Economics, scattered thoughts

[From Bill Powers (2007.11.19.1253 MDT)]
I got the actual hardcover book, Price Theory by Friedman. A real
book is nice; you can read it while you eat. Amazon claims that the
retail price of the book is $102 and that I saved 95% by buying it used.
According to opportunity cost theory (or one of its inverses), I have
become richer by $97. Funny thing, though: my bank account didn’t get any
bigger. It got $5 smaller. Of course I also have a $5 book. Maybe it will
become worth

$97 more. When I’m done with it, I’ll tell Amazon that they can have it
back for $51. That way they will lose only half of the savings they so
generously gave me.

I can see, on reading the very early pages, that Friedman’s economics
desperately needs PCT. I’ll be studying the book at length for a while
before trying to offer anything organized as an alternative, but perhaps
others will see some use in a few early ideas.

First. Utility theory is reinforcement theory. Instead of objects having
reinforcing value, they have utility. According to this theory, there is
a tendency for people to increase the behaviors which have the most
utility (that are the most reinforcing) at the expense of those with less
utility, so that people end up making the optimum choices that maximize
utility across all goods and all circumstances. Friedman sees this
“rationality” basically as an analog computation, with the
optimum outcome representing an equilibrium among many interacting
influences (I certainly agree with that). The weakest part of his
argument is that this will be the objectively best equilibrium
attainable, rather than depending on what people believe is true, what
they want, and how much they want it, and how accurately they perceive
it.

Second. While it may be true that money allows comparing the
“value” of different goods, the mathematics involved would tell
us that the value of all goods (including money) could be calculated in
terms of any good we please: say pints of ice cream. A dollar is worth
about a pint, so a recent-vintage used car is worth about 10,000 pints of
ice-cream. Money has certain advantages over ice cream as a basis of
comparison (for example it does not require refrigeration), but that’s
not the point. The point is that we’re really dealing with a very large
set of simultaneous equations, which you can solve for any variable you
choose (one way or another). The value of any one thing is a function of
the values of every other thing. Trying to break up this overall global
relationship into relationships among a few individual variables is
futile and misleading. Most of Friedman’s examples consist of considering
only a few variables, two or three, at a time.

Third. The only real standard of comparison for the values of different
goods is the setting of human reference levels for the goods and the loop
gains used in controlling for those variables. These are the independent
variables. The dependent variables are those involved in the
transactions. Economic transactions may be used as a measure of value,
but they are not determinants of value. The settings of reference levels
determine the target amounts of goods, and loop gains (which are in part
influenced by prices which are part of the environmental feedback
functions for controlling each good) partly determine the coefficients in
the simultaneous equations that describe the interactions among control
systems. It is not possible to make economic predictions from first
principles without knowing or estimating the reference levels and loop
gains of all the control systems involved, inside each person and over
all persons.

Fourth. Without a model, economic predictions can be made to turn out any
way you want, just by selecting the right assumptions about what people
value. While assumptions are always made, with a model you can’t hide
them, nor can you disguise their effects.

Skimming through the whole book, it’s clear that there is some organizing
principle behind all the examples. Common sense expects one outcome;
price theory shows that the opposite outcome occurs. Most of the book is
about that. I can’t see yet what the organizing principle is, but I’m
pretty sure it’s there. It’s like watching someone discovering that
adding up all the odd numbers produces a series of extremely
familiar-looking numbers, without realizing that they are the squares of
successive integers. Friedman’s price theory is based on some very simple
principle. Let’s try to find out what it is.

Incidentally, it seems that the control systems Friedman is (unknowingly)
talking about have integrating output functions. As long as any
disequilibrium remains, the output will keep changing. Thus the system
always tends toward the exact objectively “best” values of the
variables.

Best,

Bill P.

···

[From Bjorn Simonsen (2007.11.20,12:50 EUST)]

From Bill Powers (2007.11.19.1253 MDT)

This is HTML format.

I’ll be studying the book at length for a while before trying
to offer anything organized as an alternative, but perhaps
others will see some use in a few early ideas.

