And i was really interested in finding some value independent from labour.
Let me try again: Accumulation of capital?
Well, it's not like mainstream econ cares about empirical evidences either… Also the track record of Welfare state vs “supply side economics ” is a good one here.
Mainstream economics is tested against the real world, both through policies that assume certain models and against historical data.
But it doesn't and now the theories that have been empirically wrong for two decades are still in used to explain the current inflation rate…
That's the biggest issue with how mainstream economics works: it mostly stands on two legs (classical and Keynesian, roughly) which are both proven wrong by the real world on a regular basis but come back in flavor when the other one fails (and the Neoclassical synthesis is the wrong approach to this problem, and is in fact wrong twice as often).
True. And I agree it seems like bullshit. Now consider the entirety of economics.
Have you studied economics?
Judging by the outcomes of the field and the absurd world we live in today with insane boom/bust cycles every few years, sky-high levels of wealth accumulation, inflation out of control world-wide, one cannot wonder how nobody seems to understand it.
From the outside, it looks like either they are producing incorrect/incomplete theories that simply don't work in the real world, or it's all so theoretical that it never really translates into people's lives.
Or, alternatively, the system is working exactly as intended and the goal was always to maximize for a few individuals and not society in the first place.
Empiricism is vulnerable to the changing awareness of the participants: if you discover a reliable principle it will be manipulated until it is learned. Once it is learned it is no longer reliable.
Rational agents are typically poor proxies for human behavior, and the more of them you have the worse the narrative to make it even seem that they could plausible be the way humans behave.
I'll try to answer your question through the lens of that book: the models that economists develop work under the models assumptions, and therefore they quite rarely fit well extremely complex phenomena like inflation; in general, economists treat the problems they face on a case per case basis by comparing different models outcomes', looking at the historical data, discussing the merits of the respective arguments for one or the other policy, and obviously depending on the specific goals you find more desirable (equality vs growth for example). The way the economy is ran is not necessarily representative of the economists consensus, or even that of the economists that are employed by the biggest policymakers, as the policies chosen might be the ones deemed more politically feasible, or more desirable for the particular politician's interests, and not the ones that are economically most sound and well-founded.
By the way, a topic I've been always fascinated by but never inquired further is that of social choice, wherein the economists analyse the incentives of classes such as that of policymakers.
Their assumptions don't hold. Assume people make perfect decisions, assume they all act within their own self-interest, assume perfect information, assume effects to the environment don't matter, neither do human lives. Assume acquiring money is the only goal anybody has.
I love how much these horrible assumptions shape the economic policy of the world.
I would even go so far as to say economics also explains quite well why usually nothing substantial is done to prevent them.
More information: https://www.youtube.com/watch?v=EwB5ihGu4Jw
Here's the quote: https://www.cnbc.com/2018/05/18/warren-buffett-explains-why-...
> Kenneth Cordele Griffin is an American hedge fund manager, entrepreneur and investor. He is the founder, chief executive officer, co-chief investment officer, and 80% owner of Citadel LLC, a multinational hedge fund. He also owns Citadel Securities, one of the largest market makers in the U.S.
I don’t see economist anywhere in Ken’s Wikipedia.
Just saying it doesn't count is a bit weak because that is saying training in a certain discipline and graduating in it has no meaning or skill transfer of relevance.
But I guess your point is to make sure that economists don't have any successes, not some deeper introspection into whether the study of economics can help in being successful.
Paul McCulley (an economist) made certain predictions while working at PIMCO (as did Paul Krugman), and then he left and Bill Gross (PIMCO founder) ignored what he said and made certain financial moves and lost a whole bunch of money:
* https://www.businessinsider.com/this-was-the-bill-gross-blun...
* https://www.nytimes.com/2014/10/03/opinion/paul-krugman-depr...
Gross is way richer than McCulley (or Krugman), and yet the rich guys got it wrong and the poor(er) guys got it right. If only Gross had listened to the economists (that worked for him).
“If biologists were so good at their science, they’d all be extremely healthy”?
“If sociologists could predict what humans think, they’d have a job”? In fact competent sociologists do, and generally in marketing departments. Same for economists.
One reason is that we can now better simulate the rational actors in a market.
