Mumbo Jumbo Economics

[From Kenny Kitzke (2004.02.29)]

<Rick Marken (2004.02.28.1150)>

I am departing (for now) from the dialogue concerning whether the real economy of the USA is a closed loop system or an open loop system. As Martin has testified, he believes that both economic systems and human behavioral systems are open loops. The more relevant point may be whether such open systems show negative or positive feedback control as the open systems operate. Am I saying this right Martin?

Rick has admitted it would not be smart to use a closed loop model to analyze an open loop system. We’ll just stop where we agree. Since I believe economies are open systems and they can behave with positive feedback, I sure wouldn’t try to analyze them with a closed loop negative feedback model. But, that’s just me. Rick is Rick. And, Rick won’t read or answer my posts. What is he afraid of that I might do?

So, I have changed the subject title from “Closed loop economics” which I think is a misnomer to a critique of Rick’s analyses and conclusions which I think are just plain wrong regardless of the structure of the observed economic system.

<Here is a comparison of the US and UK quarterly data on the
relationship between economic growth (measured as percentage change in GDP per quarter) and capital investment (called gross fixed capital formation in the European databases). The UK data looks a lot more like the US data than does the Norway data (see [Rick Marken
(2004.02.25.1125)]. Note that the lagged correlations are slightly
smallerthat’s just me. Rick is Rick. And, Rick won’t read or answer my posts. What is he afraid of that I might do?

So, I have changed the subject title from “Closed loop economics” which I think is a misnomer to a critique of Rick’s analyses and conclusions which I think are just plain wrong regardless of the structure of the observed economic system.

<Here is a comparison of the US and UK quarterly data on the
relationship between economic growth (measured as percentage change in GDP per quarter) and capital investment (called gross fixed capital formation in the European databases). The UK data looks a lot more like the US data than does the Norway data (see [Rick Marken
(2004.02.25.1125)]. Note that the lagged correlations are slightly
smaller for the UK than for the US. The correlations are plotted on
different axes in different scales so that it’s easier to see the
similarity of the shape of the lagged correlation plots. Once again,
investment that occurs prior to growth (lag -1, -2, etc) is weakly or
negatively related to growth. For the UK data the negative
relationship between prior investment and growth isn’t apparent until 2
quarters prior to the present (zero lag). In both the US and the UK,
the strongest positive relationship between capital investment and
growth shows up when investment follows growth. It looks to me like
these data are consistent with the idea that the aggregate producer
invests to grow output only after there is increased demand (growth)
for that output.>

Here we go:

  1. Massaging the Data

We see a technique being used where one displaces the variables in time increments and check the correlations to see when they are positive or negative and by what amounts.

This is supposedly telling us which one is causing the other to grow. If there is such a statistical technique, I have never heard of it. No correlation assigns cause.

Second, look at the correlation coefficients Rick gets when he magically maximizes them: about 0.3 to 0.4. To my knowledge, this is so weak that any competent, unbiased analyst would avoid claiming there is even a relationship worth studying.

This seems in sharp contrast to Rick’s claim that “the strongest positive relationship between capital investment and growth shows up when investment follows growth. It looks to me like these data are consistent with the idea that the aggregate producer invests to grow output only after there is increased demand (growth)for that output.”

Sorry, but it looks like mumbo-jumbo economics analyses to me. I think a prudent analyst would say the data neither shows that GDP growth necessarily increased Investment or vice versa. They would then study more to see relationships and causes among relevant variables.

  1. But, doesn’t even this assessment prove that anyone who claims that investment will grow an economy is mistaken?

Well, yes and no. Yes, if the variables being compared by Rick were ones relevant to the generalized claim or idea. But, as Rick admits, he does not know exactly what the variables mean. Is it fixed investment people mean. Is it gross investment? Is it net investment or what?

Unless I have not understood what variables Rick claims to have correlated, it is quarterly GDP growth rate (probably annualized, or do we even know that) against absolute Investment in a quarter.

Does this seem foolish to just me? Is that what we are trying to confirm or deny?

I would think one would quickly recognize that correlation is not a valid tool for this case. Why? Because structurally (as I see Bill W. has just correctly pointed out), Investment is one of the components of GDP. So without running any correlations, mathematics would tell us that for every dollar increase in Investment (I will continue using the term that is just a column of numbers), GDP will increase one dollar. Increasing Investment always increases GDP.

Unfortunately, other things affecting the economy can simultaneously increase or decrease GDP (consumer consumption, government spending, trade balance, etc). And since these variable swamp the Investment number, the correlation goes from a sure 1.0 to a meaninglessly weak <0.4.

So, we not only have a question of whether I or GDP is the independent variable, we have the question of whether I is dependent or independent of all the other factors. How could we know that?

I would suggest that a designed statistical experiment might give us some answers. But masturbating with correlation coefficents is gonna just well feel good I suppose (I admit I have little experience in this activity with a big smile) without much other useful results. Course, I could be all wet. I am no economics expert or even trying to be one.

Well, these are a few things I would like to see addressed by the aspiring experts. Is anyone reading or listening?

If there are some answers, we could move on to the more vital topic of does every $ of GDP have the same value in the economic system? Then we can get to the real MUMBO-JUMBO of our closed loop models.

From[Bill Williams 29 February 2004 11:55 PM CST]

Kenny announces his intension of “departing the dialog” regarding the economy. In doing so he observes that “Rick won’t read or answer my posts” And, he asks "What is [Rick] afraid that [Kenny] might do? But, the answer to this seems so obvious that one wonders why it would be asked. But, since Kenny has asked the question, I’ll make a stab at answering the question. “What is Rick afraid that Kenny might do?” Well, Kenny might keep on doing what Kenny has been doing all along-- posing questions. I don’t really think that Rick is genuinely very interested in this economic thread stuff. It seems to me that he’d like to obtain some numbers and correlations and call it a day as soon as he could. And, this, it seems likely is what is behind his repeated premature claims about this and that and the other thing. Having Kenny asking questions is just going to prolong this business, and Rick would just as soon it was over and done with.

So, I am sure would more than a few people on the CSGnet would join Rick in wishing that the Economic thread could reach some conclusion so that CSGnet could return to its more typical discussions of how control theory can be applied to everyday human problems. Some people even blame me for the dominance of economic issues. They have complained to me claiming that I am responsible for the emergence and then the dominance of the economic threads on CSGnet. There may be some truth to their claims in that my presence provokes Powers and may keep economic issues at the focus of his attention. But, Powers is entirely free to take up other topics and discard the economic thread if he wishes to do so. Still, it would probably be of benefit to larger goals of the CSG community to return the CSGnet to a more inclusive discussion of human behavior. Economic theory is an important issue, but the economic thread-- under Bill Powers direction, at the present rate of progress, can be expected to occupy CSGnet for the indefinite future. Do these threads match the interests of and advance the goals of most of the subscribers to CSGnet? Almost surely not. And, as Kenny asks, " Is anyone reading or listening?" Surely not very many. Not many on the CSGnet list are proficient programmers, statisticians, economists. And, a fair measure of proficiency is required to read the economic threads with any measure of comprehension. As far as I can tell based recent postings, Powers may be making progress in reading Bruun’s dissertation, but I see no evidence that Rick has read anything of it. A comparison between Bruun’s dissertation and Everest may not be entirely apt, but does anyone remember who made it up Everest the 2nd time?

Some time ago, Bill Powers argued that the economists had confused economic issues-- which might in some cases be true-- and that what was required was a return to basic common sense and a re-construction of economics based upon what one could directly observe. However, and it is evidence of some progress on his part, Bill Powers is now considering that there are two ways that money functions in an economy. An understanding of this goes back at least to Marx, and the distinction between two types of transactions. One is often considered the “normal case” in which commodities are exchanged for money and then the money is exchanged for commodities. In the second case money is exchanged for commodities and commodies are exchanged for money. The second is characteristic of a capitalist society in which money is often the goal of economic activity rather than merely a medium of exchange. In some sense this capitalist society is not entirely subject to interpretation in terms merely of what can be directly observed. After all is the distinction between sanity and insanity be directly observed? The economic process, as I have pointed out repeatedly, is not entirely a materialistic process-- it is process that involves values, and a part of the process is symbolic. And, the issues of sanity, and value and the symbolic character of the process are never going to be successfully reduced to merely a mechanistic process.

