent interest in how mass speculation affects the market place. Two books cultivated this interest, specifically “A Short History of Financial Euphoria” and “The Big Short”.

Karl Popper introduced the idea of reflexivity into social theory, and social theory and economics, as you can imagine, are intimately linked. George Soros, a pupil of Popper, really capitalized on the utility of synthesizing and applying the two concepts to finance. That’s where I want to continue my study.

There are three areas of study that fascinate me at the moment: Evolutionary Economics, Reflexivity and Social Theory, and Disequilibrium States (more specifically, the process of creative destruction as coined by Schumpeter).  I’d really like to apply some philosophy and social theory to economics and come up with a qualitative economic system that capitalizes on the current short comings of neoclassical thought and market structures. Soros has done it, but I’d like to master his ideas and continue progressing with them. There’s gotta be some piece of the puzzle, or pie, that I can really develop and utilize for gain. I found this lil’ power point to be a helpful introduction to some of Soro’s ideas. My next readings will involve the works of Karl Popper (Philosophy of Science), Robert Schiller (Behavioral Economics), George Soros (Reflexivity), and Hyman Minsky (Disequilibrium States).

Soro’s provides a brief introduction to his concept of reflexivity in his book The Age of Fallibility:

”On the one hand, we seek to understand our situation. I call this the cognitive function. On the other hand, we seek to make an impact on the world. I call this the participating function. The two functions work in opposite directions and they can interfere with each other. The cognitive function seeks to improve our understanding. The participating function seeks to improve our position in the world. If the two functions operated independently of each other, they could in theory serve their purpose perfectly well. If reality were independently given our views could correspond to reality. And if our decisions were based on knowledge, the outcomes would correspond to our expectations. But that is not the case because the two functions intersect, and where they intersect they may interfere with each other. I have given the interference a name: reflexivity. . . .”

Here’s a video where Soro’s goes further in depth with his thoughts on reflexivity titled The New Paradigm for Financial Markets.

 

Why I think this concept is so interesting is that it incorporates a multitude of qualitative cognitive functions as well as mechanisms that result from enculturation and socialization that guide choice and action.

All that aside, today I read an amazing article on evolutionary economics titled Evolutionary Economics and the Extension of Evolution to the Economy. I’d recommend the read if nothing else but to expand your knowledge on the promising subject of evolutionary economics.

More thoughts later.

I’m never sold on one person’s theory or another’s. My aim is always to understand and synthesize them all into my own unique perspective that I can successfully apply.

Evolutionary Economics: Organic Analysis of Economic Growth

Abstract: This essay explores whether it is possible or desirable for present-day economic theory to incorporate biological or evolutionary insights of the type suggested by Alfred Marshall but not fully embraced by him.

If the study of economics is to function as a progressive system that guides and explains the behaviors of men as free and creative agents, it is necessary to examine the study in an open and dynamic way that emphasizes the growth of knowledge and qualitative factors as the prevailing force of change and progress.  Early on Marshall (2009) discovered the inherent error with rational mechanistic economic systems when he said “economics, like biology, deals with matter, of which the inner nature and constitution, as well as the outer form, are constantly changing” (p. 637). Whether Marshall knew it or not, the problem between statical and biological theories is fundamentally a philosophical one. This essay will explore this problem, delineate its philosophical roots, and build a case in favor of evolutionary economics.

The central thesis of this essay argues that neoclassical economic models operate in the outdated modernist paradigm that utilize rational closed systems which are, as a result, authoritarian and unsustainable with respects to free market innovation and evolution. The argument presented here is that economic models need to shift away from quantitative measures emphasizing ideal equilibrium states and towards a post-modern conception that accounts for freedom and change. In this way economics will reflect nature accurately, i.e. men are individual and free agents acting interdependently within an evolving economic landscape. This will provide holistic and sustainable model for interpreting progress by individuating agents according to inevitable qualitative changes within an economic system.

