PCT, economics, and social organization

[Acree_Mike]

[From Mike Acree (970605.1342 PDT)]

1. Rick Marken (970602.1250 PDT)

Unfortunately, the downscale goods are now all being made in
China. So taxing the rich and giving the money to the poor
would just create a huge amount of leakage from the U.S. economy.

Yes. I'm afraid people will just have to agree to stop doing this;-) If
people want to produce products using labor in other countries
they will just have to limit themselves to selling those products
(and spending the profits) in the countries where they are produced.

When Californians buy aluminum from Arkansas, why don't we deplore that
as leakage from the California economy? Or vice versa when Arkansans
buy California wine? If other countries produce goods or services
better or more cheaply than we do, it is to our advantage to buy from
them; and Rick's fantasy of eliminating (some aspects of) international
trade would hurt the poor the worst--both here and abroad: foreign
laborers have less of a market for what they produce, and U.S. consumer
have to pay more.

2. The recurrent talk of wealth redistribution implicitly assumes that
what anybody produces is ours in principle, and it's simply up to
Congress to decide how much they get to keep. That seems to me a
prescription for conflict, and an avoidable one. Given my expectation
that PCTists would be looking for noncoercive forms of social
organization, I'm continually surprised at the enthusiasm for all sorts
of social control through the police power of the state. (I give Rick
credit for his wry wording--"People will just have to limit
themselves"--but I feel a frustrated impulse to control underneath!)

3. Reading an article recently on "the new classical economics" (an
oxymoronic label almost as off-putting as "rational expectations
theory," by which it is also known)--the work of 1995 and 1991 Nobel
laureates Robert Lucas and Merton Miller, among others--I thought I saw
an illustration, possibly trivial but nonetheless interesting, of PCT in
economics. The (rather screamingly obvious) point of the theory is that
people take government policy into account in their economic planning
and decision making. The first interesting consequence is that any
predictable change in the money supply--emphasis on
"predictable"--should have no effect on output, employment, or any other
economic variable--just because people are going to compensate for these
perceived errors, frustrating government efforts to control their
behavior. The second consequence is that econometric models cannot in
principle predict the consequences of future economic policies: if
people were fooled once, they will try to avoid being fooled again, and
so the same policy will have different consequences the second time
around. A third consequence is that markets are efficient, within the
given constraints. The evidence is in their having been found to behave
as random walks; any potential systematic sources of variance have been
instantly exploited (and nullified) by eagle-eyed speculators like
Niederhoffer.

I wonder incidentally if there's a possible explanation in any of this
for the constancy of investment that TCP observed?

4. Bill Powers (970517.2014 MDT)

I think the question Bill raises about the origin and maintenance of
social hierarchies is one of the most interesting and urgent we face,
though I don't have anything to offer here but a few supporting
observations with respect to epistemological authority. I suspect
there's a mystery only for the few of us who were brought up with some
degree of support for independent thinking and responsibility. That's
certainly opposite the attitude usually inculcated in schools, that
grown-ups have the answers, and the path to knowledge is to ask them or
look it up. Any author who offers help with personal problems from
health to investments finds that she or he has to beat off disciples
with a stick to keep from being elevated into a guru (and most don't
resist). Psychologists are the greatest spectacle, disavowing as a
matter of dogma any ability to draw conclusions from data without the
aid of a significance test, which rests at bottom on a convention
originating from personal hostilities between Fisher and Pearson. The
pleas of Hays and other for power analysis went nowhere for years,
because they also required judgment, until Cohen codified effect sizes
as small, medium, and large. Despite his insistence that his
definitions not be conventionalized, that is exactly what has happened.

But the matter is a little more complex that that, because at the same
time people are desperate for someone to tell them what to do, they also
resist the hell out of the ensuing directives. The sequel to Peter Pan
reveals his dark side: adolescent forever.

All best,
Mike

[Bill_Powers1]

[From Bill Powers (970605.2335 MDT)]

Mike Acree (970605.1342 PDT) --

1. Rick Marken (970602.1250 PDT)

Unfortunately, the downscale goods are now all being made in
China. So taxing the rich and giving the money to the poor
would just create a huge amount of leakage from the U.S. economy.

