Wednesday, May 20, 2015

Napoleon Solow and the Phantom Mechanism

I would like to say why I think that the Doomsday Models are bad science and therefore bad guides to public policy. ... The basic assumption is that stocks of things like the world’s natural resources and the waste-disposal capacity of the environment are finite, that the world economy tends to consume the stock at an increasing rate (through the mining of minerals and the production of goods), and that there are no built-in mechanisms by which approaching exhaustion tends to turn off consumption gradually and in advance. You hardly need a giant computer to tell you that a system with those behavior rules is going to bounce off its ceiling and collapse to a low level. -- Robert M. Solow, 1973
Sandwichman is agnostic on the built-in mechanism fable.

On the one hand, Solow's "built-in mechanism" is a metaphor -- a depiction -- and of course there is no "mechanism" strictly speaking, just as God is not an old man with a long, white beard. There are instead more or less spontaneous reflexes of economic actors that in the aggregate have observable effects. Such reflexes, however, are multitude. The probability of all these reflexes co-ordinating themselves spontaneously and independently -- without help from a Maxwellian demon, Walrasian auctioneer or Invisible Hand -- to produce a conjectured effect far in the future is infinitesimal.
Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion on cavalry tactics at the Battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon Bonaparte. -- Robert M. Solow
Aside from the multiplicity of so-called mechanisms, there is the slight inconvenience that a homeostatic regulator itself consumes energy to do its work (also known as 'transaction costs'). The more vast and complex the organism being regulated, the more energy the regulator will need to consume. When what is being regulated is the consumption of energy, a contradiction emerges: progressively more energy needs to be consumed to reduce the consumption of energy. There is thus a ceiling on vastness and complexity and a floor on reducing consumption.

It is not the finiteness of resource stocks, but the fragility of self organized natural cycles that we have to fear. Unfortunately, the services provided by these cycles are part of the global commons. They are priceless, yet ‘free’. Markets play no role in the allocation of these resources. There is no built-in mechanism to ensure that supply will grow to meet demand. Indeed, there is every chance that the supply of environmental services will dwindle in the coming decades as the demand, generated by population growth and economic growth, grows exponentially. -- Robert U. Ayres, 1998
Ayres highlighted another fly in the built-in mechanism ointment. To be fair, Solow did acknowledge the externality flaw in the price system. Fixing the flaw, he assured, would be simple and virtually painless:
The flaw can be corrected, either by the simple expedient of regulating the discharge of wastes to the environment by direct control or by the slightly more complicated device of charging special prices — user taxes — to those who dispose of wastes in air or water.  
What stands between us and a decent environment is not the curse of industrialization, not an unbearable burden of cost, but just the need to organize ourselves consciously to do some simple and knowable things.
Now that we know how that organizing ourselves consciously has turned out, couldn't we please have a built-in mechanism to do that part too? What if there is a built-in mechanism in the price and profit system that militates against the social capacity "to organize ourselves consciously to do some simple and knowable things"?

Finally, even if there was a built-in self-stabilizing market mechanism, it's interaction with natural systems may not lead to the gradual, advance adjustment that Solow conjectured:

We identify and prove that the interaction between a stable natural system and a self-stabilizing market mechanism can lead to cyclical or even chaotic behaviour. A built-in self-stabilizing market mechanism will not always serve the function of stabilization. Under certain conditions, it may increase the amplitude of fluctuations and have the effect of destabilization, as demonstrated in this paper. Therefore, by incorporating a self-stabilizing market mechanism, this model yields a result that contradicts Solow's (1973) conjecture that the market mechanism will have the effect of smoothing the time path of the world economy. -- Hans Gottinger, 1998

Tuesday, May 19, 2015

Mathiness, Growth and Increasing Returns

The following was originally posted on Ecological Headstand in October, 2012 under the title, Endogenous Growth Theory and Ecological Unequal Exchange: linkage, displacement and deflection of 'diminishing returns'. Paul Romer's rant on mathiness has provoked a response from Lars Syll regarding the issue of increasing returns to scale, which I discussed in this post.

What the late Stephen G. Bunker wrote bears repeating:
The crucial difference between production and extraction is that the dynamics of scale in extractive economies function inversely to the dynamics of scale in the productive economies to which world trade connects them.
Rather than repeat what Bunker wrote, though, I'm going to cite, later, a longer piece by Nicholas Kaldor from his 1985 Hicks Lecture that makes a somewhat similar point. But first, I want to present some background on an old debate and a 'new' theory.

