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When a refutation is anything but

by Cyrille Mon Jan 20th, 2014 at 12:19:58 PM EST

For decades, many academics and pundits have pronounced that the 70s conclusively proved that Keynes had been completely wrong, and that it proved that Friedman had been completely right.

You see, there was a recession, and it should have created deflation, except if inflation was actually determined by expectations based on previous experience, in which case it would not be brought down by depression. Friedman went on to state that "inflation is always and everywhere a monetary phenomenon" which, if you think twice about it, is the most laughable statement.
And to this day, I keep reading articles, even by professors of economics in the UK, saying that the episode of inflation over 2% in the UK in the early years of the current Government is a clear indication that any stimulus would have had little to no effect, being swallowed by inflation.

That's what happens when you start believing that your model matters more than reality.

front-paged by afew


Keynes was talking of a mostly closed economy with wages set by something approaching a market mechanism. This made sense as, well, that's what was around at the time.
By mostly closed I don't mean that there was no trading at all -there was, indeed, much less than there had been before world war one, but still quite a bit. But crucial economic inputs were typically available locally, or had substitutes, or several sources.

In other words, Keynes had little reason to try and think of a society that had been entirely built on the basis that it would always get plentiful cheap oil even though it did not produce any. It had no room for the providers of a key input to suddenly wonder why on earth they should keep selling their depleting reserves at extraction cost now they had considerable market power. In other words, it had no room for something like an oil shock, because it was irrelevant to the situation the model was trying to describe. The mechanics of inflation transmission in Keynes's work (or in its "bastardisation by Samuelson", if you must) were different and indeed stagflation following a couple of oil shocks was not a natural conclusion -simply because the possibility of such a shock had not been included in the model.

It's more than a bit disingenuous to fault a model for failing to predict a situation it was not designed to assess. I don't read expiry dates to decide how long to cook something in the oven. Who knows what Keynes would have said about the economics of external shocks? And how could the events following an external shock refute his thoughts on an internal depression? Still, it gets worse.

Apparently, the suggestion that inflation could be maintained following an external shock, in a sort of self-sustaining phenomenon, struck economists as an almost unbelievable result, impressive enough that we should give a major benefit of the doubt to any other idea coming from Chicago. Inflation expectations ruled the world, and extremely strongly weighed on inflation.
Now, I don't want to imply that any effect of inflation expectation is an illusion necessarily -I understand the phenomenon of price changes being done infrequently, and therefore trying to incorporate some of the future inflation (although I think that idea can be overplayed). However, we don't need to look as far as inflation expectations to explain a self-fulfilling phenomenon: back then, many (and I do mean many) employment contracts contained a clause guaranteeing that they would at least rise in line with inflation. Pay rises were in real, not nominal terms. So, give the economy an external shock on something as big as oil, and you would see wages rise quite a bit, even as the economy slows down.

But wait, some (not, let's be fair, all) economists will say. That does not lead to an inflation spiral, because the prices of final goods will remained determined by the laws of supply and demand.
At this point, if you happen to live on Earth rather than model-land, you should probably just laugh. Whatever can be construed as an extremely long-run equilibrium, most prices are not fixed by a constant supply and demand market clearing. Companies charge cost plus. While it may be true that an individual company may have to absorb a cost shock it alone experiences (but even that is far from always. I remember a hairdresser explaining that he had raised his prices because his son had started attending a private school. 20 years later, he's still in business), remember that the oil prices affected everyone.
And most of the inflation indexing of wages were sectorial agreements. All companies would have had the same impact (that is, both the impact from oil itself, and then the impact from wages rising with inflation, year after year). All companies would have passed it onto the customer, with no impact on their market share.

And that's not even a huge insight: companies tell you they do that! Price rises are typically explained by costs having increased. Yes, they may not be able to do that in some simplistic market models, but on the planet we happen to share, that's how things go.
Of course, there are a few markets where companies are absolute price takers. Typically, grain. Well, oil is a major input for them so, if the price is too low, they simply won't produce. Guess what happens to the price of grain when there is a shortage? There are few really good substitute for food over the medium term.



