Capitalism, democracy & taxation: McDonnell & Varoufakis January 26, 2016Posted by larry in Abuse of power, Bill Mitchell, democracy, economic inequality, economics, Varoufakis.
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I believe the current UK Tory government to be the most dangerous in living memory, at least for its own citizens and residents. This is why.
John McDonnell, the Labour shadow Chancellor, was interviewed on Channel 4 News last night and on Newsnight later on, Monday evening, 25 January. Even though the Channel 4interview raised the same old chestnuts, he showed he really doesn’t “get” the functions of taxation. He made a big point about how taxes are needed in order to pay for schools, hospitals, &c. And he made an even ghastlier mistake at the end of Osborne’s autumn statement last year, sounding like Balls, how the Corbyn Labour Party would bring down the deficit but slower and in a fairer way. Ye gods!!! Don’t just believe me. Have a look at Beardsley Ruml in 1946 – “Taxes for Revenue are Obsolete”: http://home.hiwaay.net/~becraft/RUMLTAXES.html. McDonnell doesn’t “get it”.
McDonnell may have been listening to Varoufakis, possibly on taxation, too much, methinks. The only things V cares about are Greece and his European democracy project, which are good things to care about. But Varoufakis has bad reasons for counting Osborne as one of his “friends”. I think McDonnell has also talked to Wren-Lewis, a neo-Keynesian, which won’t help. V contends that there hasn’t been much austerity in the UK; compared to Greece, I think he means. Well, Osborne I think has applied his austerity mostly in ways that usually do not affect GDP. The people he usually attacks make no appreciable impact on GDP and therefore would not show up in the overall statistics. So, when GDP drops, he realizes that he may have made a mistake and attacked the “wrong people”, and he adjusts. A tad. No reason Varoufakis should know about this, but then to make the statements he does seems to me to be irresponsible.
What this shows is that GDP in itself is insufficient for assessing the degree of austerity being imposed on a citizenry. You need to know where the cuts are being implemented. So, if where they are being implemented will not affect GDP very much, you will not see much change there and could conclude that not much austerity has been implemented. Which would be a grave error. Welfare payments constitute only about 0.7% of the UK’s GDP, which is not much. In addition, if you believe that taxes pay for this, you will undoubtedly think that money that could be used otherwise has been lost. However, once you grasp that taxation, and thereby taxpayers, do not fund government spending, then you can see that there is no Peter-Paul situation at all. And that spending on welfare does not affect anyone else at all.
As for the European project, Varoufakis has some fascinating and possibly controversial things to say about the relationship between capitalism and democracy. It is only the UK’s singular position he seems to be misled about.
When Varoufakis gets to the relationship between capitalism and democracy, he gets into interesting territory. In the early part of the 20th century, it was often felt that democracy was a consequence of capitalism. The evidence for this was that they arose in tandem and seemed to develop together. Bertrand Russell among others put the view forward that it was capitalism that made democracy possible. Max Weber, a little earlier, put forward a somewhat different argument. He contended that capitalism was the inevitable consequence of Calvinism. Both confused correlation with causation.
Varoufakis does not make that mistake. Although Varoufakis develops his argument in the context of Europe, it applies as well to the UK, virtually without modification. To show by example what I mean, let me go by way of a recent work by Nick Davies, an investigative journalist, published in 2014, Hack Attack: How the Truth Caught Up with Rupert Murdoch. It did, and nothing seems to have changed. Murdoch wants to further invade the UK communications network and, I would contend, further destroy it. Cameron has met with Murdoch a number of times. One would have thought this could not or should not have been happening.
The explanation Varoufakis would provide for this is that the political sphere has been swallowed up by the economic sphere, a scenario in which corporations rule the world in a democracy-free zone. Though he doesn’t say this, one could conclude from this perspective that democracy, if not a complete sham, is for the “little people”, while the rich and the multinational corporations can do whatever they want (an example of which is TTIP) with politicians as their servants rather than their regulators. In such an environment, could one be forgiven for wanting to be rich, even thoughtlessly so?
