Where I expose my ignorance of elemental economics

[SimpleDon]

I have been accused, most recently by dismal and coloradoatheist, but certainly by others over the years, as not understanding the most basic, elemental economics. That for example, I don't, according to dismal, understand that supply and demand are a function of the price. Others are amazed that I don't understand that we have inflation because the Federal Reserve Bank 'prints' too much money. Usually to ensure the election of democrats and liberals.

I have decided to expose my ignorance for all to see and to suffer the derision that I justly deserve for that ignorance. I have listed below my understanding of basic economics, Econ 101, neoclassical economics, marginalism, the dominant paradigm, mainstream economics, or as I am going to call it, since this is my thread, free market fundamentalism, since this economics that supports, defines, and, dare I say, proves that an economy based on the self-regulating free market model can exist.

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Most of the people here who post frequently on economics questions are, in varying degrees, free market fundamentalists. This is quite understandable, this is the view of the vast majority of economists in the country and the way that economics is taught in the vast majority of the universities in the country. It is mainstream economics, the orthodox economics. It is the basis of our country's economic policies. It is the consolidated, consensus result of two hundred years of academic study and research.

It is commonly referred to as neoclassical economics, to both point out its roots in the classical economics of Smith, Ricardo, Mill, Malthus, Marx, etc. and to point out the break with classical economics starting in the 1890's with Marshall, Clark, Wicksteed, etc., who amplified and coalesced the 1860's work of Menger, Walras and Jevons. Alfred Marshall and his contemporaries added the critical ideas of supply and demand setting prices, marginal utility and productivity, general equilibrium and costs of production to the body of economic knowledge.

Any economist, even those who do not accept this orthodox economics, the so-called heterodox economists, must understand these foundations. In addition, anyone who discusses economics on the Internet will quickly learn that most people, fueled by their six semester hours of economics, are convinced that this neoclassical economics not only explains the economy that we have now but defines the way to the truly free market, when the economy will be released from the corrupting influence of government.

I have been repeating myself over and over again here in my posts. I have numbered these points and principles and I intend to write posts of my heterodox economics, Post Keynesian, objections to them, referring to the points by number as a key word. This will make it easier to search for a topic. At the very least I will be able point people to one of the posts and won't have to repeat myself so often.

These are in no special order. They are pretty much as I thought of them over a period of a few days. I have included the economics buzzwords and theory names for reference purposes where I could remember them, along with a brief description of what they are in simple English.

I am going out on a limb here and assuming that all here are familiar enough with Google to search for a more detailed explanation of term you don't understand. You can then pick your own bias confirming source and I wouldn't have listen to complaints of bias on the part of the links that I provide.

In part I am tabling these as a way of establishing a baseline for any further discussion. There is an unfortunate tendency here to mold the theory to the argument of the day, then to reverse field, often in the next sentence.

These rationalizations are perfectly understandable. These are attempts to make some sense of the theory in light of their personal knowledge of how things operate in the real world economy. The problem is not with their personal knowledge of the way things are. The problem is that the neoclassical economic theories are wrong.

This questioning of the theory based on empirical knowledge is the reverse of what most neoclassical economists do, for them the preservation of the theory is the most important thing because the whole theory only makes sense if it is accepted whole. It is a house of cards, the interlocking theories support each other. It is intellectual sunk capital.

This is my poor knowledge of basic, neoclassical economics. Please review it and comment where you feel appropriate to correct me. This is a rather long post so please don't quote the whole thing in your reply to list my many mistakes and misunderstandings of basic economics. Just put the number of the one that you are referring to as a key word.

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Let's start out with a statement of the proposition of the theory -

There is a natural, self-regulating*, self-organizing* free market based on market clearing prices* reached by the balancing of supply and demand through barter-like exchange*, that price reached that equaling the marginal cost* of the last product produced, possible because of the prefect competition* that would result if only we could eliminate government intervention from the market except to enforce contracts and to provide security from both external and internal threats but not to police the markets to prevent abuses by market participants because the discipline from supply and demand setting prices will eliminate all* market abuse. This free market* is the fundamental basis of capitalism, it is part and parcel of capitalism itself, without a free market* capitalism doesn't exist and can't exist. The free market, unbridled from the burden of government intervention* will provide the best possible outcomes because it will produce the best utilization of scarce resources*, including raw materials, land, labor and the scarcest and most important resource of all, financial capital for investment, by assuring that all of the components going into the production are rewarded at their true value.* That this mechanism supports the natural tendency of the free market toward a general equilibrium of full employment, the lowest possible costs of goods and services* while achieving the maximum amount of social justice possible.* * or about as close as it gets