Yes. I'm afraid people will just have to agree to stop doing >>this;-) If
people want to produce products using labor in other countries
they will just have to limit themselves to selling those products
(and spending the profits) in the countries where they are produced.

When Californians buy aluminum from Arkansas, why don't we deplore >that

as leakage from the California economy? Or vice versa when >Arkansans buy
California wine? If other countries produce goods or >services better or
more cheaply than we do, it is to our advantage >to buy from them; and
Rick's fantasy of eliminating (some aspects >of) international trade would
hurt the poor the worst--both here and >abroad: foreign laborers have less
of a market for what they >produce, and U.S. consumer have to pay more.

The problem here is how to supply the required buying power to the U.S.
consumers. To exaggerate a bit to make the point, suppose that ALL
production of widgets is sent overseas, so all the former widget-making
workers are out of a job, with zero income. What are they going to use to
buy the widgets? No matter how cheap they are, due to the lower labor costs
overseas, the wageless U.S. workers still won't be able to buy any of them.
The point of TCP's analysis is that the composite producer must SOMEHOW put
enough money at the disposal of the composite consumer to buy the whole
product. The way this is done in our system is through wages and capital
income -- there is no other source of buying power.

2. The recurrent talk of wealth redistribution implicitly assumes >that

what anybody produces is ours in principle, and it's simply up >to Congress
to decide how much they get to keep. That seems to me a

prescription for conflict, and an avoidable one. Given my >expectation

that PCTists would be looking for noncoercive forms of >social
organization, I'm continually surprised at the enthusiasm for >all sorts of
social control through the police power of the state.

Rick's reply to this is good -- it's not a moral issue. The problem is that
there is a bug in the system, such that the very wealthy simply cannot help
removing buying power from the circular flow -- they can't possibly spend
as much as they earn. I don't know where the point will be reached where
maldistribution of buying power will result in a fatal crash, but it's
clearly in everyone's interest to see that we get some control over leakage
before it exceeds even our best countervailing ability to expand the
economy. As more buying power shifts into fewer and fewer hands, the
difficulty in maintaining the circular flow, and expanding it, becomes ever
greater, and leakage gets larger and larger.

You're quite right in saying that coercive methods of getting control of
leakage are not consistent with the sort of world we PCTers would like to
live in. But they're quite consistent with PCT. If the United States were
being taken over by fascists or communists who were imposing programs on us
that caused large amounts of suffering and oppression, the only natural
thing to do would be to take action against them -- as much action as
necessary to control what matters to us, using any means from strong words
to strong weapons. That's human nature; it's how all living systems
survive. So if certain economic customs turn out to be threatening our
well-being as a nation, and neither logic nor diplomacy can persuade the
perpetrators of their errors, what is left but coercion? Suicide?

Taxation is a very mild form of coercion, compared to other forms in
popular use around the world. Of course before I would recommend even that
mild way of correcting the bug in the system, I would like to make sure
that the analysis is really correct, and I would spend a lot of time trying
to explain what is going wrong, so well-meaning people who are pursuing
destructive goals would have a chance to understand the part they are
playing, unwittingly, and do something to help correct the problem. We can
live with a certain amount of leakage; simple understanding may reduce it
enough to allow us to accept a certain amount of it without creating huge
social conflicts.

···

--------------------------
Your question about "local leakage" is a very good one. I noticed that
business owners and investors actually talk about it even on such a small
scale as the economy of Durango, Colorado. They don't call it "leakage," of
course, but they recognize that when a lot of big chains open stores in our
little town, this creates a problem with cash flow: money leaves our
economy, and the local businesses notice it. We have a large tourist
business which tends to offset some of this leakage, but the problem again
is that a good part of this business is owned outside Durango, even outside
Colorado. The profits leave the borders of our town and county, instead of
becoming buying power for the local people and income for the local
businesses. Wages in Durango, by and large, are too low to allow the people
who work here to live here. And of course people who live far away spend
their wages far away, leaving less income for the local businesses, making
them cut costs even more, and so on.

