
Economists effectively assume that capitalism is unnecessary - carsongross
http://www.forbes.com/sites/stevekeen/2015/10/25/economists-prove-that-capitalism-is-unnecessary/
======
carsongross
Steve Keen is a very interesting hetrodox economist that I highly recommend to
HN.

He is very difficult to categorize: he is a liberal Australian academic who is
an admirer of _both_ Keynes _and_ Hayek, and has built upon and synthesized
both of their work. He does a lot of computer simulations of economies using
real-world behaviors (e.g. mark-up pricing) and has generated results and
opinions that are guaranteed to annoy pretty much everyone.

He blogs at Forbes (which is funny, given his politics):

[http://www.forbes.com/sites/stevekeen/](http://www.forbes.com/sites/stevekeen/)

And has a great book out that takes on classical economics:

[http://www.amazon.com/Debunking-Economics-Revised-
Expanded-D...](http://www.amazon.com/Debunking-Economics-Revised-Expanded-
Dethroned/dp/1848139926)

~~~
latj
I had never heard of him but the title of this article is beyond a literary
device- it is bait-and-switch. It is dishonest. You expect this from from
shifty clickbait websites hawking beauty tips and lists of top 10 ___ "they"
dont want you to know about. But you cannot take anyone serious who writes an
article like this.

~~~
carsongross
The title is a joke. Yes, it's provocative, but give the guy a break: he's a
small time economist at a second-tier university in an island nation who is
saying some of the most interesting things about economics in the world today.

You would be doing yourself a disservice not reading his stuff based on a blog
post title.

~~~
latj
Well, your description of him hits a little too close to home so I guess I
have to give him a second chance.

Also I wrote "hawking". haha.

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jedharris
Multiple commenters say "The title is a joke" \-- but Keen is just reporting
the direct implication of the Arrow Debreu theorems which economists regard as
foundational for economic theory (not practice or empirical analysis).

So maybe a _literal_ title would be "Economists prove that Economic Theory
says Free Markets are Unnecessary". The joke is on mainstream economic theory.

~~~
bruu_
Yeah. If you read the article, it is not asserting "Capitalism is Bad", it is
saying that the rationality assumption implies that we don't need the market.
If everyone was perfectly rational, we would all coordinate without the
market.

~~~
sharemywin
I read it more as you need all knowing agents to make capitalism work which is
the same requirement for a command economy.

------
devereaux
No they don't. And there are many school of thought in economics.

For Austrians, the knowledge problem lies at the core. A lot of individuals,
each with limited knowledge and limited processing power try to do their best.
An emergent feature is capitalism. This is Adam Smith "invisible hand",
because it is an emergent feature of a complex system. You can't observe it
directly, but it works.

The article correctly quotes Hayek, but shows a poor understanding on why
Hayek said so in the socialist calculation debate, or its later work, or other
schools of thought.

You don't need people with 100% clarity, only that they do their best, and act
upon what they believe is true. That is called purposeful action, in Mises'
human action. We all make mistakes, but we also revise our opinions when
proved wrong, and when replaced by the next generation!!

And entrepreneurs make big bucks when mistakes persist for too long, and an
opportunity remains unexploited. You can basically see profit as a reward for
helping everyone.

~~~
jedharris
This is an interesting argument but I don't know any proof that it is correct.
It seems very vulnerable to "adding up" or aggregation problems, where local
optimization clearly can work, but when you have lots of independent local
optimization, the aggregate effect is bad.

Have the Austrians proved that large number of actors each doing the best they
will reliably aggregate up to global optimality? (That would actually be
darned impressive given the well known problems of getting stuck on local
optima.)

If not then there's no clear argument against government action to prevent or
deal with bad local optima. And without any strong account of how and when
markets fail, the scope of government action needed is potentially broad.

By the way, Shrekli is a pretty good example of "profit as a reward for
helping everyone."

~~~
AnimalMuppet
> If not then there's no clear argument against government action to prevent
> or deal with bad local optima.

There may not be an economic argument, but there's a political one.

In theory, government can move you from a local maximum to a global one. _In
practice,_ though, government moves you to a maximum likelihood of [them]
getting re-elected, not to a maximum of any economic utility function.

More bluntly: You worry that the free market is going to produce a sub-optimal
solution? Okay; that's a valid concern. But you think Congress is going to
make things _better?_ Have you looked at Congress lately?

(And, yes, of course I know that the Ayn Rand unfettered free market is not
the answer. We really do need regulation. I get that. But be wary of the
assumption that government can do better than the market at optimizing
aggregate results. Government is a very blunt hammer, not a fine adjustment.)

------
roymurdock
The necessary sub header from the article: _Actually they’ve done no such
thing. But they do effectively assume that it’s unnecessary all the time._

This article is just a short rant about how simple, traditional, econ 101
models from the 19th century assume purely rational actors whereas the author
has decided that not everyone is a "Nostradamus" with infinite knowledge and
wisdom.

Nobody believes the rational agent assumption to hold at the individual level,
but it is _sometimes_ a useful approximation that can build the foundation of
a macroeconomic model that _sometimes_ makes sense. It's also a necessary
stepping stone on the way to more complex models. An unnecessary article with
a clickbait title.

That said, his book _Debunking Economics_ is very good and I'm glad that he's
advancing the state of modern economics by relaxing traditional assumptions
and building better models based on more realistic heuristics. But I don't
think this should be getting voted up HN.

