Assuming Away the Economy

Recently, a thought occurred to me regarding the disconnect between economic models/assumptions and the economy they purport to represent. It is demonstrated aptly by a quote, via Jonathan Catalan, from Frank Knight:

To begin with a general abstract answer, it will be evident to anyone with a rudimentary understanding of economic processes and analysis that profit (always in the sense of pure profit) would be absent under the conditions of equilibrium with “perfect competition,” (which may be defined in more than one way). The”tendency” of the competitive processes of buying and selling and the control of production is to impute the whole product to the productive agencies which create it, leaving nothing for entrepreneurship as a distinct function (except for monopoly gain, referred to below). This means that under the conditions of ideal equilibrium (stationary or moving) the function of entrepreneurship itself is entirely absent from the economy.

This isn’t the only time that economic assumptions undermine themselves. For example, another problem with perfect competition is that it assumes everyone is a ‘price taker'; that is, they cannot set prices themselves. But if everybody is a ‘price taker’ and nobody can be a ‘price maker’, how is there a price?

The assumption of perfect information also undermines the study of the economy, for it assumes away most real world services. Obvious examples are pure data processing companies: if everybody had access to, and the capacity to retain, information on this level, then the companies would simply not exist.

Furthermore, many services are born because of information asymmetries lack of information. If you hire a lawyer, it’s primarily because you don’t have a comprehensive knowledge of the law; if you hire a stockbroker, it’s because you don’t know what to do with your stocks, or how to do it; if you use a teacher, it’s because you don’t know something that you want to know.

Rationality also potentially undermines entrepreneurship. Consider this quote from blogger Matt Sherman:

The process of going from nothing to something…is inherently irrational…To embark on it is to leave the world of economic modelling…[P]rogress requires madness, that is, the freedom to pursue choices whose rationality can’t be measured.

A rational, reasonably emotionless, utility maximising individual, when faced with the choice between steady wage income – which they can casually trade off against leisure as they please – and the alternative of highly volatile and uncertain profits, would clearly opt for the former.

Perfect competition, perfect information and pure rationality are not always used in the higher echelons of modern economics, but that’s not the point. The fact is that they are often used as starting points, and are still taught in most courses, despite their clear incoherence.

Capitalist economies thrive on the inefficiencies and ‘frictions’ presumed to be the only obstacle to the economy functioning ‘efficiently’, in the sense of economics textbooks. Should you remove all these ‘frictions’, it seems that the foundations of economic theory would leave us in a world with no firms, no entrepreneurship and few business opportunities. In other words, large portion of economics could barely be said to be a theory of capitalism.

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  1. #1 by Woj on June 1, 2012 - 4:56 pm

    Earlier today I was listening to a recent podcast with Ronald Coase, who’s Nature of the firm described this same issue many decades ago. Too bad the lesson was not taken to heart by economists.

    This post also reminded me of Milton Friedman’s comment that the accuracy of a theory’s predictions matter more than the “soundness of its assumptions.” The trouble with this statement appears to be that when a theory’s predictions are accurate, the underlying assumptions are then often applied to other theories and presumed to be true. In this way economics preserves assumptions that may have momentarily predicted an outcome, in a certain environment, by sheer coincidence.

  2. #2 by john77 on June 1, 2012 - 4:58 pm

    While you have a point about the disconnect between economic models and the real economy that does not, of itself, render them useless (except the Marxist model). For well over 2,000 years people have built houses, cathedrals, aqueducts etc using Euclidean Geometry on the surface of the earth which is better represented by Riemannian Geometry.
    You should choose a different list of examples as “information asymmetry” does not refer to hiring a lawyer or stockbroker, nor is the concept of everyone having all the available information (which isn’t “perfect information”) compatible with the non-existence of pure data-processing companies, which are the means by which investors receive the information. Under perfect competition everyone is a price-taker *at the margin*. Initially BP, or Exxon or Shell will swetr a price intended to maximise profits then someone else will set a price 0.1p or 0.2p lower to maximise profits given the first price then someone else will set a price a further 0.1p lower until the least efficient has a price 0.1p above marginal costs or no-one can increase profits by reducing its price. This isn’t just textbook economics – it is what actually happens. If you’ve got so much leisure time, you should buy food in the local market. Your assumption that there could be no entrepreneurship ignores the difference between everyman’s view of profit and the economic concept of “pure profit” which is net of economic return on capital and the labour value of the work by the entrepreneur and takes no account of unreasonable tax burden on commuting employees.
    This last point is anecdata – but is still valid data to void your assumption that all people are identical (if we were I could be Donald Bradman, Jesse Owens, Rocky Marciano, Seb Coe, Ian Botham, David Beckham and Usain Bolt in succession one day each week!!) – when I was a youngish bachelor I had a steady wage income – which I could NOT trade off against leisure as I pleased (who on earth do you work for?) – and I used a substantial part of the surplus to fund worthwhile charities: I should have jumped at the opportunity to join a partnership with higher reward and risk.