Kenny raises a number of questions. I’d like to emphasize a couple of points:

I would think one would quickly recognize that correlation is not a valid tool for this case. Why? Because structurally (as I see Bill W. has just correctly pointed out), Investment is >one of the components of GDP. So without running any correlations, mathematics would tell us that for every dollar increase in Investment (I will continue using the term that is just a >column of numbers), GDP will increase one dollar. Increasing Investment always increases GDP.

I’d like to qualify this a bit. A dollar spent for investment ( of whatever sort ) will increase GDP by a dollar ( as Kenny says ) unless there is some process that reduces consumption by a dollar for every dollar spent for investment. I know of no such process, and can not at this point imagine why such a process might exist. I have a model-- part of which was demomonatrated at the St Louis meeting – which does have control theory based agents which generates an increase in GDP in excess of investment expenditure.

as Rick admits, he does not know exactly what the variables mean.

I would delete the “exactly” in Kenny’s statement. The dispute about the identity of savings and investment which Powers completely misunderstood is a comic example of what happens when one attempts to undertake a task that is largely symbolic without knowing what the symbols mean.

And, as a result of “not knowing what the symbols mean” the arguments which are being presented are in a constant process of equivocation. The distance between Bjorn’s wonderful correlation and Ricks, or Bill Dad’s claims seems to me to be only a matter of arrogance. Bjorn never claimed definitive results, Rick frequently does. And, so do Bill Powers and his dad. But, the original issues seem no closer to resolution. Does the leakages thesis apply to the Great Depression and World War II or not? And, there is the continuing question of the clear case of equivocation in which Gross Investment is being substituted for Net Investment. At least in terms of the numbers I presented investment (net investment) is far more variable than TCP thesis would lead one to suspect. When Bill Powers calculated net investment he found the same relationship which Keynes found for investment–that it is more variable than consumption. So, the claim that investment in the sense of net capital formation is a constant fraction of national income can not be sustained. You can credit Keynes’ numbers or you can credit the numbers Powers calculated-- either set of numbers indicate the same thing-- the variability of capital formation.

Ricks numbers are of course interesting-- in the same way that Bjorn’s numbers were interesting. What the lag/lead computation reminds me of is my reading the editorial page as a sixth grader sitting in an apple tree. President Eisenhower was explaining that his budget defict wasn’t really a deficit spending, rather it was “pump priming.” According to the good general sometimes you needed to prime the economy to get it going. And, the little bit of government spending would set business in motion. I thnk Rick ought, using the same method to examine the lead lag structure between government deficits and GNP. The obvious suspect is the possibility of auto-correlated variables, but while running the numbers it might be interesting to see, according to Ricks method, do government deficits create growth in national income?

Bill Williams

From[Bill Williams 1 March 2004 9:40 PM CST]

[From Bill Powers (2004.03.01.1649 MST)]

I don’t know what a control system model would look like – we’d have > to guess at what this manager is controlling such that it leads to the

observed dependence.

In one sentence Bill Powers provides two illustrations of the problems that are involved in pursuing economic theory without being acquainted with economics. When he says, "… we’d have to guess at what this manager is controlling [for] it seems apparent that Powers is not acquainted with the literature that describes the variety of goals which manager’s have pursued. It isn’t really neccesary to guess. To start with there is “profit maximization.” Problematic as this conception of manageral goals might be, capitalism is a system that many people think of as driven by the pursuit of profit. However, if you adopt to begin with an disposition to treat a whole profession with contempt-- then when you set out to defeat the world-- you are stuck with what resources you can by yourself create.

Second, Powers appears to be engaging in yet one more act of equvocation. He describes Rick’s recent statistical inference in terms of an “observed dependence.” The difficulty here is that the lead lag structure that Rick has calculated is a part of a larger system-- that screams mutually coorelated variables. There is a thing called a “business cycle” of which the national income variables are a part. “Has anyone observed a dependence of investment upon the level of income?” Well, may I recomend chapter 14 in Keynes’ 1936 General Theory? And, in passing may I recomend the following passage from Keynes, 1936

"The writer of a book, such as this, treading along unfamiliar

paths, is extremely dependent on criticism and conversation,

if he is to avoid an undue proportion of mistakes. It is astonishing

what foolish things one can temporarily believe if one thinks too

long alone, particularly in economics … where it is often impossiible

to bring one’s ideas to a conclusive test either formal or experimental.

p. vii.

It may not, as Keynes says, be possible to reach a “conclusive” test, but the experience of the last two thirds of a century following the publication of Keynes’ Gen THeory have been quite different than the like period before its publication. The income-expenditure system that Keynes is largely responsible for introducing has been a unique event in economic thought. The General Theory is a genuinely difficult book to understand under the best of circumstances, if it is approached with a paranoid preconception that Keynes was a shady politician then it appears to be impossible to comprehend its message.

Between the masturbation with the data, and the creation of what is reported to be on its way to an intractible computer simulation, Bill and Rick don’t have time to consider work being done in economics such as the award of this years bank prize (aka Nobel prize ) to work on the theory of auto-coorelated variables. Auto-correlated variables-- a concept to reflect upon.

Bill Williams

Bill Williams wrote:

The General Theory is a genuinely difficult book to understand
under the best of circumstances, if it is approached with a paranoid
preconception that Keynes was a shady politician then it appears to
be impossible to comprehend its message.

Actually, the ideas behind The General Theory are very simple if you
translate the technical language Keynes uses. For example, Keynes
describes the substance of his Theory of Employment, which, after
translation into simple language, reads:

···

----------

"Now if for a given number of employees the employer is making a
profit (i.e.,the value of what the employees produce is greater than
the amount needed to pay them). There is an incentive for the
employer to employ more people; if necessary, offering higher wages:
competing with other employers to get workers. All the employers will
compete with each other to get as many employees as possible by
offering higher wages than each other. This they will do until it is
no longer profitable to employ any more. (i.e. Employers will keep
competing with each other to employ more people until they have
driven up the amount they are offering in wages to the point where
their total profits start to fall). There comes a point when it does
not pay to hire any more workers and at this point wages will be at
their highest.

...this is the substance of the Theory of Employment."
----------

If you now put these ideas into a Game Theory context, they provide
an excellent insight into what happens in the economy in the real
world.

(A fuller description you'll find at:

)

Peter Small

Author of: Lingo Sorcery, Magical A-Life Avatars, The Entrepreneurial
Web, The Ultimate Game of Strategy and Web Presence
http://www.stigmergicsystems.com
--

[From Bill Powers (2004.03.02.0818 MST)]

Peter Small (2004.03.02) --

Actually, the ideas behind The General Theory are very simple if you
translate the technical language Keynes uses. For example, Keynes
describes the substance of his Theory of Employment, which, after
translation into simple language, reads:

----------

"Now if for a given number of employees the employer is making a
profit (i.e.,the value of what the employees produce is greater than
the amount needed to pay them). There is an incentive for the
employer to employ more people; if necessary, offering higher wages:
competing with other employers to get workers.

In my program Econ004 as it stands today, the wage rate is an independent
variable (adjustable by the user but not affected by the agents in the
model). Arbitrarily increasing wages simply results in a new equilibrium
with prices elevated in proportion; consumption is not affected after the
transient rebalancing occurs. I don't know if this is realistic; I'm simply
describing how the model behaves in its present form.

However, wage negotiations can be included in future versions of the model.
In order to do this, we have to settle on a model of the plant manager who
makes hiring decisions, and of the wage-consumer who gets hired. Keynes'
model (which, as described above, seems to be simply his rendition of the
classical theory of employment outlined on p. 5 of the General Theory)
assumes that the entrepreneur is trying to maximize profit, and that the
worker operates according to a balance of forces between the "utility" of a
given wage and the "disutility" of working. If such ideas could be
quantified they could be put into Econ004 as models of, respectively, the
plant manager and the wage-consumer.

I would prefer a different model of the agents involved -- a PCT model in
which the behavior we see is the indirect result of what the parties
involved are controlling. This is not to say that certain individuals do
not try to maximize profits, but maximizing is an inherently hard-to-define
process. Maximizing utility does not necessarily entail maximizing
consumption -- the utility of eating food reaches a maximum long before one
has eaten the absolute maximum amount possible. The idea of a reference
level and a control system makes much more sense. Simon, I believe, got a
Nobel Prize in Economics for showing that real managers, on the whole,
actually do not try to maximize profit, but to "satisfice" -- that is, to
meet specific goals, which is more like the behavior of a PCT model. The
goals can shift due to higher-order considerations, but at any given time
the details of behavior would be determined by errors relative to the
current goals, not by an urge to get as much as possible regardless of the
human cost or the occurrance of satiation.

