Re: [OPE] Behavioural economics: a revolution in science?

Michael W.: **Monitoring of MC is surely not adequate to the PLANNING of resource allocation which is, like investment management under any system, necessarily forward-looking.**   Every social accounting system, including that operating in capitalism, is *backward-looking*. Provided that consumers have freedom to choose, it is impossible to build a precise *forward-looking accounting system*.   The forward-looking function in capitalism is carried out by entrepreneurs at the cost of taking risks in a trial and error way. Mandatory price mechanism variant of Market Socialism rests upon the same principle. A *backward-looking accounting system* to register up to date MC’s and the entrepreneurial function of mangers to experiment taking risks, trying to discover future prices.   Kind regards, Alejandro Agafonow ----- Mensaje original ---- De: Michael Williams <michael.williams.j@googlemail.com> Para: Outline on Political Economy mailing list <ope@lists.csuchico.edu> Enviado: sábado, 4 de octubre, 2008 21:02:20 Asunto: RE: [OPE] Behavioural economics: a revolution in science? Monitoring of MC is surely not adequate to the PLANNING of resource allocation which is, like investment management under any system, necessarily forward-looking.   michael -------------------------------------------- Dr Michael Williams, BA, MSc, PhD   Mob +447906172655 Home tel +4423 80768641 PHelp save paper - Do you need to print this email?   From:ope-bounces@lists.csuchico.edu [mailto:ope-bounces@lists.csuchico.edu] On Behalf Of Alejandro Agafonow Sent: 03 October 2008 15:03 To: Outline on Political Economy mailing list Subject: Re: [OPE] Behavioural economics: a revolution in science?   1) Michael W.: *I don’t understand how what you say solves the problem of practicality. MC varies with level of output. P=MC of course traces out a S curve, which is why theoretically the S curve is up-sloping. How does the planning authority know where that market will be on each day (say) of the planning period? Additionally, in the long run, short run S and D curves will be shifting around. If you want MC to impact prices and output levels, why not leave it to the market? […]I guess your object could be fulfilled by some mechanism of profits tax.*   The capacity of calculation of the supercomputers nowadays would indeed let a planning authority to monitor the evolution of market in real time, as Cottrell and Cockshott have shown. But I am not thinking in this kind of *Langian Market Socialism*.   I have in mind a kind of *Dickinsonian Market Socialism* where every single public firm monitor the evolution of the marginal costs of their own production. Here we need far less computational resources. In this model an Economic Board only have to centrally monitor the volume of production effectively sold off and the difference between profits and expending in each firm, taking care that at the end of a period of production this difference amounts approximately to cero.   We can’t expect that MC’s impact prices and output levels fulfilling the goal of the *expansion of the scale of production* until prices equalize marginal costs. Progressive policymakers have quitted this goal in capitalist economies substituting it by the less ambitious *average profit*.     2) Michael W.: *I know of no management accountant who seriously claims to be able to forecast MC.*   I don’t either. I’m not talking of forecasting MC’s. I’m talking of monitoring and registering MC’s. This is possible with the current accounting systems.     3) Michael W.: *Your comments on paretian idealized, etc, seem to invoke a split between abstract models and concrete reality, rather than a concretisation of the former to the latter. What is more, in the light of many of your other arguments resting on the insights of abstract models, your choice of when to connect and when not to connect model to reality seems to be tactically driven by the argumentative point you are trying to establish …*   Your confusion seems reasonable since we can’t be in an e-mail as precise and plenty of arguments as we can in a PhD dissertation or a book. But you are right in a sense. Mandatory price mechanism variant of Market Socialism only takes the social accounting system implied in marginal theory putting it in a real institutional context.   Kind regards, A. Agafonow     ----- Mensaje original ---- De: Michael Williams <michael.williams.j@googlemail.com> Para: Outline on Political Economy mailing list <ope@lists.csuchico.edu> Enviado: miércoles, 1 de octubre, 2008 19:12:59 Asunto: RE: [OPE] Behavioural economics: a revolution in science? I don’t understand how what you say solves the problem of practicality. MC varies with level of output. P=MC of course traces out a S curve, which is why theoretically the S curve is up-sloping. How does the planning authority know where that market will be on each day (say) of the planning period? Additionally, in the long run, short run S and D curves will be shifting around. If you want MC to impact prices and output levels, why not leave it to the market?   