So guess what: if you increase the price of a component, you get inflation. And if you have a system that increases the price of the main component (labour is an even bigger part of the price than oil, would you believe it?) in line with inflation, then you get a spiral. This seems somewhat underwhelming as a paradigm-changing epiphany.

Still, it clearly has not sunk in, even 4 decades later. As I mentioned earlier, you get suggestions that the UK inflation of over 2% proves that more stimulus would have been in vain (yes, I know, suggesting that the UK was at full employment just because its inflation was not lower than 2%, and not collapsing, strikes me as using the wrong indicator when you have direct ones showing that there were about 10 people looking for a job for every job opening). But look at the news reports and you'll find that, just before, the UK government had increased VAT twice!
Guess what? the VAT hikes showed up in inflation figures. And when they had been absorbed, inflation started falling. But you see, in a pure form clearing market, this is not supposed to be possible. So I guess it must not be happening...

Models are useful. I will keep using them and defend their sensible use. But constant reliance of a model, beyond its scope, with no understanding of what it really says is a recipe for disaster. Refusing to inform your analysis with context is not objectivity, it's hermeticism.
Bayes would have wept.

(cross-posted on my blog Anachronicles) (edit: changed the clumsy title)

Display:
Admittedly more of a rant than a well-referenced and constructed article, but constantly seing stagflation and now the UK inflation rate trotted around without any mention of inflation-indexed wages and VAT raises drives me nuts.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Tue Jan 14th, 2014 at 10:00:10 AM EST
Note that all of this criticism was available at the time, since at the time that Bastard Keynesianism was breaking down from intellectual inconsistency, Post Keynesian work had already incorporated all of the elements you touch on, and were offering a more effective explanation of what was going on than the Monetarists could offer ...

... and that was even before it was uncovered that some of Friedman's results were fabricated.

Except, the thing is that the neoclassicals in the profession were trying to get rid of Keynesianism, and using the breakdown of the Neoclassical/NeoKeynesian Synthesis work as an excuse to ditch the side of the model that had some validity in favor of the side of the model that was built upon falsehoods (many known at the time, some uncovered later in the 70's) could well have happened without the "stagflation" episodes. After all, if one pretext to do what you wanted to do anyway does not appear, you simply wait for another one to appear or else you fabricate one.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jan 28th, 2014 at 11:51:29 AM EST
[ Parent ]
See Krugman's blog: The Anti-Scientific Revolution in Macroeconomics (January 12, 2014)
So what did happen? Keynes offered an answer: it is, in fact, possible for economies to suffer from an overall lack of demand. Other people had said things along these lines, but Keynesian economics put it front and center.

...

So let me summarize: we had a scientific revolution in economics, one that dramatically increased our comprehension of the world and also gave us crucial practical guidance about what to do in the face of depressions. The broad outlines of the theory devised during that revolution have held up extremely well in the face of experience, while those rejecting the theory because it doesn't correspond to their notion of common sense have been wrong every step of the way.

Yet a large part of both the political establishment and the economics establishment rejects the whole thing out of hand, because they don't like the conclusions.

Galileo wept.



A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Jan 14th, 2014 at 10:08:50 AM EST
It's pretty obvious, the world is being managed down to a shit level. It won't take long.
by das monde on Tue Jan 14th, 2014 at 10:34:40 AM EST
[ Parent ]
BBC News today:

The UK's inflation rate fell to the Bank of England's target of 2% last month for the first time since November 2009, helped by a slowdown in the increase of fruit prices.

The slowdown in the increase of fruit prices will provide welcome relief to struggling British families, who no longer need be haunted by the daunting economic spectre of ever-more expensive fruit.

It's a shame that low inflation means that interest rates will have to go up soon (sic).

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jan 14th, 2014 at 11:01:25 AM EST
[ Parent ]
It's a shame that low inflation means that interest rates will have to go up soon (sic).
WHat!?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Jan 14th, 2014 at 02:16:48 PM EST
[ Parent ]
To be fair, the news item actually says the opposite - for now.