I think that the concept of unemployment is much too imprecise to become
part of a model just now. When I was growing up, full employmnent consisted
(roughly) of every household having one working adult, while the other
adult stayed home and raised the children. Now full employment seems to
mean every household having two or more working members each with one more
more jobs, so one wonders where the future will find us.

The concepts of utility and disutility should be replaced by the PCT ideas
of reference signals and the other trappings of control theory. The reason
that most people work is not simply that wages have some sort of "utility"
stuffed into the pay envelope along with the check, but that workers
require certain amounts of goods and services to stay alive, stay healthy,
and stay happy (in order of decreasing urgency). Those are the goals, the
reference signals, on which all else in the economy depends. Consumers do
not have the option of not working at all, and thus not consuming -- in
order to live, they must either be supported by the earnings of other
people, or they must work wherever they can get a job that pays enough to
live on. Enough wages must be paid to those with jobs to support all the
rest, regardless of the level of employment. One way or another, those who
work must earn enough to keep those who do not work from dying. So the
levels of wages are set, in the long run, by the society's principles
concerning the fate of the least-favored among us. If people began dying in
large numbers, employers would simply have to revise their ideas of what
constitutes a sufficient profit. That may not have been true in the 18th
Century, but I hope it is at least more true in the 21st.

Bargaining for wages is basically a conflict situation: the worker wants to
get as much money as required for a good life with time off work to enjoy
it, and the employer (according to classical theory and Keynes) wants to
get as much work from the employees as possible at the least wage possible,
to the point where adding or subtracting even one worker would decrease
profits. This is indeed a simple idea, but the question is whether it is
(a) correct, and (b) a basis for a viable society. Perhaps these motives
are indeed the ones in effect, but they can be plugged into the Test Bed
model, once it is completed, to see if the results are realistic. I think
some surprising relationships would come to light if we plugged the assumed
properties of workers and employers (and even a mix of _different_
properties) into a properly-constructed test-bed model.

I am not enthusiastic about giving up at this early stage and falling back
on Chaos theory and other assumptions that reject the possibility of
understanding. I think it is possible to construct a model that captures at
least the macro aspects of the economy, including the effects of policies
that are adopted by large numbers of people (collective bargaining, layoffs
as a way of increasing productivity, and so on). The keystone of any
successful theory, I am convinced, lies in the consumer's requirement for
certain kinds of consumption, which arise from the biological nature of
human beings, particularly their properties as living control systems. Bill
Williams showed how such biological requirements can explain the Giffen
effect; I think the scope of PCT explanations in economics can be
considerably broader than that.

Best,

Bill P.

[From Rick Marken (2004.03.02.0910)]

Peter Small writes:

Actually, the ideas behind The General Theory are very simple if you
translate the technical language Keynes uses. For example, Keynes
describes the substance of his Theory of Employment, which, after
translation into simple language, reads:

----------

"Now if for a given number of employees the employer is making a
profit (i.e.,the value of what the employees produce is greater than
the amount needed to pay them). There is an incentive for the
employer to employ more people; if necessary, offering higher wages:
competing with other employers to get workers. All the employers will
compete with each other to get as many employees as possible by
offering higher wages than each other. This they will do until it is
no longer profitable to employ any more. (i.e. Employers will keep
competing with each other to employ more people until they have
driven up the amount they are offering in wages to the point where
their total profits start to fall). There comes a point when it does
not pay to hire any more workers and at this point wages will be at
their highest.

...this is the substance of the Theory of Employment."

This sounds like a stimulus-response model of employment. It says that
profit (p) drives employment (e), so that e = f(p). But p is also a function
of e, so that p =g (e). So profit and employment are variables that exist in
a closed loop relationship to each other, making an open-loop, S-R analysis
invalid.

I think the appropriate analysis of the relationship between profit and
employment would views p as a controlled variable, influenced by external
disturbances (d, the factors that affect the employer's income from sale of
what is produced) and the level of employment, e. Using a quasi-static,
linear systems approach (like that used in my "Blind men and the elephant"
paper in _More Mind Readings_) I would say:

p = k1 (d - e) (1)

e = k2 (p - r) (2)

Where k1 and k2 are constants and r is the employer's reference for profit.
Equation (1) says that employment is negatively related to profit. Equation
(2) say that increases in profit relative to the reference for profit are
positively related to employment. Thus, equation (2) is Keynes Theory of
Employment, with r unspecified.

Equations (1) and (2) represent functional relationships that exist
simultaneously in a closed loop. So the two equations must be solved as a
simultaneous pair in order to determine the functional relationships between
variables in the loop. Solving (1) and (2) simultaneously for e (employment
level) we get

e = k2k1/(1+k2k1) d - 1/(1+k2k1) r (3)

Assuming that the product k2k1 is large, k2k1/(1+k2k1) approaches 1.0 and
1/(1+k2k1) approaches 0.0 and equation (3) can be simplified to

e = d (4)

So a closed loop analysis shows that, if profit is a controlled variable,
then variations in employment level, e, are a function of disturbances to
profit, d, not to profit itself. Profit doesn't even show up as an
independent variable in equation (4).

Equation (4) says that Keynes Theory of Employment is a theory (like
reinforcement theory or S-R theory in psychology) that is based on a version
of what is called the "behavioral illusion" in PCT (see W. T. Powers (1973)
Behavior: The control of perception). The illusion, in this case, is that a
controlled variable (profits, in this case) is the cause of variations in
the outputs (employment levels) that affect the state of this variable. In
fact, the variable that "causes" (via the causal connections in the closed
loop) variations in output is the variable that disturbs the state of the
controlled variable (profit, in this case). The disturbances, in this case,
are factors that are independent of the actions of the employer (the only
action we consider in this case is employment level) that influence profit,
factors like the level of demand for the product, desirability of the
product, an so on.

Keynes, like other prominent social scientists of the 20th century,
succumbed to the behavioral illusion because it is quite compelling and
because the only way to see past it is by using control theory, the proper
application of which to the social sciences was not known until 1973, when
Powers published B:CP. Of course, now social scientists have no excuse for
succumbing to the behavioral illusion, especially those (many of whom
participate in this discussion group) who claim to understand control
theory.

Best regards

Rick

···

--
Richard S. Marken
MindReadings.com
Home: 310 474 0313
Cell: 310 729 1400

From[Bill Williams 2 March 2004 3:30 PM CST]

[From Bill Powers (2004.03.02.0818 MST)]

. Keynes'
model (which, as described above, seems to be simply his rendition of the
classical theory of employment outlined on p. 5 of the General Theory)
assumes that the entrepreneur is trying to maximize profit, and that the
worker operates according to a balance of forces between the "utility" of

a

given wage and the "disutility" of working.

Bill Powers is completely mistaken. Neither the entrepreneur nor the worker
is in a position to either maximize profit nor to balance "utility" and
"disutility."
And, it is the impossiblity of either the entrepreneur or the working, or a
combination between them achiving this that resulted in the Great
Depression.
The son misunderstands Keynes in the same way as the father. Thus, the
resort to "simple" answers and an a futile attempt to reinvent a whell that
has
been rolling quite well, if we let it, for the past two thirds of a century.

I think that the concept of unemployment is much too imprecise to become
part of a model just now.

Pity that the unemployed will just have to wait on the progress of science.
Powers of course can not be bothered with reviewing the literature before
setting out to revolutionize a field-- he can even be bother to learn what
the
terms mean.

If people began dying in
large numbers, employers would simply have to revise their ideas of what
constitutes a sufficient profit. That may not have been true in the 18th
Century, but I hope it is at least more true in the 21st.

Where is the neccesity for this?

they can be plugged into the Test Bed

model, once it is completed,

Any predictions as to the launch date?

Bill
Williams showed how such biological requirements can explain the Giffen
effect; I think the scope of PCT explanations in economics can be
considerably broader than that.

Powers is being more generous than accurate here, figuring out the Giffen
effect was a genuine collaboration. And, I of course agree that the
application
of control theory has broader, considerably broader, implications for
economics.

It is unfortunately that Bill Powers bellieves that making such an
application
requires misrepresenting and attacking Keynes. The effect of this adversion
to
Keynes can only likely to have a retarding effect upon the use of control
theory
in economics.

Bill Williams

···

Subject: Re: Mumbo Jumbo Economics

From[Bill Williams 2 March 2004 7:30 PM CST]

In a posting today [From Rick Market 2004.03.02.0910)] takes off from

from a grotesque mis-representation of Keynes' work to generate still

further mis-representations.