For Varoufakis, there is no inherent connection between capitalism and democracy. They are independent developments. And the evidence for this lies in Singapore and China, which have successful capitalistic economies devoid of democratic elements. For a good discussion of what democracy is, have a look at Robert Dahl’s How Democratic is the American Constitution? (2nd ed. 2003). Or view Varoufakis’s TED talk from last December: http://yanisvaroufakis.eu/2016/01/26/capitalism-vs-democracy-vs-capitalism-my-ted-global-talk/. Varoufakis believes Europe is on the cusp of becoming undemocratic, which would have the most drastic consequences. The ultimate cause of this is the structure of the Eurozone, a currency structure that is completely unworkable. It has only appeared to be workable because it had not faced any volatile stressors until 2008, the GFC, when the world’s banking systems collapsed. Varoufakis’s argument is not very deep but he had only about 20 minutes to put his case, hence my recommendation to look at Dahl’s analysis.
Economists researching psychological topics, again January 4, 2016Posted by larry in economics, Game Theory, Psychology.
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Susan Webber aka Yves Smith makes a trenchant critique of this research undertaken by economists. If you look at the early work of Tversky and Kahneman, you find that, essentially, people are classed as being irrational if they fail to follow the Kolmogorov axioms (of probability) first set out in 1938. Game theorists tend to view people as irrational if they fail to maximize their utilities, whatever these might be. Gerd Gigerenzer has shown fairly conclusively in a number of studies that people, even medics, do not understand probabilities if presented to them in the standard way. But do understand them if presented in what he calls standard frequencies, for instance, asking people what the odds are for people like X to be (or have) Y. Behavioral economics, except as practiced by a few exceptional researchers, is almost unremittingly awful.
This research is another example of discipline overreach. Physicists do it. Biologists do it. Social scientists tend not to. But perhaps not for the best reasons. In this particular case, the researchers are investigating what makes for a “team player”, what leads to social cooperation, and the like.
The author of this piece is a personnel economist. WTF is that?
Another example is economists researching into happiness. They are completely missing the point. Psychologists have shown that what makes people happy is all over the place, but what they wish to avoid is much more circumscribed. And these researchers, in addition, think contentment may be a more tractable research topic than happiness. Another example of economists not doing their reading. This could be the title of a book: Economists, Why Don’t They Read?.
Roosevelt making fun of his Republican opponents in 1936 August 21, 2014Posted by larry in economics, humor, Roosevelt.
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Would that we had such orators today who actually more or less kept their word and their election promises. But this is comedy politicking at its best. Just sit back and enjoy.
On Phil Pilkington’s question concerning whether there could be an economic induced psychosis August 14, 2014Posted by larry in Culture, economics, Mind, Philosophy, Psychology, Science.
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I take Phil’s question to be an important, though unusual, one. But in order to approach an answer, we need to set up our framework. First, we need to define what a psychosis is. And I think it reasonable to define a psychotic state as one where the individual suffers from neurological malfunctioning of the brain that results in them seeing and/or hearing things that are not there, that is, that do not exist.
Second, we need to distinguish between the mind and the brain. We could go into great detail but for our purposes here it should be sufficient to use the term ‘brain’ to refer to the neural connections and activity of this organ’s neurons. (For anyone who has difficulty with this, I recommend a look at Gordon Shepherd’s Foundations of the Neuron Doctrine (1991), and the term ‘mind’ to refer to what we ordinarily consider to be mental activity and conceptions. There is an entire literature on this in both psychology and philosophy.
Third, we need to divide economics into two, possibly overlapping, spheres. One would be economics qua conceptual construct (or idea or belief or the like). The other would be economics qua economic activity. The first is a mental construct, while the second is a behavioral activity. They are naturally related, though any causal link could go in either direction.
We now have two related questions before us. 1) Can having a particular economic idea or conceptual construct drive a person into having a psychotic delusion? 2) Can engaging in a particular kind of economic activity drive a person into having a psychotic delusion? The film, Gaslight, involves both, as the husband places ideas in his wife’s head while simultaneously engaging in certain kinds of behavior, all designed to drive her into having a psychotic delusion, in terms of the film, the delusion that she is insane whereas there is, in fact, nothing wrong with her. In the terms which we have set, she does not exhibit either the types of behavior typical of someone who does have a psychosis or have a malfunctioning brain in the sense defined above.