The rational choice for food would not lead to an obesity and diabetes epidemic in the wealthiest country. Something doesn't add up.
Let's try again. Can you give sources showing that AI effectively models the economic decisions of non-rational actors? Anyone who can predict the economy should be able to quickly become very wealthy.
There was a physicist (Feynman?) who once joked that his job would have been much harder if particles had free will.
But there are regular experiments that are run in the realm of economics and various models make different predictions. It turns out that tax cuts don't pay for themselves, as some say:
* https://en.wikipedia.org/wiki/Kansas_experiment
* https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act
Turns out QE wouldn't devalue the currency and cause hyperinflation (as some said it would):
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
* https://manhattan.institute/article/an-open-letter-to-ben-be...
Turns out that austerity is not expansionary (i.e., cutting government demand/spending does not grow the economy; see Chart 2):
* https://www.theguardian.com/business/ng-interactive/2015/apr...
* https://en.wikipedia.org/wiki/Austerity:_The_History_of_a_Da...
There are certainly areas where things can get complicated and there's room for debate, but in other areas the mechanisms are understood.
Just because some folks choose to go with ideology over accurate models does not mean we don't have accurate models: is it the fault of medicine that some people say vaccines and masks don't work for ideological reasons?
Austerity to the point of being able to pay down government debt is painful, that’s well known. Unchecked spending and unlimited growth in debt is however unsustainable.
Also this usually works short-term because companies and people still have the infrastructure from previous government spending.
When that infrastructure inevitably crumbles because the taxes don't suffice to support it 10 years down the road, it's too late, the infrastructure needed to create new businesses will be missing, leading to a downward spiral for the economy.
It's not so much that the idea was simplified to push a political agenda: Arthur Laffer himself, when popularizing the concept (with the eponymous Laffer Curve[1]), used it as an argument against tax raise in the US.
So the big problem with economics is not so much that its results are being hijacked by politicians to push their agenda, it's that most of them (at least most of the prominent ones) are in fact pushing their ideologies through their publications.
“The basic concept was not new; Laffer himself notes antecedents in the writings of the 14th-century social philosopher Ibn Khaldun and others.”
IMO, it’s says less about economics than it does democracy. You can find many “think tanks” which are paid to create papers in support various ideologies. This doesn’t guarantee what they are saying is incorrect, but it does many they gloss over any inconvenient caveats.
Also, I’m assuming it’s unlikely the government has set the tax rate at the optimal rate to maximise revenue. But this assumption is probably dubious because even without explicit knowledge of the curve governments are probably pushed towards the optimal rate.
For one thing, it's kind of like saying "if scientists really understood the weather, we wouldn't have tornados every few years". Or even better, "if we really understood climate change, we'd stop it". There's a big difference between understanding something and being able to do something about it.
Another thing, it's missing the nuance that financial crises could be handled better or worse, and it seems to me like it's getting better (e.g. compare the great depression to the great recession).
People like to dump on things they don't have much familiarity with, and software engineers and the HN crowd in general seems to think everything besides software is all noise full of uneducated people. (Not saying you specifically are an outsider to economics or a software engineer, but that is the general trend.)
Edit: here is also the source code for the cooperative coin, if it helps the discussion https://github.com/lmlhub/ee_web_apps/blob/main/cooperating_...
Edit: also I don't see it very similar to insurance, since insurance is withholding wealth in order to distribute it occasionally when needed because it's zero-sum. But if distributing it all the time everywhere is a net positive gain, that's entirely different than the insurance game.
Insurance is zero-sum (negative-sum, actually) when it comes to money. It is not zero-sum overall, because reducing risk is valuable. A 50/50 shot at either 10 million dollars or nothing is significantly less valuable (to anyone who isn't already very rich) than a guaranteed 5 million.
That’s not even snark, humans preferring both of higher risk and lower payoff is a canonical psycho-economic result. And even the question of whether the concept of a rational utility maximizer is well-founded is the exact subject of this very fine article!
Sure. I very much doubt anyone seeks risk because it's risk. They do it for the thrill, or for social reasons, or because calculating risk is hard, etc.