Keynes, it is supposed suffered Rick indicates from the dreaded

affliction of behaviorism. Lacking access to a pair of Princess

Lady Diana's sunglasses Keynes gets it all wrong.

This attribution of a position of behaviorism to Keynes is a bit

doubtful since Keynes was an admirer of Freud. And Keynes also put

a great deal of weight upon the role of instincts and what he called

the "animal spirits." In the Keynesian analysis economic agents

were considered as active participants in determining the conduct

of the economy.

There is also the connection between Keynes and the American

economist John R. Commons. Commons work in turn had a close

connection to the work of Pierce, Veblen and Dewey. The Pierce,

Veblen and Dewey linage has been one of the early centers

of opposition to behaviorism. Historically, Rick is apparently

entirely unaware of this connection. Psychologically, it is

not correct to suppose that Keynes's work can be dismissed

because he made the mistake of adopting behaviorism as his

psychological foundation.

Rick launches this message using a mistake made by Peter Small

in which Small says that,

> "Now if for a given number of employees the employer is making a

> profit (i.e.,the value of what the employees produce is greater than

> the amount needed to pay them). There is an incentive for the

> employer to employ more people;

As a matter of logic, what Small asserts in the sentences above is

incorrect. Anyone with a modest training in economic theory should

see the error immediately. (However, apparently neither Rick nor

Bill Powers perceived the elementary mistake in Peter's statement.)

As it stands Peter's description of the situation that an employer faces

is in error. As a result the discussion by both Rick and Bill Powers is

to greater or lesser extent contaminated by Peter's error.

Is it worth pursuing the issue when the basic presupposition is

mistaken? As a matter of constructive inquiry, almost surely not.

As, is well known startling results can be derived by starting with

a contradiction. So, ordinarily people try to avoid reasoning that

begins with a fallacy. But, it can be instructive to trace how

arguments develop when they being with premises that are

contradictory.

And,

Small confuses two very different matters. One is the employer

who is supposed, in the macro-economy to "in fact" be making

a profit. The other is a very different matter regarding the employer

"expecting" to make a profit. This confusion on Small's part between

an actual profit that has been realized-- a matter which can only be

determined after the labor has been hired, the work done and paid, and

the resulting output sold, and the employer's

                    _EXPECTATION_

of making a profit should I think invalidates any claim that Small might

make to be a dependable interpreter of Keynes' work. Realized profits

in the Keynesian system are not a part of the causal loop. The loop

runs through expectations rather than past experience.

Peter, before making this elementary mistake said,

> Actually, the ideas behind The General Theory are very simple

If, the ideas behind the _Gen Th_ were actually simple, then we wouldn't

expect to see Small making so basic a mistake in his attempt to translate

what Keynes said into simpler terms. Keynes used a technical language

for a purpose-- the ideas which he was introducing were novel and the

economists of his day were habituated to think in a way that made it

difficult for them to see what Keynes meant. So, if Keynes' ideas are

simple, which in itself implausible, then they are despite their simplicity

evidently too complex for Small to accurately comprehend.

However, Small, despite making a basic error between Keynes's

analysis of an entrepreneur's expectations, and what the books of

the entrepreneur show after his product is sold, and he has paid his

bills, Rick Marken without noticing this elementary mistake apparently

believes Small's mistaken claim that

>

> ...this is the substance of the Theory of Employment."

Rick doesn't know Keynes' work sufficiently well to be in a position to

distinguish between Keynes' actual position, and the mistaken

interpretation which Small provides.

Rick says,

This sounds like a stimulus-response model of employment.

Keynes, as I have pointed out above at length treated the behavior of

economic agents as something other than the "stimulus-response"

conception characteristic of behaviorism. And, I will again point out

that Small's argument is not a competent expression of Keynes' analysis

of employment.

However, Rick, oblivious to Small's mistake, goes on to say that,

It says that profit (p) drives employment (e), so that e = f(p).

The equation doesn't say anything-- the agency doing the talking is Rick.

And, the equation is based upon Small's mis-representation. As I will

show later on, the statement that employment is a function of profit,

is an absurdity. What the statement asserts, but Rick doesn't know

enough about macro-economic theory to see this, is that employment

is always zero. In effect there is no economic employment and therefore

no output, and no economy.

If Rick knew the Keynesian system, he would have recognized Small's

error, and realized that in the Keynesian system it is the _EXPECTATION_

of profit rather than an actual profit that provides the motivation for the

Keynesian system. What psychological premises are consistent with the

system that Keynes developed remains a matter of controversy. But,

behaviorism is not the most prominent candidate for the task.

Rick, however, oblivious to Small's fundamental mistake continues, saying,

But p is also a function of e, so that p =g (e). So profit and employment

are variables that exist in a closed loop relationship to each other,

making

an open-loop, S-R analysisinvalid.

I am not sure why Rick thinks this argument is needed. In my understanding

the S-R analysis is never a valid argument in application to a living

system-- which an economy-- consisting of living systems -- obvious is a

representative-- of a sort.

I think that I would agree with Kenny that Rick's distinction between an

open-loop and a closed_loop system may be a bit confused. Is a dog

chasing its tail an open-loop or a closed-loop system. I think various

people might give various answers.

Rick proceeds to consider the issue

I think the appropriate analysis of the relationship between profit and

employment would views p as a controlled variable,

Further on I present arguments why this viewing p (profit) in a macro-

context as a controlled variable is an absurdity.

influenced by external

disturbances (d, the factors that affect the employer's income from sale

of

what is produced) and the level of employment, e.

Rick says that p (profit) is a controlled variable. But, it might be asked,
who

is controlling p (profit). Is the employer in a position to control for
profit?

In the aggregate-- which is the context of this discussion-- we can sum all

of the current transactions. On one side of the balance sheet we will have

total sales. On the other side we can add up total purchases. Another way

of speaking about this characteristic of a transaction is to speak of
monetary

costs and monetary output. The fascinating thing about the aggregate, or

one of the fascinating things, is that in the aggregate monetary production

(sales) are equal to monetary costs (purchases by entrepreneur's). Now,

profit can be defined as the monetary production (the sales side of the

entrepreneur's balance sheet) minus the monetary costs of that production,

the factor inputs (the entrepreneur's purchases). If we consider the nature

of a transaction we may notice that what is a sale on one side of a
transaction

is a purchase on the other side. When this insight is transferred to the
balance

sheet of the aggregate economy the results is what many people find to be

an unexpected result, that since sales equal purchases in the aggregate

profits are always equal to zero. Now, control loops are marvelous things

but one thing they can not do is force the two sides of an identity to take
on

values so that one side of the identity doesn't equal the other side of the

identity. So, a number of implications can be derived-- starting from first

principles-- the nature of a transaction among them -- that provide an

explanation of why a capitalist system is liable to the difficulties that it

sometimes experiences. And, why people have so much difficulty in under-

standing how a capitalist system functions.

In part I think this difficulty that both Rick and Bill Powers experience

in understanding economic relationships has it source in an extremely

conflicted orientation regarding the economy. This seems to have the

effect of rendering economic issues fascinating at the same time that the

conflict prevents them from benefiting from anyone else's efforts.

Both Peter and Rick uncritically assume that, in the aggregate economy, it

is possible for profit (income - expenditure) to take on a positive number.

Entrepreneurs can of course _EXPECT_ that if they do this or that, that

then they will make a profit. Entrepreneurs can form whatever expectation

they wish. There is nothing to restrict the process by which they develop

expectations.

The reality, however, is that in the aggregate profits are always--

regardless of what anyone does, going to be equal to zero. I explained

this relationship at a CSG conference in Durango years ago. Powers, at

that time defended this argument, asserting that I had proved the

result that in the aggregate profits are equal to zero. I was pleased

to have his support at the time, but the reality doesn't depend upon

who believes what.

Rick goes on to say that, (and I've snipped out some stuff )

Equation (1) says that employment is negatively related to profit.

Of course, if profits are always, in the macro-economy, equal to zero,

then the employment relation is not going to be very interesting.

Equation

(2) say that increases in profit relative to the reference for profit are

positively related to employment. Thus, equation (2) is Keynes Theory of

Employment, with r unspecified.

First Keynes says nothing of the sort. This attribution is an indication

that Rick's understanding of the Keynesian system is effectively almost

null. Perhaps his understanding is less than, null, if that is what he

misunderstands is subtracted from what, if anything, he does understand.

And, obviously if profits are always zero then there isn't any point in

considering, as Rick does, "increases in profit." Zero is zero.

