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Financial giant makes $400 million as high-risk commodity trading pushes already fragile food system to breaking point
As the world’s most vulnerable populations succumb to surging global food prices—driven in part by drought, climate change, and a global food system increasingly vulnerable to the whims of commodity speculation—Goldman Sachs has managed to turn the poverty and suffering of others into profits for itself.
Another excellent article by Steve Keen, which is a must-read for students.
web site: http://www.businessspectator.com.au/
Adam Smith’s contention that the self-interested drive for profits leads “as if by an invisible hand” to an outcome that is socially beneficial to all is one of the most potent propositions ever uttered. Generations of conventional “Neoclassical” economists since have gone on their own version of the Quest for the Holy Grail, trying to prove that Smith’s Invisible Hand is real: that the metaphor actually describes how a market economy functions.
According to economic textbooks, this quest was successful: the invisible hand exists. Politicians have long accepted that economists are right, and that the best government is one that allows the invisible hand to weave its magic and convert self-interest into social harmony.
There’s just one sticking point: these same textbooks teach that a pre-requisite for the invisible hand to function is that the market price must equal what economists call “marginal cost” – the cost of the very last item produced. If it does, then price is set by the intersection of supply and demand –Alfred Marshall’s famous “two blades of the scissors” that determine both price and quantity – and the invisible hand works: not only is individual profit maximised, so too is social welfare.
But if the market price is higher than marginal cost, then the invisible hand breaks down: profit can still be maximised, but social welfare suffers.
This condition that price equals marginal cost can be achieved in one of two ways: either firms behave as ‘price takers’ who ignore what their competitors do, or they play a game of strategy with those same competitors that is named after the mathematician John Nash (who was made famous by Russell Crowe in the movie A Beautiful Mind).
If these two conditions sound somewhat contradictory to you, you’re onto something: they are. But economists often don’t realise this, since they learn the first, relatively easy explanation as freshers, and only learn the far more complicated “Cournot Nash Equilibrium” model as Masters or PhD students.
According to the ‘easy’ model (which is attributed to Alfred Marshall), all firms behave the same way, whether they’re in a competitive industry or they are a monopoly – they strive to find the level of output that maximises their profits. They do so by producing the quantity at which the very last unit sold adds just as much to their revenue as it cost to produce it. In econospeak, they equate ‘marginal revenue’ – the increase in revenue from the last unit sold – to ‘marginal cost’ – the cost of producing that output. When a monopoly does this, it maximises its profit but sets its price above marginal cost. But competitive firms, following exactly the same rule, also maximise their individual profits, but cause the market price to be equal to marginal cost – and they produce about twice as much output as the monopoly as well.
The paradox that exactly the same behaviour by competitive firms and monopolies leads to very different outcomes occurs, so the Marshallian model alleges, because the individual competitive firm has a ‘horizontal’ demand curve: it can sell as much as it likes without affecting the market price, even though the market demand curve slopes down – demand rises as the market price falls. Therefore a competitive firm’s ‘marginal revenue’ is identical to the market price, whereas a monopoly has to reduce its price if it wants to sell additional output.
When I wrote the first edition of Debunking Economics in 2001, I focused just on this Marshallian model, and pointed out what Al Gore would call “an inconvenient truth“: The proposition that the market demand curve slopes downwards while individual demand curves are horizontal is a mathematical fallacy. Once the fallacy was corrected, the upshot was that a ‘competitive’ industry would produce the same amount as a monopoly.
This claim elicited howls of protest from conventional economists – how dare I claim that the invisible hand doesn’t work! Tim Worstall’s recent piece in Forbes Magazine is an echo of this debate, which raged for about four years.
Figure 1: Tim Worstall’s column in Forbes
Without fail, critics either misinterpreted my argument (by, for example, alleging as Worstall does that it relied on the impossibility of infinite number of producers, or by defending the mathematically false Marshallian model using the very different mathematically correct Cournot-Nash model, asChris Auld does in a paper Worstall links to).
The debate led me to refine my argument, and also to find that I wasn’t the first to make it: that honour belongs to the impeccably conservative, Nobel-Prize-winning Chicago economist George Stigler. Writing in the equally conservative Chicago University journal The Journal of Political Economy, Stigler proved in 1957 that the demand curve for the individual firm could not be horizontal, using possibly the simplest rule of calculus, the Chain Rule.