I enjoy the way you comment what you read.

I can see, on reading the very early pages, that Friedman’s
economics desperately needs PCT.

I agree.

First. Utility theory is reinforcement theory. Instead of objects
having reinforcing value, they have utility.

I don’t think I agree.
Ordinary reinforcement theory states that reinforcement acts to increase or decrease the probability that a response will follow a given stimulus.
Utility theory states that if we compare two different goods there is a tendency for people to increase behaviors which has most utility.
The marginal substitution fraction -(delta x2/delta x1) is greater or less dependent on which indifference curve the author of the textbook uses. I think they all make it clear that different people are in need of different goods. And I think they all make it clear that if two people are in need of the same two goods, these goods may substitute each other in different ways as you may see on the indifference curves below.
Outlook8.bmp|x

The economists don’t say that utility reinforce the behavior of people. They say that utility may influence in different ways dependent on which person you are.

My judgment why economists desperately need PCT is that people don’t have utility references, they have their goals or purposes. They wish to buy this and that and there is a relationship between this and that.

Friedman sees this “rationality” basically as an analog computation, with the
optimum outcome representing an equilibrium among many interacting influences
(I certainly agree with that). The weakest part of his argument is that this will be
the objectively best equilibrium attainable, rather than depending on what people
believe is true, what they want, and how much they want it, and how accurately
they perceive it.

I don’t think economists think that their
presentations are the best equilibrium attainable. I think they say: “If a person say that two goods can substitute each other in different ways dependent on their spending power (as the indifference curve indicates), then they also think they can substitute each other in a certain way dependent on their actual income from employment”.

I don’t think the effect of that statement is very different from the effect of having a certain reference and a certain disturbance (actual income from employment).

Most of Friedman’s examples consist of considering only a few variables,
two or three, at a time.

I think economists I know consider only a few variables because they write textbooks for students. They at the same time say: "In order to ease the account, they limit their analysis to pass for two goods. Some economists are able to think in greater dimensions.

Third. The only real standard of comparison for the values of different goods is the
setting of human reference levels for the goods and the loop gains used in controlling
for those variables. These are the independent variables. The dependent variables are
those involved in the transactions. Economic transactions may be used as a measure
of value, but they are not determinants of value. The settings of reference levels
determine the target amounts of goods, and loop gains (which are in part influenced by
prices which are part of the environmental feedback functions for controlling each good)
partly determine the coefficients in the simultaneous equations that describe the
interactions among control systems. It is not possible to make economic predictions from
first principles without knowing or estimating the reference levels and loop gains of all
the control systems involved, inside each person and over all persons.

May I ask a question?

Situation 1
If I walk along the road when a Lexus passes by and I turn around to get a taxi to drive me to the Lexus salesman. I really wish to by a Lexus which I always have dreamt about.

Situation 2
My wife and I sit in the sofa discussing which car we shall by and I say that I really wish to buy a Lexus.

In situation 1, I thought the Lexus represented an independent variable. In situation two, I thought my wish, the reference represented an independent variable.

Am I wrong?

Fourth. Without a model, economic predictions can be made
to turn out any way you want, just by selecting the right

assumptions about what people value.

Yes, I agree. They use a model. But the theory behind supply and demand doesn’t represent a mental representation of the external world. The theory of supply and demand is an imagined “picture” without any point of connection to the external reality. In the external reality there are people buying and selling but no supply and demand. Supply and demand is not describing an external state of affairs. Supply and demand is a perceived imagination.

Skimming through the whole book, it’s clear that there is some
organizing principle behind all the examples.

I have just read the online chapters written by David Friedman. On this basis I think he has organized his account on basis of his later explanations about Economic Efficiency and more.

bjorn

First. Utility theory is
reinforcement theory. Instead of objects

having reinforcing value, they have
utility.
[From Bill Powers (2007.11.20.0850 MST)]

Bjorn Simonsen (2007.11.20,12:50 EUST) –

I don’t think I agree.

Ordinary reinforcement theory states that reinforcement acts to increase
or decrease the probability that a response will follow a given
stimulus.