Equations (1) and (2) represent functional relationships that exist

simultaneously in a closed loop. So the two equations must be solved as a

simultaneous pair in order to determine the functional relationships

between

variables in the loop. Solving (1) and (2) simultaneously for e

(employment

level) we get

e = k2k1/(1+k2k1) d - 1/(1+k2k1) r (3)

Assuming that the product k2k1 is large, k2k1/(1+k2k1) approaches 1.0 and

1/(1+k2k1) approaches 0.0 and equation (3) can be simplified to

e = d (4)

So a closed loop analysis shows that, if profit is a controlled variable,

then variations in employment level, e, are a function of disturbances to

profit, d, not to profit itself.

The idea of a disturbance to a variable that is always equal to zero is an

interesting and novel concept. Is there something profound involved here?

I doubt it. Rick's equations are, to being with based upon a misconception

Of the economic relationships that are involved. Rick was too trusting in

Assuming that Peter know what he was talking about. Rick is often far

Too trusting, but usually it is a matter of his being far too trusting of
Rick.

Still Rick despite his mistaken premise, obtains an interesting result

that I Am sure he and Peter can enjoy in discussion. I don't think that

I have any interest in the specification of a "disturbance" to a

variable that is always equal to zero.

Profit doesn't even show up as an independent variable in equation (4).

This is the sort of thing that can happen when one starts from a

contradictory and mistaken premises.

Equation (4) says that Keynes Theory of Employment is a theory (like

reinforcement theory or S-R theory in psychology) that is based on a

version

of what is called the "behavioral illusion" in PCT (see W. T. Powers

(1973)

Rick is fond of a mode of expression in which he attributes a causal agency
to

Symbols on a screen. Everyone knows, of course, that "Equations" never
really

Say anything. And, in this case, what we have is a parade in which the
"blind"

(Peter Small) are leading the blind (Rick Marken) into a pit. What Rick is
saying

has nothing at all to do with Keynes. How a disturbance to zero, is going
to

have a causal impact, well the whole thing is nonsense-beginning with

Peter Small's idea that Keynes' General Theory is"simple."

Rick goes on to repeat his mistake saying that,

(the only

action we consider in this case is employment level) that influence

profit,

Rick's idea about influence-is novel. Whatever you do to it, zero is always

Zero. So, we are back to Peter Small's original mistake, and the path down

Which Rick is headed based on Small's misconception.

factors like the level of demand for the product, desirability of the

product, an so on.

I marvel how Rick comes up with this stuff. How, is the desirability of a

Product going to influence the aggregate level of profit? Profit is a
matter

Of an accounting identity.

Keynes, like other prominent social scientists of the 20th century,

succumbed to the behavioral illusion because it is quite compelling and

because the only way to see past it is by using control theory,

What Rick indicates here is his ignorance of the number of people who "saw

Past" behaviorism before the emergence of control theory-if control theory

Can be said to have yet emerged.

the proper

application of which to the social sciences was not known until 1973, when

Powers published B:CP. Of course, now social scientists have no excuse for

succumbing to the behavioral illusion, especially those (many of whom

participate in this discussion group) who claim to understand control

theory.

A brave statement by a man who's principle claim to fame is to have
constructed

Programs (I am not going to call them models) which Bill Powers labeled
"Giant

Leaps in the wrong direction." The pseudo-analysis above is a small
hop-but

It still is going in the wrong direction.

The Attack upon Keynes is an irrational legacy that Bill's dad managed to
saddle control theory with-- at least in CSG circles.

Bill Williams

[From Peter Small (2004.03.03)]

Rick Marken writes (in commenting on Keynes' model of employment):

This sounds like a stimulus-response model of employment. It says that
profit (p) drives employment (e), so that e = f(p). But p is also a function
of e, so that p =g (e). So profit and employment are variables that exist in
a closed loop relationship to each other, making an open-loop, S-R analysis
invalid.

I think the appropriate analysis of the relationship between profit and
employment would views p as a controlled variable, influenced by external
disturbances (d, the factors that affect the employer's income from sale of
what is produced) and the level of employment, e.

Although PCT is a neat concept to visualize the way humans make
decisions, its weakness is that it can make predictions only if all
the variables are known. This is always highly unlikely.

In this instance, PCT assumes that profit is the control variable and
provides the motivation for employers to hire more employees. But, in
a real life situation, profit is unpredictable. The driving force is
usually a perception of demand. Employers aim to satisfy demand and
if demand appears to be greater than can be satisfied by a current
work force they will employ more people. This will continue to happen
as long as this maintains a profit. This is what Keynes' model is
telling us.

Having spent some time in the fashion business, I've had plenty of
experience of this. When a fashion trend appears, all the
manufacturers respond by concentrating their resources upon it. There
is often a shortage of a particular skill and the cost of this skill
goes up.

Just as quickly as fashion trends appear, they can wane and die out.
Then resources are taken away and the employees specializing in that
area become redundant. This is a stimulus-response situation and PCT
is only useful at a current, micro level and is ho help in being able
to control or predict the overall situation.

This is not confined to the fashion industry. It also describes the
way many industries work - in particular the information technology
sector.

Peter Small

Author of: Lingo Sorcery, Magical A-Life
Avatars, The Entrepreneurial Web, The
Ultimate Game of Strategy and Web
Presence
http://www.stigmergicsystems.com

···

--

From[Bill Williams 2 March 2004 12:20 AM CST]

[From Peter Small (2004.03.03)]

When Peter Small says that,

This is a stimulus-response situation ... "

He has provided people who take the control theory
analysis of behavior as fundamental with some very
useful information. From the standpoint of a control
theory conception of behavior there is no such thing
as a stimulus-response situation. Apparently Peter
doesn't comprehend the principle of control theory
sufficiently well to realize that control theory and
behaviorism are not conceptions which CSG people
have typically regarded as eclectic alternatives.

There are well developed arguements, beginning
with Dewey's "Reflex Arc" paper 1896 in the
Psychological Review, and continuing down the
to the 1970's and 1980's when the roof for
behaviorism feel in that Peter should become
familiar with, before repeating arguments such as
the above.

Not that CSGnet is unfriendly, If Peter wants to learn
about control theory, I am sure someone would be
willing to help him out.

When Peter goes on to say,

Employers aim to satisfy demand and if demand
appears to be greater than can be satisfied by a
current work force they will employ more people.
This will continue to happen as long as this
maintains a profit. This is what Keynes' model is
telling us.

Peter indicates that he know, no more about economics
than he does about control theory.

I am not much inclined to argue with a such a guy. I can
barely justify arguing with Rick.

Bill Williams

[From Peter Small (2004.03.03)]

Bill. You criticized my interpretation of Keynes.

Here are his exact words, taken from his book:

···

--------

Now if for a given value of N the expected proceeds being greater
than aggregate supply price i.e., if D is greater than Z, there will
be an incentive to entrepreneurs to increase employment beyond N,
and, if necessary - to raise the costs by competing with one and
other for the factors of production, to raise the costs by competing
with one and other for the factors of production up to the value of N
for which Z has become equal to D. Thus the volume of employment is
given by the point of intersection between the aggregate demand
function and the aggregate supply function; for it is at this point
that the entrepreneur's expectation of profit will be maximized. The
value of D at the point of the aggregate demand function - where it
is intersected by the aggregate supply function will be called 'the
effective demand

.......................This is the substance of The General Theory of
Employment

D= Demand price for labour
N = Quality of labour
Z= Supply price for labour

-----------

Here is how I interpreted it:

The note at the bottom says N means 'Quantity of labour, which is a
technical way of saying:- 'number of employees'
So we can rewrite the beginning as 'Now if for a given number of employees '

The next bit, about 'proceeds being greater than aggregate supply
price' simply means 'making a profit on what you are producing'

'D is greater than Z' simply means 'The value of what the employees
produce is greater than the amount needed to pay them'

The phrase 'there is an incentive to entrepreneurs to increase
employment beyond N' means 'there is an incentive for employers to
employ more people'
And 'if necessary - to raise the costs by competing with one and
other for the factors of production' means 'if necessary - offering
higher wages: competing with other employers to get workers.'

Then 'up to the value of N for which Z has become equal to
D' means 'All the employers will compete with each other to get as
many employees as possible by offering higher wages than each
other.' 'This they will do until it is no longer profitable to
employ any more'.

'Thus the volume of employment is given by the point of intersection
between the aggregate demand function and the aggregate supply
function' .... is saying 'Employers will keep competing with each
other to employ more people until they have driven up the amount they
are offering in wages to the point where their total profits start to
fall'.