I know of no management accountant who seriously claims to be able to forecast MC.   Your comments on paretian idealized, etc, seem to invoke a split between abstract models and concrete reality, rather than a concretisation of the former to the latter. What is more, in the light of many of your other arguments resting on the insights of abstract models, your choice of when to connect and when not to connect model to reality seems to be tactically driven by the argumentative point you are trying to establish … .   Of course we can modify in an ad hoc fashion short run MC prices to cope with such things as high fixed costs, whether as you have it to reduce excess profit opportunities, or as the standard SOE pricing literature has it, to avoid on-going losses. The latter involves some mechanism of subsidisation. I guess your object could be fulfilled by some mechanism of profits tax.   michael -------------------------------------------- Dr Michael Williams, BA, MSc, PhD   Mob +447906172655 Home tel +4423 80768641 PHelp save paper - Do you need to print this email?   From:ope-bounces@lists.csuchico.edu [mailto:ope-bounces@lists.csuchico.edu] On Behalf Of Alejandro Agafonow Sent: 01 October 2008 17:34 To: Outline on Political Economy mailing list Subject: Re: [OPE] Behavioural economics: a revolution in science?   Michael W.: “Measuring marginal costs is impractical centrally or in a de-centralized fashion, because they vary with level of output. You can assume this away and then assume constant returns to scale, so that MC = Average Cost, but this then has none of the efficiency advantages of MC pricing.”   In the whole body of literature that concerns the economic calculation controversy, this point never aroused. The reason is obvious.   Since we know indeed the position of one point at which the curves of supply and demand cut or have cut today and we are using an homogeneous accounting unit, managers are able to measure “marginal costs” (increasing, decreasing and constant).   Some time economists forget the useful practical knowledge that management sciences have accumulated for the sake of the direction of a firm. Part of this knowledge concerns accurate accounting systems.   So we can measure real MC’s without meaning the Paretian idealized concept of costs that arise in a mathematical model where is concentrated all the time and space.   The problem arises when we apply this marginal pricing rule to goods with a very high proportion of fixed costs to prime costs, like public utilities. And even in this case we have alternatives to the marginal pricing rule that permit pricing avoiding profits that harm consumers (I am thinking in the alternatives conceived by Henry Dickinson and Harold Hotteling).   Kind regards, A. Agafonow   ----- Mensaje original ---- De: Michael Williams <michael.williams.j@googlemail.com> Para: Outline on Political Economy mailing list <ope@lists.csuchico.edu> Enviado: miércoles, 1 de octubre, 2008 16:34:25 Asunto: RE: [OPE] Behavioural economics: a revolution in science? Measuring marginal costs is impractical centrally or in a de-centralized fashion, because they vary with level of output. You can assume this away and then assume constant returns to scale, so that MC = Average Cost, but this then has none of the efficiency advantages of MC pricing. This is quite independent of the incentive problems to which you refer.   That the theory of second best has been used by some policy advisors doesn’t ‘support the fact’ that competitive markets cannot support MC pricing (This is a matter of logic not literature). Rather such advice notes that prices are not =  MCs (because, for example, of imperfect competition) and then suggests that the state should intervene to align prices to MC in those cases where they are not so aligned. THEN 2nd best theory points out that unless this can lead to P=MC everywhere, it is either pointless or efficiency-reducing to try and set P=MC anywhere.   Normal profits pay the opportunity costs of capital, that which is required to keep just the required amount of capital invested in the industry concerned, and so are included in efficient cost curves. Pragmatically, they are the going rate of profit in similar firms/ industries with a similar risk profile and ‘adequate’ competition. When P=MC, supernormal profits are zero per definition, because profits are competed down to those that can be appropriated elsewhere by similar firms.   In the long run (when all inputs to production, including capital inputs, marginal costs will include the costs of capital; capitalists can appropriate profits from their private (or equity) ownership of capital.   Comradely … michael -------------------------------------------- Dr Michael Williams, BA, MSc, PhD   Mob +447906172655 Home tel +4423 80768641 PHelp save paper - Do you need to print this email?   