Robert Reich Understands Closed Loop Economics

[From Rick Marken (2008.10.01.1100)]

My daughter sent me this link to a talk given recently by Robert
Reich, who, if you don't know, was Secretary of Labor under Clinton. I
am posting this link for the sake of those, like Kenny Kitzke, who
evaluate ideas based on their acceptance by authorities. Kenny and
others (like the late Bill Williams) have criticized my ideas about
economics (which I call "closed-loop economics") mainly by pointing
out the "real" economists don't agree with those ideas. Well, Robert
Reich is about as real (and prestigious) as economists get and he
agrees with me completely. Listen to his wonderful talk at:

http://wacsf.vportal.net/?fileid=5549

Note that he (like me) attributes the current economic crisis lack of
aggregate demand due to income inequality. He specifically says (as I
have) that economy has been able to limp along despite the growth in
income inequality because those at the lower end of the income scale
have been able to borrow. But finally the borrowing party is over.

The only difference between Reich and me that I can see (besides the
fact that he is much smarter and shorter than me) is that he was
actually able, when pressed, to think of one Republican economic
policy idea that was good;-)

Listen and enjoy (if you are a progressive) or wince (if you are a
free-marketeer).

Best

Rick

···

--
Richard S. Marken PhD
rsmarken@gmail.com

[FRom Dick Robertson, 2008.10.01.1800CDT]

Thanks so much for the link. It was especially gratifying to hear Reich say what has long seemed so obvious to me (but apparently refuted by the great economic thinkers) that poor people can’t buy anything if they have no money. And, of course, since the rich people own the means of production, if there is nobody to buy their stuff, they too, don’t prosper.

Best,

Dick R

[From Bill Powers (2008.10.01.1727 MDT)]

Rick Marken (2008.10.01.1100)]

My daughter sent me this link to
a talk given recently by Robert

Reich, who, if you don’t know, was Secretary of Labor under
Clinton.

Excellent.
I’ve been having odd thoughts about the economy in the light of the
current crisis. Somewhere in the foundations of our economic culture
there are some things being taken for granted, largely because there are
people who benefit enormously from our doing so. These are the people who
make their livings without contributing anything at all to the rest of
us: they manipulate the system so as to drain buying power out of it for
their own benefit – and that is basically all that they do. They
become enormously rich and powerful by doing this, and they don’t want
people asking too many questions about what they are doing.

I don’t want to try to defend that idea right now – I know there are
arguments on the other side and I don’t know enough to think straight
about them. But what preys on my mind is an image that somehow makes more
sense as time goes on. It’s an image of an economy running without any
financial superstructure at all – or with only a small skeleton of the
current system.

Under normal circumstances, when you see life going on, even commercial
life, you don’t see the financial system. You see people doing things;
making products, performing services, buying and selling, fixing what’s
broken, transporting goods from one place to another, eating and drinking
and playing and maintaining things in order. Money changes hands, again
and again and again, flowing counter to the flow of goods and services.
But if you somehow grey out that money flow, what you see is that the
goods and services that people need are provided by other people, clerks
and engineers and managers and CEOs and lawyers and driver of trucks, who
are using their brains to invent things and do skillful things and
organize things. The money isn’t doing anything at all to affect how
people produce or how they consume.

There is nothing about the flow of money that enables people to do all
these things. If you just substituted a handshake for the act of trading
money for services or goods, exactly the same physical processes could
happen; the same people could do the same jobs, buy the same goods and
services, entertain themselves in the same ways. Money has absolutely
nothing to do with our physical capacity either to produce or consume
what we need or want. If all money were instantaneously abolished, we
could still grow food, manufacture cars, produce and act in movies,
deliver goods to stores, fill the tank with gas brought by trucks from
refineries, and so on.

But as we are seeing now, somehow money has come to have EVERYTHING to do
with our capacity to produce and consume. A huge abstract superstructure
sits on top of all our everyday dealings with each other, and the
superstructure just keeps growing and getting more complex, like a tumor.
Most of what happens in this superstructure has nothing to do with real
life; it’s like a game of Dungeons and Dragons, where the rules
proliferate all by themselves and the people caught up in the system use
so much of their brainpower figuring out the rules and trying to advance
another level where new rules appear that they have no attention left
with which to ask themselves why they are doing this. The superstructure
has become a powerful systematic delusion.

Of course there are multiple arguments to show that the financial
superstructure performs valuable functions. The problem is that nobody
knows which of those functions are necessary to keep the economy going. I
certainly don’t know, but it’s time that we all find out what is
necessary and junk the rest.

I’m think of writing to President Obama to suggest that we need a
Manhattan Project for economics. We need to know how our economy actually
works. Economists and financiers should be sent to the sidelines where
they can be asked questions, but where their manifest greed,
superstitions, and quaint beliefs will have no effect. This is a
scientific or engineering question, and needs to be addressed by those
who have demonstrated that they know how to find out the facts of nature
by showing that they can predict correctly what is going to happen when
certain actions occur.

At present, I doubt that there is any influential economist or financier
brave enough to claim having predicted what is happening now. Anybody can
make such a claim, of course, but the people in charge, if they were to
say they predicted it correctly, would be asking for a position in front
of a firing squad. If the president’s team of high-powered advisors knew
it would happen, why did they let it happen?

This is the time to admit ignorance and start doing something about
it.

Best,

Bill P.

···

I

am posting this link for the sake of those, like Kenny Kitzke, who

evaluate ideas based on their acceptance by authorities. Kenny and

others (like the late Bill Williams) have criticized my ideas about

economics (which I call “closed-loop economics”) mainly by
pointing

out the “real” economists don’t agree with those ideas. Well,
Robert

Reich is about as real (and prestigious) as economists get and he

agrees with me completely. Listen to his wonderful talk at:


http://wacsf.vportal.net/?fileid=5549

Note that he (like me) attributes the current economic crisis lack
of

aggregate demand due to income inequality. He specifically says (as
I

have) that economy has been able to limp along despite the growth in

income inequality because those at the lower end of the income scale

have been able to borrow. But finally the borrowing party is
over.