> having any other computable utility function on any other measurable that we’d have to accept as equally valid if we want to convince any non-economist that we aren’t just using utility as a weasely word for money
Almost anything else will do just as well. If you can buy it (or the means to acquire it) on the market, then there's always some point at which twice as much money buys less than twice as much. Maybe 10 million is not enough to hit that point, or 5 million is too much, but the curve flattens out somewhere. And if you can't, then the money makes no direct difference, but can still buy you food and shelter and free time with which to pursue your other projects.
I suppose in principle you could actively want to not have money (and not want to give it away either), in which case getting rid of 10 million is probably not twice as hard as getting rid of 5, but that hardly seems realistic.
Most first world governments "fine" you quite a lot of money if you work on risky things. For example, if you earn $100,000 for ten years, vs $1,000,000 on one of those random years, after taxes you would have $720,000 vs $520,000 if you lived in San Francisco.
I think you're right if you're thinking about lottery winnings or other kinds of non-capital-gain windfalls like a gift from a benefactor, but those aren't the result of valuable "work on risky things".
The principle of a few big winners pay for many small losers is pretty well understood in other areas too: it underpins Sand Hill Road as well as the social insurance of welfare states....
The article is pretty pointedly about wealth redistribution, i.e. pooling of windfalls rather than of risk, but I don’t think that was lost on anyone... are you talking about a different model where there’s some sort of insurable situation?
But no, the payoffs don't go to zero: it's heads you double your wealth, tails you lose 40%. That's insurable risk. (if the payoffs went to zero there would be no benefit to pooling... the only winning move is not to play)
The article pretty pointedly is about social insurance, but it doesn't make a particularly good case for it since it's a completely abstract model which bears no relationship to the actual reasons wealth and income disparities exist and feeding unemployed people might be a good idea. Rich people don't need to gamble 40% of their wealth on each economic interaction (they're perfectly capable of diversifying their own portfolios) and very rarely get bailed out with a share of lots of less rich people's earnings when their investments suck.
The non-straw man version of "mainstream economics" absolutely understands how risks work and literally invented the type of game theoretic model the author is using to show what he thinks "mainstream economics" is missing
Any insurer would have to guarantee some share of the 1.05x EV per toss, call that share itself X. The insurer would keep the remainder of the EV as premium, call that Y.
X and Y are both positive so it seems at first like you should be able to underwrite this. However, the math will not work out unless you change the dynamics of the model in some way.
The fundamental problem is that this is a model for a sequence of N events, and X (and therefore Y) are exponential functions of N. After some finite N, it’s only the insurer’s most recent guarantee that matters to the total payoffs. No previous events are consequential; the brute force of exponential math says the exponent alone dominates.
So we can just think in terms of x^N. At some point the insurer must pay out x^N in losses from the previous x^(N-1) in gains.
In other words, regardless of the premium charged, or the number of individuals whose risk is pooled, this individual’s status as an insurer doesn’t give them any special exemption from exponential reality that prevents individuals in general from remaining solvent in the limit of this model.
(I haven’t totally worked through the outcome table for the author’s proposed solution— I’d encourage you to do that if you think the solution might be flawed. But this does indeed seem to be a situation where any individual who attempts to capture the EV will fail, and only unconditional sharing can succeed.)
All of which is moot to my original point which was that the OP's original argument that the mainstream economics profession is focused purely on expected value with no concept of risk is laughably wrong.
They're in fact a few steps ahead of him, because they also assess pooling of earnings in terms of moral hazard and adverse selection, instead of naively assuming that expected return and downside risks are evenly distributed across the population and invariant with respect to wealth pooling. Adverse selection is the actual reason private insurers are unlikely to take on the burden of insuring things like unemployment (people that find it easy to find employment and have lots of savings will rationally avoid participating unless its compulsory, which means more people wanting to claim on it than pay in), but of course introducing variation in likelihood of payoffs to the model leads to potentially very different outcomes...
Nobody wanted willingly to give up their fields and farms, so fathers we re forced to sign contracts at gunpoint. Stories like these are not that rare, I knoe personally few whose granddads lost it all to aparatchiks.
Anyway, it was an utter failure, as communism is. Central planning doesnt work, farmers with intimate knowledge of their fields and crops were much more effective and motivated than then some random workers who tought mainly about themselves and stealing common property rather some common good.