From:ope-bounces@lists.csuchico.edu [mailto:ope-bounces@lists.csuchico.edu] On Behalf Of Alejandro Agafonow Sent: 01 October 2008 13:55 To: Outline on Political Economy mailing list Subject: Re: [OPE] Behavioural economics: a revolution in science?   1) Michael W.: “The same comments would apply to any attempt to use MC pricing in a post-capitalist economy. A consistent policy of equalization of prices and marginal costs is impractical.”   Why do you think it is impractical?   The Austrian criticism to Market Socialism (particularly to Oskar Lanke) rightly points out that the Lagean Central Board of Planning would face an immense amount of information that would impede it to find the more efficient combination of factors of production as well as the proper scale of production. Hayek is the best exponent of this criticism.   But if we look at more decentralized models of Market Socialism where this combination would rests upon the managers of the firms –avoiding the knowledge/information problems–, we have Jack Wiseman who argued that these managers would be willing to avoid the rule P = MC, fixing prices above marginal costs because they would want to appropriate the difference (profit).   Is it possible to avoid this problem giving feasibility to this mandatory price mechanism?   I think so and it was the purpose of my PhD dissertation to find a solution, which rests in a coherent institutional design to avoid the problem highlighted by Wiseman. Of curse, my PhD dissertation is in Spanish and will have a limited divulgation, but if you have in mind either of the former criticisms it is important to note that they are avoidable.     2) Michael W.: “The theory of the second best doesn’t conclude anything about the spontaneous support of universal MC Pricing.”   I don’t have textual evidence to oppose this, but it seems to me that the “theory of the second best” sometimes is used by policy makers to support the fact that the equalization of prices and marginal costs can’t be reached spontaneously.     3) Michael W.: “…if they [capitalists] do so under perfect competition they will end up with only the normal profits included in efficient cost functions.”   What does mean “normal profit” in this context?   In the past I discussed this with Diego G. and I think that you both have in mind the real way capitalist economy works when meaning by “normal profit” a positive amount of money that results as a consequence of fixing P’s above MC’s.   Nevertheless, in the formal Paretian sense normal profits are cero or near to cero profits, that result in the long run due to the equalization of P’s and MC’s once reached the lowest mean costs. This is the way manuals of Microeconomics present the theory (I am thinking in Hal Varian) and this is theoretically consistent –not necessarily institutionally consistent.     4) Michael W.: “It would not suppress private property provided the datum is Long Run Marginal costs.”   What do you mean here?   Sincerely yours, A. Agafonow     ----- Mensaje original ---- De: Michael Williams <michael.williams.j@googlemail.com> Para: Outline on Political Economy mailing list <ope@lists.csuchico.edu> Enviado: miércoles, 1 de octubre, 2008 11:12:56 Asunto: RE: [OPE] Behavioural economics: a revolution in science? That would be michAel … J!   Let’s drop it: you can call me whatever you like.   Universal equalisation of prices and marginal costs is a characteristic of an economically efficient allocation of resources and can be supported by universal perfect competition.   No doubt because of that, it has been recommended that state intervention to correct for market failures leading to the divergence of P from MC, should be directed at equating price to MC.  Apart from being impractical, the theory of the second best shows that if you cannot achieve P =MC EVERYwhere then there are no efficiency reasons for trying to achieve it ANYwhere. So the theory of second best indicates that in the presence of some de facto divergences of Ps from MCs, policy should aim to adjust other prices (say of the output of SOEs) away from MC to compensate for the de facto divergences. (Incidentally: even more impractical) The same comments would apply to any attempt to use MC pricing in a post-capitalist economy.   The theory of the second best doesn’t conclude anything about the spontaneous support of universal MC Pricing. It merely says that IF there is even a single lapse from P=MC, there are no efficiency advantages to putting P = MC elsewhere. Incidentally, general equilibrium is not able to conclude that economic efficiency, with P=MC, can be ‘reached’ by a perfectly competitive system; only that it can be ‘sustained’ by such a system. (This is the key point about GE’s neglect of market dynamics.)   So: 1)“a consistent policy of equalization of prices and marginal costs” is impractical 2) It would not suppress private property provided the datum is Long Run Marginal costs 3) This is at a very abstract level at which, as Keynes pointed out, we expect capitalists to pursue profit maximisation knowing that if they do so under perfect competition they will end up with only the normal profits included in efficient cost functions. 