But it also hints that low inflation = recovery = increased pay pressure = higher interest rates.

'S inevitable, innit. Just watch what happens if pay rises get anywhere near the inflation rate.

Still - at least we can all afford cheap fruit this month.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jan 14th, 2014 at 02:25:43 PM EST
[ Parent ]
Well, I must admit that my closing sentence was a direct hint at that post.

Krugman has had three terrific posts in a row, understandable by anyone, I should think, without being dumbed down.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Tue Jan 14th, 2014 at 11:17:04 AM EST
[ Parent ]
At least, you live in the UK and didn't have to listen to Elie Cohen today, trotting the "offer driven" economy (no demand needed) and openly rejoicing at Hollande officially echoing this line during today's press conference...
by Bernard on Tue Jan 14th, 2014 at 05:14:00 PM EST
Well, it's 5.25, I'm in the Eurostar lounge, and indeed the very words "socialisme de l'offre" on display on the Figaro front page bothered me very much.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Wed Jan 15th, 2014 at 12:25:50 AM EST
[ Parent ]
Come on, don't you know that "supply creates demand" as Hollande said?

We're all supply-siders now.

</gag>

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Jan 15th, 2014 at 01:25:33 AM EST
[ Parent ]
We have regressed to Say and the aggregate supply/aggregate demand model built on his basic macro view.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 15th, 2014 at 10:37:32 AM EST
[ Parent ]
On the contrary, I think the gagging is just beginning.
by rifek on Fri Jan 17th, 2014 at 01:19:23 AM EST
[ Parent ]
Cyrille:
the very words "socialisme de l'offre" on display on the Figaro front page bothered me very much.

Don't worry: it's as bad as it looks.

by Bernard on Wed Jan 15th, 2014 at 03:47:37 PM EST
[ Parent ]
I've just had time to catch up with what was being said.

Gosh. I couldn't believe that a "Socialist" president would lead the Say's revival.
Actually, to be fair to Say, he realised by the end of his life that he had been wrong (and he didn't quite have as easy an access to data). To revive such a fallacy, now of all time is...

I don't think I'll be able to defend Hollande much now. Though, of course, the right wing is professing the same kind of drivel. Where is this leading us?

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Thu Jan 16th, 2014 at 01:34:43 PM EST
[ Parent ]
France by the Numbers - NYTimes.com

"You shall not crucify mankind upon a croissant d'or." That was Alan Taylor's response (in correspondence) to François Hollande's embrace of Say's law -- he literally said that "supply actually creates demand" -- together with a shift to, again in his own words, supply-side policies. Kevin O'Rourke also weighs in, as did Ambrose Evans-Pritchard . Mark Thoma is your go-to site for the rapidly growing avalanche of horrified snark.

The amazing thing to me, aside from Hollande's haplessness, is the extreme pessimism that has evidently enveloped French elite opinion. You'd think that France was a disaster area. Yet the numbers, while not good, just aren't that dramatic.

Also follow the link to Francesco Saraceno's blog.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jan 16th, 2014 at 02:10:38 PM EST
[ Parent ]
Where is this leading us?

See that rat hole over there?

by rifek on Fri Jan 17th, 2014 at 01:22:36 AM EST
[ Parent ]
Milton Friedman - Wikiquote
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. ... A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.
  • The Counter-Revolution in Monetary Theory (1970)

Always is a very strong claim, it just needs one example to be proven false. Now, as you know the inflation of Sweden and Switzerland during world war two was a bit of rollercoster:

I haven't been able to find Switzerland's amount of money these years, but I did find
 a long term graph for Sweden (M3 in percentage of GDP). So according to the theory we are expecting a big increase in 1939.