Utility theory states that if we compare two different goods there is a
tendency for people to increase behaviors which has most
utility.

That is reinforcement theory. The reinforcer is the good; its reinforcing
effect is its utility. The person increases purchases of the good that is
the most reinforcing for him, meaning it has the most utility for
him.

The marginal
substitution fraction -(delta x2/delta x1) is greater or less dependent
on which indifference curve the author of the textbook uses. I think they
all make it clear that different people are in need of different
goods. And I think they all make it clear that if two people are in
need of the same two goods, these goods may substitute each other in
different ways as you may see on the indifference curves
below.

A person will buy whichever good reinforces buying the most (has the
highest utility). Substitution effects, indifference curves, merely show
that n1 units of one good have the same reinforcing effect as n2 units of
the second good – they cause the same amount of buying behavior. Without
control theory, Friedman’s price theory (which appears quite
conventional) is purely behavioristic. The marginal utility is just the
imagined partial derivative of one reinforcing effect with respect to the
other.

Don’t forget that those utility curves you drew are (as far as I can see)
completely imaginary. There is no practical way to measure them, is
there? If there is, I’d like to see the data.

Let’s focus on finding out what Friedman’s model is, and on building a
better one.

Best,

Bill P.

5245fa3.jpg

These are imagined curves, aren’t they? If they were convex the
other way, all the conclusions about marginal utilities would be
reversed.

[From Bjorn Simonsen (2007.11.20,20:00 EUST)]

From Bill Powers (2007.11.20.0850 MST)
This is HTML format.

That is reinforcement theory. The reinforcer is the good; its
reinforcing effect is its utility. The person increases purchases
of the good that is the most reinforcing for him, meaning it
has the most utility for him.

I still disagree ( a little). I don’t know which indifference curves that are actual for most people.
[I have tried to ask myself how I consider 250 g meat and 1 bread. I can’t think how I will substitute the units. I can imagine that a mother in Senegal or in Palestine being able to describe her indifference curve for meat and bread. But most of those mothers have no employment income.]

But if I accept an indifference curve as we find them in textbooks.

Outlook9.bmp|x

Your argument: " The person increases purchases of the good that is the most reinforcing for him, meaning it has the most utility for him". is wrong. What the indifference curve tells us is that the more the consumer consumes of one good, e.g. good x2, the more of this good he is willing to renounce to obtain a unit of the other good, here x1. (The indifference curve may be wrong.)

A person will buy whichever good reinforces buying the most (has the highest utility).

You misunderstand the utility curve, I think. Along the utility curve the two goods substitute each other. It is the the farther away from origin of coordinates, the more they are buying.

Outlook10.bmp|x

Substitution effects, indifference curves, merely show that n1 units of one good
have the same reinforcing effect as n2 units of the second good – they cause
the same amount of buying behavior.

This is only the half truth. The other half says that all points on the curve represent a number of units of the normal good that the consumer is willing to substitute with a number of the inferior good.

Without control theory, Friedman’s price theory (which
appears quite conventional) is purely behavioristic.

Yes, all economic theories I remember are behavioristic.
Now I will say something positive about them.
Economic theories explain how a lot of people behave, shall we say 20%, 40%, 50%. If we use economic theories to advise a government how to budget, it is OK. Maybe the best we have. But it is not good enough.

The problem starts when economists advise single people to buy a house now, to buy stocks now, on basis of supply and demand. Then things often go to hell.

Don’t forget that those utility curves you drew are
(as far as I can see) completely imaginary.

Of course they are. That is what I try to express.

There is no practical way to measure them, is there?

I tried for myself, but I didn’t make it.

If there is, I’d like to see the data.

I have never seen them.

Let’s focus on finding out what Friedman’s model is,
and on building a better one.

Friedman’s model is supply and demand. And I think your econ005a is a good start. It is the brain that make people behave, and different brains make people behave different.

Yes, let us start with a model representing the brain.

bjorn

These are imagined curves, aren’t they? If they were convex the other way, all the conclusions about marginal utilities would be reversed.