Now we come to the crucial part
'for it is at this point that the entrepreneur's expectation of
profit will be maximized' means 'There comes a point when it does
not pay to hire any more workers'

This leads to the final sentence 'The value of D at the point of the
aggregate demand function - where it is intersected by the aggregate
supply function - will be called 'the effective demand'.
This is saying 'at the point where it does not pay to hire any more
workers - wages will be at their highest'.

.......................This is the substance of The General Theory of
Employment

I'd be grateful if you could show us where I went wrong.

Peter Small

Author of: Lingo Sorcery, Magical A-Life
Avatars, The Entrepreneurial Web, The
Ultimate Game of Strategy and Web
Presence
http://www.stigmergicsystems.com

--

[From Peter Small (2004.03.03)]

Bill Williams wrote:

When Peter goes on to say,

Employers aim to satisfy demand and if demand
appears to be greater than can be satisfied by a
current work force they will employ more people.
This will continue to happen as long as this
maintains a profit. This is what Keynes' model is
telling us.

Peter indicates that he know, no more about economics
than he does about control theory.

I am not much inclined to argue with a such a guy. I can
barely justify arguing with Rick.

Bill Williams

Are you saying you only accept viewpoints that agree with your own?

I admit that my knowledge of economics and control theory is not
academic, but they are based upon fifteen years of real life
entrepreneurship. Maybe that doesn't count in your book, but
sometimes it is useful for a little reality to qualify some of the
theoretical musings.

Peter Small

Author of: Lingo Sorcery, Magical A-Life
Avatars, The Entrepreneurial Web, The
Ultimate Game of Strategy and Web
Presence
http://www.stigmergicsystems.com

···

--

[From Peter Small (2004.03.03)]

Bill. You criticized my interpretation of Keynes.

Here are his exact words, taken from his book:

--------

Now if for a given value of N the expected proceeds being greater
than aggregate supply price i.e., if D is greater than Z, there will
be an incentive to entrepreneurs to increase employment beyond N,
and, if necessary - to raise the costs by competing with one and
other for the factors of production, to raise the costs by competing
with one and other for the factors of production up to the value of N
for which Z has become equal to D. Thus the volume of employment is
given by the point of intersection between the aggregate demand
function and the aggregate supply function; for it is at this point
that the entrepreneur's

#### expectation #####

of profit will be maximized. The

value of D at the point of the aggregate demand function - where it
is intersected by the aggregate supply function will be called 'the
effective demand

.......................This is the substance of The General Theory of
Employment

D= Demand price for labour
N = Quality of labour
Z= Supply price for labour

-----------

Here is how I interpreted it:

The note at the bottom says N means 'Quantity of labour, which is a
technical way of saying:- 'number of employees'
So we can rewrite the beginning as 'Now if for a given number of

employees '

The next bit, about 'proceeds being greater than aggregate supply
price' simply means 'making a profit on what you are producing'

'D is greater than Z' simply means 'The value of what the employees
produce is greater than the amount needed to pay them'

The phrase 'there is an incentive to entrepreneurs to increase
employment beyond N' means 'there is an incentive for employers to
employ more people'
And 'if necessary - to raise the costs by competing with one and
other for the factors of production' means 'if necessary - offering
higher wages: competing with other employers to get workers.'

Then 'up to the value of N for which Z has become equal to
D' means 'All the employers will compete with each other to get as
many employees as possible by offering higher wages than each
other.' 'This they will do until it is no longer profitable to
employ any more'.

'Thus the volume of employment is given by the point of intersection
between the aggregate demand function and the aggregate supply
function' .... is saying 'Employers will keep competing with each
other to employ more people until they have driven up the amount they
are offering in wages to the point where their total profits start to
fall'.

Now we come to the crucial part
'for it is at this point that the entrepreneur's expectation of
profit will be maximized' means 'There comes a point when it does
not pay to hire any more workers'

This leads to the final sentence 'The value of D at the point of the
aggregate demand function - where it is intersected by the aggregate
supply function - will be called 'the effective demand'.
This is saying 'at the point where it does not pay to hire any more
workers - wages will be at their highest'.

.......................This is the substance of The General Theory of
Employment

I'd be grateful if you could show us where I went wrong.

Sure. Note that you place the relationship not in terms of expectations, but
in terms profits. There is a big difference. In attempting to translate you
neglected that it is the entrepreneur's _expectation_ that Keynes' is
concerned about. The one word which I bracket above in pound signs, makes
all the difference. Expectations can be whatever a businessman
irrationality may lead him to expect. But, profits are, in the
macro-economy always equal to zero-- and this is the result of the nature of
a transaction.

···

----- Original Message -----
From: "Peter Small" <peter@PETERSMALL.NET>
To: <CSGNET@listserv.uiuc.edu>
Sent: Wednesday, March 03, 2004 12:48 AM
Subject: Re: Mumbo Jumbo Economics

Peter Small

Author of: Lingo Sorcery, Magical A-Life
Avatars, The Entrepreneurial Web, The
Ultimate Game of Strategy and Web
Presence
http://www.stigmergicsystems.com

--

From[Bill Williams 3 March 2004 1:50 AM CST]

[From Peter Small (2004.03.03)]

Are you saying you only accept viewpoints that agree > with your own?

But, of course! It wouldn't make any sense at all for me to agree with
viewpoints that are in conflict with what I know. To accept view points that
are in conflict with what I know would involve me in a contradiction. I
think the reasonable thing for me to do is to reject viewpoints that I can
see are contrary to what I know. I wouldn't say that I know the Keynesian
system or the Keynesian texts as well as I might if I were myself a
Keynesian. I did write a MA thesis in 1969 "Equilibrium and Equation in
Marshal and Keynes" which provided me with a measure of familiarity with the
Keynesian system and the contrast of the Keynesian system with that of
orthodoxy (represented by Alfred Marshall). The MA thesis was followed by a
dissertation in which I examined the issue of what sort of mathematical
structure is most suitable for consistently representing an economic system.

And, recently I have become to some extent re-familiarized myself with the
text of the General Theory as a result of tutoring graduate students taking
advanced level macro-economics courses. So, when I saw that you were
interpreting Keynes in terms of "profits" rather than in terms of the
"expectation of profits" I felt entirely confident in asserting that you
were mistaken.

Is there a possibility that I might make a mistake. Possibility. And, when
I saw that you had extracted a large block out of Keynes I wondered, if
perhaps Keynes had managed not to include the essential word--
expectations -- in the passage. If he had, that would have been awkward.
Keynes does from time to time in the General Theory make mistakes. Mistakes
aren't necessarily fatal, but I'd rather avoid not only mistakes but the
appearance of mistakes. So, when reading through the passage I was relieved
to see that Keynes had included the crucial word-- expectations.

I admit that my knowledge of economics and control >theory is not

academic, but they are based upon

fifteen years of real life entrepreneurship. Maybe that
doesn't count in your book,

I think it depends. Do you suppose that my academic experience would
necessarily impress a venture capitalist? Maybe depending upon the
circumstance, but probably not. Am I supposed to be impressed when you say
that the Keynesian system is simple, and then make an elementary, but
fundamental error in interpretation? So if you think that your business
experience of as you say, "real life entrepreneurship" are going to outweigh
my years of academic experience-- that is what Keynes means. I think I have
the advance over you-- on that playing field.

but

sometimes it is useful for a little reality to qualify some of the
theoretical musings.

"Reality?" You must be kidding. What does "reality" have to do with this?
We are talking about the text of Keynes' Gen Theory. You managed to skip
over one important word -- expectations -- and that changes the meaning of
the whole passage. You were playing an academic game with a real academic,
on the academic's home turf, more or less, and you lost. But, you set
yourself up. Where I argued that Keynes' Gen Theory was difficult, you
thinking that you knew my business better than I do, claimed that Keynes was
"simple." And, then you flubbed it.

In the future, may I suggest that when you wish to expound one of your
interpretations that you do so in a way that avoids rousing in people a
reference level for kicking your ass. You, could have said, "Contrary to
Williams' impression that the text of Keynes' GEneral theory is "difficult"
it seems to me that the principles that Keynes developed can be expressed in
a way that is both simple and direct." Had you said this, I would have
agreed with you-- at least up to the point where you managed to skip over
the distinction between actual profits and expected profits. Keynes was a
clever bastard. And, the General Theory may have been the worst book ever
written. But, it wasn't simple.