Now Phil has rightly raised the specter of certain religious notions. Would we want to claim that someone, perhaps an entire group of people, even an entire society, was psychotically deluded because they have a belief in a god of some sort? Are they psychotic because they indulge in a communal ritual of communion, which, in principle, involves the doctrine of transubstantiation?
Let us leave religion and consider the Nazis. We assume, for which there is evidence, that there existed true believers. One of their beliefs was that there was such a thing as a pure Aryan race. Another was that there was a Jewish conspiracy to destroy Germany qua its racial essence. Is anyone who holds such beliefs or even virtually an entire society holding such beliefs and engaging in the activities indicated as being appropriate by the beliefs in the grip of a psychotic delusion?
Most people would probably answer No to the former case and Yes to the latter. But what is the difference between them? Both involve engaging in activities and entertaining conceptions for which there is no empirical evidence that would justify either and, indeed, there is (and was) abundant evidence to the contrary. Both cases involve people believing falsehoods and acting on them, blatant or otherwise. Surely, we would not wish to contend that anyone in the grip of a false belief is ipso facto in the grip of a psychotic delusion.
The answer, it seems to me, lies in our original definition of ‘psychosis’. With respect to either case, is it reasonable to ‘believe’ that an entire society, that is, its members, could be more or less simultaneously experiencing a particular brain malfunction? We need another term, I think, to describe what is going on in cases such as these.
The case that Phil really has in mind is the neoclassical economic paradigm, which has true believers and for which there is abundant contrary evidence. Are followers of this ‘false’ paradigm in the grip of a psychotic delusion? I honestly do not know the answer, but it is possible that Phil has asked the wrong question. And the answer concerning what question he ought to have asked instead depends on what term we replace ‘psychosis’ with. And to that conundrum, I have no real answer at the present time.
How the Economy Actually Works & Why Austerity Doesn’t July 27, 2014Posted by larry in economics, MMT.
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These links are of pdf files of PowerPoint slides and associated document pages containing the notes associates with the slides and should be viewable in your browser but if not, you will have to open the files from your browser in a pdf viewer. These documents will not display properly in Firefox, for example. I don’t know why. But most recent revisions to the browser further incapacitate the browser’s ability to view certain kinds of image files instead of improving it. In short, the browser is becoming a pain in the ass to use. So, if Firefox displays a note that the file might not be properly viewable, close it and a pdf viewer dialog box should open that will enable you to view the file.
The first link consists of the slides themselves, while the second link consists of the notes that accompany each slide (with the slide residing at the top of the page). The first link will take you to your default browser if it is compatible. The second link will do the same. The notes are of varying length and on some you may have to scroll, depending on your screen resolution and other factors. Some of the font sizes may appear small on some screens – they were altered in order to fit on the same page as the slide. And in some cases, the slides themselves have been shrunk in order to better accommodate the comments associated with the given slide. I hope this causes no serious inconvenience, though it may cause some. These adjustments were unavoidable due to the limitations of current technology.
I should warn some readers that a few of the slides and their notes are of a rather technical nature, but they are, I think, in the minority. Most are I hope accessible to most readers of this blog. Unless it is in the commons, all non-original material is, I believe, properly referenced. It will be obvious that I along with others have built on the work of our predecessors. And some of those from the thirties and forties appear to have understood the workings of the economic system better than many contemporary commentators. This is a scandal that has so far only been discussed by some heterodox economists. And even many of them shy away from the issue of fraud, which is endemic particularly accounting fraud, although that is beginning to change. I myself only make a few references to it. And this is because I am not sufficiently deeply informed about accounting fraud and how it can take place. Hence, I rely on the blog posts of Bill Black and others for this. Black, a former financial regulator and now a criminologist at the University of Missouri, Kansas City, is an expert on accounting fraud and is on the faculty of the university just mentioned, which is a haven for MMT (Modern Money Theory) economics, the paradigm that fundamentally informs the approach of this post. Along with Randy Wray of UMKC, I cite Bill Mitchell of the University of Newcastle, Australia. You will find their works along with those of others in my reading and reference lists. I should point out that not everyone I cite is an MMTer, as they are known.
