Who Will Disrupt the Disruptors? A Review of Live Work Work Work Die

The final words of Corey Pein's Live Work Work Work Die are, "Off with their heads." In an engaging, hilarious, and gutwrenching first person account of the netherworld of Silicon Valley startup culture, Pein implores the reader to consider seriously the titans of tech are leading us into. By his account, it is a highly stratified society in which the toiling masses take turns pretending that they are among the tech elite.

New Post at NSER: Experimental Evidence of Sunspot Bank Runs

Last week, I attended a seminar by Jasmina Arifovic. I did a write up at the New School Economic Review blog:

For all the adoration that the gold standard gets from radical libertarians, currency is surely more stable without it. On the gold standard, currency crises were so regular that social scientists and philosophers came up with all sorts of theories to explain them. Some of them were really weird.

Among the weirdest was the sunspot theory of bank runs. Through several blind leaps of conjecture, William Stanley Jevons connected the occurrence of sunspots as having an (unproven) effect on crop yields which, in turn affects farmers’ debt from seed to harvest.

Later Arthur Pigou and later John Maynard Keynes used the phrase to describe sudden shifts in financial markets not based on changes in the fundamentals. A fluke. A panic. A sunspot. A bankrun.

Read the rest here

When Commodities are Contracts

On Monday, I brutalized my muscles in my first Krav Maga class. Afterwards, I got drinks with one of the people from the class who turned out to have a really interesting finance job. He is a lawyer who writes contracts for derivatives.

In my naivete, I said something to the effect of, "That must be exhausting writing and reviewing all those contracts so quickly." His response made me think about something in derivatives markets I had never thought of before. As he explained it, his job was to draft template contracts in advance of trading. He said that a minor oversight in the wording could mean thousands of trades that have nothing to do with fundamentals.

So in addition to "animal spirits" affecting the financial markets seemingly at random, the legal frameworks under-girding the financial market itself pushes traders in various directions. So much for fundamentals.

#tbt Gary Becker 1962 Irrational Behavior and Economic Theory

Gary Becker is often known for his penchant for the hyper-rational. The large body of his work attempts to tease individualistic rationality out of seemingly irrational behavior. In this pursuit, he sought to include all sorts of moral values into the "utility function" to explain things like monogamy, addiction, and suicide. Thus, it might come as a surprise to most to learn that one of his earlier papers made the case that one didn't need any sort of utility function at all in order to derive normal economic behavior.

According to one of my mentors, this paper is the best thing Becker ever wrote. In the 1962 article in the Journal of Political Economy, Becker shows how it is possible to derive normal aggregate demand behavior - all that a market needs to function properly - from any sort of budget maximization. Becker shows that even with completely irrational and inconsistent actors, overall behavior will be consistent enough for firms to react to market demand. What this shows, among other things, is that it's entirely possible (and perhaps likely) that what determines economic behavior is not preference at all, but rather structural constraints on behavior. Of course, for a Chicago economist in the heart of the microfoundations (counter)revolution, such conclusions are unacceptable. So instead, we got Superfreakonomics.

Download the paper here

#tbt Shapley & Shubik 1964 Ownership and the Production Function

Before the modern era of competitive game theory -- what one of my mentors refers to as the "neoclassical bicycle repair shop" -- game theory was a tool with which to challenge neoclassical dogma about how individuals behaved at the microeconomic level. Lloyd Shapley, in particular, revolutionized cooperative game theory with what came to be known as the Shapley value -- a quantitative measure of whether or not to take a particular role in a game. This form of game theory -- what might by today's standards of competitive game theory resemble a sort of meta-game theory -- sought to investigate the structural outcomes of certain incentive structures and resource constraints.

This paper by Shapley and Martin Shubik builds upon this by calling into question ownership structures themselves. Drawing in part on stylized facts about certain modes of production and resource distribution, Shapley and Shubik derive explanations for emergent ownership structures from tribal communism, feudalism, industrialism, etc. on the basis of labor and capital productivity. It's a really clever model, and provides some pretty decent inspiration with regards to modeling alternative economic systems outside of the paradigm of competition.

Download the paper here

A New Consensus Physics Problem

This past semester, I took a seminar on economic methodology. Throughout the course, we talked a lot about the New Consensus obsession with microfoundations among other things. I presented this physics problem to the class and the New Consensus answer.

Problem: You have enough 1 cm diameter marbles to fill a 40 cm diameter, 30 cm high bucket. If you were to pour them in, how many marbles would be touching the bottom of the bucket.

New Consensus Answer: All of them. Since an individual marble will be pulled down by the force of gravity to the bottom of the bucket, this means that each marble will go to the bottom of the bucket. Therefore all of them. If they don't all touch the bottom, then there's probably something wrong with the marbles.

#tbt Ben Fine and Anwar Shaikh at the 2015 NSER Journal Launch

"Heterodox Economists Don't Do Math" Reader

Anwar Shaikh - All the Humbug Papers. Literally all of them.

Herbert Simon - A Formal Theory of the Employment Relation

Thomas Herndon et al. - Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff

Duncan Foley and Deepankar Basu - Dynamics of Output and Employment in the U.S. Economy

Jesus de Felipe and John McCombie - The CES Production Function, the Accounting Identity, and Occam's Razor

The Problem with Human Capital as a Factor of Production

Shaikh's "Humbug" paper should have sounded the death knell for the Cobb-Douglas "production" function. Instead of accepting that the Solow residual (A in the equation below) was identically equal to the share-weighted geometric mean of the factor prices, New Classical economists have turned inward.

$$Y = AK^{\alpha}L^{1 - \alpha}$$

Now, the mainstream theory of growth is in constant search to "endogenize" the Solow residual. Thus, the hunt has been on for additional factors to "explain" the Solow residual as "accumulated" factor productivity.

If you take as given the Shaikhian formulation, then it becomes obvious why "total factor productivity" increases over time. Since average wages have generally been increasing over time while the average rate of profit is roughly constant (per the last two Kaldor facts), the Solow residual will necessarily be increasing over time. Thus anything roughly correlated with the average wage rate should allow for the ad-hoc creation of a "factors only" production function.

#tbt Herbert Simon 1951 A Formal Theory of the Employment Relationship

Today, I'm thinking about Herbert Simon on labor. In Simon's view, an important and often overlooked characteristic of the employment relationship is the degree of authority granted the employer over the behavior of the employee. In the extreme, a sales contract - the standard economic approach - would have employers paying merely for the product of labor. However, in practice, the employment relationship is one in which employees would likely prefer to do less work while employers would prefer they do more.

Simon used game theoretic notions of bounded rationality to explain the various situations in the labor market that would result in either sale contracts or employment contracts would arise. According to Simon's model, employment contracts will be preferred to wage contracts as information asymmetry about effort expenditure increases and as labor disutility decreases.

I find his approach interesting, mostly for its relative abandonment of supply and demand curve in favor of satisfaction functions. Rather than simply proving the existing of a point of intersection, Simon proposes that a bounded set of wage-behavior pairs could exist that would be acceptable to both the worker and the employer.

Simon proposes an extension to explain the existence and persistence of unions as well. Unlike mainstream economic models, it does not rely on supply and demand, and hence on so-called "market imperfections." Rather, Simon shows that union administration functions as a shift in authority, reducing uncertainty for all parties involved. I wonder what extensions can be made for public assistance or a reserve army.

Download the article here