It would be extremely interesting to do a complete analysis of this small
economy, if one could somehow persuade businesses to confide (anonymously)
the details of their income and expenses to a reputable investigator. I
think we would see the same interrelationships on this small scale that we
see in the whole economy of the US. As Rick pointed out, the basic analysis
applies to any economic unit that has definable boundaries.

3. Reading an article recently on "the new classical economics" (an
oxymoronic label almost as off-putting as "rational expectations
theory," by which it is also known)--the work of 1995 and 1991 Nobel
laureates Robert Lucas and Merton Miller, among others--I thought I >saw

an illustration, possibly trivial but nonetheless interesting, >of PCT in
economics. The (rather screamingly obvious) point of the >theory is that
people take government policy into account in their >economic planning and
decision making. The first interesting >consequence is that any
predictable change in the money supply-->emphasis on "predictable"--should
have no effect on output, >employment, or any other economic variable--just
because people are >going to compensate for these perceived errors,
frustrating >government efforts to control their behavior. The second

consequence is that econometric models cannot in principle predict >the

consequences of future economic policies: if people were fooled >once,
they will try to avoid being fooled again, and so the same >policy will
have different consequences the second time

around. A third consequence is that markets are efficient, within >the

given constraints. The evidence is in their having been found >to behave
as random walks; any potential systematic sources of >variance have been
instantly exploited (and nullified) by eagle-eyed >speculators like
Niederhoffer.

I'm sure there are many examples in support of these points, but the basis
thesis is not correct. The "impossibility" of prediction is based on a
lineal concept of cause and effect. When you think in terms of closed
loops, there's no problem with taking feedback effects into account. When
you think in terms of lineal causation, you run into effects like those
mentioned, where someone reacts to a policy, thereby changing the effect of
the policy; this seems to lead to infinite regress and failure of any
analysis. But if you write the closed-loop equations, you can obviously
solve for the resulting state of the system, and analysis isn't impossible
at all.

Furthermore, when there are policies that have an effect on the _whole
nation_, such as restricting the money supply, there is nothing any one
segment can do to prevent the overall effect. It is simply not true that
the effect of manipulating the money supply is compensated for, or
unpredictable. The effect is highly predictable: every time the supply is
tightened, the growth rate goes down and unemployment rises. And most
likely, inflation increases. Furthermore, since some time in the 1960s (I
don't have TCP's book right in front of me), the effects of this tightening
have been _irreversible_. The loss in total growth due to the slowdown is
not made up by later increases in growth rate, as often happened before
that time. Something has changed to make this "rho leakage" into "alpha
leakage" -- the kind that you can't make up for.

Of course there are many cases in which government policies are thwarted by
clever adjustments on the part of entrepreneurs -- think of the fiasco in
which tax credits supposedly designed to increase production and wages were
spent, instead, on leveraged buyouts. But that is only one of the positive
examples -- there are counterexamples as well. I really hate sweeping
generalizations to which I can immediately think of half a dozen contrary
instances.

I wonder incidentally if there's a possible explanation in any of >this

for the constancy of investment that TCP observed?

I would think so.

Best,

Bill P.

[Bruce_Gregory9]

[From Bruce Gregory (970606.1100 EDT)]

Rick Marken (970615.1950)

I've always been puzzled by the role of stocks. Clearly when I
buy a share of CSG from someone, CSG gains no additional
resources to produce more Autonomous Control Systems. Since CSG
pays no dividends, my only motive for purchasing these shares
is the expectation that I can sell them at a later time for more
money -- that in the future people will be willing to pay more
for them than they are now. I am a speculator. (But since this a
a bad word, I will be called an investor.) If the person who
sold me the stocks now buys stockes in S-R industries, nothing
productive has occurred. What's going on here?

Bruce

[Richard_Marken1]

[From Rick Marken (970615.1950)]

Mike Acree (970605.1342 PDT) --

When Californians buy aluminum from Arkansas, why don't we
deplore that as leakage from the California economy?

I guess it depends on where one wants to draw the line around
"an economy". TCP's model assumes that an "economy" is a
collection of produceres who are also the consumers of what they
produce. The US as a whole is probably a closer approximation to
this model than any of its states. But even that US economy
doesn't fit this model to the extent that a significant portion
of GNP is non-domestic.