The only difference between Reich and me that I can see (besides the

fact that he is much smarter and shorter than me) is that he was

actually able, when pressed, to think of one Republican economic

policy idea that was good;-)

Listen and enjoy (if you are a progressive) or wince (if you are a

free-marketeer).

Best

Rick

Richard S. Marken PhD

rsmarken@gmail.com

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Checked by AVG -
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7:08 PM

[From Bruce Nevin (2008.10.01.2254 EDT)]

Bill Powers (2008.10.01.1727 MDT)

These are the people who make their livings without contributing
anything at all to the rest of us: they manipulate the system so
as to drain buying power out of it for their own benefit -- and
that is basically all that they do. They become enormously rich
and powerful by doing this, and they don't want people asking too
many questions about what they are doing.

This perception of the speculator as parasite, with its moral
undercurrent, was the norm until relatively recently. The "Reagan
Revolution" marked the ascendancy of the perception that "success" is
good and sufficient proof of being deserving. Likewise, in our not so
distant past failure was a transient event rather than a moral stature,
now widely replaced by the socalled "conservative" view that failure
indicates a weakness that must be punished by the consequences of
failure so that you learn right from wrong, and if you don't succeed you
deserve that punishment. So don't coddle those deadbeats! (etc.)

My sister in law forwarded to me the attached slideshow, which in pretty
basic terms aims to describe the debt portion of what's going on. The
insurance part is 50x bigger. Here's an excellent primer that a
colleague pointed me to:
http://www.financialsense.com/fsu/editorials/amerman/2008/0917.html

  /Bruce

Presentation1.pps (2.44 MB)

[From Richard Kennaway (2008.10.02.0845 BST)]

[From Bill Powers (2008.10.01.1727 MDT)]
There is nothing about the flow of money that enables people to do all these things. If you just substituted a handshake for the act of trading money for services or goods, exactly the same physical processes could happen; the same people could do the same jobs, buy the same goods and services, entertain themselves in the same ways. Money has absolutely nothing to do with our physical capacity either to produce or consume what we need or want. If all money were instantaneously abolished, we could still grow food, manufacture cars, produce and act in movies, deliver goods to stores, fill the tank with gas brought by trucks from refineries, and so on.

That's like looking at a control system and saying you could do without the controller: exactly the same actions and perceptions could go on without it. The inverted pendulum could stand upright on its own, the car could be driven in the dark with no lights, and the stone deaf could speak with perfect enunciation. All it needs is for the right actions to be performed. What do you need a controller for?

No, it's not *like* that: it *is* that. The people who do all of the things that you list are doing them for their own purposes. What are those purposes? Actors might still act without being paid, but no-one drives a delivery van for the joy of bringing goods to the shops. No-one pumps gas for the joy of rendering a service to motorists. They are doing these things to make a living. They may have additional reasons for choosing their occupations, but unless they can find something to do that other people are willing to pay them for (being a dependent is included here), then they won't be able to achieve anything else.

What we could not do, without a medium of exchange, is coordinate all of these acts. How shall I get shoes from the cobbler? If I produce bread, how shall I pay him if he already has all the bread he wants? How did I get the grain to bake bread from the farmer? How does the farmer decide who shall receive his produce? Why does the cobbler make shoes? Why does the farmer grow crops? Not because they have a zeal to see their neighbours shod or fed.

A medium of exchange -- historically, it was usually precious metals, but many other things have been used -- resolves these problems.

How the precious metal system evolved into the present scheme of doing things is summarised in this video:

http://video.google.com/videoplay?docid=-9050474362583451279
Main website: http://www.moneyasdebt.net/

Money does more than merely avoid the inconvenience of barter. Besides exchanging goods, it also results in exchanging information. By publicly asking and offering prices, people communicate the value they place on the things they are buying and selling. The better they communicate, the more efficient the market, in the sense of satisfying more of people's desires -- their purposes -- their controlled perceptions.

"Speculation" is putting a price on future goods, and trading accordingly. If you think the price of something is going to rise in the future, you buy it now -- either something for your own use or to sell later. That tends to raise prices now and decrease them later. If you think the price is going to drop, sell now and buy later. What that does is dampen out the fluctuations.

There may well be issues around leverage (borrowing most of the money you use to make these trades), and whether excessive leverage results in instability: I don't know, but I think it likely that the mathematics on these issues has been done already. Of course, maybe a PCT perspective would suggest new and better models.

But "speculation" is just a sideshow, as is the furore over "fat cat bonuses", the magnitude of which is a drop in the bucket compared to the sums of money at stake. The real beneficiaries of the system will be only too glad to have the public distracted with these shadow puppets.

BTW, one factor in the current financial situation is that the government required many of the bad loans to be made, in the name of "equality". See

and

These measures hindered the flow of information in the market. How effectively can you drive a car when the windscreen is fogged up?

···

--
Richard Kennaway, jrk@cmp.uea.ac.uk, Richard Kennaway
School of Computing Sciences,
University of East Anglia, Norwich NR4 7TJ, U.K.

[From Fred Nickols (2008.10.02.0630 PDT)]

[From Bruce Nevin (2008.10.01.2254 EDT)]

Here's an excellent primer that a
colleague pointed me to:
http://www.financialsense.com/fsu/editorials/amerman/2008/0917.html

Bruce:

Thanks for sending along the link to the piece by Amerman. Very scary. But it also has the ring of reality to it. I spent a little time in the financial services industry and it is very definitely all about short-term profit (and bonuses).