In December 1926, The Economic Journal published an article by Piero Sraffa dealing with "that difficult branch of economic theory" -- the theory of increasing returns. Over the next five years it published responses from Cecil Pigou, G. F. Shove, Lionel Robbins and Allyn Young and, in March 1930, a symposium on the topic by D. H. Robertson, Sraffa and Shrove.

Almost exactly 60 years later, in October 1986, The Journal of Political Economy, published Paul D. Romer's "Increasing Returns and Long-Run Growth," an important contribution to so-called New Growth Theory. Romer took his cue explicitly from Young's 1928 paper, "Increasing Returns and Economic Progress" and although he mentioned the precedents of Adam Smith's pin factory and Alfred Marshall's distinction between internal and external economies, he skipped over the rest of the debate in which Young's contribution had appeared.

Critics have argued that Romer's usage of increasing returns and external economies is not faithful to Young's formulation, in that it "overlooked Young's emphasis on the reciprocal relations between the division of labor and the feed-back into aggregate demand as a requirement for growth," "neglected Young's categorical rejection of the usefulness of Walrasian general equilibrium models" and wrested "Marshall's microeconomic concepts of internal and external economies out of his theory of value and price to serve as a basis for amending constant return production functions to exhibit increasing returns for the macroeconomy" (Rima 2004, 181-182).

My concern here is with a more conspicuous omission in Romer's analysis -- the distinction between increasing returns as characteristic of manufacturing and diminishing returns as dominant in agriculture and extractive industries (Young 1928, 528-529). The words "agriculture," "land" and "rent" do not appear in Romer's 1986 article. When Romer mentions diminishing returns, it is only in the context of research activity or the limiting assumptions of classical conventional growth models. But diminishing returns is a specific limitation, not a generality that can be indiscriminately "offset" by increasing returns. In a lecture given at Harvard in 1974, "What is Wrong with Economic Theory," Kaldor explained that "it is the income of the agricultural sector, (given the "terms of trade") that really determines the level and the rate of growth of industrial production, according to the formula:"
Or, in prose, economic growth depends on either a relative reduction in the income of agriculture or increased demand from agriculture for industrial products. And, of course, increased demand from agriculture implies increased agricultural production, which at some point confronts the problem of diminishing returns. In his 1985 Hicks Lecture, Kaldor explained the inverse dynamics of scale between industrial and agricultural areas, parenthetically, in terms of the "differing manner of operation of perfect and imperfect competition":
The basic requirement of continued economic growth is that the various complementary sectors expand in due relationship with each other -- that is to say that general expansion is not held up by "bottlenecks" in key sectors. However, in the course of time, under the influence of technical progress, both of the natural-resource saving and labour-saving kind, the requirements of expansion may become considerably modified. In the manufacturing sector which becomes more important as real incomes rise, there are considerable economies of scale, as a result of which manufacturing activities are subject to a "polarization process" -- they are likely to develop in a few successful centres, and their success has an inhibiting effect on similar developments in other areas. The realisation of these economies of scale normally requires also that numerous processes of production which are related to each other are carried out in close geographical proximity.

As a result different regions experience unequal rates of growth of output and of population. The industrial areas experience a growing demand for labour which may involve immigration from other areas once their own surplus labour is exhausted. Technological development in primary production on the other hand, tends to be more labour-saving than land-saving, so that the growth of output may go hand in hand with a falling demand for labour; and though output per head may grow fast in real terms, the level of wages will tend to remain low (and may even be falling) as a result of a growing surplus population. Since labour cost per unit of output is the most important factor in determining selling prices (at any rate under competitive conditions) the low wages prevailing, in terms of industrial products, will mean that the terms of trade will move unfavourably to primary producers, which may be the main factor, along with the low coefficient of labour utilisation, for their state of "under-development" characterised by low standards of living. The important contrast -- which I regard as a major factor in the growing inequality of incomes between rich and poor countries -- resides in the fact that the benefit of labour saving technical progress in the primary sector tends to get passed on to the consumers in the secondary sector in lower prices, whereas in the industrial sector its benefits are retained within the sector through higher wages and profits. (The main reason for this difference lies in the differing manner of operation of perfect and imperfect competition.)
Kaldor's parenthetical explanation suggests more than it reveals. Sraffa's 1926 discussion is the key to unpacking why Kaldor specifies perfect competition as characteristic of primary production and associates imperfect competition with manufacturing industry. The key determinants, in that view, are the shapes of the firms' supply curves (increasing or diminishing returns) and the nature of external economies.