What Stigler did was calculate marginal revenue for a competitive firm by breaking the slope of the individual firm’s demand curve (how much market price changes because of a change in a single firm’s output) into two bits: how much market price changes if market output changes, multiplied by how much market output changes if one firm changes its output (see figure 2). The first bit is negative (since market demand rises as market price falls), while under the Marshallian assumption that firms don’t interact with each other, the second bit is one. Therefore the slope of the demand curve for the individual firm is exactly the same as the slope of the market demand curve – contrary to what is asserted in every economics textbook ever published.
Figure 2: Stigler’s use of the Chain Rule
It’s not amazing that economists ignore me – I’m a self-declared economic heretic after all – but how can they justify ignoring Stigler?
Partly, I think, because Stigler also thought he had found a way to neutralise this Inconvenient Truth. Though the conventional pedagogy was clearly false, he then argued that, if each firm set its marginal revenue equal to its marginal cost, then with a sufficiently large number of firms, market price ultimately converged to marginal cost (and as few as 100 firms were enough for the difference to be less than 1 per cent if market demand was elastic).
Stigler set this out in a formula in which, rather strangely for a mathematical economist, he used whole words rather than just symbols:
Figure 3: Stigler’s “convergence to perfect competition” argument
His argument was mathematically correct – and perhaps economists who knew about Stigler’s paper then thought: “why bother changing? The textbook fallacy and Stigler’s accurate mathematics reach the same conclusion, the fallacy is easier to teach, let’s stick with it”. But my reaction was that it was logically impossible for a fallacy and a correct argument to reach the same conclusion – there had to be something wrong with the ‘correct’ argument as well.
A bit of calculus quickly revealed the problem: equating marginal cost and marginal revenue, which economists describe as “profit maximising behaviour” doesn’t actually maximise profits. Instead, for any firm other than a monopoly, it results in a production level where the firm produces more than the profit-maximizing level. In the economists’ ‘ideal’ model of perfect competition, firms don’t just break even on the last item produced, as economists allege: they lose money on almost 50 per cent of the output that the theory recommends they produce.
I’ve yet to have any neoclassical economist engage with this substantive part of my argument (which I explain verbally on pages 96-98 of the new edition of Debunking Economics as well as academic papers like this maths-heavy one, or this one in the physics journal Physica A). And I’m sure they’d distort my words if they did, because it goes to the heart of the Holy Grail: maximising profit and maximising social welfare are incompatible.
This result is also not new: this is one way of interpreting the outcome of the Cournot-Nash model of competition. In that model, strategic reactions to what their competitors might hypothetically do push firms into a ‘Nash Equilibrium’ where they produce more than the profit-maximizing output level, but end up unintentionally maximising social welfare.
Why then do economists continue to teach the mathematically false Marshallian model to new students, when they could teach a mathematically sound one instead? Again, I expect the sloppy pedagogy that characterises this pseudo-science is partly to blame: “why teach a difficult correct model when a simple false one reaches almost the same result?”
But the quest for the mythical Holy Grail is also important. The vision of a perfect society in which individual profit and social welfare are compatible is so seductive that economists teach that as part of the initiation rite into their discipline, which is far more a religion than it is a science. Admitting that the Holy Grail doesn’t exist is just too difficult for this intellectual priesthood.
From Hugo Domic
This book is the transcript of the conversation that Oliver Stone and Tariq Ali had for a upcoming film of Oliver Stone.
As the title indicate they talk about History, mainly 20th century history, but a lot of current events. Because as they say we can only understand the present if we know the past.
I highly recommend this book for everybody.
Most of the things they say are not known to 99% of the population, so it’s very important that people read this and get to know some disturbing truths about how the world really works.
The book tells many inconvenient truths about many countries.
It’s a short amusing and informative book, so get the book and read it!
From Hugo Domic
This is a extremely interesting book to get to know some of the history of violence. But not so much for understanding the roots of violence and consequently the dynamics of violence. I think the book can be divided in two (although the narrative don’t make the separation).
First the book is a great introduction to the history of violence (war, domestic, criminal etc) the author gives lots of references for this field, and the author does a terrific work in exposing this history, it’s always interesting and vivid. He overviews violence since we have records of it, he uses personal or cultural examples to improve the narrative which I think was very well done. Is a terrific initial book to study the history of violence.
Second the author tries to identify the reasons behind the decline in violence, and this part is disappointing.