Regards,

Fred Nickols
nickols@att.net

From Bill Powers (2008.10.02.0605 MDT)]

Richard Kennaway (2008.10.02.0845 BST) --

[From Bill Powers (2008.10.01.1727 MDT)]
There is nothing about the flow of money that enables people to do all these things.

That's like looking at a control system and saying you could do without the controller: exactly the same actions and perceptions could go on without it.

Not quite. It's like saying we could do without the environmental feedback function: the means by which our actions alter our inputs. Money is part of the environmental feedback function, not the outputs or inputs, of a person. It is not, however, the entire environmental feedback function -- it's not the only way to convert our actions into getting what we want.

No, it's not *like* that: it *is* that. The people who do all of the things that you list are doing them for their own purposes. What are those purposes? Actors might still act without being paid, but no-one drives a delivery van for the joy of bringing goods to the shops.

Right. Driving the delivery van is a means of obtaining credit that can then be used to obtain the inputs the driver wants. The purposes for which the driver drives the van are all his his usual purposes, which are to get food, shelter, warmth, pleasure, companionship, and so on, from bottom to top. So this tells us that money is useful as a substitute for barter, which is impractical when things get at all complicated. But the main thing it is useful for is getting people what they want and need -- if barter works better, and often it does, people will use that rather than money. It's been estimated that the undergound economy, which avoids monetary transactions (and taxes) is 30 to 40 per cent of the monetary economy in the USA. I don't know if that is correct.

Why does the farmer grow crops? Not because they have a zeal to see their neighbours shod or fed.

That's an interesting point, because at least in the past, many farmers grew crops and raised livestock even in years when they lost money doing it, because they so greatly preferred that life-style over the alternatives. In fact there are many people who say they would work free if they could afford to, just because they love what they do. I once published a science-fiction story called The Calibrated Man, in which all those "menial" jobs like driving taxis and garbage trucks were done by teenagers who had always wanted to do such things. That doesn't quite cover everything, but it covers a lot.

But the main point we're approaching here is that money is only a means to an end, and the end is to provide people with what they want without requiring from them more effort than they can generate without pain (mental or physical). Economic theories try to explain how the economy works without taking individual reference conditions into account. The late Bill Williams, our only CSG economist, would use the word "individual" as a swear-word, with a sneer, when it was suggested that the driving force behind economics is what individuals want. The words "supply" and "demand" refer to abstract, and imaginary, forces that float in the air among people, making "the market" behave as it does. Economics shares that view with old-style sociology, which tried to deal with social laws in the same way, as statistical abstractions.

This is the same dehumanizing view of human affairs that we find in the bomber pilot, who is not bombing grandparents, parents, children, lovers, and invalids, but "targets."

PCT brings us back to considering live, real, people, who do what they find necessary and possible in order to control what they experience. PCT will lead to a person-centered rather than a institution-centered economics.

A medium of exchange -- historically, it was usually precious metals, but many other things have been used -- resolves these problems.

I agree, and these features of a monetary system will probably survive. The shopping mall will survive for its sheer interest and convenience, and people need to bring money, not carts full of other goods, to a shopping mall.

How the precious metal system evolved into the present scheme of doing things is summarised in this video:

http://video.google.com/videoplay?docid=-9050474362583451279
Main website: http://www.moneyasdebt.net/

That was excellent. It supports what I gleaned from others some years ago. Interestingly, though, it didn't consider what happens to the money that people borrow and spend when they default on a loan. The banks can't go around to the people who got the money that was spent and take it back. That money (minus forfeited property auctioned at a fraction of its worth) becomes "permanent money". The bank has to "write off" the unpaid balance -- erase it from the books. This doesn't cost the bank anything, but it leaves more money in the system than there was before the loan was made.

The result is that it can't be true that all the money in existence is debt. In fact, the amount of money that is permanent can only increase. Could this be the counterbalance to the threat of the banks owning everything? Most debts get repaid, destroying the money they represent. But bad debts are never repaid by auctioning off the collateral (if there is any). And that money doesn't disappear just because it was spent.

Money does more than merely avoid the inconvenience of barter. Besides exchanging goods, it also results in exchanging information. By publicly asking and offering prices, people communicate the value they place on the things they are buying and selling. The better they communicate, the more efficient the market, in the sense of satisfying more of people's desires -- their purposes -- their controlled perceptions.

I find that a lot less convincing. What do I care about the value other people place on things, if I get what I want? Things don't "have" value. If I'm willing to pay 50 cents for a newspaper, does that mean I have calculated its value relative to all the other things I might have got for my 50 cents, or compared the value of the newspaper to me with it's value to someone else? Of course not, not even subconciously. I have the 50 cents, and more; I want the newspaper; I buy the newspaper.

The idea of the "rational actor" in economics is a figment of the imagination. That person doesn't exist, outside the small group of obsessive-compulsive accountants who still have their first nickel.

"Speculation" is putting a price on future goods, and trading accordingly. If you think the price of something is going to rise in the future, you buy it now -- either something for your own use or to sell later. That tends to raise prices now and decrease them later. If you think the price is going to drop, sell now and buy later. What that does is dampen out the fluctuations.

Nonsense. It's just as likely to amplify them. Look at the 777-point dive the Dow Industrials took when Congress didn't pass the rescue bill. A bunch of nervous nellies, hypersensitive to the first derivative of every market indicator, with loop gains as high as their blood pressure. Sure, rate feedback in moderation will dampen fluctuations, but not when there's a time delay and predictions are imperfect and there is a lot of system noise.

If you want to prove to me that your prediction about dampening the fluctuations is right, you'll have to show me a working model in which that (legitimately) occurs. So you see, I entice you into my trap.