Perhaps I also should point out that MMT is built on the work of others, most particularly, Keynes, Kalecki, Hyman Minsky, Wynne Godley, and Abba Lerner, to name only the most prominent. The principal founders of this particular paradigm, which is the best alternative to the neoclassical economic world view there is, are Bill Mitchell, Warren Mosler, and Randy Wray. If I have left anyone out, apologies.
Victoria Chick and Paul Davidson (a Post-Keynesian) both probably know as much about Keynes’ work as anyone alive. Davidson has said effectively that if you have read Keynes’ General Theory without having read the corrections he made in response to critics over the following two or three years (most of which can be found at JSTOR), then your understanding of the theory is incomplete. I know this to be true, as I discovered myself before having come across Davidson’s statement. Two corrections are of especial importance. One is Keynes’ theory of investment, which is corrected by Kalecki in a review of the book. Another is to note that another type of motivation for liquidity preference needs to be added to the General Theory that is in the Treatise on Money but left out of the General Theory, finance preference. Keynes added this in response to a critic later. It is of some importance to note that Hicks admitted in a letter he sent to Davidson that he, Hicks, had been wrong about his IS-LM theory (as it came to be known) and told Davidson that he no longer felt it accurately reflected Keynes’ theory. Davidson notes this in his The Keynes Solution (2009).
Taub shows complete lack of understanding of how a contemporary monetary system actually operates July 27, 2014Posted by larry in economics.
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The taxpayer meme is once again causing havoc and preventing deeper analysis and, down the line, effective legislation. Dodd-Frank got through by the skin of its teeth. This extract from NYT is by Jennifer Taub of the Vermont Law School. I have never been able to get anyone to understand that taxpayers do not pay for anything, that the taxes they pay leave the monetary circuit never to return, that it is not a Peter-Paul situation or a zero-sum game. Nothing seems to get through, But Taub should be able to see through this. That she doesn’t should be deeply worrying to us all.
Taub ends her piece thus.
Delivering fruit and flowers is relatively easy compared with the need to tend to the deeply rooted practices of excessive leverage, over-reliance on short-term funding, and too-big-to-fail, and too-big-to-manage institutions, that persist.
Delivering fruit and flowers is also easy compared with the need to get a handle on how he money system actually works so that battles based on faulty premises can then end. If this is anything like her book, Other Peoples Houses, published by Yale last May, the book couldn’t fail to be deeply misleading, in this respect at least. OMG.
Orderly resolution was created as an alternative to the distasteful choice between a chaotic Lehman-like bankruptcy and a taxpayer -funded bailout. It involves the Federal Deposit Insurance Corporation quickly liquidating a large failing bank holding company or systemically important non-bank financial firm that is on the brink of collapse and poses a significant risk to our financial stability. Many wonder whether this process can function well across borders. If it works out as intended, however, a single bank’s failure will be isolated, and losses will be imposed on shareholders and creditors, and managers replaced.
Getting this right is critical. As the Fed chairwoman, Janet Yellen, testified in February, she is “not positive that we can declare, with confidence, that ‘too big to fail’ has ended until it’s tested in some way.” The test she suggested was putting a failing firm through the orderly resolution process.
As it stands now, upon F.D.I.C. takeover of a falling giant, taxpayers will advance the money needed to oversee the process via a line of credit from Treasury. If the proceeds from the F.D.I.C.’s sale of the failed institution are not enough to pay back the loan, then the large surviving banks will be assessed several years after.
For those who claim Dodd-Frank “enshrines” taxpayer-funded bailouts, an easy remedy would be a simple amendment to create a bank pre-paid risk fund. Bank assessments could be based upon risk factors including size, leverage, and dependence on short-term funding. In addition to avoiding Treasury fronting the funeral bill, a pre-paid fund would create better incentives for banks to monitor each other.
A $150 billion bank pre-fund was part of the House version of the reform bill, but was dropped during the Dodd-Frank legislative process after intense industry pressure. In Orwellian fashion, congressional opponents contended that bank pre-funding was a taxpayer-funded bailout.