    • #3 by john77 on June 1, 2012 - 5:05 pm

      I should have expanded by explaining that the expected return deducted from actual profit to get the academic economist’s “pure profit” exceeds that from depositing cash with a bank, so in a theoretically perfect economy *anyone* with entrepreneurial skills and some savings should choose to become an entrepreneur.

    • #4 by Unlearningecon on June 2, 2012 - 11:44 am

      John, as usual there are some good points in here but you have misunderstood some of what I’ve said and it’s hard to understand where you’re coming from.

      Yeah, I wrote this in a hurry and misused ‘information asymmetry’. However I think my points about lawyers and perfect information still stand even if you remove the term.

      compatible with the non-existence of pure data-processing companies, which are the means by which investors receive the information.

      I disagree. If they already have all this information why would they need to receive it?

      Under perfect competition everyone is a price-taker *at the margin*.

      Again, I think you’re missing the point. If, by assumption, nobody can set price, then where does the price come from?

      when I was a youngish bachelor I had a steady wage income – which I could NOT trade off against leisure as I pleased (who on earth do you work for?)

      This is not my assertion but the assumption of labour economics. I was simply following it through to its logical conclusion.

      I should have jumped at the opportunity to join a partnership with higher reward and risk.

      Hindsight is 20/20. I don’t think that anything you’ve said refutes the idea that entrepreneurship is inherently irrational – as profits can’t be predicted – and as such incompatible with many economic models (also I didn’t say all people were identical?)

      • #5 by john77 on June 2, 2012 - 5:39 pm

        The data processing companies – Reuters, Dow Jones, LSE’s RNS subsidiary etc are the means by which investors receive the information (a.k.a. data). They have in the past used carrier pigeons, telex, ticker-tape, … – they now use the internet but their function is to distribute information to the widest possible audience. Without them how do you surmise that all investors would get the information – word of mouth in the pub?s

      • #6 by john77 on June 2, 2012 - 8:33 pm

        Secondly, profits can be and are predicted (although not often with 100% accuracy) and when the expected profits are large relative to the risk of a shortfall relative to wage income, it is rational to become an entrepreneur.
        You have misread my post – I was not expressing regret for failure to to take an opportunity: I was saying that if I had been offered that opportunity, which I wasn’t. I should have jumped at it because I was a bachelor.
        You seem to have overlooked the necessity for entrepreneurs to exist to create the companies in which people receive steady wage incomes (or is your population comprised solely of government employees and domestic servants?).
        You didn’t say all individuals were identical but you presumed that they had the same utility function. I have observed many individuals who clearly have very different utility functions.

      • #7 by Unlearningecon on June 3, 2012 - 2:40 pm

        John – please try to keep to one post at a time per issue otherwise the thread can get flooded.

        Without them how do you surmise that all investors would get the information – word of mouth in the pub?s

        You seem to think I am endorsing the position taken by economic theory. It simply presumes that individuals automatically have all the information they need. How, I’m not exactly sure, but that’s what it does. You are correct to note that it is an odd assumption.

        Secondly, profits can be and are predicted (although not often with 100% accuracy) and when the expected profits are large relative to the risk of a shortfall relative to wage income, it is rational to become an entrepreneur.

        This really isn’t true. Knightian uncertainty suggests that you simply cannot know whether a business will be successful, and any bank will tell you they have a hard time choosing where to allocate capital. If they are sufficiently big they can play the law of averages, but individually homo economicus would have no reason to choose such an unpredictable path.

        You seem to have overlooked the necessity for entrepreneurs to exist to create the companies in which people receive steady wage incomes (or is your population comprised solely of government employees and domestic servants?).

        Again, you are acting as if I endorse a position when I am highlighting how ridiculous it is. A number of logical flaws suggest that some economic theory assumes away entrepreneurship, and hence, yes, wage income too! So it completely undermines the study of the economy. This is my point.

        You didn’t say all individuals were identical but you presumed that they had the same utility function. I have observed many individuals who clearly have very different utility functions.

