Tuesday, December 21, 2010

Supply and Demand

The iconic analysis of the economic textbook since the 19th century has been Marshall's Cross: the sloping supply and demand curves, intersecting to determine price and quantity sold, in a (metaphoric) market.

A witty geometrician might observe that the Economist has overturned Euclid, in drawing this familiar graph: instead of two points determining a line, two lines determine a point.  The joke is actually profoundly important: this economic analysis is overdetermined.  Whatever price and quantity transacted, there are always two available explanations:  supply and demand.

What one can actually observe is the price and quantity transacted.  The rest of the supply or demand curve is a counterfactual supposition: an act of imagination tempered by subjective assessments of plausibility.

The result is arguments between economists, over whose counterfactual is better.

Here's Brad DeLong:
Consider the claims – rampant nowadays in the US – that further government attempts to alleviate unemployment will fail, because America’s current high unemployment is “structural”: a failure of economic calculation has left the country with the wrong productive resources to satisfy household and business demand. The problem, advocates of this view claim, is a shortage of productive supply rather than a shortage of aggregate demand.
But it should be easy . . . to tell whether a fall in sales is due to a shortage of supply or a shortage of demand. If a fall in sales is due to a shortage of demand while there is ample supply, then, as quantities fall relative to trend, prices will fall as well. If, on the other hand, the fall in sales is due to a shortage of supply while there is ample demand, then prices will rise as quantities fall. . . .
Or consider the claims – also rampant these days – that further government attempts to increase demand, whether through monetary policy to alleviate a liquidity squeeze, banking policy to increase risk tolerance, or fiscal policy to provide a much-needed savings vehicle, will similarly fail. Once again, . . . ask whether the economic problems that current levels of government debt are causing reflect too much public debt supplied by governments or too much public debt demanded by the private sector. If the problem were that supply is too great, then new emissions of government debt would be accompanied by low prices – that is, by high interest rates. If the problem were that demand is too great, then new emissions of government debt would be accompanied by high prices – that is, by low interest rates..
Now, I am sympathetic to Professor DeLong's political viewpoint, so let it be understood that my criticism, here, is of his economics, and not so much his politics.

This is a very common form of analysis for economists.  Marshall's Cross is iconic for a reason.  There's also a bit semantic generalization going on, a bit of intellectual slipping and sliding away from the intellectual foundation.  Professor DeLong has moved from Marshall's analysis of a single market, to arguably, an aggregation of markets.  That entails some very big problems, which he doesn't bother with.  And, I won't bother with them, either, for the moment.

What interests me, at the moment, is that he is so confident that Supply AND Demand can be treated as a problem of Supply OR Demand.  The basic theory is the former.  Brad's theory is the latter.

It's a slippery form of argument.  You need two points to determine a line, and Brad gets his two points from change in time: his points are before and after.  Of course, that only gets you one line, not the two of supply and demand.  So, he argues that his two points must describe either supply or demand, depending, as he would have it, on circumstance.

There's a lot of imagined stuff, here, and very little observed fact, and what is observed is not enough to distinguish cases.  Brad is simply wrong when he asserts "it should be easy . . . to tell whether a fall in sales is due to a shortage of supply or a shortage of demand".  According to the theory, which, by the way, doesn't define anything as a "shortage of supply" or "shortage of demand", it should be impossible to tell attribute a price/quantity entirely to demand or supply, because the price/quantity outcome is jointly determined.

The supposition that supply slopes upward, increasing with price, and demand slopes downward, decreasing with price, is just that: supposition.  It rests on some auxiliary hypotheses -- the famous law of diminishing returns and the like -- that express our intuition and sense of what is plausible.  There's no more foundation for them, really, than the plausible notion that heavy objects will fall faster than lighter ones, propelled by the greater force evidenced in their greater weight.  

Monday, December 20, 2010

Steve Keen

I haven't read Steve Keen's Debunking Economics, but, maybe I will, now that I am writing this blog.

Steve Keen is an Economist, and writes as an iconoclast and heretic, as much as a critic.  He advocates for the out-party Heterodox against the in-group, Orthodox.  It's a dispute I don't care about, to be honest.

Professor Keen does take seriously the fundamentals of economics, and especially the fundamentals as represented in the textbooks, particular the introductory, "Econ 101" textbooks.  That's where my critique and his may intersect, since many economic arguments in the public political discourse derive their intuition and authority from Econ 101.  The extent to which Econ 101 theory is faulty, or commonly misunderstood and misconstrued, is a real problem for the quality of the public discourse, as well as for Economics as a programme of academic research and teaching.

The simple fact that Economics can have a division between the "Orthodox" and the "Heterodox" may indicate that something is seriously wrong in the Academy.  No academic discipline can usefully admit dogma to its doctrine.  It may be useful, later, to explore a bit the epistemology of religion and science.

First Post: Purposes and Themes

I am not an economist, and really have no business writing a blog, where I pontificate on what is wrong with economics, but . . . here I am and here I blog, nevertheless.

I have great respect for the importance of economics as a subject of study and a guide to politics and policy.  Of the academic profession, I have more doubts.  I decided to write this blog, because I keep having ideas for posts that might fit on such a blog.  Maybe, the ideas will run out on me, now that I have a place to put them. 

I am going to try to maintain some reasonable standard of respect for the business of seriously considered economic ideas, and not be a complete philistine.  I intend to be a Critic, not a Crank.  It has been said that those, who cannot do, teach; and those, who will not teach, criticize.  That may well be true of me.

A Critic is an active listener, a discriminating audience.  Authors may well claim that they "intend" this, or that, in communication, but communication requires two, and what the recipient perceives is as important as what the speaker "intends".  This blog is about what I read, hear and perceive, while observing those, who do, and, most especially those, who presume to teach.