There may well be issues around leverage (borrowing most of the money you use to make these trades), and whether excessive leverage results in instability: I don't know, but I think it likely that the mathematics on these issues has been done already. Of course, maybe a PCT perspective would suggest new and better models.

I doubt that the mathematics has been done right (garbage in, garbage out), and I do think PCT will provide a new perspective. Mostly, we have to go back to the level of the individual controller and build the model up from there. The number of different economic policies that people follow is not infinite; our computers are big and fast enough now (even the ones we can carry around) to model quite a large array of possibilities.

But "speculation" is just a sideshow, as is the furore over "fat cat bonuses", the magnitude of which is a drop in the bucket compared to the sums of money at stake. The real beneficiaries of the system will be only too glad to have the public distracted with these shadow puppets.

BTW, one factor in the current financial situation is that the government required many of the bad loans to be made, in the name of "equality". See
A Mortgage Fable - WSJ
and
Community Reinvestment Act - Wikipedia
These measures hindered the flow of information in the market. How effectively can you drive a car when the windscreen is fogged up?

Well, forcing a lot of really bad loans is one way the government can put a lot of permanent money into circulation, if my idea about the effects of loan defaults is right. But I'd rather see it done without making poor people suffer the results.

I just don't believe anything any economist says about how things work, and won't until I see a working model that behaves the way real people behave, quantitatively. I see no signs that anyone understands the economy: it's all a lot of bluster and bluff.

Best,

Bill P.

[From Rick Marken (2008.10.04.1940)]

From Bill Powers (2008.10.02.0605 MDT)]

I just don't believe anything any economist says about how things work, and
won't until I see a working model that behaves the way real people behave,
quantitatively. I see no signs that anyone understands the economy: it's all
a lot of bluster and bluff.

I agree, of course. But even if one doesn't know how the economy works
there are surely some empirical facts about the economy that should
inform people about what are likely to be better policy directions.
For example, there is no evidence at all that reducing taxes leads to
increased GDP growth or job growth. But there is considerable evidence
that investment in infrastructure (healthcare, education, roads,
research, etc) does increase growth and jobs. So even though no
economist really knows _how_ the economy works, in terms of having a
mechanistic model that explains the behavior of the economy, I think
there are some economists who know _how_ it works, in terms of the
behavior of economic data. Reich, for example, knows that economies
work better for everyone when there is progressive taxation and when
the revenue from that taxation is used to invest in common
infrastructure.

I think people who think taxes are job killers think so because they
have an incorrect theory in their heads of how the economy works that
leads to predictions that are inconsistent with the facts. People who
think taxes are _not_ job killers may also have an incorrect theory in
their heads of how the economy works but at least their theory leads
to a prediction that is consistent with the facts.

I predict that if those who want to cut taxes (and, thus, spending)
actually get their way we will will continue in a positive feedback
spiral that will end in the mother of all depressions. McCain/Palin
view the current string of job losses as evidence that taxes should be
cut even further. Since it's likely that tax cuts (and the resulting
inclination to not spend on infrastructure investments) are
responsible for the current job losses (and sluggish job growth since
2001; compare it too the huge growth in jobs that occurred after
Clinton raised taxes in 1993) I think we will see a major depression
within a year if the Republicans retake the White House. Just remember
that you heard it here first folks.

Best

Rick

···

--
Richard S. Marken PhD
rsmarken@gmail.com

(Gavin Ritz 2008.10.05.16.13NZT)

[From Rick Marken (2008.10.04.1940)]

From Bill Powers (2008.10.02.0605 MDT)]

I just don’t believe anything any economist says about how things work, and
won’t until I see a working model that behaves the way real people behave,
quantitatively. I see no signs that anyone understands the economy: it’s all
a lot of bluster and bluff.

I agree, of course. But even if one doesn’t know how the economy works
there are surely some empirical facts about the economy that should
inform people about what are likely to be
better policy directions.
For example, there is no evidence at all that reducing taxes leads to
increased GDP growth or job growth. But there is considerable evidence
that investment in infrastructure (healthcare, education, roads,
research, etc) does increase growth and jobs. So even though no
economist really knows how the economy works, in terms of having a
mechanistic model that explains the behavior of the economy,

Have you actually seriously looked economic theory, of-course there are more modern versions like Brian Arthur’s efforts, or older models like Howard Odum’s ideas or even Georgescu Rogen’s, entropy and the economic process or are you talking about the more anecdotal common street parlance of economics.

Or are you saying people like Keynes, Samuelson, Friedman are fools and gave us such crap models of economics that its not worth even taking any notice
of.

Regards
Gavin

[From Rick Marken (2008.10.04.2230)]

Gavin Ritz (2008.10.05.16.13NZT)

Rick Marken (2008.10.04.1940)]

Bill Powers (2008.10.02.0605 MDT)]

I just don't believe anything any economist says about how things work,
and won't until I see a working model that behaves the way real people
behave, quantitatively.

I agree, of course.

Have you actually seriously looked economic theory...or are you talking about
the more anecdotal common street parlance of economics.

Or are you saying people like Keynes, Samuelson, Friedman are fools and gave
us such crap models of economics that its not worth even taking any notice of.

As Robert DeNiro once said "Are you talkin' to me"? Well, he actually
said it more than once. But if you are asking me, my answer is that I
am not saying that people like Keynes, Samuelson and Friedman are (or
were) fools but they did give us models of economics that are pretty
lousy, mainly because those models are not based on an understanding
of the nature of humans as control systems but also because they don't
seem to make anything like accurate predictions of macroeconomic data.