Bill Williams

···

Peter Small

Author of: Lingo Sorcery, Magical A-Life
Avatars, The Entrepreneurial Web, The
Ultimate Game of Strategy and Web
Presence
http://www.stigmergicsystems.com
--

[From Peter Small (2004.03.03)]

I asked Bill Williams to correct my interpretation of this paragraph
from Keynes.Book:

Now if for a given value of N the expected proceeds being greater
than aggregate supply price i.e., if D is greater than Z, there will
be an incentive to entrepreneurs to increase employment beyond N,
and, if necessary - to raise the costs by competing with one and
other for the factors of production, to raise the costs by competing
with one and other for the factors of production up to the value of N
for which Z has become equal to D. Thus the volume of employment is
given by the point of intersection between the aggregate demand
function and the aggregate supply function; for it is at this point
that the entrepreneur's expectation of profit will be maximized. The
value of D at the point of the aggregate demand function - where it
is intersected by the aggregate supply function will be called 'the
effective demand

.......................This is the substance of The General Theory of
Employment

D= Demand price for labour
N = Quantity of labour
Z= Supply price for labour

His reply was:

>for it is at this point
> that the entrepreneur's

#### expectation #####

of profit will be maximized.

Sure. Note that you place the relationship not in terms of expectations, but
in terms profits. There is a big difference. In attempting to translate you
neglected that it is the entrepreneur's _expectation_ that Keynes' is
concerned about. The one word which I bracket above in pound signs, makes
all the difference. Expectations can be whatever a businessman
irrationality may lead him to expect. But, profits are, in the
macro-economy always equal to zero-- and this is the result of the nature of
a transaction.

Bill,

I am really disappointed that you should base a long criticism on a
question of semantics.

Keynes did say "expectation" of profits, but, from my experience, it
is more likely to be the actual realization of lack of profit that
triggers a slow down in employment. The difference is of little
consequence unless you want to nit-pick. The inclusion of the
businessman's irrationality is irrelevant as this is an unknown that
can cause any effect, including having such a pessimistic view that
no increase in employment takes place at all.

The point you seem to be missing in this clinical approach to
economic theory is that Keynes' conceptualization opens up the way
for a Game Theory analysis. Here is what I wrote in my book, after
interpreting that paragraph:

···

-------------

In isolation, this seems a rather bland series of statements of the
obvious and at first glance it doesn't seem possible that this could
form the core paradigm that had produced Keynes's widely acclaimed,
major contribution to economic theory. It simply seems to be saying
that employers will employ more people if it is profitable to do so
and if it is profitable they will compete with each other for
employees. Big deal! It seems incredible that such a simple and
obvious observation could form the basis of what is regarded as one
of the most renown works in the whole history of economics.

Fortunately, at that time, I was extremely interested in game theory
and was reading a book by Thomas C. Schelling called "The Strategy of
Conflict" (1960). Schelling had become famous as one of the main
advisors to Dr. Henry Kissinger during the Cuban missile crisis where
the American government had played out a nail biting game scenario
with the Russians to stop them building missile sites in Cuba.

The essence of Schelling's book was that international conflicts
should be put into a game theory framework, such that promises,
threats and counter threats could be described in the form of a
pay-off matrix. The idea was that every unfavorable move possible to
an opponent could be countered by making that move less attractive to
the opponent than some other alternative that would be tolerably
acceptable.

His basic proposition was that you could influence the way people
acted through changing the pay-off matrix of the outcomes of actions.
Schelling observed that the adjustment to the pay-offs, as seen by an
opponent, could be adjusted through two tactics: promise and threat.
By making a promise of some reward, if an opponent did something you
wanted them to do, they would be more inclined to do it. Similarly, a
threat - that something unpleasant would happen to an opponent if
they did something you didn't want them to do - could be used to
influence them not to do it.

Schelling's strategy was to devise ways in which it could be arranged
that there was a pay off matrix that could provide a solution that
would be suitable for both sides: a compromise where the outcome was
not necessarily the best for either side but provided an acceptable
second best solution for each.

The eureka moment for me came when I made a connection between the
core paradigm of Keynes and the game theory approach advocated by
Schelling. I'd read somewhere about Keynes' interest in game theory.
Suddenly, I could see what Keynes had been explaining. He wasn't
stating the obvious at all. He was saying that business was a game
and the game wasn't focused on the obvious ( i.e., competing for
money), it was focused on getting employees. The paradigm shift
therefore is not to see business as a game of conflict for money but
a game of competition for co-operation.

If a profitable situation arises, employers would be in a win-win
situation, but, only if they can get employees. Employees were also
in a win-win situation because employers would be in competition with
each other and have to pay them more and more in order to win their
co-operation.

Keynes' insight was to see that by creating enough profitable
situations (by increasing the money supply), labour would be at a
premium and employers would be forced to bid up the amount they'd
have to pay their employees to attract and keep them. With full
employment and employees achieving maximum earnings the economy was
bound to be buoyant.

Here then is another counter intuitive paradox: Business is a game
where you compete for co-operation. Employers are not in a
competitive situation with their employees, they are in a competition
with each other to acquire co-operators. Employees are the objects of
desire and are keenly sought after and competed for wherever a
profitable situation emerges.

The idea behind Keynes recommendation of increasing the money supply
was to allow more non zero sum situations to be created. Arguable,
these increased opportunities are created at the expense of people
who have savings, but, as most savings are invested into these newly
created opportunities the gains and losses are not easy to determine.

The actual gain of Keynes' strategy comes as a result of the whole
economy becoming more efficient as an increasing number of people are
employed and their employment effort is used more efficiently. This
again is another paradox. Why should employees work more efficiently
if there is a shortage of labor and they are in high demand?

The answer is that entrepreneurs and big business employers will have
to compete more expertly to acquire their co-operation. They will
have to pay them higher wages and this they can only do if they are
directing the labor efficiently. The net result is entrepreneurs and
employers will have to look for the most profitable areas of trade
and commerce and this must be where the greatest improvements in
efficiencies are to be found. Any employers stuck in a business that
isn't increasing efficiency in some way will not be able to make
enough money to compete successfully in the labor market.

(Note: This Keynsian view is in sharp contrast to the views of many
post Keynsian economists who recommend maintaining a pool of
unemployment to force workers to work more efficiently in order to
maintain their jobs. It is also in contrast to the monetarists who
want to keep the money supply constant.)

Peter Small

Author of: Lingo Sorcery, Magical A-Life
Avatars, The Entrepreneurial Web, The
Ultimate Game of Strategy and Web
Presence
http://www.stigmergicsystems.com

--

From[Bill Williams 3 March 2004 4:20 AM CST]

[From Peter Small (2004.03.03)] says,

> The idea behind Keynes recommendation of

increasing the money supply was to allow more non
zero sum situations to be created.

I can certainly agree with what you say here. I might go even further and
argue that when money is "tight" what is created is a situation which is a
negative sum game. World War II it seems to me might be viewed as a vast
negative sum game.

There is a sense in which I view some elements which are considered to be a
part of game theory favorably-- such as Kenneth Bouldings work. His
_Conflict and Defense_ might be viewed as an early example of a game
theoretic approach.

And, Nash equilibria are intuitively so appealing that one might think that
everything is a Nash equilibria-- but then perhaps it should be noted that
Nash wasn't sane-- not at least for a very long periods of time. And, a
game theoretic approach to life may in a sense be autistic. Economists are
know for being extremely poor players in Axelrod's games of cooperation.

Keynes, of course, had a intense interest in games, but his conception of
uncertainty it seems to me may lead in other directions than those which
seem to predominate in game theory. But, "game theory" can mean many
things.

Bill Williams

From[Bill Williams 3 March 2004 3:20 AM CST]

[From Peter Small (2004.03.03)]

The discussion with Peter was so much fun, that I decided to examine the actual text of the _General Theory_ to see what Keynes did in expounding his defintions of agreegate supply and demand. I was interested in seeing if it appeared that Keynes might have been intensionally misleading in his exposition of the aggregate supply and demand functions. But, after reading the passage which Peter reproduced and the surrounding text, I don't think that it can be claimed that Keynes was actually engaged in purposfully misleading his readers.

On the page proceeding Peter's passage (p. 24. ) Keynes warns in a foonote that his definition of an aggregate supply price is distinct from the customary meaning of a supply price.

Then Keynes warns in a second lengthy footnote that aggregate supply and demand, as he is defining the terms is _net _ of user cost. Those who have followed the economics thread will appreciate how ominous this warning genuinely is, especially when the warning is followed by a discussion that takes up almost half a page.

Then in a third footnote Keynes enters into a discussion that expands upon the meaning which Keynes assigns to "expectations."