4) In terms of ideological deployment of perfect competition models to legitimate market capitalism, within orthodox economics we have imperfect competition models that undermine such an attempt, not to mention immense empirical evidence that concentrated industries generate super-normal profits – by, indeed, fixing prices that turn out to be > MC.   I agree that ‘behavioural economics’ is ill-defined, often subsuming institutional economics, psychological economics, etc. I guess the common element is to posit that economic behaviour is significantly and relevantly more complex than that assumed by rational choice theory. In that sense I would locate its usefulness as aiding concretisation of rational choice models.   Comradely greetings   michael -------------------------------------------- Dr Michael Williams, BA, MSc, PhD   Mob +447906172655 Home tel +4423 80768641 PHelp save paper - Do you need to print this email?   From:ope-bounces@lists.csuchico.edu [mailto:ope-bounces@lists.csuchico.edu] On Behalf Of Alejandro Agafonow Sent: 01 October 2008 08:05 To: Outline on Political Economy mailing list Subject: Re: [OPE] Behavioural economics: a revolution in science?   Hello Michel!   I usually use the last name of OPE’s members because some of us share the same first name. So I want to avoid confusions about who is the addressee of my e-mails.   M. Williams: “There is no formal contradiction between market failure and the equalization of price and marginal cost.”   I’m not sure what are you meaning here. Either if I suggested this contradiction or if the “theory of the second best” is compatible with the equalization of prices and marginal costs.   If it is the first case, I didn’t. I just pointed out that an original unexpected consequence of the neoclassical body of knowledge is that a consistent policy of equalization of prices and marginal costs would lead to the suppression of “private ownership”, supporting instead the public management of firms pricing good and services according to their marginal costs in the short run (Some provisos for this rule are necessary in the case of public utilities).   The justification of State intervention due to market failures is a consequence that appeared a little bit later in the history of economics thought.   If it is the second case; well the “theory of the second best” implies the recognition that the equalization of prices and marginal costs can’t be reached spontaneously. Therefore the fixation of prices above marginal costs taking possession of the proceeds is the usual way the real capitalist economy works.   It is true, as you pointed out, that in this last case the marginal cost pricing ends to be the basis of economic policy. Nevertheless, policy makers led by this theory watch instead “mean profits”, accepting the fact that prices always will be fixed above marginal costs and taking care that neither firm is obtaining extraordinary profits, which could mean a sign of monopolization according to this theory.   Of course, these considerations are taken from ideal theoretical types and some contemporary currents in economic policy introduce further shades that move them away from the strict Paretian model.   And yes, I know that today Behavioural Economics can’t be reduced to game theory, but I think that at the beginning game theory –at least as Morgenstern conceived it– was considered the spring of Behavioural Economics. Of course, at that time Austrian Economics was not considered a branch of Behavioural Economics and today it is, isn’t it? Maybe we have to identify when Behavioural Economics started to be considered a broad realm where different heterodox currents in Economics meet.   Kind regards, A. Agafonow   ----- Mensaje original ---- De: Michael Williams <michael.williams.j@googlemail.com> Para: Outline on Political Economy mailing list <ope@lists.csuchico.edu> Enviado: martes, 30 de septiembre, 2008 10:58:46 Asunto: RE: [OPE] Behavioural economics: a revolution in science? 1.       There is no formal contradiction between market failure and the equalization of price and marginal cost. That universal equalization marks an economically efficient allocation of resources, and a universally perfectly competitive market system will sustain such a universal equalisation of price and marginal costs. The most telling formal critique of the competitive perfect equilibrium abstract once we take the smallest concretising step by acknowledging that any (significant) market is not perfectly competitive is provided by the general theory of the second best that shows that once we lose perfect competition anywhere it is no longer necessarily more economically efficient to move towards perfect competition elsewhere. This of course, also undermines ‘marginal cost pricing’ as the basis of policy to correct specific market failures. 2.       