2. The recurrent talk of wealth redistribution implicitly
assumes that what anybody produces is ours in principle, and
it's simply up to Congress to decide how much they get to
keep.

I think that the aggregate producer produces _stuff_ (goods and
services) for the aggregate consumer (which consists of the same
individuals as the aggregate producer itself). I think that, in
principle (all things being equal and all that), each member of
the aggregate producer is entitled to (as a member of the aggregate
consumer) an equal share of what is produced. For example, assume
that 1000 producers produce $5000 worth of _stuff_. 20% of this
goes for capital investment (to keep produciton going and growing)
so each producer (as a consumer) is entitled to 1/1000*$4000 = $4. Each
producer (as a consumer) can now buy $4 worth of all kinds of different
things that make up the _stuff_ produced by the aggregate produced.

In practice, some individual producers may be responsible for
producing a larger portion of the _stuff_ made by the aggregate producer
than others. So some produces may be more valuable
than others and I have no gripe with the fact that some people
get a larger proportion of the total value of the stuff produced
than others. I have no idea how the value of each producer could
be determined (it probably can't) but I think it is highly unlikely that
any producer is worth much more that 2 times any other. So, in the
example above, I can't imagine any producer (as a consumer) getting more
than about twice what any other gets.

In the US economy, you've got a few people (10 out of 1000) taking about
half the total worth of the stuff produced. In the above example, that's
like 10 people taking $2000 and leaving $2000 to be divided among the
remaining 900. So the average share of the total
value of the stuff produced by these 900 individuals is $0.22. That's
about 1/25th of the $4 (+or - $2) to which I think members of the
aggregate producer are entitled.

This is what I think of as maldistribution of wealth. Before I
read TCP's book I thought this maldistribution was mainly a moral
issue; that it was just a reflection of selfishness and greed. But
TCP's book has convinced me that this maldistribution is not just
a moral issue -- it is an economic issue as well. The economy would
_work better_ (in terms of rate of growth of the amount of _stuff_
produced_) if the degree of maldistribution were reduced. The
problem is that people with all the wealth simply can't use it for
consumption. Much of what they can't use is apparently lost from the
economy in the form of bad investments and who knows what else --
leakage.

As far as Congress deciding how much people can make, I don't think
that's likely (even with an amendment to make it constitutional)
but I wouldn't object if they did. This is still a democracy;
Congress people have that role because people voted for them. If people
vote for Congress people who want to regulate their incomes then that's
the way it goes. Heck, we keep electing people
to Congress who make what I consider to be all kinds of
dysfunctional rules (which they said they'd make when they ran)
and fail to make all kinds of functional ones (which they said
they wouldn't make when they ran). The Congress we have is the
one that the majority of voters wants. That's how it works here
in this country -- and I like that. We even have rules that protect
the minority from the whims of the majority. It's not perfect, but
it's really pretty good.

Given my expectation that PCTists would be looking for
noncoercive forms of social organization, I'm continually
surprised at the enthusiasm for all sorts of social control
through the police power of the state.

I think there will always be some coercion involved in enforcing
rules agreed on by the collective -- especially rules (like taxes)
that require some sacrifice on the part of each individual. The benefits
of cooperation are not always immediately obvious at the individual
level.

Best

Rick

···

--

Richard S. Marken Phone or Fax: 310 474-0313
Life Learning Associates e-mail: marken@leonardo.net
http://www.leonardo.net/Marken

[Bill_Powers1]

[From Bill Powers (970606.1020 MDT)]

Bruce Gregory (970606.1100 EDT)]

I've always been puzzled by the role of stocks. Clearly when I
buy a share of CSG from someone, CSG gains no additional
resources to produce more Autonomous Control Systems. Since CSG
pays no dividends, my only motive for purchasing these shares
is the expectation that I can sell them at a later time for more
money -- that in the future people will be willing to pay more
for them than they are now. I am a speculator. (But since this a
a bad word, I will be called an investor.) If the person who
sold me the stocks now buys stockes in S-R industries, nothing
productive has occurred. What's going on here?