Externality and Ecological Overshoot

Marshall's notion of "external economies" has gone through a series of modifications to become today's "externalities." Pigou extended the concept beyond Marshall's industrial agglomerations and distinguished between “incidental uncharged disservices” and "incidental uncompensated services." The former became known as negative externalities and the latter as positive externalities, although typically it is the negative environmental externalities that are referred to simply as externalities. There is a seeming but misleading symmetry to the two terms and a similarly illusory quality of reciprocity within each of them. When a disservice is uncharged or a service is uncompensated there is a presumption that there might otherwise have been a "whom" to charge or to compensate and that the missing invoice could have been denominated in currency. In other words, the charging and compensating would appear to be a financial transaction between two parties, both of whom must be assumed to be legal persons. In reality, the services or disservices performed may (or may not!) be extremely indirect and the parties affected incredibly diffuse, both in space and time. Mundane examples of factory soot and laundry hanging out to dry may be more mystification than illumination.

In the case of the external economies of increasing returns and diminishing returns, respectively, although they function inversely to one another it is a double inversion that ultimately produces parallel incentives to firms in manufacturing and agricultural or extractive industries. In other words, while firms in the manufacturing center are routinely considered to be the beneficiaries of external economies that generate increasing returns in the sense that they receive uncompensated services, firms in the extractive periphery may also benefit from the externalization of diminishing returns in that they are able to avoid being charged for the environmental disservices they inflict. In effect, the cost of diminishing returns is first displaced to poor regions where it is then deflected onto society and the environment. Unequal exchange thus takes place, that is to say, in the global external economies, "behind the back", so to speak, of formal monetary transactions.

Sunday, April 19, 2015

Viral Gyro Spiral

"We need campaign finance reform. We do not need 'heroes' who take meaningless flights of fancy." -- Marsha Mercer, Richmond Times-Dispatch
Have you ever wondered what politicians do with all that campaign finance money? They don't keep it (or at least not most of it). They spend it. On campaigning. A lot of it on advertising. Which means buying time and space in the media. Including the Richmond Times-Dispatch.

That media is not going to bite the hand that feeds it, is it? So, it's a bit rich when a columnist scolds a citizen for taking a "meaningless flight of fancy." What would Marsha Mercer do?

Labelling Doug Hughes's gyrocopter flight "meaningless" is what Mercer did. So we don't really need to ask what she "would" do. The job of the media is to spin and frame dissent as either trivial or terroristic. In an oligarchy, all dissent is either trivial or it is terror. Thus, by definition, no dissent can be "meaningful" in the sense of being both effectual and legitimate.

This is precisely the eye of the needle that Hughes threaded with his marvelous stunt. Superficially, it is about oligarchy and corruption of democracy by big money. But more profoundly -- and metaphorically -- it is about the hermetically-sealed "closed air space" over Washington. D.C. In his letter to all 535 members of Congress, Hughes quoted John Kerry on the corrosion of money in politics and it's contribution to "the justifiable anger of the American people. They know it. They know we know it. And yet nothing happens."

Kerry went on to point out how the corruption of money in politics "muzzles more Americans than it empowers." How does it do this? Well, for one, those same media outlets that profit from the spending of that corrupting money to buy advertising space also get to pass judgment on the wisdom or folly of dissenting speech: "Sit down, sit down, sit down, sit down! Sit down, you're rocking the boat!"

We need a lot more than campaign finance reform. We do not need minders and muzzlers from the media to tell us what is "meaningful" and what is not.

Wednesday, April 15, 2015

Never Mind the Bollocks. Here's the Gyro.

Hughes on First?

Have to admit, the spectre of mailman flying a gyrocopter onto the lawn of the Capitol building appeals to the Sandwichman's weakness for eccentric idealists.