I do not think it is useful to reduce behavioural economics (not even in its ‘institutional economics’ guise) to game theory. Game theory does provide guidance on concretising the competitive equilibrium models. But note that its most basic insight – that competition may not lead to a ‘socially’ efficient outcome, even when that is characterised only in terms of being the best available for all players – is an elaboration of the market failure that arises from less than perfect competition.   (Alejandro – if I may call you that – I don’t want to be a precious old man over what is probably a minor cross-cultural glitch, but if you must address me formally, I would prefer you to call me ‘Dr’ Williams; but what I would really like you to do is to call me:   michael J) --------------------------------------------   Mob +447906172655 Home tel +4423 80768641 PHelp save paper - Do you need to print this email?   From:ope-bounces@lists.csuchico.edu [mailto:ope-bounces@lists.csuchico.edu] On Behalf Of Alejandro Agafonow Sent: 30 September 2008 08:35 To: Outline on Political Economy mailing list Subject: Re: [OPE] Behavioural economics: a revolution in science?   1) Ekeland: “That the neo-classical economists are unable to prove mathematically convergence to such an equilibrium even in the most perfect models undermines the whole project too.”   Ekeland is right and his observation finds its roots in Morgenstern, who was concerned about the determination of an optimal game strategy, which he understood that it was radically different from the determination of “general equilibrium” that requires too demanding conditions. So, Morgenstern wondered how the neoclassical economists were so bold to postulate a stable economic system if the stability of another much simpler system, that one of the orbit of the moon around the earth, still could not be proved. 2) Williams: “Then, the most substantial criticisms of static equilibrium models come not from Marxists but from the Austrian School. Who amongst other things, rejected neoclassical equilibrium models because they seemed to justify (through their market failure theories) large amounts of state intervention in markets.”   I agree with Williams. But in addition to the market failure another key aspect that justifies State intervention, is the fact that the goal of many economists from Adam Smith to Vilfredo Pareto has been the equalization of “selling prices” to “marginal costs”, pricing process that in real capitalist economies takes place fixing prices above marginal costs and taking possession of the proceeds. Even Vilfredo Pareto recognized that this only could be achieved in a Socialist economy. But the handicaps of Behavioural Economics, understood as “game theory”, to understand the phenomena of institutional real world, manifested in Morgenstern when he noted that the neoclassical assumption of “perfect foresight” of the agents would be replaced in his theory by the assumption of “perfect and complete information” as these concepts are used in game theory –according to Morgenstern– in a specific way and without contradiction.   This led to the development of the “theory of expected utility” and thus, investment and consumption decisions allegedly could be treated successfully from the likelihood that an individual faces when making decisions in an environment of rivalry.   Kind regards, A. Agafonow       ----- Mensaje original ---- De: Michael Williams <michael.williams.j@googlemail.com> Para: Outline on Political Economy mailing list <ope@lists.csuchico.edu> Enviado: domingo, 28 de septiembre, 2008 13:55:32 Asunto: RE: [OPE] Behavioural economics: a revolution in science? Maybe static equilibrium models are an abstraction that behavioural economics can play some small part in concretising? Then, all abstractions are, in a naïve sense 'unrealistic'. To move beyond that would involve criticising the usefulness, relevance, ideological partiality, etc. of this as opposed to some other abstraction. (I have a feeling that Marx writes somewhere something along the lines of 'To think is to abstract', but I have never managed to find a source. Can anyone help?) An abstraction that can be successfully concretised does then not rely for its validity on mathematical proofs of convergence. Then, the most substantial criticisms of static equilibrium models come not from Marxists but from the Austrian School. Who amongst other things, rejected neoclassical equilibrium models because they seemed to justify (through their market failure theories) large amounts of state intervention in markets. As to that hoary old chestnut under which soi-disant revolutionary socialist save their most vicious attacks for those they label 'reformist' ... well I can think of a few reforms that would benefit the deprived of this world while we all wait for the second coming of 'the revolution', and that could be implemented in a way that would move us along the road to the revolutionary transformations that I would guess all OPE'ers are working for. comradely