No big uptick in 1939 as far as I can see. No uptick at all until the end of the war (when inflation is down)

Myth busted.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Jan 15th, 2014 at 03:02:56 AM EST
A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.
Interesting: nominal GDP targeting and inflation as a financial stabilizer, all coming from Friedman...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 15th, 2014 at 04:03:32 AM EST
[ Parent ]
As always, Friedman != Lucas/Prescott.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jan 23rd, 2014 at 03:18:14 PM EST
[ Parent ]
It is one thing to assert axioms such as 'parallel lines never meet', an assertion for which there was no obvious falsification for over 2,000 years, as did Euclid. It is quite another to assert "Inflation is always and everywhere a monetary phenomenon" as did Freedman - an assertion for which it is not even that difficult to falsify. I would argue that Freedman was making a normative assertion - 'this is what we should accept as the basis for our understanding', though without labeling it as such. With that statement, amplified by friendly media and bespoke think tank output, Freedman effectively Mesmerized the Anglo economics and political sphere. But in both professions what practitioners saw on the bob that was swinging back and forth before their eyes was a dollar sign representing the security of their income and their continued enjoyment of the grace of the wealthy and powerful. Science-schmience! This is real money here!  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 15th, 2014 at 10:58:04 AM EST
[ Parent ]
It is one thing to assert axioms such as 'parallel lines never meet', an assertion for which there was no obvious falsification for over 2,000 years, as did Euclid.
That's not even an axiom, it is a definition. There are no parallel lines on a sphere. The axiom of parallels is something entirely else:

  • There is at most one line that can be drawn parallel to another given one through an external point. (Playfair's axiom)
  • The sum of the angles in every triangle is 180° (triangle postulate).
  • There exists a triangle whose angles add up to 180°.
  • The sum of the angles is the same for every triangle.
  • There exists a pair of similar, but not congruent, triangles.
  • Every triangle can be circumscribed.
  • If three angles of a quadrilateral are right angles, then the fourth angle is also a right angle.
  • There exists a quadrilateral in which all angles are right angles.
  • There exists a pair of straight lines that are at constant distance from each other.
  • Two lines that are parallel to the same line are also parallel to each other.
  • In a right-angled triangle, the square of the hypotenuse equals the sum of the squares of the other two sides (Pythagoras' Theorem).
  • There is no upper limit to the area of a triangle. (Wallis axiom)
  • The summit angles of the Saccheri quadrilateral are 90°.
  • If a line intersects one of two parallel lines, both of which are coplanar with the original line, then it also intersects the other. (Proclus' axiom)


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 15th, 2014 at 11:05:46 AM EST
[ Parent ]
Perhaps falsification was not the proper choice of words.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 16th, 2014 at 12:56:57 AM EST
[ Parent ]
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

The Emergency Economic Stabilization Act of 2008:

... analysis by Bloomberg found the Federal Reserve had, by March 2009, committed $7.77 trillion to rescuing the financial system, more than half the value of everything produced in the U.S. that year

So, where's the inflation?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Jan 15th, 2014 at 12:42:18 PM EST
[ Parent ]
Lending government money to rich people is growth, because only rich people create growth.

Lending government money to poor people is inflationary, because only poor people create inflation.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jan 15th, 2014 at 01:30:05 PM EST
[ Parent ]
If you're an Austrian you can always get around not seeing price inflation:

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jan 16th, 2014 at 08:46:45 AM EST
[ Parent ]
Isn't expansion of the money supply supposed to trigger declining value of the monetary unit, or is the market catatonic?
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jan 16th, 2014 at 08:58:17 AM EST
[ Parent ]
I suppose the market has been drugged out of its senses by easy money.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jan 16th, 2014 at 09:42:32 AM EST
[ Parent ]
Mr. Market is undergoing treatment for Anti-social Personality Disorder.  Aripiprazole has been prescribed and the doctors are confident he will be able to be released to a half-way house in the near future.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Fri Jan 17th, 2014 at 12:24:59 PM EST
[ Parent ]
What an idiot.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jan 21st, 2014 at 12:25:12 PM EST
[ Parent ]
Sure, but it must be nice to be able to change the meaning of words to suit your statements. You can make any testable prediction, provided you use other words than in your previous testable predictions, and you will always be proven right!

It makes science somewhat easier to practice, doesn't it?