        This is true but all agents are presumed to be rational (and actually many economic models use a single representative agent). I’m arguing that rationality undermines entrepreneurship, which is an inherently irrational practice that requires going into debt, abandoning steady income, and entering an uncertain future.

      • #8 by john77 on June 3, 2012 - 3:46 pm

        It is not necessary to go into debt to become an entrepreneur if either one starts with sufficient savings/capital to finance the business or has a business model with positive cashflow from day one. In the real world most bank lending to small business is not for start-ups but for expanding successful businesses faster than they could from reinvested profits. If “Knightian uncertainty” says that you can never know whether or not a business will succeed that that is part of economics that people need to unlearn. A talented craftsman who sets up on his own with promised support from customers who spotted his talent when he was a journeyman, which was how almost of members of the mediaeval guilds started their businesses, was at risk of fire, flood, plague, famine and civil war but not of business failure if he maintained his standards. More common in modern days is the farmer’s wife who runs “Bed & Breakfast” using the bedrooms no longer used by the long-departed farm workers: she is just as much an entrepreneur as the guy who spends half-a-million to build an abattoir next to the cattle market but her risk is negligible.

      • #9 by Unlearningecon on June 3, 2012 - 4:55 pm

        It is not necessary to go into debt to become an entrepreneur if either one starts with sufficient savings/capital to finance the business or has a business model with positive cashflow from day one.

        Well that’s great for people who already have loads of money, but what about those who don’t? As for positive cash flow, what about a business that requires time to get established? You’re positing ideal conditions here.

        In the real world most bank lending to small business is not for start-ups but for expanding successful businesses faster than they could from reinvested profits.

        Correct, because banks know how uncertain potential revenues from new businesses are!

        If “Knightian uncertainty” says that you can never know whether or not a business will succeed that that is part of economics that people need to unlearn.

        Knightian uncertainty is a mathematical concept and simply says that not all future events can be predicted with probabilities.

      • #10 by john77 on June 3, 2012 - 5:51 pm

        I am not positing ideal conditions to occur *all the time* – that would be silly. I am pointing out that debt is not always essential and providing a couple of examples where that is totally obvious. You don’t need to be very rich to start a small business if it doesn’t require a lot of capital although if you want to start a shipping company or an airline the odd £30 million donation from Dad helps.
        Your definition of Knightian uncertainty doesn’t mean that you can never tell whether any business will succeed, it means that you cannot tell whether *some* businesses will succeed.

  3. #11 by Min on June 1, 2012 - 6:23 pm

    I thought that the idea was that markets tended towards equilibrium, not that equilibrium was a steady state. Isn’t the point of patents and copyrights to prevent equilibrium, to grant monopolies for limited periods of time?

    • #12 by john77 on June 1, 2012 - 6:48 pm

      The surplus income during the period of validity of the patent is supposed to generate a market return on the cost of research (including the average cost of research that showed the idea didn’t work).

  4. #13 by Woj on June 1, 2012 - 6:27 pm

    This morning, on my drive to work, I listed to a recent EconTalk podcast with Ronald Coase. One of the topics discussed was a paper by Coase, “The Nature of the Firm.” Coase’s paper was written in 1937 and Knight’s quote above is from 1942. Seven decades later economics is still with the fundamental problem that equilibrium unerlies all mainstream theories but fails to provide a reasonable representation of the real world.

    http://bubblesandbusts.blogspot.com/2012/06/studying-reality-new-path-for-economics.html

  5. #14 by paul on June 1, 2012 - 7:20 pm

    “…Capitalist economies thrive on the inefficiencies and ‘frictions’ presumed to be the only obstacle to the economy functioning ‘efficiently’…”

    Capitalist economies thrive on net government spending, otherwise profit would be literally (mathematically) impossible. For the USA as a whole, that is. Relatively small groups could profit at the expense of others, however.

    • #15 by Unlearningecon on June 2, 2012 - 11:45 am

      This is true although slightly irrelevant to this post.

      • #16 by paul on June 2, 2012 - 12:07 pm

        Is that like slightly pregnant?

        I would argue that my comment is part and parcel based on the same math relationships you are exploiting in your post.

        Every process within a closed system is governed by a feedback loop that maintains stability. Our world is fundamentally a stable one.

        When an exogenous input disturbs that feedback loop enough bad things happen.

        See GFC, global warming, etc.

        These events are all governed by the same maths.

        Capitalism is a naturally unstable process. I have never been opposed to capitalism, always believed it was a great thing.