Corruption, selfishness, laziness are things that collapse any similar pipe dream society, or make it at least very ineffective.
The problem comes when power resides in hands which are incompetent (frequent communism issue, people get power for rectal speology and not proven hard skills).
Or even worse they are competent, but incentives are completely misaligned - ceos having tens of millions as yearly base salary, golden parachutes regardless of fubar they create, then they look for additional means of their own profit, regardless of harm to company.
Those highly functioning sociopaths would grok say government-mandated jail terms for really bad stuff (TM) very quickly if it would be on the table, but its not and everybody up there knows it.
For one, no country on earth has ever been Capitalist. The word itself is a Marxist word describing a system that worships capital, it's actually meant to be derogatory and sarcastic. Every western country today is a liberal democracy and follows Liberalism, where any one in particular lies on a spectrum from Capitalist to Communist is variable but only within a fairly small range.
Finally, only a wilful idiot could call the current US a "failure". Is it flawed, far from perfect, miserable for a large part of its population? Yes. But does it also deliver them from starvation, war and natural disaster? Yeah, mostly. Better than nearly all other systems. It could do better, maybe a lot better, but it's so far from "failure" it's quite laughable.
But besides from that, European-style social democracies (note, also liberalist) can only exist because the US exists to guarantee that you can be that way safely. And because advanced, rich nations are more profitable for the US to trade with.
It's not Marxist to hate capitalism, it's Marxist to see capitalism as an incredible advance over what came before, which can still be improved on thanks to capitalism laying the foundation for further advances.
This is funny because it's the reason so many people are questioning the status quo or what they call 'capitalism' these days. The FOMC is at the center of the US (and to a large extent global) economy. It is a central planning body, arguably responsible for the stagnation in wages. Copied from a comment I wrote some days ago:
It's a little convoluted, but google 'dcf model', 'benchmark rates', and 'open market operations'. It's more than a single post to explain the mechanics, but you can grok it in a few afternoons. I'll attempt anyway: In order to figure out what activities we ought to allocate resources to, we compare their present values as a sum of future cash flows, each period 'discounted' by a rate. The rate is calculated based on the activities risks + a 'benchmark' or 'risk free' rate. Basically "this activity is risky, how much more should it pay than something totally without risk?"
The closest thing we have to that is US debt. US bonds have a set face value and interest rate, but if you buy above/below the face value, the interest will be a higher or lower return on what you paid, 'yield'. US debt is the most active market in the world, so taking the 'yield' shows what rate the global market[0] is accepting 'risk free' investment.
If the market is nervous, more bonds get bought because everyone wants 'safety'. But this drives up the bond price and lowers yield. Lower yields create an incentive to consider 'hey maybe we do something a little risky after all, it pays better.' Vice versa: if the market is buying risky stuff instead of safe bonds, yields go up and people think 'why do something risky if I can get that return with no risk'?
BUT the Fed interferes in this market. They have unlimited power to buy/sell bonds and therefore establish price ceilings and floors[1]. For most of the past 20 years they created a high price floor, which means low yields. This forces society to allocate resources to risky activity with higher returns.
In particular, when rates go down, cash flows in the future relatively contribute more to present value. With higher rates you look harder at the next 20 years. With lower rates, you look more at years 20+[2].
In practice it made any business that can 'promise the future' an attractive investment. Think Big Tech, VC startups, Tesla, Wework, Theranos. Meanwhile, businesses that are less risky and make goods and services now have to compete with those guys for ROI. If you have little hope of growth, and your business is established you have to raise prices or reduce costs somewhere. You can't control what you pay for raw materials/inputs, but you can control what you pay workers.
To further illustrate: Google burns hundreds of billions on projects that never see daylight or get axed after a couple years. How did market forces decide that was a better use of resources than building (relatively) more hospitals and bridges? Fed yield interference.
I'm not saying high rates are good, or low rates are bad. I'm saying rates that don't match market conditions are bad.
[0] Explainer on the bond market for the uninitiated: Big companies can't safely keep a lot of cash as currency because FDIC insurance is meant for individuals and only covers 250k. Instead you buy something 'safe' and very easily tradeable or 'liquid'. In the past, this might have been gold. Now it's US debt, which works better than gold for this purpose (diff maturities, easier settlement, etc.)