What Taub says here about how the FDIC is supported or works is so far from being right that you can’t really say that it is wrong. “Wrong” is too weak a descriptor of what her piece is saying about the workings of the monetary system we actually have.
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In a recent post about debt-free money, Randy Wray makes some remarks about the relationship between the role of taxation and the movement of the monetary circuit. It is my purpose here to explore the character of this relationship from a logical perspective. Wray contends that taxes are a sufficient but not necessary condition for driving the monetary circuit. As his comments were not entirely clear to me, I asked him what he meant. Among other comments he made, which we will get to, he made these remarks.
If I said “taxes are a necessary and sufficient condition” then that means you must have taxes and nothing else will do. I don’t say that.
If I said taxes are a necessary condition, then that means you must have taxes, but maybe that alone is not enough. I don’t say that.
If I say taxes are a sufficient condition then that means if you have taxes you will drive a currency. However something else might drive it, too.
I think these statements are relatively clear even if not entirely logically so. In order to show what I mean by this, let me specify, how, logically, necessary and sufficient conditions are specified. First, we have a variable, x, that ranges over taxes. Now, we are in a position to specify the exact character of necessary and sufficient conditions relevant to Wray’s concerns.
Sufficient condition (for tax to drive monetary circuit): if x is a tax, then x drives the monetary circuit.
Necessary condition (for tax to drive monetary circuit): is x drives the monetary circuit, then x is a tax.
Necessary & Sufficient condition (for same): x is a tax iff x drives the monetary circuit.
It is probably apparent that my formulations do not quite conform to Wray’s formulations. We can ignore the stipulation about tax being a necessary and sufficient condition for driving the monetary circuit, as it is obviously false. Therefore, we need concentrate only on the other two. First, we must note that Wray is engaged in a complexly compacted argument. Let us take sufficient condition first.
The first sentence is nothing more than a statement of what a sufficient condition is. When he mentions that other factors may drive the circuit, he is merely pointing out that for something to be a sufficient condition for something else, this does not rule out the possibility of other sufficient conditions being operative. He is right about this; it is a logically elementary feature of the context.
When we come to Wray’s discussion of necessary conditions, we encounter a little prolixity. When Wray says that were taxes a necessary condition, this would mean that one must have taxes but that this might not be enough, it is not entirely clear, logically, what he is trying to say. For tax to be a necessary condition,this means that if you don’t have taxes (via an application of modus tollens), the circuit will stop unless some other factor can drive the circuit (like the situation with the sufficient condition). While Wray may be clear what he means, the logical structure of what he is trying to get across certainly isn’t.
However, in denying that taxes are a necessary condition for the movement of the monetary circuit,he seems to be saying more than that if x drives the monetary circuit, then x is a tax, from which follows, if x is not a tax, then x does not drive the monetary circuit. This situation does not allow one to contend, as Wray does, that if taxes were a necessary condition of monetary motion, one must have taxes. Additional assumptions are needed in order to derive this conclusion. Hence, I can do no other than to conclude that Wray’s comments in this regard obfuscate the point he is trying to make. Which I think is a straightforward one. it is that the stipulation that taxes are a necessary condition for the driving of the monetary circuit are false because he denies the implication that if something isn’t a tax, then it doesn’t drive the monetary circuit. From which one can conclude that only taxes can do this driving. Which is false. There are other factors that can drive the monetary circuit besides taxes, such as fines, tithes, and the like.
Taxes as a sufficient condition allow for these additional factors to be drivers of the monetary circuit along with taxes. Hence, Wray’s contention that taxes are only sufficient but not necessary.
Upshot: while the logical structure of Wray’s argument isn’t entirely clear, he is consistent. And the role he assigns taxes vis-a-vis the monetary circuit seems to be more than reasonable.
Public Debt Vs. Private Debt July 5, 2014Posted by larry in economics, Philosophy.