        When I realized that as a mathematical principle it can only work for a (relatively) short time and was inherently unstable, I decided it was time to point that out at every opportunity.

        No point in lying to ourselves. We have to find a different system. Or else.

      • #17 by Unlearningecon on June 2, 2012 - 12:10 pm

        I see what you’re saying now – the idea that the economy is a closed system makes (net) profit impossible.

    • #18 by john77 on June 2, 2012 - 8:16 pm

      NO, that is utter nonsense.
      The key factor of a capitalist economy is the use of capital to enable labour to be more productive and the sharing of the value-added from a process between the provider of the capital required for the process and the provider of the labour required. The profit or loss is the difference between the value-added and the price paid for labour. Net government spending is neither a necessary nor a sufficient condition

      • #19 by paul on June 3, 2012 - 2:35 am

        “The profit or loss is the difference between the value-added and the price paid for labour…”

        Profit/loss in the net (balance sheet USA) is nominal. Only increasing the persistent money supply (ie not credit) can add nominal gains in the non-government.

        Paper gains aren’t monetized until the money is printed. Hence, most pension funds, etc. haven’t been funded yet (and probably never will be). The “value” of paper gains only exists as “value” if the agents taking gains in cash are limited to a relative few. Otherwise we would have the equivalent of a bank run and major crash.

        There is roughly $70 Trillion (conservative estimate) of wealth held in the US. There is only about $5 Trillion in net cash and another $11 Trillion in bonds.

        That’s a lot of leverage.

        Basic closed system arithmetic (accounting).

      • #20 by john77 on June 3, 2012 - 8:53 am

        Firstly, increases/decreases in nominal value due to inflation are not profits or losses. We had this argument in the 70s.
        Secondly, capitalists can create an increase in wealth without an increase in the money supply and have done so over the centuries through consuming less than they produce/earn and creating capital assets by investing their savings in productive machinery and buildings housing them.
        You seem to have defined wealth as the net amount owing to the private sector by the government thereby claiming that all the farmland, factories, houses, even food has zero value.
        In which case, Fail.

      • #21 by paul on June 3, 2012 - 12:24 pm

        “…You seem to have defined wealth as the net amount owing to the private sector by the government…”

        Not at all. I’m saying that FINANCIAL wealth, dollars, is what all other wealth is measured by. Otherwise what would value mean?

        Companies sell products to consumers in exchange for dollars. Companies pay their employees and suppliers with dollars. The difference between these two sums is either a positive or negative profit. A company’s performance is measured in dollars, implying an increase in the company’s cash position.

        IN THE AGGREGATE, it is impossible for companies to increase their cash position without net government spending.

        Any other expression of “profit”, say an increase in net worth or through some accounting operation is an expression of an increase in “paper value”, not nominal value.

        Paper gains must be redeemed, cashed out to be realized, otherwise they are just investments. As we have seen, the value of investments can be gone in a flash.

        Dollars cannot be created or destroyed except by the government.

        You and many others are having difficulty separating the real and the nominal. The separation is called leverage.

    • #22 by john77 on June 3, 2012 - 2:18 pm

      You seem to think that price is the same as value. Your argument is the same as saying Mount Everest wasn’t 29,002 feet high until someone measured it.
      Real things have real values. Pieces of paper have prices.
      *I* have not had any difficulty in separating the real from the nominal since childhood. *I* am also capable of distinguishing between cash flow and profit. Cash is not the same as profit, as you will find out if you accumulate cash of $1,000 and debts of $1,000,000 through trading on credit, or if you start out with $1,000,000 and end up with $10 after paying your bills – the latter means that you have accumulated losses of $999,990.
      You also seem to assume that there are no households in the USA who can have positive or negative cash and asset positions.
      Leverage is commonly used to refer to the ratio of debt to equity in company accounts.
      After all that demonstration of ignorance you have the cheek to accuse me of having difficulty separating real and nominal when your equation for *cash* NOT profit only works in *nominal* dollars if there are *no households*.
      LOL

      • #23 by paul on June 3, 2012 - 3:52 pm

        LOL indeed;

        Your argument is incoherent. I excluded credit from my argument for a reason.

        It is nothing more than a leverage instrument. It can create velocity, but not financial wealth. That is impossible, literally.

        Credit is not capable of adding one penny to one’s financial wealth.

        I’m not making an argument for either price or value, my argument is based on mathematical reality.

        Nominal wealth in dollars and dollar-denominated financial assets is constrained by the willingness of government to produce those instruments.