Best

Rick

···

--
Richard S. Marken PhD
rsmarken@gmail.com

(Gavin Ritz 2008.10.05.23.22NZT)

[From Rick Marken (2008.10.04.2230)]

Gavin Ritz (2008.10.05.16.13NZT)

Rick Marken (2008.10.04.1940)]

Bill Powers (2008.10.02.0605 MDT)]

But if you are asking me, my answer is that I
am not saying that people like Keynes, Samuelson and Friedman are (or
were) fools but they did give us models of economics that are pretty
lousy,

They work pretty well under many conditions, agreed not so well under others.

mainly because those models are not based on an understanding
of the
nature of humans as control systems

Are you saying here now because they didnt know about (or care about, or think about or whatever) humans as control systems their models are total unrobust under all conditions.

but also because they don’t
seem to make anything like accurate predictions of macroeconomic data.

Okay then give me some specific non accurate predication of macroeconomic data, to show this.

best
Gavin

[From Dick Robertson,2008.10.04.0905CDT]

Rick,

Have you sent this to Move On? I think you should. (You could cite some of the fact-sources to which you’re referring, too.)

Best,

Dick R

[From Bill Powers (2008.10.05.0757 MDT)]

(Gavin Ritz 2008.10.05.23.22NZT)

Okay then give me some specific non accurate predication of macroeconomic data, to show this.

I don't know of any prediction by macroeconomics at all, since economic theory seems to predict only after things have happened. Yesterday I was watching some economics show on TV, and the two Republican economists were screaming at each other about the right way to end the current crisis, one yelling that the government should withdraw all aid and let everything collapse so the free market could fix the problem, and the other shouting to be heard over the first one, saying that if we did that we would end up with a dictatorship and nothing could prevent a depression anyway. Economics doesn't have theories, it has passionate beliefs and glib explanations. It's mostly a religion. The system models are phoney and are not based on mathematical analysis of data. At best a few isolated relationships are proposed (but never tested), without any apparent realization that the behavior of the system can't simply be extrapolated from the behavior of some of its parts. The historical record does not support the most important beliefs, such as the belief that increasing investment increases the growth rate. (there is no significant causal relationmship between investment rate and growth rate, either concurrent or lagged). Economists answer this by saying the data are flawed and the theory is correct.

I actually don't blame anyone for this state of affairs. Economists have done the best they could. They have listened to the wrong psychologists to find out how people work (they think there is no limit but available money on how much of anything people want to buy; I heard two economists saying we shouldn't reward bad behavior and punish good behavior, meaning we should do the opposite). Most of economics grew up before anyone understood how to analyze closed loops of cause and effect, as when supply affects demand and demand affects supply. As a result, problems that are relatively simple to model when you do know control theory ended up baffling them. To expand the aggregate level of business activity, new money is needed to buy machinery, acquire raw materials, and hire a workforce (so new workers with wages and new investors with capital income can buy the new products). But new money has to be borrowed from a bank, because that is where all new money comes from. If somebody invests his old money, money already in existence, that has to be withdrawn from some other investment, so on the macro scale old money is useless as an investment. Does that mean that in the final analysis, only banks can invest? But wait, when the loan is repaid that money disappears. Now there isn't enough money to pay the expanded work force, and there will not be enough customers with enough money to buy the expanded output of the producer ... but aha, when a business collapses and can't repay its loan, the money it has spent can't be recovered by the bank so at least some of it remains in circulation: some of that new money is not destroyed, so the net investment can increase after all...but wait, where did all the interest money come from, which can be much more than the loan ...

So it goes, reasoning from one cause to the next effect, and producing only a tangle of ifs and buts. This is not how you analyze a system of relationships. You have to deal with all of them at the same time by using simultaneous differential equations. Nobody can get the right answer just with verbal reasoning. Even Warren McCullouch, undoubtedly a brilliant neurologist, told the Fifth Macy Conference on Cybernetics that he had been looking into control loops in neural networks and found that the loop gain can't be greater than 1, so no really effective control systems could exist in an organism. I picture him pausing, picking up his glass of water, bringing it to his lips, tilting it and draining it, setting it back down where it was, and smiling confidently through his big bushy beard at his newly-enlightened audience. Brains don't get you anywhere if you're on the wrong road.

If you don't have the necessary tools it doesn't matter how smart you are; you can't do the job. Economics can't do the job, and I think that the current fiscal mess should be taken as the written-in-blood resignation of all current economists. If they predicted this, why did they let it happen, and why can't they agree on what made it happen?

Best,

Bill P.

[From Rick Marken (2008.10.05.1220)]

Dick Robertson (2008.10.04.0905CDT)--

Rick,

Have you sent this to Move On? I think you should. (You could cite some of
the fact-sources to which you're referring, too.)

Hi Dick

No, I have only posted it to the net (and to some friends). Sending it
to MoveOn would just be preaching to the choir and, given its
reception on CSGNet, I'm pretty sure that data is of no particular
interest to economists or anyone else for that matter. I think it's
pretty much hopeless. I think FDR was able to get the economy on track
in the US due to a confluence of lucky coincidences. I don't know if
those coincidences exist now. Let's hope so. But showing data isn't
going to help.

Best

Rick

···

--
Richard S. Marken PhD
rsmarken@gmail.com

[From Richard Kennaway (2008.10.08.1637)]

From Bill Powers (2008.10.02.0605 MDT)]

Right. Driving the delivery van is a means of obtaining credit that can then be used to obtain the inputs the driver wants. The purposes for which the driver drives the van are all his his usual purposes, which are to get food, shelter, warmth, pleasure, companionship, and so on, from bottom to top. So this tells us that money is useful as a substitute for barter, which is impractical when things get at all complicated. But the main thing it is useful for is getting people what they want and need -- if barter works better, and often it does, people will use that rather than money. It's been estimated that the undergound economy, which avoids monetary transactions (and taxes) is 30 to 40 per cent of the monetary economy in the USA. I don't know if that is correct.