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Tue Jan 21st, 2014 at 12:50:42 PM EST
[ Parent ]
Right.  "Your definitions don't agree with me, so I'll make up new ones, because fuck reality."

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jan 21st, 2014 at 08:03:17 PM EST
[ Parent ]
They're like Humpty Dumpty: Words mean what they say they mean.  I saw that in my macro class 35 years ago.
by rifek on Thu Jan 30th, 2014 at 12:19:10 PM EST
[ Parent ]
Since my study in geology, practically any use 'always' in connotation to whatever claim make my eyes roll.

Though the word still ranks behind the wanton bandying of 'unprecedented' and the no. 1 personal irritant: (biggest/smallest) 'ever'. That one is even worse than the improper usage of Holland...

by Bjinse on Thu Jan 16th, 2014 at 06:51:03 AM EST
[ Parent ]
That one is the worst ever?
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jan 16th, 2014 at 07:47:49 AM EST
[ Parent ]
Friedman was more full of BS than the Chicago stockyards ever were.
by rifek on Fri Jan 17th, 2014 at 01:23:21 AM EST
[ Parent ]
I'm assuming that's Swedish M3 data.  Don't know what M3 represents at the Bank of Sweden, but if it's the same as the American version, it's not a useful indicator on growth and inflation.  M2 is the better one.  M3 seems to exist primarily to fuel ShadowStats subscriptions.

(Note:  Doesn't mean M2 causes either.)

Inflation is, of course, not always and everywhere a monetary phenomenon.  In fact, the bad (non-hyperinflationary) bouts of it almost always seem to me to be about supply shocks.  Once the resource shock eases, inflation eases.

To be fair, Friedman acknowledged that monetarism didn't pan out.

The real problem is that the rise of Friedman resulted in fraudulent discrediting of Keynes, a quiet Friedman exit, and the real counter-revolution -- the New Classicals, led by Lucas and Prescott.  Their credibility rested in part on (thanks to Friedman's notoriety) originating at Chicago.

While the field has obviously had its share of assholes throughout history (eg, Samuelson), the New Classicals were the Gingrich Republicans of economics.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jan 23rd, 2014 at 08:06:12 PM EST
[ Parent ]
Drew J Jones:
I'm assuming that's Swedish M3 data.

Yes.

Drew J Jones:

Don't know what M3 represents at the Bank of Sweden, but if it's the same as the American version

Have to admit I choose the graph because it was there, but upon checking, no, apparently not.

Penningmängd 1871-2006 | Sveriges Riksbank

M3. Omfattar M0, inlåning i banker och bankcertifikat.

M0 is coins and bills held outside banks (including private bank bills until 1903). M3 is M0 plus deposits plus bankcertifikat. Bankcertifikat are as far as I can tell bank issued bonds with a fixed interest and a maturity of not more then one year. From wikipedia I can't see a direct US equivalent.

No argument on the substance of your comment. Guess I got triggered by the 'always'.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Jan 24th, 2014 at 07:06:04 AM EST
[ Parent ]
We are an absurdly dichotomous civilization.  Communism falls, so capitalism must be absolutely right.  This is even more extreme: Keynes doesn't model for stagflation, therefore Friedman is right.  Of course he was using a money model that was laughably 19th-Century and was ignoring the reality that oil price increases were simultaneously increasing the cost inputs of everything while destroying the last pillar supporting the US's post-war economic advantage, thus causing both rising prices and falling demand, but what the heck.  Miltie was painting a version of reality that was exactly what the Ueberklass wanted.
by rifek on Sun Jan 19th, 2014 at 10:38:53 PM EST
We are an absurdly dichotomous civilization.

That is a consequence of information flow being dominated by the  preferred propaganda of the incumbent wealth holders. If large numbers of people begin seeing through this manipulation they respond with fear inducing distraction.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 21st, 2014 at 07:41:50 PM EST
[ Parent ]
Black and white is an easy picture to paint.
by rifek on Wed Jan 22nd, 2014 at 07:12:29 PM EST
[ Parent ]
Time for a new theory of the firm    Cameron K. Murray   (H/T Steve Keen)

By making the theoretical objective of firms flexible and consistent with observation they are able to relax ridiculous requirements such as "free entry and exit and perfect knowledge of the future" and get realistic results.