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While it can be generally agreed that the terms ‘public debt’ and ‘private debt’ on their own don’t imprint themselves easily on the mind, I think there is a way around this seeming impasse. And this is to link them to simple equivalences. This can be accomplished by emphasizing the direction of the debt relationship. And this can be done quite simply. Public debt = what the government owes its creditors, while private debt = what members of the public, including firms, owe their creditors.
To further spell this out, you can then elaborate who the creditors are in each case. In the case of the public/government debt, the primary creditor is the public as a collective, and this is shown on the so-called US national debt clock (which ought to be called the US national public resource clock). In the case of private/individual debt, there may be many creditors – in short, anyone you owe money to, which would include the government. I am including business firms within the penumbra of the public qua collective for the sake of simplicity. It is important to note that it is not particular individuals with whom the government has this general indebtedness relationship, but the public considered as a collective body. When we speak of public debt in general, it is the public as a whole to whom the government is indebted, not individual members of this public (though such relationships do exist, though not in this sense).
Logically speaking, debt is an asymmetric relationship, analogous, say, to temporal relations. Taking two logical individuals, A and B, to say that the indebtedness relation is asymmetric is to say that the nature of the indebtedness of A to B and that of B to A are distinct in character. Using the general terms, government, creditors, and individuals (persons or firms), we can put the relationships between the three this way.
With G = government, C = creditors, and I = private individual(s) or firms, public debt is one where G is indebted to C qua q, while private debt is one where I is indebted to C qua r, where q and r characterize, in general terms, the two different modes of indebtedness. The characters of the two distinct types of indebtedness are distinct in many ways while simultaneously possessing fundamental underlying similarities. These two modes of indebtedness are logically distinct from one another. The nature of government indebtedness is different in essential ways from the indebtedness of the individual citizen or resident. This difference is captured I think by formulating the indebtedness relationships in this way. The formulation is quite abstract, but that is by necessity.
While the nature of creditorhood in both types of indebtedness may be so similar as to be effectively identical in the two cases, the character of the indebtedness relations themselves will not necessarily be similarly similar (ugh).
When spelled out in this way, it is easy to see that the debt relationship goes both ways but in distinct respects. To reiterate, while there are differences, there is a fundamental similarity and this similarity can interfere with appreciating the differences between the two types of indebtedness relations. Formulating the two distinct indebtedness relations in this way can, I trust, render the differences more salient without allowing the underlying similarity to inhibit understanding the fundamental characteristics of this relationship. Or so I would argue.
Therefore, when the terms, ‘public debt’ and ‘private debt’, are used, they should be considered to be parsed in the way I have suggested above and displayed starkly in the picture at the top. In this way, hopefully whatever confusion there might be between the two terms will vanish or become insignificant. And we can, therefore, go on using the two terms without confusing ourselves.
Don’t use UPS to deliver dog food April 28, 2014Posted by larry in Uncategorized.
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UPS, a US based company, is not as reliable as its advertisements say it is. What a surprise, I hear you say. The problem is that the delivery person may be so lazy or so pressured by the company to deliver or else that they can, and have, delivered parcels to addresses the addressee has never heard of or knows. Therefore, they are unable to go there to retrieve their parcel. Should you ask UPS customer service, they will tell you what you already know, that your parcel was delivered to an address you never heard of and have no idea where it is. Royal Mail can and will do better than this.
Definition of the Situation April 24, 2014Posted by larry in Culture, Frame Analysis, Philosophy, Psychology.
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The concept of the definition of the situation originates with William Isaac Thomas, possibly in Thomas and Florian Znaniecki’sThe Polish Peasant in Europe and America (1918-1920). The concept was given new vigor and poignancy in the fifties by Erving Goffman in his study of roles in face-to-face social interaction in Presentation of Self in Everyday Life (1957). Goffman agreed to a significant extent with what has become known as the Thomas theorem (1928): “If men define things as real, they are real in their consequences”.
Most situations bring their histories along with them. To do well in a situation, it pays to know something of its history. And to successfully redefine a situation, it may be essential to know that situation’s history. Sometimes the history can be daunting and intimidating thereby rendering the situation daunting and intimidating.
The concept of the definition of the situation is closely related to frame analysis, although this relationship is not always explored, to the detriment of both approaches, I think.