        The non-government cannot produce dollars.

        How much wealth can be produced if the number of dollars held is fixed?

        Assume a closed system.

        Dollar assets can be divided amongst two groups, consumers and producers.

        The interaction between consumers and producers (spending)
        moves overall in one direction if there is net accumulation of financial assets (big part or most all of profit) by the producers.

        Assuming continuing accumulation of wealth (growth) by the producers this is a one-way process that can be modelled with an hourglass, the grains of sand being dollars.

        Since by definition the producers are in the net taking more than they are spending, there is a smaller and smaller pool of money to compete for.

        Rinse and repeat until all of the dollars held by consumers is gone.

        Welcome to life post-1970’s.

        What is a capitalist economy without spending?

      • #24 by john77 on June 3, 2012 - 4:30 pm

        You clearly do not understand the English language. Mathematics *describes* reality – it can also describe non-real concepts but there is no such thing as “mathematical reality”.
        You appear to be fixated on the currency in circulation, which is a means of exchange and has no value except to purchase goods and services. Real things have value and they would still have value if every dollar bill was seized and turned overnight into papier-mache. Equally they would have the same value but a different price if Obama announced that he had approved Bernanke’s plan to issue ten trillion dollars and distribute them to every American. Would your house suddenly have an extra room, your winter jacket a fur-lining, your freezer fill up with ribeye steaks?
        Can I introduce you to two concepts that seem to have passed you by: reinvestment of profits and dividends? Corporate profits are not a quicksand for currency, as you suggest..

      • #25 by paul on June 3, 2012 - 5:04 pm

        “…which is a means of exchange and has no value except to purchase goods and services…”

        This part you have right, otherwise you are just thrashing.

        You seem to be claiming the economy would do fine as a barter economy.

        We happen to have a monetary economy.

        Dollars we earn allow us accumulate “credits” that we can exchange for goods and services. When there are none to earn exchange becomes difficult, even impossible for some. Much of value is based on ease of exchange so…

        Apple is holding $100 Billion in cash. Where do you think that money came from?

        “Real things have value and they would still have value if every dollar bill was seized and turned overnight into papier-mache”

        True, some real things would still have “value”, but it would be indeterminate.

        As far as investment funds, pension funds, stocks, etc., they would no longer have any financial value. How would that value be realized? What would Apple take in exchange for an iPad?

        A car sitting with the tank empty still has value I suppose. Of course a car is meant for transportation, so it’s functional value would be zero. Until you were able to give it gas.

        “…two concepts that seem to have passed you by: reinvestment of profits and dividends?”

        In the aggregate these things lead to greater and greater extraction of dollar wealth from the economy. If that weren’t true no one would invest. Every cycle more and more dollars are added to the pile held by the few.

        Leverage will only get the system so far, then it will snap back and realize losses that eliminate most if not all of the paper gains. Sure, there is “real” wealth that was created, but how much is it worth and who could afford to buy it anyway?

        Most of us would have nothing, not even the basics without providing it for ourselves out of the dirt.

        This has already occurred re the GFC. Many trillions of so-called gains evaporated, just because the credit binge reached it’s ceiling.

      • #26 by john77 on June 3, 2012 - 6:08 pm

        Let me explain that in English “price” and “value” are two separate words with separate meanings. One of the problems with soviet economics was that Russian uses the same word for both so confusion was too easy. You said that without dollar bills, “value” would be indeterminate – not so,
        The value of my clothes is not changed by the clothing retailer doubling or halving the price after I have bought them. The value of food is not altered by a change in its price. Quite often identical tins and packets have different prices in a convenience store and a supermarket ten minutes away (or in my home town, two minutes away) – are the values different?

  6. #27 by Simon R (@sarsathome) on June 1, 2012 - 7:30 pm

    As John77 pointed out, asymmetric information isn’t exactly what you’re making it out to be. AI means that one party in a transaction does not know something that would be relevant to the its decision, like when insurers cannot identify people with preexisting conditions. It’s not the same as knowledge specialization, which is what lawyers do. Same goes for John’s points on perfect competition.

    More importantly though, I made, and continue to make, the same kind of skeptical judgments about supposedly solid economic assumptions. It didn’t take me long to realize perfect competition was not a very realistic assumption to make in the vast majority of cases. Rather than throw the baby out with the bathwater though, I think it’s important to take these assumptions as what they are (or should be): highly stylized but intellectually useful ways of thinking about the world we live in. We need these simple assumptions to provide a baseline for understanding what results follow from the mechanics we’re describing in an idealized world, and afterwards we can perturb/alter/remove/throw out the window to try and accurately describe reality.