Continue reading “Evolutionary Economics: Organic Analysis of Economic Growth”

Thoughts on Evolutionary Economics: Organic Models of Economic Growth

‘Progress’ or ‘evolution,’ industrial and social, is not mere increase and decrease. It is organic growth, chastened and confined and occasionally reversed by decay of innumerable factors, each of which influences and is influenced by those around it; and every such mutual influence varies with the stages which the respective factors have already reached in their growth. In this vital respect all sciences of life are akin to one another, and are unlike physical sciences. And therefore in the later stages of economics, when we are approaching nearly to the conditions of life, biological analogies are to be preferred to mechanical, other things being equal. (Alfred Marshall 1898: 42-3)

Examine the Thesis: Economic models must not be closed. Rational models are not reflective of nature as a function of change and therefore time. The creative and adaptive enterprises of men cause rational economic models to become outdated in the long run. Rational economic models are suitable for short run analysis but can not make accurate long run predictions.

Alfred Marshall and the Growth of Wealth: A Short Microeconomic Analysis of Wealth Accumulation

Alfred Marshall was a pioneer in economics, even by today’s standards. In 1890 he published Principles of Economics which, compiled from years of study and contemplation, proved to be his magnum opus on economic thought. The work was so fastidiously compiled that it served as a standard in which all economic thought over the next century would respectfully consider. This essay will delve into the concept and history of the growth in wealth. A brief outline of Marshall’s descriptive analysis of wealth accumulation will provide a basic framework that can be used for comparing Marshall’s thoughts to that of other economists.

Continue reading “Alfred Marshall and the Growth of Wealth: A Short Microeconomic Analysis of Wealth Accumulation”

Schumpeter and Creative Destruction: The Process of Market Innovation in Capitalist Societies

Schumpeter and Creative Destruction:
The Process of Market Innovation in Capitalist Societies

Joseph Schumpeter was a 20th century Austrian economist who taught at Harvard for several years upon coming to the US. While much of his work was overshadowed by his contemporary Keynes, he made important contributions to macroeconomic theory by developing dynamic models of market change. His work described the nature of market innovation within capitalist societies and emphasized the role of less quantitative measures such as sociology as a major factor for economic development. Much of his inspiration was drawn from the economists Marx and Weber who favored dynamic sociological backgrounds, as well as Walrus from whom he borrowed the concept of the entrepreneur. Despite his emphasis on social factors, however, Schumpeter was one of the leading econometric economists of his day.

In 1942 Schumpeter published Capitalism, Socialism, and Democracy. In this work lies the theory of creative destruction, one of his most notable contributions. Originally a term coined by Marx, Schumpeter employed the “creative destruction” to mean the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”. He wrote that the concerns of capitalism were less about how existing structures were administered and maintained and more about how these structures are destroyed and created. Entrepreneurs, he says, are the sole facilitators of innovation and invention that bring about these structural and market changes in economic systems.

Schumpeter placed much focus on equilibrium and the role of entrepreneurs to facilitate change within an economy. According to Schumpeter, an economy in equilibrium produces products for future consumers who are consuming their present products, and consumers consume products of past producers in a circular flow based on past experience. The expectations and cycles are essentially contained with no new production functions allowing for changes. The entrepreneur operates outside the system and introduces changes to the production function that allow for the creation of new wealth and destruction of the old- hence the term, creative destruction.

In Schumpeter’s analysis, entrepreneurs are the sole agents of change and responsible for the destruction and construction of new markets and wealth within a society. It is the sheer acts of will and leadership, rather than intellect, which characterize the entrepreneur and secure economic progress through successful innovation.

According to Schumpeter, capitalist societies did not operate in a the static circular flow, or equilibrium, proposed by Weber where the production function is invariant and preexisting factors of production are combined according to the technology at hand mechanically. Market activity is much more dynamic and changing. It is the Entrepreneurs who operate as a nonentity outside of this equilibrium and force new combinations of factors that disturb the circular flow as a means of innovative development. Rather than changing the quantity of factors to change the quantity of products produced, this disturbance creates market disequilibrium as their innovative contributions change the form of the production function. This change in production function form introduces new and higher quality commodities which destroys old wealth and creates new wealth.