The underground economy avoids taxes, but mostly uses money. I've read that $100 bills are the preferred monetary token for wholesalers of illegal drugs.

Why does the farmer grow crops? Not because they have a zeal to see their neighbours shod or fed.

That's an interesting point, because at least in the past, many farmers grew crops and raised livestock even in years when they lost money doing it, because they so greatly preferred that life-style over the alternatives.

The farmer won't have a farming lifestyle for long if he carries on making a loss at it. In the long run, his business has to put food on the table and a roof over his head. Only when life is assured can you have a "lifestyle".

In fact there are many people who say they would work free if they could afford to, just because they love what they do. I once published a science-fiction story called The Calibrated Man, in which all those "menial" jobs like driving taxis and garbage trucks were done by teenagers who had always wanted to do such things. That doesn't quite cover everything, but it covers a lot.

Do you really want your garbage collections to depend on how many teenagers think that being a garbage man is cool this week?

Money provides a mechanism for matching up what people want with what people provide. If few are offering what many want, the providers can put up their prices and still get all the trade they can deal with. That attracts more people into the trade, pushing prices back down. If there are too many providing what too few want, some will go out of business, or at least out of that business.

But the main point we're approaching here is that money is only a means to an end, and the end is to provide people with what they want without requiring from them more effort than they can generate without pain (mental or physical). Economic theories try to explain how the economy works without taking individual reference conditions into account. The late Bill Williams, our only CSG economist, would use the word "individual" as a swear-word, with a sneer, when it was suggested that the driving force behind economics is what individuals want. The words "supply" and "demand" refer to abstract, and imaginary, forces that float in the air among people, making "the market" behave as it does. Economics shares that view with old-style sociology, which tried to deal with social laws in the same way, as statistical abstractions.

Likewise, the aggregate consumer, producer, employer, employee, government, and taxpayer that figure in Rick Marken's model.

But you are talking about macroeconomics. Microeconomics is very much concerned with individuals making decisions -- that is, by definition, what it is about. In microeconomics, "supply" is things like how many taxi drivers there are in a given city, and "demand" is how much each individual, with their own preferences, is willing to pay for a taxi ride.

Money does more than merely avoid the inconvenience of barter. Besides exchanging goods, it also results in exchanging information. By publicly asking and offering prices, people communicate the value they place on the things they are buying and selling. The better they communicate, the more efficient the market, in the sense of satisfying more of people's desires -- their purposes -- their controlled perceptions.

I find that a lot less convincing. What do I care about the value other people place on things, if I get what I want?

Because it affects whether you get it. If you have something to sell, you care very much about what other people are willing to pay, and what other people are selling the same sort of thing for. You can't sell yours for much more, and if you sell for much less, you're leaving money on the table. Likewise if you are looking to buy something.

A taxi driver charging three times his competitors will have few customers, unless he plies his trade at an international airport full of tourists unfamiliar with local currency and prices.

Things don't "have" value. If I'm willing to pay 50 cents for a newspaper, does that mean I have calculated its value relative to all the other things I might have got for my 50 cents, or compared the value of the newspaper to me with it's value to someone else? Of course not, not even subconciously. I have the 50 cents, and more; I want the newspaper; I buy the newspaper.

Only because 50 cents is a trivial amount of money to you. Try the same attitude to a major purchase, like a house. To someone in poverty, a week's groceries is a major purchase. Every dollar counts, and if you buy this, you can't buy that.

"Speculation" is putting a price on future goods, and trading accordingly. If you think the price of something is going to rise in the future, you buy it now -- either something for your own use or to sell later. That tends to raise prices now and decrease them later. If you think the price is going to drop, sell now and buy later. What that does is dampen out the fluctuations.

Nonsense. It's just as likely to amplify them.

Point taken.

···

--
Richard Kennaway, jrk@cmp.uea.ac.uk, Richard Kennaway
School of Computing Sciences,
University of East Anglia, Norwich NR4 7TJ, U.K.

(Gavin Ritz 2008.10.10.10.54AUST)
[From Bill Powers (2008.10.05.0757 MDT)]

(Gavin Ritz 2008.10…05.23.22NZT)

Youve made some good points.

Okay then give me some specific non accurate predication of
macroeconomic data, to show this.

I don’t know of any prediction by macroeconomics at all, since
economic theory seems to predict only after things have happened.
Yesterday I was watching some economics show on TV, and the two
Republican economists were screaming at each other about the right
way to end the current crisis, one yelling that the government should
withdraw all aid and let everything collapse so the free market could
fix the problem, and the other shouting to be heard over the first
one, saying that if we did that we would end up with a dictatorship
and nothing could prevent a depression anyway. Economics doesn’t have
theories, it has passionate beliefs and glib explanations. It’s
mostly a religion. The system models
are phoney and are not based on
mathematical analysis of data. At best a few isolated relationships
are proposed (but never tested), without any apparent realization
that the behavior of the system can’t simply be extrapolated from the
behavior of some of its parts. The historical record does not support
the most important beliefs, such as the belief that increasing
investment increases the growth rate. (there is no significant causal
relationmship between investment rate and growth rate, either
concurrent or lagged). Economists answer this by saying the data are
flawed and the theory is correct.