Some notes on that:
Unfortunately is sad to see that the myth of barter is used by the the author, thus some of the conclusions are logically inconsistent.
The ideas that Pinker uses from Norbert Elias are bad derivatives of Psychoanalysis, the use of some concepts of this field are used in erroneous ways (in many parts of the book) and lead to a politically correct use of Psychoanalysis, this is not good at all! Norbert Elias was better than this, the interpretation of Pinker is misleading. The use of Freud in some parts is inexplicable since the author only uses some words that originated with Freud and not giving them anymore though, so although the author pretends to follow Elias thesis is seems oblivious to Psychoanalysis theory.
The author presents lots of statistics. Unfortunately some used are in general ridiculous, comparing data sets of an entire nation to a small sample of a century ago is not evidence! How can we compare data from a century ago which is constituted by a small sample of the population with data from modern times where virtually all the population is taken into account? We can’t and with the fallacious numbers the author tries to make wrong conclusions. Even worst I think is trying to use data from previous centuries, where we didn’t even had population statistics but somehow crime statistics are to be trusted or be representative? The author even uses “evidence” from Gregory Clark book, this data set is not reliable and we know that (Solow gave some examples in his review of Clark).
The use of the concept of anarchy for some areas is highly misleading, the authors never defines anarchy or how it operates, thus it leaves the concept to be interpret by popular ideas and not by good explanations.
The rather surprising naive view of modern wars amazes me, the author could at least list the wars, conflicts and civil wars, actively promoted and designed by the United States, some publicly some with black op operations, almost every conflict in Latin America this century, some in Africa and Asia were orchestrated by the USA this should be mention and quantified in a book that tries to explain (among other things) war conflicts in this century. So when in “statistics” Pinker (and many others) count wars among and within non-developed countries as a result of non-democratic countries and other things well it should count as USA wars thus democratic or not stops being a reason for war but USA intervention. On the positive side the author remarks that some dictators were puppets of the USA (Saddam Hussein for example) so he is not that naive and we see that he self-censor himself in some parts.
The ignorance of Bourdieu (not to mention Levi-Strauss) work is astonishing. Bourdieu wrote an entire book on distinction, which the author tries to explain with lousy explanations, if only he had read Bourdieu he would have better explanations.
The use of statistics from Psychology experiments is just unacceptable, the experiences are so bad and without meaning in most cases. They should be used for illustrative purposes, bu the author uses them as explanations. No need to say the explanations are terrible.
I think that the idea of Steve Pinker has merit, and is not wrong, but I think he can do much better to explain why and how. If only he had taken more time to dig deep on the Philosophy of violence, Psychoanalysis, and Psychology and presented a more “theoretical” explanation I would be more satisfied. The use of skecthy “evidence”, “statistics” and “experiments” undermine the quality of the author. His vision is good, his goal is good but his means are terrible.
Overall great historical narrative, but a disappointing explanations.
It’s a big book it’s worth reading it for the history it tells. But don’t take the explanations too serious.
Economist Joseph Stiglitz argues that past American innovators weren’t motivated by money and wouldn’t be deterred by higher taxes.
In this exclusive, unedited interview, economist and author Joseph Stiglitz suggests ways to move workers out of manufacturing and into other economic spheres.
The Nobel Prize-winning economist Joseph Stiglitz argues that Social Security needs only slight tweaks to remain viable.
Text from LSE blog: http://blogs.lse.ac.uk/europpblog/2012/07/23/eurozone-over-consumption/
Welcome to the 21st century rerun of a 20th century fight: Keynes and Hayek are grappling again. As ever, their fight is undecided, although it seems French demands for growth (Keynes) are crowding out German demands for sound money (Hayek). Despite some very strong feelings in Berlin, talk in Paris of looser monetary policy is gaining momentum. The IMF’s most recent World Economic Outlook calls for “monetary policy in the euro area to ease further.” Not surprisingly, most Europeans have had enough of the pain.
There nonetheless remains a deeper European quandary than current economic misery, one barely addressed in the debate over the Eurozone crisis. According to a 2011 speech by Bank of England Governor Sir Mervyn King, what is most urgent for the West is to tackle “unsustainably high levels of consumption.”
Consider the unthinkable. Could the Eurozone crisis offer the solution?