Financial Euphoria & Its Speculative Ruin

The recent financial and economic crisis is yet again the result of the same speculative orgy that happened not twenty years prior in the 1987 market crash. When the dust settled, the same inimical features culpably appear as reason for the disaster. As happened so many times in history, there was intense speculation that was fueled by misplaced faith in the lenders and rich. The association with intelligence and money contributed to a speculative boom that lead individuals to risks and over extend their confidence and credit. In addition, financiers at large investment banking companies were hailed for their seemingly innovative, yet unoriginal, practices of leveraging debt through financial instruments taking the forms of derivatives, securities and ARM’s (adjustable rate mortgages).

In the 90’s the US government passed a series of policies allowing home buyers to more easily secure mortgages through government backed debt. As more and more people began buying homes, housing values began to increase all over the countries. In attractive states such as Florida and Nevada, housing prices near tripled their original value. Lending companies began to underwrite mortgages well under standards to meet the demand and soon began pushing sub-prime loans onto home buyers. Many unworthy home buyers maintained poor credit, or bought multiple homes with hopes of flipping the home on speculation that its value will continue appreciating.

The speculative housing mania fostered the creation of massive MDS (mortgage backed securities) and subsequently CDO’s (collateralized debt obligations) which allowed shadow banking systems and credit markets to flourish while operating with little or no oversight. These and other “financial innovations”, nothing more repackaged debt being attractively marketed to meet investor demands, resulted in growing specious debt being incorrectly valued and over leveraged.

To hedge against risk, investors unloaded securities through CDS’s (credit default swaps) to mitigate against potential loss. These CDS’s allowed for more speculation as investors could basis trade on CDS spreads. As more and more loans defaulted, packaged MDS and CDO’s became riddled with unknown risk value and were dubbed toxic. These derivatives soon became worthless as panic stricken investors began selling bonds.

The banks bought these mortgage backed securities with the thought that, being backed by actual homes, they were fairly risk free. They predicted that the home values would sustain and that they could simply turn around and sell the properties at these high prices to compensate for any defaulted debt. In 2006 the crisis was set in motion when the housing bubble began to deflate as economic pressures forced home buyers to walk out on loans, leaving a wake of severely overvalued and ‘toxic’ securities in its path.

Major financial institutions, deemed credible and near prophetic with their steady gains, capitalized on the public’s gullibility for getting rich quick, as well as their short term memory of the financial crash just twenty years prior. These lending and banking institutions were thought to be “too big to fail” and garnered the pollyanna support of investors all over the world. As the housing market evaluations increased so too did the financial and banking markets in exponential disproportion.

In addition, individuals hailed as innovative financial frontiersman possessed the reputations that granted the support of willful and ignorant investors of all over. Such financiers included once NASDAQ chairman Bernard Madoff who masterminded a reminiscent Ponzi scheme that would rob investors of more than $60 billion. Hedge funds and the wealthy elite all over the world became victims of his vacuous enterprise.

As in all major financial disasters to date, the subsequent crash caused a sudden and permanent drop in US wealth as more than a quarter of wealth evaporated from their coffers. A decrease in consumption lead to an increase in unemployment above fourteen percent and the annualized rate of decline in US GDP reached closed to fifteen percent.

As the past has revealed, the aftermath of the crash caused a blind hunt to find and persecute the blameworthy. Everyone from the banks to the investors to the fed chairman and even the president of the US has been subject to scrutiny and called out for not predicting and preventing such an event. While regulation policies and reform measures followed, there was almost predictably no talk to the wide spread delusion and mania persistent throughout society which allowed for such a disaster to take place. Little blame was placed on the mass insanity of those who gullibly entrusted their money to “intelligent investors” of the financial community. Nor was their criticism of the baseless free-enterprise attitudes that the market is a perfect and neutral force absolved from external influences and inherent errors.

Those held responsible, mostly investment bankers and hedge fun managers, found their integrity and confidence completely ruined. As seen in the past, some fled in light of the impending crash, cashing out and leaving with their pockets full before they were apprehended as the cause. Many others, broken and shamed, thought suicide was the more appropriate measure for reconciling their guilt.

In the end euphoric speculation was the crux of the financial disaster as the masses became entranced with the seemingly boundless increases in the market. Vacuous financial innovations that leveraged risky debt were fabricated to promote and continue the growth. Those jumping on the bandwagon only fueled and reinforced the delusion. Caught up in the euphoric mood, many sage and perspicacious people overlooked the risks and the inevitable end that was to come.