[1] These are decided by a committee of 12 individuals, the FOMC.
[2]To see this for yourself, model out a dcf and then add a row where you divide each discounted cash flow by the present value, "contribution to PV". Then, set up a bar chart for this row and play with your discount rate to see how the "time-shape" of PV contributions changes.
"Expected value (a mathematical object belonging to the very rigorous field of probability theory) is often used by economists in a non-rigorous way."
The covert implication is something along the lines of, economists do this deliberately to gain the benefit of rigor that the empirical performance of economic theory hasn't earned. You should definitely interpret that first as a political argument, motivated by a metaphysical argument, motivated by a mathematical argument.
And you're right to hear some alarm bells, because that's certainly a controversial claim.
But it's not an outlandish claim. The field of psycho-economics is basically the study of the many ways that people observably, empirically don't make economic decisions on the basis of EV maximization, so what more need be said?
And there are plenty of other metaphysical arguments that you probably accept in principle. Pascal's Wager, and the converse Pascal's Mugging, clearly show that EV maximization at least has to "break down at high energy levels", to borrow a metaphor.
So, this thought experiment is one of those, but it's actually a pretty elegant one:
In a series of two coin flips you have four outcomes, so your expected value is a quarter of (0.6 x 0.6) + (0.6 x 1.5) + (1.5 x 0.6) + (1.5 x 1.5) = about 4.4 over four = about 110% of your stake. So this is a winning gamble, so EV maximization predicts you will take it.
However: more than half of that EV, (1.5 x 1.5)/4 = 56% out of that 110%, comes from the relatively rare event in which you win two coin flips in a row.
The other three outcomes have to share the remaining 54% EV between them. It should make sense by now that if you lose, and play again, you can expect to lose again, despite still having a positive EV on the toss.
So the essential question the author is asking, the thing that makes this metaphysically controversial but not mathematically so, is this:
Assuming there's no mechanism to actually share the EV, how much should those three out of four parallel-universe versions of you who individually lose, and collectively have to come up with the cash to pay out 2x winnings, care about the one out of four of you who's taking those 2x winnings home?
And the political question is: Does more than 1/4 of you still think EV is a good basis for decision making absent a mechanism to actually share the EV?
Too late to edit but I feel like I should highlight this more, because it looks like the place something would be swept under the rug:
Yes, the individual who wins two flips in a row is still ahead even if they lose the next two flips. If they win the first four, they can afford to lose three more.
And if they win the first five, they can afford to lose… still only three. Five to four no longer breaks even.
That’s the thing that, if it doesn’t seem intuitive, is a meaningful insight. “This +EV dynamics is not ergodic” means:
In the limit, a) the individual who wins every single coin flip can afford to pay the losses of everyone else and profit, and b) no other individual breaks even.
"Pooling and sharing of computer source code makes everyone's products better"
Is there enough empirical evidence to support that analogy? Why shouldn't the same apply to wealth in a broader sense?
A closer (but not perfect) analogy is more like "pooling and sharing the computational time of the university's lone supercomputer makes everyone's projects better".
Well, a lone author publishing a 4 page essay on arXiv isn't particularly compelling to say the least. I could take two hours of my afternoon and write “«‘Ergodicity Economics’ is Pseudoscience» is Pseudoscience” and publish it there.
In fact, the author of the said PDF[1] explicitly write down that he doesn't really attempted to understand the point of the guy he's criticizing:
From the second paragraph:
> it is not easy to define what EE is because I am not an expert on this field
> It is not clear what kind of economic questions the author is trying to address
> I interpret that EE prescribes
Dude this isn't how science works, you don't just publish papers to shit on someone else's research without even having attempted to understand what it is about. WTF
It seems largely pushed by one guy - Ole Peters. It seems he created the Wikipedia page on this subject. His research is done under the umbrella of the authoritative sounding “London Mathematical Laboratory”, which he founded.
It makes giant claims, like the headline here which seems intended to be read as “mathematics proves collectivism is best” - and yet offers little empirical evidence beyond saying that an abstract mathematical model can tell us something about the real world. Spherical horses and all that.
It even pulls the classic pseudoscience manoeuvre of positioning itself against “mainstream economics”.
Crank until proven otherwise IMHO.