We - myself and co-author Brendan Markey-Towler - have released a working paper outlining a new theory of return-seeking firms. And to our surprise, what seems a rather minor change in the firm's objective function leads to a variety of results consistent with the empirical record, and with many alternative theories of firm production and pricing (such as mark-up pricing).

What did we do?

First, we relaxed the assumptions about market conditions. Rather than the unrealistic free entry and exit and perfect knowledge of the future which define most models, in our world firms face uncertainty, have irreversible costs, and can delay investment to future time periods. As per real options theory, these conditions give rise to our firm objective of return maximisation.

Next, we allow competition to enter the model via the shape of the firm-specific demand curve. The firm specific demand curve can be specified to include the supply of other firms producing substitute goods, and the parameters of the curve can be varied to reflect differing intensity of competitive pressures.

We do this because the usual model condenses similar products into a single market, yet there are almost no examples of markets where the goods produced by different firms are perfectly interchangeable. Hence, competition is a process of return-seeking between firms competing in close substitute goods. This conception of competition also predicts non-price competition which aims to reduce the price sensitivity of customers, such as loyalty schemes and other incentives, and of course, product differentiation.

Because of the way market competition is conceived in our new model, there is no need for the arbitrary conceptual leap between a downward-sloping market demand curve, and a horizontal curve faced by a firm in a competitive market. All firms operate in their own markets, whose demand schedule is influenced by the offerings in substitute markets.



"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 21st, 2014 at 07:36:13 PM EST
Nothing about that represents any conceptual leap beyond what every reasonably clever neoclassical has been doing for decades.

Maybe the mathematics is a little more elegant, but it's still the same old bounded optimization logic under all the new paint.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 22nd, 2014 at 01:34:25 PM EST
[ Parent ]
Dropping some of the ridiculous assumptions and treating the firm in a way that is recognizable to anyone that has practical experience in business, especially if at least discussed in early economics courses, might start to make the discipline more relevant to other departments. So much of what makes it into blogs and media seems to show economists adopting an attitude of "look how ridiculous and off-putting we can be!" This is likely part of why so many business schools only require one intro economics course.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 22nd, 2014 at 05:40:36 PM EST
[ Parent ]
Dropping some of the ridiculous assumptions and treating the firm in a way that is recognizable to anyone that has practical experience in business, especially if at least discussed in early economics courses, might start to make the discipline more relevant to other departments.

You say that as if it were a good thing.

Economics departments need to learn from the real social sciences. Not the other way around.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 22nd, 2014 at 05:42:32 PM EST
[ Parent ]
You say that as if it were a good thing.

While having other academic curricula not require significant course work in economics might not, unfortunately, affect the baleful influence the current Mainstream version of Economics has on public policy it could lead to a collapse of the discipline in the academy. In comparison to the effect the entrenchment of current version of economics is having on societies the destruction of the discipline might well be an improvement.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 22nd, 2014 at 07:33:51 PM EST
[ Parent ]
But departments who become motivated to include economics course because they [treat] the firm in a way that is recognizable to anyone that has practical experience in business, are unlikely to recognize and point out that the entire treatment is a nonsense from the ground up which has merely been tortured long enough to form some pale reflection of the real thing.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jan 23rd, 2014 at 02:27:51 PM EST
[ Parent ]
The entire, US business school model is based on teaching versions of business and markets that have no basis in reality.  They're almost as bad as law schools.
by rifek on Thu Jan 30th, 2014 at 12:22:30 PM EST
[ Parent ]
Or rather, "might start to make the discipline seem more relevant to other departments", since the change required to make the discipline actually more relevant to other departments is to convert to a scientific approach, in which the effort being made is to explain cause and effect relationships in the real world, as opposed to trying to simple emulate real world outcomes.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Jan 28th, 2014 at 11:46:21 AM EST
[ Parent ]


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