From the Tampa Bay Times, here is the letter that Doug Hughes was delivering to 535 members of both houses of Congress.
Dear ___________,
Consider the following statement by John Kerry in his farewell speech to the Senate —
"The unending chase for money I believe threatens to steal our democracy itself. They know it. They know we know it. And yet, Nothing Happens!" — John Kerry, 2-13
In a July 2012 Gallup poll, 87% tagged corruption in the federal government as extremely important or very important, placing this issue just barely behind job creation. According to Gallup, public faith in Congress is at a 41-year record low, 7%. (June 2014) Kerry is correct. The popular perception outside the DC beltway is that the federal government is corrupt and the US Congress is the major problem. As a voter, I'm a member of the only political body with authority over Congress. I'm demanding reform and declaring a voter's rebellion in a manner consistent with Jefferson's description of rights in the Declaration of Independence. As a member of Congress, you have three options.
  1. You may pretend corruption does not exist.
  2. You may pretend to oppose corruption while you sabotage reform.
  3. You may actively participate in real reform.
If you're considering option 1, you may wonder if voters really know what the 'chase for money' is. Your dismal and declining popularity documented by Gallup suggests we know, but allow a few examples, by no means a complete list. That these practices are legal does not make them right! Obviously, it is Congress who writes the laws that make corruption legal.
1. Dozens of major and very profitable corporations pay nothing in taxes. Voters know how this is done. Corporations pay millions to lobbyists for special legislation. Many companies on the list of freeloaders are household names — GE, Boeing, Exxon Mobil, Verizon, Citigroup, Dow … 
2. Almost half of the retiring members of Congress from 1998 to 2004 got jobs as lobbyists earning on average fourteen times their Congressional salary. (50% of the Senate, 42% of the House) 
3. The new democratic freshmen to the US House in 2012 were 'advised' by the party to schedule 4 hours per day on the phones fund raising at party headquarters (because fund raising is illegal from gov't offices.) It is the donors with deep pockets who get the calls, but seldom do the priorities of the rich donor help the average citizen. 
4. The relevant (rich) donors who command the attention of Congress are only .05% of the public (5 people in a thousand) but these aristocrats of both parties are who Congress really works for. As a member of the US Congress, you should work only for The People. 
1. Not yourself.
2. Not your political party.
3. Not the richest donors to your campaign.
4. Not the lobbyist company who will hire you after your leave Congress. 
There are several credible groups working to reform Congress. Their evaluations of the problem are remarkably in agreement though the leadership (and membership) may lean conservative or liberal. They see the corrupting effect of money — how the current rules empower special interests through lobbyists and PACs — robbing the average American of any representation on any issue where the connected have a stake. This is not democracy even if the ritual of elections is maintained. 
The various mechanisms which funnel money to candidates and congress-persons are complex. It happens before they are elected, while they are in office and after they leave Congress. Fortunately, a solution to corruption is not complicated. All the proposals are built around either reform legislation or a Constitutional Amendment. Actually, we need both — a constitutional amendment and legislation. 
There will be discussion about the structure and details of reform. As I see it, campaign finance reform is the cornerstone of building an honest Congress. Erect a wall of separation between our elected officials and big money. This you must do — or your replacement will do. A corporation is not 'people' and no individual should be allowed to spend hundreds of millions to 'influence' an election. That much money is a megaphone which drowns out the voices of 'We the People.' Next, a retired member of Congress has a lifelong obligation to avoid the appearance of impropriety. That almost half the retired members of Congress work as lobbyists and make millions of dollars per year smells like bribery, however legal. It must end. Pass real campaign finance reform and prohibit even the appearance of payola after retirement and you will be part of a Congress I can respect. 
The states have the power to pass a Constitutional Amendment without Congress — and we will. You in Congress will likely embrace the change just to survive, because liberals and conservatives won't settle for less than democracy. The leadership and organization to coordinate a voters revolution exist now! New groups will add their voices because the vast majority of Americans believe in the real democracy we once had, which Congress over time has eroded to the corrupt, dysfunctional plutocracy we have.
The question is where YOU individually stand. You have three options and you must choose. 
Douglas M. Hughes

Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism.
See also, Souter dissent:
"This century-long tradition of legislation and judicial precedent rests on facing undeniable facts and testifies to an equally undeniable value. Campaign finance reform has been a series of reactions to documented threats to electoral integrity obvious to any voter, posed by large sums of money from corporate or union treasuries, with no redolence of 'grassroots' about them. Neither Congress’s decisions nor our own have understood the corrupting influence of money in politics as being limited to outright bribery or discrete quid pro quo; campaign finance reform has instead consistently focused on the more pervasive distortion of electoral institutions by concentrated wealth, on the special access and guaranteed favor that sap the representative integrity of American government and defy public confidence in its institutions. From early in the 20th century through the decision in McConnell, we have acknowledged that the value of democratic integrity justifies a realistic response when corporations and labor organizations commit the concentrated moneys in their treasuries to electioneering."