I actually don’t blame anyone for this state of affairs. Economists
have done the best they could. They have listened to the wrong
psychologists to find out how people work (they think there is no
limit but available money on how much of anything people want to buy;
I heard two economists saying we
shouldn’t reward bad behavior and
punish good behavior, meaning we should do the opposite). Most of
economics grew up before anyone understood how to analyze closed
loops of cause and effect, as when supply affects demand and demand
affects supply. As a result, problems that are relatively simple to
model when you do know control theory ended up baffling them. To
expand the aggregate level of business activity, new money is needed
to buy machinery, acquire raw materials, and hire a workforce (so new
workers with wages and new investors with capital income can buy the
new products). But new money has to be borrowed from a bank, because
that is where all new money comes from. If somebody invests his old
money, money already in existence, that has to be withdrawn from some
other investment, so on the macro scale old money is useless as an
investment. Does that mean that in the final analysis, only banks
can
invest? But wait, when the loan is repaid that money disappears. Now
there isn’t enough money to pay the expanded work force, and there
will not be enough customers with enough money to buy the expanded
output of the producer … but aha, when a business collapses and
can’t repay its loan, the money it has spent can’t be recovered by
the bank so at least some of it remains in circulation: some of that
new money is not destroyed, so the net investment can increase after
all…but wait, where did all the interest money come from, which can
be much more than the loan …

So it goes, reasoning from one cause to the next effect, and
producing only a tangle of ifs and buts. This is not how you analyze
a system of relationships. You have to deal with all of them at the
same time by using simultaneous differential equations. Nobody can
get the right answer just with verbal reasoning. Even Warren

McCullouch, undoubtedly a brilliant neurologist, told the Fifth Macy
Conference on Cybernetics that he had been looking into control loops
in neural networks and found that the loop gain can’t be greater than
1, so no really effective control systems could exist in an organism.
I picture him pausing, picking up his glass of water, bringing it to
his lips, tilting it and draining it, setting it back down where it
was, and smiling confidently through his big bushy beard at his
newly-enlightened audience. Brains don’t get you anywhere if you’re
on the wrong road.

If you don’t have the necessary tools it doesn’t matter how smart you
are; you can’t do the job. Economics can’t do the job, and I think
that the current fiscal mess should be taken as the written-in-blood
resignation of all current economists. If they predicted this, why
did they let it happen, and why can’t they agree on what made it
happen?

Best,

Bill P.

[From Bill Powers (2008.10.09.1715 MDT)]

Richard Kennaway (2008.10.08.1637) –

The underground economy avoids
taxes, but mostly uses money. I’ve read that $100 bills are the
preferred monetary token for wholesalers of illegal
drugs.

I think I’m not being clear. I’m not against the idea of money. But I
want to strip it out of the system first, to see how a model without it
would run, and then, when we see exactly why we need it, re-introduce it
only to perform the functions actually needed.

Why does the farmer grow crops?
Not because they have a zeal to see their neighbours shod or
fed.

That’s an interesting point, because at least in the past, many farmers
grew crops and raised livestock even in years when they lost money doing
it, because they so greatly preferred that life-style over the
alternatives.

The farmer won’t have a farming lifestyle for long if he carries on
making a loss at it. In the long run, his business has to put food
on the table and a roof over his head. Only when life is assured
can you have a “lifestyle”.

Yes, I agree. I only pointed out the life-style reference conditions to
show a non-economic condition that the system has to satisfy for a
farmer. And the presence of money is not what causes the farm to produce
food and other products. The farmer’s skill and knowledge are also
necessary ingredients, in fact essential ingredients even if the farmer
just raises his own food.

In fact there are many people
who say they would work free if they could afford to, just because they
love what they do. I once published a science-fiction story called The
Calibrated Man, in which all those “menial” jobs like driving
taxis and garbage trucks were done by teenagers who had always wanted to
do such things. That doesn’t quite cover everything, but it covers a
lot.

Do you really want your garbage collections to depend on how many
teenagers think that being a garbage man is cool this
week?

Sure, why not, if there are enough them? I’d rather have enthusiastic
teenagers doing the job than sullen workers doomed to do that for the
rest of their lives and going on on strike whenever they feel aggrieved.
I can make up supporting premises just as fast as you can.

Money provides a mechanism for
matching up what people want with what people provide.

I agree, and that’s probably one of the functions we would need money for
in the final model. Although I change “what people want” to
“how much of any given good people want”, since what they want
is determined by their reference conditions, both learned and
intrinsic.

If few are offering what
many want, the providers can put up their prices and still get all the
trade they can deal with. That attracts more people into the trade,
pushing prices back down.

No. You know that can’t be the right way to say it. This is a closed loop
you’re trying to describe, not a sequence of events. You can’t just
isolate one condition and satisfy it without considering all the other
conditions that have to be satisfied at the same time. Sure, if a lot of
people want a good, you can raise prices without causing them to stop
wanting it, but if the potential buyers are not paid enough for their
labor they still won’t buy the good because they don’t have enough money,
or need something else more. All these feedback loops operate at the same
time, not one after another or in isolation. Figuring out what the stable
condition will be, or whether the system will be unstable, can’t be
discovered by doing a couple of sums on the back of an envelope.

If there are too many
providing what too few want, some will go out of business, or at least
out of that business.

Yes, that’s one of the relationships that will be going on all of the
time, but again that’s not the right way to describe a feedback loop, and
especially not a feedback look that is embedded in a larger system of
loops all operating at once.

Economics shares that view
with old-style sociology, which tried to deal with social laws in the
same way, as statistical abstractions.

Likewise, the aggregate consumer, producer, employer, employee,
government, and taxpayer that figure in Rick Marken’s
model.

Not likewise, because those are control systems, which are not taken into
account in the old-style theories. When you model the composite consumer,
you have to set up an array of reference levels for various goods and for
the desired level of cash reserves, and other things. You have to specify
how the consumer gets money (whether wages or capital income), and what
kind and amount of action is needed to do that. Then you have to see what
kinds of loop gains (and other factors) for all these things are needed
to make the model’s behavior approximate real behavior as closely as you
can. You have to do this for each entity you mention above, realizing
that the same people can play several different roles in the system, some
of them conflicting. No human mind that I know about could ever predict
correctly what the outcome would be. You have to have a working model
even to get started on this problem.