Let’s summarise. In the immediate, the Eurozone is facing a potential banking crisis, plus the economic and political fallout of different economies sharing a currency but not (occasionally excessive) sovereign debt. That is a legacy of how, among other issues over the last ten years, Europeans consumed far more than they had the means to consume (e.g. Greece). In the long-term, as Keynes helpfully pointed out, we’re all dead. Clearly aware of this economic insight, Europeans have done their best to enjoy the short-to-medium term along the way.
Consumption is a problematic vice. On the one hand, it ought to be welcomed during a recession, as, especially in high-street driven economies, consumption can be indicative of growth. Consumption is, however, often also a pretty good indicator of increasing consumer debt. Plus, a sustained increase in the demand for imports signals the kind of imbalanced world economy that Sir Mervyn King warns against: “Without a rebalancing of spending in the world economy, a struggle between debtor and creditor countries will inflict economic pain on everyone.” Needless to say, Europe gets most of its consumer goods from Asia.
It is difficult, therefore, to determine where the line should be drawn between excessive and appropriate consumption. During a recession, any uptake in consumption is seen as shorthand for ‘a working economy.’ Look at how, in recent years, the Bank of England has promoted Keynesian boosts for demand at the same time as warning against excessive-consumption. Sir Mervyn King, for all his warnings on debt and consumption, has supported quantitative easing, which is designed to fight the sort of low growth in the UK that would see inflation fall below the bank’s 2% inflation target.
Whatever the problems, here is the possible upside. The Eurozone crisis has calmed Europe’s consumption binge. As European consumers worry about jobs and austerity, and have subsequently purchased less, there has been a very notable fall in the number of consumer goods China is sending to Europe. A significant drop-off in containerised trade along the key westbound Asia-Europe shipping route has occurred. In fact, volumes from Asia to Europe fell by 6.9% in May 2012 compared with the same month last year, and lines are reducing capacity ahead of a period more normally associated with the Christmas stock-up. European ports have also experienced less traffic.
If the West should borrow and consume less, and the East should spend and consume more, the breakdown of an effective crisis-solution for the Eurozone has clearly helped. One easy conclusion is that the severity of the current down cycle is helping to solve the problem of Western overconsumption; therefore a major downturn has a major upside. Troubled European policy makers and politicians can rest a little easier.
Only a brave person would describe that as a good thing. If there is an orthodoxy in the modern world, it is that less global trade spells more global trouble. “Now is a time… to avoid protectionism” saidPresident Obama in June. The reality is therefore clear: no meaningful solution to the Eurozone crisis will contribute to any significant rebalancing of the world economy, as the inclusion of measures to tackle low growth in the Eurozone will likely also stimulate European consumer sentiment. With global free trade protected that in turn would likely include an increase in European demand for imported consumer goods. Consider the context, according to market research group Finaccord in May: “outstanding consumer debt is a structural feature of many [European] economies and for a lot of individuals it is simply not possible for them to manage without it.”
A pause for thought. Put two economists in a room and they will provide at least three different answers. There are other scenarios in which a convincing solution to the Eurozone crisis – i.e. answers to the lack of growth – will see short-term import demand based consumption fall as imported goods become relatively more expensive. These scenarios revolve around the future strength of the Euro against other currencies. Here, either or both a weakening of the Euro or Eurozone inflation may occur after any stimulus. Note: according to Eurostat this month inflation is currently under control: “Euro area annual inflation [is] stable at 2.4.”
For future scenarios, much depends on how markets interpret any form of solution to the crisis, for example European debt sharing and possible relaxation of Greek and Spanish austerity. In any solution to the Eurozone crisis, it will be critical whether risk is perceived as having been locked-in, or locked-out, of Europe’s single currency
Back to consumption and debt, along with banking problems, the bedrocks of the crisis. In a recent EUROPP article, Harvard Professor JeffryFrieden summarised our collective Western dilemma: “a decade of debt-financed consumption… [where] borrowing was not associated with increased investment but rather with increased consumption.” He also prescribed a response: “the overriding imperative is to rekindle economic growth. This almost certainly requires stimulative macroeconomic policies.”
In other words, with modern economics there is no standing still. We need growth – forward momentum – to avoid going backwards. Regardless of the future implications, there is a direct contradiction between solving the Eurozone crisis, which must happen, and reducing unsustainable aspects of European consumption. That latter task is also imperative, given that Europe’s consumption, based largely on debt, helped cause the Eurozone crisis in the first place.
Deep breath. Perhaps the most immediate answer is a strong cup of tea, albeit one presumably imported and paid for on credit.