My guess is that the stock market has very little to do with the
macroeconomy -- it's mostly about trading ownership for money in the
microeconomy. If you can persuade someone that your piece of paper is worth
X dollars, you can end up with X dollar's worth of buying power (minus
commission) while the other person ends up with your piece of paper.
There's no "investment" involved -- the company that issued the stock got
its money when the offering was first bought, so unless it owns some of its
own stock, or offers more, a rise in the stock price doesn't benefit the
company any more. Issuing stock certificates is just a way of borrowing
money, but it doesn't create any new money because the money comes from
what is already in circulation. What I spend to get a stock certificate I
can't spend for goods and services. Stock trades just move existing money
from one person's pocket into another's, as far as I can see. If you own a
stock that pays dividends, you become a recipient of capital income; if it
doesn't pay dividends, you're just drawing to an inside straight.
Whatever you win, someone else has to lose.

Nobody is ever going to understand how the economy works until someone puts
together a comprehensive working model that shows us the effects of all the
interactions that take place.

Best,

Bill P.

[Harry_Witchel]

Bill Powers wrote:

[From Bill Powers (970606.1020 MDT)]

Bruce Gregory (970606.1100 EDT)]

>I've always been puzzled by the role of stocks. Clearly when I
>buy a share of CSG from someone, CSG gains no additional
>resources to produce more Autonomous Control Systems. Since CSG
>pays no dividends, my only motive for purchasing these shares
>is the expectation that I can sell them at a later time for more
>money -- that in the future people will be willing to pay more
>for them than they are now. I am a speculator. (But since this a
>a bad word, I will be called an investor.) If the person who
>sold me the stocks now buys stockes in S-R industries, nothing
>productive has occurred. What's going on here?

My guess is that the stock market has very little to do with the
macroeconomy -- it's mostly about trading ownership for money in the
microeconomy. If you can persuade someone that your piece of paper is worth
X dollars, you can end up with X dollar's worth of buying power (minus
commission) while the other person ends up with your piece of paper.
There's no "investment" involved -- the company that issued the stock got
its money when the offering was first bought, so unless it owns some of its
own stock, or offers more, a rise in the stock price doesn't benefit the
company any more. Issuing stock certificates is just a way of borrowing
money, but it doesn't create any new money because the money comes from
what is already in circulation. What I spend to get a stock certificate I
can't spend for goods and services. Stock trades just move existing money
from one person's pocket into another's, as far as I can see. If you own a
stock that pays dividends, you become a recipient of capital income; if it
doesn't pay dividends, you're just drawing to an inside straight.
Whatever you win, someone else has to lose.

Dear Bill--
        One possibility that you raise is that the "market" system for
selling stocks and bonds is a way of raising cash for investment. We
are agreed that this is true for the occasional IPO (initial public
offering) of a stock, but what about the billons of other stock
transactions, most of which are probably speculative in nature?
        I suspect that the market system (with its inherent
overabundance of specualtion) is a necessary evil for the success of the
IPOs and the genuine fund raising dne by the market. Consider: if you
were an investor thinking about buying a new stock, would being able to
sell the stock at any time make a difference to your willingness to
invest? Would it change the amount you were willing to invest?
Admittedly, the market system would be nothing more than a form of
speculation after the IPO, but all the IPOs would benefit, and more
money would be available.
        Businessmen and investors respond to this kind of motivation.
Perhaps incentive is more powerful than usefulness or wholesomeness
when considering fundraising in general. Consider the example of
charity dinners. Charity dinners raise large sums of money for good
charities as well as political parties, etc.. However, every
dinner-goer knows that a fair bit of the donation in a charity dinner is
spent on administration and on the dinner itself. Logically, if people
just wanted to donate money to charity, they could write a check and
skip the dinner. Logically...
        In fact nothing of the kind happens. Rich people give to
organisiations that they "feel they are part of", even if that just
means eating dinner with everyone else. Also, many of the dinners have
celebrities, interesting speakers, wonderful people to hobnob with,
etc.. The dinner-goers get something out of the meal. They could just
write a check, but most of them don't -- instead they get a meal and
"pay" substantially over the odds prices for the meal, knowing that it's
all for a good cause.
        By allowing speculation, you increase substantially
investment by the rich. One could make the same analogy for a charity
car wash and the poor.
        Harry