    This was the biggest hurdle to overcome when thinking about the economics I learned in basic undergrad courses. My friends and I even started to call it the “unhappy valley”, because there was a prolonged period where it seemed like we were being taught complete nonsense before we started seeing the value in playing with these assumptions even if they are unrealistic. I had a professor tell me “Models don’t have to be realistic to be useful” and I think he was riffing on Friedman when he said it, but for the longest time I thought he was nuts. In my opinion, guiding students through this unhappy valley should be the priority of any professor teaching intermediate courses. Otherwise you end up with people who believe the invisible hand really does fix everything Adam-Smith style, and on the other hand you have those few who lose all faith entirely because there are no perfectly competitive markets in the world.

    -Simon

    • #28 by Unlearningecon on June 2, 2012 - 11:53 am

      Yeah I was in a rush and misused the term. However, I think the points still stand.

      I appreciate your constructive comment but narratives like this ultimately strike me as somewhere between concern trolling and ‘I used to be like you, but now I love big brother!’

      Firstly, if the conclusions of a theory are all that matter then economics cannot be said to have done well. Monetarism: failure; repeated recessions and depression: failure; prediction of firm pricing behaviour: failure; predictions of the level of ‘involuntary’ unemployment: failure. I could go on.

      Secondly, assumptions are not interchangeable. An assumption that the economy is closed is fine – it eliminates a known variable. An assumption that the labour force is homogeneous, on the other hand? What happens when we relax it? Generally, the models simply collapse.

      In physics, engineering, they wouldn’t send students into the real world armed with a textbook that assumes a vacuum: even though the assumption is scientifically defensible, the models would still be absolutely useless! If you add friction as a constant coefficient term to an ODE, you end up with a far more complicated solution. Once you incorporate spin, volume, etc., you end up with an extremely complicated solution that takes a long time to solve. Yet economists think they can use models that have more assumptions than are available in engineering, as if it won’t have an important effect on the analysis.

      Also bear in mind the way neoclassical economics frames these issues: the reason you end up with ‘free market’ zealots is because you teach them that the economy is ‘usually’ equilibrating but for a few special cases and frictions. The general idea is that if we removed frictions, the economy would behave like our textbooks. But this is not so – I plan a post on it in the near future.

      • #29 by paul on June 2, 2012 - 12:09 pm

        “…The general idea is that if we removed frictions, the economy would behave like our textbooks. But this is not so…”

        I fully agree with this – look forward to your upcoming post.

  7. #30 by Simon R (@sarsathome) on June 2, 2012 - 2:03 pm

    Yeah, the way I wrote my comment certainly seems concern-troll-y, which I didn’t intend. It was just supposed to reflect my personal experience with what you’re writing about. I’ve personally come to the conclusion that some models are useful despite being incredibly simplified. That’s why I think it’s so important to have professors teach why we model instead of just the results.

    And I think you’re spot-on when you compare economics to engineering while assuming a vacuum. That’s how we end up with the majority of layperson free market zealots.

    • #31 by Unlearningecon on June 2, 2012 - 2:11 pm

      Sure, I believe that many concepts and models as taught are useful. Externalities, signalling, consumption functions, and many more, are useful. Supply-demand also captures some important truths. But at the very least economists have to be more willing to abandon the core of models once they prove themselves less useful, rather than retaining it and adding ex post, ad-hoc corrections.

  8. #32 by Isaac "Izzy" Marmolejo on June 5, 2012 - 8:52 am

    unlearningecon,
    irrelevant point here but I dont have a twitter account… On twitter you asked something along the lines of: What ring winger takes into account for endogenous money?

    An answer is Ludwig Lachmann. I would recommend reading his 1937 article: ‘Uncertainty and Liquidity-Preference’. Let me quote a passage from this article that you might like:

    “Of all the institutions within the framework of which the human actions described by economic science are performed, the existence of money-debts is doubtless one of the most important. Now, Money is the legal means of payment, i.e., its owner can use it for discharging debts.’ This is the only use in which it has no substitutes, for its very institutional character excludes that. On the worst of days, when all instruments of exchange fail us, when all markets and banks are closed, when the most liquid assets have become entirely illiquid, Money-and only Money 1-will still serve to discharge a debt.”

  1. The ‘Ring Wing’, Debt, and Growth | The Radical Subjectivist
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