Then on the page that Peter extracted from the General Theory, (p. 25.) Keynes in three places describes the aggregate functions in terms of "expectations."

So, while those who's experience and associations have their connection to the micro-economic aspects of economic relations may be inclined to attribute to Keynes extraneous meanings, I think that Keynes provided more than enough warning for a reader.

I would like to comment on a passage following the one that Peter quoted that is relevant to a passage that Bill Powers triped over in a recent discussion.

Keynes (p. 25.) says,

   " The classical doctrine, on the other hand, which used to be expressed categorically in the statement that "Supply creates its own demand" and continues to underlie all orthodox economic theory, involves a special assumption as the relationship between these two functions. "

Keynes goes on to discuss the difficulties involved in the assumption that aggregate supply creates its own demand on the following page.

Bill Powers attributes to Keynes the position that Keynes criticizes as a part of the orthodox classical tradition. It is absurd to criticize Keynes for not having a theory of aggregate demand. It really would help if Bill Powers would take the time to read-- say Harrods biography of Keynes. Then Powers might see that the boogyman figure which he has created has nothing to do, aside from Keynes' fondness for champange, with who Keynes actually was.

Bill Williams

[From Bill Powers (2004.03.03.0545 MST)]

Peter Small (2004.03.03)--

Bill. You criticized my interpretation of Keynes

If you were talking to me, I don't think I criticized it. Keynes'
proposition about employment is perfectly clear and not very complex:
entrepreneurs keep adding more employees (and I presume negotiating wages)
until they maximize profit. This is essentially what (Keynes says) the
classical theory is, though his description of the classical theory doesn't
spell out the maximizing in such detail.

Your ideas about complexity theory are way above my head, I'm afraid.
Whatever it takes to get one's brain around concepts like that, I don't
have. I guess I'm stuck with control theory.

Best,

Bill P.

From[Bill Williams 3 March 2004 1:10 PM CST]

[From Bill Powers (2004.03.03.0545 MST)]

Peter Small (2004.03.03)--

>Bill. You criticized my interpretation of Keynes

If you were talking to me,

No, I wasn't talking to you. And, I am surprized that you adressing an email
to me. Officially you are the Guy who put on me on your spam list. But,
apparently that doesn't always do the job. So, why don't you put the blocker
on everyone. Then you wouldn't have encounter me even indirectly. That
would suit me. In case you are now in the recieving mode, the first thing I
have to say to you is "stuff it."

Your comments on Keynes that follow are completely worthless.

Keynes'
proposition about employment is perfectly clear and
not very complex:
entrepreneurs keep adding more employees (and

I > presume negotiating wages)

until they maximize profit.

You evidently didn't read what I wrote explaining to Peter where he went
wrong. Peter complained that was resorting to "semantics" and, of course,
that is what I was doing. But, it wasn't an archane issue. When Keynes
says half a dozen times on two pages defining the aggregate supply and
demand functions that the functions are defined in terms of expectations,
and you keep saying "until they maximize profit." would it have helped if
Keynes had said it a dozen times on the two pages? I don't think so.

This is essentially what (Keynes says) the

classical theory is,

Wrong again. Wrong in the sense that since you were determined to mis-read
Keynes the result is that you now assert that Keynes' position and that of
the "classical" economists is, if not preciesly the same, very nearly the
same. And, since you were wrong to start with the error probagates down
through your arguement increasing the confusing as it goes.

though his description of the classical theory doesn't

spell out the maximizing in such detail.

You have developed what seems to be a habit of making comments such as the
above that not only are pointless but completely uninformed. They have the
structure of intellegent speech, but the content is sheer non-sense. You
are in no position to offer such judgements regarding material that it is
all too evident you do not understand.

Your ideas about complexity theory are way above my head,

Whose Ideas about complexity? It doesn't make any sense for you to be making
sarcastic remarks about my ideas about "complexity theory" when I don't have
any such Ideas and am in fact more than a little bit skeptical about the
worth of what goes on under the caption "complexity theory."

I'm afraid. Whatever it takes to get one's brain around > concepts like

that, I don't have.

Under the circumstances I think it is neccesary that I repeat myself. I am
no fan of complexity theory. So, if your comment is directed to me it is
mis-directed.

But, you go on to say,

I guess I'm stuck with control theory.

In my opinion it would have made far more sense if you _had_ stuck with
control theory. You really aren't getting your "brain around" economics.
You say Keynes' position regarding employment is "perfectly clear and not
very complex." It seems to me that they only content in this assertion is
your contempt for a system that, as is readily appent, you do not
understand. Understand I am not saying that you haven't put forth and
effort to understand Keynes. I think you have. But, it hasn't worked.
Eventually, I am convinced control theory will take it's place in economic
theory and when it does it will displace an orthodoxy based upon the
principle of maximization. But, your efforts to do economics, in my
judgement, delay rather than assist, the development of a control theoretic
economics.

Bill Williams

From[Bill Williams 7 March 2004 3:45 AM CST]

Something Bill Powers said sometime about caught my attention--

[Bill Powers(2004.01.25.07:55 MST]

Nobody in this field [economics] apparently,

has any idea that people buy things because

they want things.

Bill's statement like his attribution of a "shocking stupidity" to people he
has offended is one that presents some difficulties of interpretation.

I am doing my best to figure out how I can incorporate this into my "Running
Naked in the Forest" fable, but the reality is outstrinpping the fantasy.

Bill's statement is akin in some ways to Rick Marken's self-description in
terms of either Albert Einstein or Isaac Newton.

In the past I've suggested that a comparison with the career of Ezra Pound
might be illuminating. Not because either Bill Powers

or Rick Marken are fascists (and the extent to which Pound was a fascist is
subject to interpretation) but rather because they are crazy.

The focus of their craziness is economics which compounds their
irrationality. Of course, economics is a subject-matter that can be
disturbing even to those who are otherwise entirely, or at least more or
less, and on the average, sane.

On the other hand, when I consider the standard texts that are routinely
used convey orthodox doctrine, the issue of sanity, or rather comparative
sanity, is not one that is so easily disposed of. Perhaps, what Bill Powers
ought to do is explain to Professor Bruun that he has a novel truth which is
bound to revolutionize economic theory-- "People buy things because they
want them." It really is an uncannily profound, and unexpectted, insight.

Unfortunately, while Bill's and Rick's zany antics are unlikely to disturb
the course of economic inquiry, it seems possible that what is proceeding
may have the effect of discrediting, or at least casting some doubt, upon
the advisability of attempting to apply control theory to problems of human
behavior and social

theory.

The results of such applications might be more discoveries such as the
insight-- "That people buy things because they want them."

Let me assure everyone that the conception that people buy things because
they want things is an idea that has for, all of it arcane difficulties,
been understood for quite some time-- like since the 17th century, or
perhaps even earlier.

As a picturesque example of a conventional economist who seems to have
understood the difficult and hard to grasp notion that

people buy things because they want them consider the following:

Marx, Karl. 1887 _Capital: A Critical Analysis of Capital Production_ London
: Swan Sonnenschein Lowrey & Company

"A commodity is, in the first place, an object outside us, a thing that,
by its properties satisfies human wants of some sort, or another. The
nature of such wants, whether, for instance, they spring from the stomach or
from fancy, makes no difference. 2 ( p.35 )

And, note also his footnote to:

  2 "Desire implies want; it is the appetite of the mind, and as natural as
hunger to the body... The greatest number ( of things) have their value
from supplying wants of the mind."

Nicholas Barbon: "A Discourse Concerning Coining the New Money lighter In
Answer to Mr. Locke's Considerations." London 1696.

I hope I have removed any doubts that Bill's ranting may possibly created.
econmists some of them at least, do understand why eople buy things, and
have understood this for quite some time--like for a couple hundred years.

Sturgeon, I am sorry to say, has had relapse. When he heard of Bill Power's
discovery "That people buy things because they want things." he reverted to
his earlier laughing fits and had to be returned to the intensive care
facility.

Students have memorialized the discovery with a banner proclaiming,

  "People buy things because they want them."

Bill Williams

   Surette, Leon 1999 _Pound in Purgatory: From Economic

     Radicalism to Anti-Semitism_

  Banking and SocialCredit

  Economics and Mythopoeia

  Modernism and Fascism

  Social Credit and Fascism

  The Keynesian Revolution and Social Credit

  The ABC of Economics and the New Deal

  Modernism, Postmodernism, and Fascism

  Silvio Gesell and Irving Fisher

  An Increasing Eclecticism

  Arthur Kitson

  The Jewish Conspiracy

  From Rome to Washington

  Volitionist