But you are talking about
macroeconomics. Microeconomics is very much concerned with
individuals making decisions – that is, by definition, what it is
about. In microeconomics, “supply” is things like how
many taxi drivers there are in a given city, and “demand” is
how much each individual, with their own preferences, is willing to pay
for a taxi ride.

There’s no reason we can’t include microeconomics in the model. We could
have 1000 each of 100 types of transactions going on in the model, with
many different assumptions about how and why subgroups of managers manage
and subgroups of consumers consume as they do. The whole point is to find
out which assumptions give us a model that behaves as people really
behave.

Money does more than merely
avoid the inconvenience of barter. Besides exchanging goods, it also
results in exchanging information. By publicly asking and offering
prices, people communicate the value they place on the things they are
buying and selling. The better they communicate, the more efficient
the market, in the sense of satisfying more of people’s desires – their
purposes – their controlled
perceptions.

That’s if prices and purchases and production and consumption and wages
and interest and depreciation and dividends and preferences and needs and
all the rest of those variables interact as you imagine they do. Can you
show that you’re imagining correctly? I doubt it. I know I can’t defend
my imaginings, either. I don’t think anyone can. Face it: *we don’t
know how this system works. If we don’t come up with a working model of
the system, we will never know, and we will continue to be surprised by
disasters.*If I’m wrong, Richard, how are you ever going to show anyone I’m
wrong without a working model to back you up?

Best,

Bill P.

[From Richard Kennaway (2008.10.10 0844 BST)]

[From Bill Powers (2008.10.09.1715 MDT)]

I only pointed out the life-style reference conditions to show a non-economic condition that the system has to satisfy for a farmer. And the presence of money is not what causes the farm to produce food and other products. The farmer's skill and knowledge are also necessary ingredients, in fact essential ingredients even if the farmer just raises his own food.

Of course. The subject matter of economics is not money, but all of the above and more.

[Re supply and demand of taxi rides:]

Yes, that's one of the relationships that will be going on all of the time, but again that's not the right way to describe a feedback loop, and especially not a feedback look that is embedded in a larger system of loops all operating at once.

I know, it's just an imperfect way of talking about the causal relations among the individual variables. Your code does the same thing: one thing after another, whizzing around the inner loop fast enough to simulate a continuous system. So why the problem with "functional reactive programming", which in effect does exactly what you're asking for here: stating all the causal relationships among the variables, instead of describing one-thing-after-another?

From the "Hudak on robotic simulation" thread:

[From Bill Powers (2008.10.09.1642 MDT)]

[[description of Vensim]]
Is this the sort of thing that "functional reactive programming" does?

Yes, exactly. The implementation of the language -- whether Vensim or Yampa -- takes care of all the "x = y + k*dt" stuff that happens for each step of simulated time. The creator of the simulation just has to set up the causal relationships between the signals, and the implementation then performs the simulation through time.

Likewise, the aggregate consumer, producer, employer, employee, government, and taxpayer that figure in Rick Marken's model.

Not likewise, because those are control systems, which are not taken into account in the old-style theories. When you model the composite consumer, you have to set up an array of reference levels for various goods and for the desired level of cash reserves, and other things. You have to specify how the consumer gets money (whether wages or capital income), and what kind and amount of action is needed to do that. Then you have to see what kinds of loop gains (and other factors) for all these things are needed to make the model's behavior approximate real behavior as closely as you can. You have to do this for each entity you mention above, realizing that the same people can play several different roles in the system, some of them conflicting. No human mind that I know about could ever predict correctly what the outcome would be. You have to have a working model even to get started on this problem.

Does Rick have one? Where can I download it? I haven't followed the economic discussions too closely.

-- Richard

···

--
Richard Kennaway, jrk@cmp.uea.ac.uk, Richard Kennaway
School of Computing Sciences,
University of East Anglia, Norwich NR4 7TJ, U.K.

[From Bill Powers (2008.10.10.0250 MDT)]

Richard Kennaway (2008.10.10 0844 BST) --

Re supply and demand of taxi rides:]

Yes, that's one of the relationships that will be going on all of the time, but again that's not the right way to describe a feedback loop, and especially not a feedback look that is embedded in a larger system of loops all operating at once.

I know, it's just an imperfect way of talking about the causal relations among the individual variables.

Not just imperfect: incorrect. You do not get the right answers by analyzing a closed-loop system sequentially unless you're very careful to handle the dynamics correctly. As you know, I have learned how to do that.

  Your code does the same thing: one thing after another, whizzing around the inner loop fast enough to simulate a continuous system.

Not quite. The whizzing takes place only in individual loops. When there are many loops, each loop whizzes from input back to just before the next value of input independently of all the other loops during each iteration. At the end of an iteration, all the control systems have been updated effectively in parallel, in units of 1/60 second. The overall effect is that of parallel processing. This can be carried further, as in Simcon (see my post to Tracy Harms), so that all functions are computed correctly in parallel, even inside the loops, but that's not necessary unless you're trying to model a single loop with maximum accuracy.

So why the problem with "functional reactive programming", which in effect does exactly what you're asking for here: stating all the causal relationships among the variables, instead of describing one-thing-after-another?

No problem with it, except that when you read about it on the web the explanations seem excessively complicated for what is actually being done. And my approach does not describe one thing after another except within one loop and one iteration. Even that can be changed to pure parallel processing. Or to put it an other way, ALL programs do one thing after another if there's only one CPU. You have to do some tricks to make the processes appear simultaneous. It took me some years to get that right.

You have to have a working model even to get started on this problem.

Does Rick have one? Where can I download it? I haven't followed the economic discussions too closely.

Rick has one and I have one, but both are in the category of "Look, here's the sort of thing that can be done." Doing this right would be a very large project. Why don't you try it? You'd probably do it better than either of us could.

Best,

Bill P.