~~~
jedharris
You greatly underestimate the depth of the problem. Mainstream economic theory
provably leads to economies that are unstable -- they don't converge to
equilibrium, and in fact can end up arbitrarily far from equilibrium. This is
not due to old or simple models, it is baked into current foundations.

Keen makes fun of the assumptions economists use to avoid that instability --
more the representative agent assumption than unbounded rationality. The
representative agent assumption is that all economic actors in the model
behave exactly like each other, and like the theory predicts would be
rational. Without that, the models would not converge. With that assumption,
as Keen points out, we can simply delegate all economic decisions to a central
planner. If this is a joke, it is one the economists are playing on us all the
time.

~~~
roymurdock
"Mainstream economics" moved away from convergence in the 1950s to the Solow-
Swan exogenous growth models and more recently the controversial endogenous
growth models such as the AK and the R&D models. They allow for differences in
savings rates and human capital respectively that determine whether or not
different economies will reach a steady state or converge with one another.
But this is all academic fluff: I doubt anyone at the Fed is plugging data
into any of these simple models that professors use to illustrate high level
empirical trends ex post facto.

Ultimately, your comment is much more concise and insightful than the post
itself. You get to the heart of the matter: central planning vs. free markets.
No organization can know enough about every variable that affects an economy
to do a perfect job of governing it. On the other hand, without central
planning there is little incentive to build infrastructure, protect borders,
provide affordable education and healthcare, and create a place where people
(excepting Ayn Rand) generally want to live.

Could we have a better system? Probably. Almost everything in the world can be
"improved" in one way or another depending on your viewpoint and agenda. But I
think its a bit dramatic to hold the viewpoint that "the economists" (whoever
they are) are playing a joke on us all the time. They're fallible humans
playing their part in a fallible system just like you and me.

It would have been great to see a careful consideration of the other side's
viewpoint and a proposal for a better system rather than a short, click baity
rant.

~~~
jedharris
Thanks for the positive words about my comment.

I have a lot of respect for economists who are deeply engaged with empirical
research.

My own problem is primarily with hard core "free market" theorists who lack
humility and have an outsized role in promoting economic mythology. Keen
paints with too broad a brush, but the people he describes do exist and do
have way too much influence.

Realistic ways of addressing most of the items on your list (infrastructure,
education, healthcare, quality of life) are quite explicitly condemned by
these theorists.

This economic mythology depends heavily on ideas about optimality that don't
survive the problems with Arrow Debreu, the limitations of representative
agents, etc.

The economic profession should be explicit about this. Every respectable
economist should agree that (say) "We know free markets can't be generally
relied on to produce good results. Government intervention is often required
to avoid serious problems." That would help undermine the mythology.

The American Economic Association (and others) should make some kind of
official statement along these lines, and should reiterate it whenever the
assumption that "the market is better" comes up in policy discussions.

But for whatever reason mainstream economists typically want to avoid making
explicit comments about the problems of "free markets".

------
moomin
Someone demonstrated a while back that the perfect market hypothesis is
equivalent to P=NP. In other words, the "rational actor" so beloved of
classical economics is, at best, not possible with current technology.

~~~
craigyk
And if you did have a machine that could optimally solve NP-hard problems, why
not just switch to a centrally planned economy?

~~~
jedharris
There would still be the problem of collecting accurate data to permit the
algorithm to work. This would be expensive and people could lie to their own
advantage.

BUT! Most economic models assume acquiring the necessary information for
decisions is free AND they assume your agents always faithfully serve your
interests. So once again these modeling assumptions have made the world safe
for central planning. Praise the economists!

------
tmaly
Mises anyone?

------
dmfdmf
You might as well conclude that freedom is unnecessary because that is the
implication.

~~~
api
Freedom is unnecessary for Capitalism. Look at China.

~~~
ashark
I believe you'll find that many who would consider freedom to (more or less)
equal capitalism have settled on definitions of all relevant terms that cause
"freedom = capitalism" (for their definitions of both terms) to be a
tautology. "Freedom", "capitalism", "coercion" and others will have been
stretched in some places and narrowed in others, nuance and odd corners
trimmed off until it all fits together, nice and neat, pleasing to the eye in
its simplicity and certainty.