What I criticize will not be the high theory of Economics, the academic discipline.  Whatever I ever knew of advanced economics has passed its half-life several times over.  For the most part, advanced economics is pretty useless to ordinary people, anyway.  The esoteric arguments reached by the Ivory Towers are, usually, ill-understood by their proponents, and the methods often prove arcane, sterile and faddish.  When Economics is working well, as an academic enterprise, the good stuff is refined and percolates downward; as valid and powerful arguments are better understood, they can be expressed in terms and frames accessible in intermediate and introductory college courses, and put to good use in business and government.  Ultimately, economics is -- or ought to be -- about discovering fundamental relationships in how the political economy works; and fundamentals, though unexpected and even hard to understand in all their ramifications, are more fundamentally simple than esoterically obscure.

It may be that the research programme of High Economics has become degenerative, and High Economics is not working well.  Certainly, there is a case to be made that the Macroeconomics of Dynamic, Stochastic General Equilibrium with Representative Agents and Rational Expectations seems remarkably sterile, and as unable to cope with the events of the day, as the Financial Economics of the Efficient Market Hypothesis is unwilling.  Various areas of Microeconomics may be doing better.  My focus, though, is not High Theory, but, rather, where economic ideas make their way into the public discourse.  I will be taking the Texts I choose to criticize (mostly) from the econ blogosphere, which I think few will mistake for a seminar room, for discussing high theory or active research programmes.  (Few, that is, other than Brad DeLong.)

There are distinct divisions among academic economists: a civil war, almost between the "orthodox" and the "heterodox", which, as far as I know, has no parallel at the moment in any other social science.  I take no part in this division, though I expect I may take some ideas and inspiration from the critiques of the self-consciously "heterodox".  (Did I mention that I am not an economist?)

My critiques will be . . . well, critiques, and not either affirmations or refutations, per se.  As a Critic, the point of my analyzing a text will be to expose the structure of the Text to sniping from a great height, that is, to meta-level comments and observations.  You can call this "deconstruction", though I cannot claim to know anything much about the methods of literary criticism that take that word as a label.

I know what I say will follow several themes, and as I sort these out, I may try to classify posts according to the theme each exemplifies.  Here's a(n incomplete and not mutually exclusive) list, in no particular order:
1.) Arguments are structured as hypnosis as much as by logic;
2.) The parsing of a problem contains the most important assumptions; Economists tend to forget the parsing of economic problems;
3.) Intuition derived from thinking about a certain world applies poorly to an uncertain world; uncertainty changes everything;
4.)  Meaning and function belong to different domains of knowledge; therefore, Story (Narrative) and Theory (Analysis) belong to different domains of knowledge;
5.)  Counterfactuals are theory, not evidence;
6.) And is not Or; the multi-handed economist may be smarter than he sounds;
7.) Theory (Analysis) is not descriptive; an analytical proposition about what might be possible should not be confused with a synthetic statement about what actually is;
8.) Economic phenomena, like all social phenomena, are "overdetermined";
9.)  Allocative efficiency is distinct from technical efficiency; both are only partially solved problems in the real economy;
10.) [TBD]. 

[I reserve the right to revise and extend this list.  Revising and extending this list is the purpose of this blog.]

I will apply my critiques to economic arguments made in, and at the level of, the econ blogosphere.  In other words, mostly, at the level of Econ 101 and the popular political discourse.  Economics delivers, mostly, very, very bad product into the popular political discourse and understanding.  Professional economists, invoking the authority of their discipline and learning, are frequently talking nonsense.  Most economists -- at least the majority making appearances before the general public, are, apparently, incompetent. I don't expect to lack examples of foolish thinking, derived from indoctrination in economic theory.

Although I think one of the problems with academic Economics is that it is deeply corrupt, I don't think the foolishness is limited to the Right, and I will strive to take examples from the Left spectrum of political opinion, often enough to avoid becoming a mere partisan, despite my liberal Democratic leanings.

I also will not be a proponent of "common-sense" or sweeping "know-nothing" views.  Facile and fatuous claims, say, that Economics went terribly wrong when it adopted the rational individual as its model of homo Ĺ“conomicus are not something I wish to waste my time with.  Nor will I debate with anyone, whether Economics can be classed as a Science -- at least, I hope not.  Economic thinking and economic arguments are worth criticizing only to the extent that it really does matter to the progress of society, whether they are done well.  Whether anyone thinks Economics a science matters not one whit.

As a Critic, I am always right (correct).  It goes with the Critical Voice, and follows from the Critic's lack of responsibility for knowing the correct answer.  It is enough to recognize that an unsolved problem remains unsolved.

I make no claim of Authority or Originality.  (Did I mention that I am not an Economist?)  I'll almost always neglect citations; my purpose is not scholarship.  When I use the declarative to phrase assertions, I do so, not from Authority, but from a conviction that Logic and Evidence are Public Goods, accessible, in principle, to all.  Anyone, in principle, can discover the truth of a logical proposition or assess the implications of facts.  If a Reader (do I dare hope to have a Reader?) cares to question the basis for one of my more sweeping claims, comments are open.

The Original Sin of Economics is Economists thinking that they have the answer, the solution.  Economics is fundamentally and centrally defined as being about a problem, the economic problem, which is never solved perfectly and finally.  That is my ur-Theme: Economics is about an imperfectly solved problem, not a clever system of solutions.

Up against the tendency of incompetent economists to parody Dr. Pangloss, someone with more of a sense of humor, would make more progress, than I will.  Good jokes in comments will be promoted as posts.