michael -------------------------------------------- Dr Michael Williams, BA, MSc, PhD Mob +447906172655 Home tel +4423 80768641  Help save paper - Do you need to print this email?P -----Original Message----- From: ope-bounces@lists.csuchico.edu [mailto:ope-bounces@lists.csuchico.edu] On Behalf Of Anders Ekeland Sent: 28 September 2008 09:28 To: Outline on Political Economy mailing list Subject: Re: [OPE] Behavioural economics: a revolution in science? Hi, maybe the behaviuoural economics will be the main-streams way out of the *static* equilibrium straight jacket  - especially since it does not mean that you have to say to heterodox critics: "You were right" and do not have openly to take on board the mostly left wing implications of rejecting static models. The totally unrealistic character of static equilibrium theory was not wanted, it is just necessary if you want the political, neo-liberal "results" (no role for government, unions etc. etc.). That the neo-classical economists are unable to prove mathematically convergence to such an equilibrium even in the most perfect models undermines the whole project too. But what behavioural economics (and "information economics", "institutional economics") introduces is precisely *dynamics", i.e. learning, path-dependency etc. etc. Akerlof and "The market for lemons" has kicked in this (for heterodox economists) open door already. But that was when the "cold war" still was going on. The elites has all the time had the choice between static theory being ideologically strong but empirically useless, and dynamic theory (institutional, behavioural, Schumpeterian) much more realistic, but less ideologically dominant. These guys are indeed going to be "soft" and "reformist", here is their evaluation of main stream economics: "Orthodox economic models are not wrong as such, but rather sloppy, biased approximations of how our economy works. They present a cartoon characterisation of economic life, greatly exaggerating one side of our nature at the expense of others. Behavioural economics has started to paint a more realistic picture." "... not wrong as such ..." - rather feeble start of a revolution! Regards Anders At 19:14 27.09.2008, you wrote: >... a revolution is under way in economic >thought. Behavioural economics is no bell or >whistle on the contraption of traditional >economics; it is a big departure which will >deliver a revolutionary new way of understanding >the world. The founding assumptions of orthodox, >neoclassical economics—that people can be >thought of as rational, selfish and >independent—are collapsing under the weight of >empirical refutations. Here is one example: the >“ultimatum game,” which typifies the story of >behavioural economics with a curious yet simple >experiment. As you know, in this two-player >game, the “proposer” is given a sum (say £10) on >condition that he or she offers a proportion to >the “responder.” If the responder accepts the >offer, each player gets the amounts agreed. If >he or she rejects it, both get nothing. Orthodox >economics says players are selfish, and so >predicts that the proposer will offer just a >penny and the responder, preferring a penny to >nothing, will accept. But this is not what >happens. The most common offer is half the total >sum, and offers of less than 30 per cent are >almost always rejected. If the proposer’s offer >is seen as unfair, the responder will decline >free money. ><http://www.prospect-magazine.co.uk/article_details.php?id=10359>http://www.prospect-magazine.co.uk/article_details.php?id=10359 > > >_______________________________________________ >ope mailing list >ope@lists.csuchico.edu >https://lists.csuchico.edu/mailman/listinfo/ope _______________________________________________ ope mailing list ope@lists.csuchico.edu https://lists.csuchico.edu/mailman/listinfo/ope No virus found in this incoming message. Checked by AVG - http://www.avg.com Version: 8.0.169 / Virus Database: 270.7.4/1695 - Release Date: 27/09/2008 13:11 _______________________________________________ ope mailing list ope@lists.csuchico.edu https://lists.csuchico.edu/mailman/listinfo/ope   No virus found in this incoming message. Checked by AVG - http://www.avg.com Version: 8.0.169 / Virus Database: 270.7.5/1697 - Release Date: 29/09/2008 07:40   No virus found in this incoming message. Checked by AVG - http://www.avg.com Version: 8.0.173 / Virus Database: 270.7.5/1701 - Release Date: 30/09/2008 19:08   No virus found in this incoming message. Checked by AVG - http://www.avg.com Version: 8.0.173 / Virus Database: 270.7.5/1702 - Release Date: 01/10/2008 09:05   No virus found in this incoming message. Checked by AVG - http://www.avg.com Version: 8.0.173 / Virus Database: 270.7.5/1702 - Release Date: 01/10/2008 09:05   No virus found in this incoming message. Checked by AVG - http://www.avg.com Version: 8.0.173 / Virus Database: 270.7.5/1705 - Release Date: 03/10/2008 08:18

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Received on Tue Oct 7 10:13:14 2008