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This is the free market position advanced by the vast majority of economists today and economic schools from the anarchist capitalistic Austrians on the far right through the neoclassical schools, fresh water, politically conservative, monetarist economics on the center right all of the way to the center left New Keynesians like Paul Krugman, although in varying degrees and with somewhat less enthusiastic and incomplete support from some.

This is the elegant theory of Marshall and his contemporaries that was made possible by the theory of marginal utilization, that what is important to the economy is the last or the marginal, not the aggregate. For this reason its proponents all across the spectrum are often called "marginalists."

This is the first time that an economic theory "closed the loop" as a complete explanation of how the free market economy could work, that is how it could self-regulate, in the absence of the government and its many job killing regulations.

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The neoclassical theoretical foundations supporting the above proposition of the free market are:

Economics is the study of scarcity, of mutually beneficial exchange and of substitution effects ruled by the gross substitution axiom. It is the study of the intersection of an upward sloping supply curve with a downward sloping demand curve. A free market economy satisfies the maximum societal good by maximizing the efficient use of resources and by rewarding all of the factors of production, including wages paid to labor and profits paid to capital, based on the true value of their contributions.

Capitalism as a perfect or a near perfect economic system.

The economy not only can be separate from the political and social system, it is better if the economy operates separately from the political and social systems of a nation.

General Equilibrium Theory - the markets are inherently stable, if allowed free competition the economy always tends toward the one single equilibrium that brings full employment, nothing else can.

The Quantity Theory of Money - MV = PT, where M is the money supply, V is the velocity of money, P is the price level, T is the number of transactions. Which leads to P = MV/T, the price level depends on the quantity of money. The velocity of money is the number of times a unit of money changes hands in a unit of time. The velocity of money is a natural part of the economy, there is no way to understand why it happens that the velocity of money varies over time. It is a mystery.

Money casts a veil over the economy, masking the barter nature of exchanges, money is neutral, it doesn't impact the operation of the economy, debt is neutral, for every borrower there is a lender, except for the government debt, which does impact the economy negatively because it crowds out private investment.

Rational Expectations - within any economic model, markets are rational because market participants are rational. The market, left on its own, will always reach the correct response to any stimulus, internal or external.

Efficient Market Hypothesis - asset prices set by the market are always correct based on the information available. That is, asset prices set by the markets aggregate and reflect all of the information available to the market and are therefore able to allocate resources correctly.

Micro foundations of the economy - the overall economy is nothing but the micro-economy many times over, the macroeconomy is less important than the aggregated micro-economies. Examples; the constraints on government debt are the same as they are on household debt, government has to tax or to borrow before it can spend, government debt is nothing but deferred taxes. Austerity is the best reaction to recession to minimize the accumulation of government debt during a recession. The federal government should be required to balance their budget every year, except for the debt resulting from tax cuts for the already rich.

DSGE - "Dynamic Stochastic General Equilibrium" - Models with a single representative agent standing in for the whole economy, simplified from the previous CGE - "Computational General Equilibrium" - Models which were multi-sectoral with no micro-foundations but with the addition of temporal, over time, elements.

Methodology - Instrumentalism, all behavior is maximizing preference-satisfaction, i.e. some utility function, revealed preference axioms; anti-realism, mathematical models and abstraction, propositions don't have to be true it is enough if they are descriptive, stretching Friedman's "as if" doctrine; if you treat the economy as if it is supply side lead, it will behave "as if" it is supply side lead. The results of the models are more important than historical, empirical observations.

Methodology - Individualism, what is important is the pursuit of individual not collective interests; Atomism, Reductionism, social institutions arise solely from the actions and interests of individuals, the whole is a function of its parts, you have to understand the parts in order to understand the whole, the idea that socio economic explanation must be pursued at the level of the individual rational agent. Curves of indifference.

Methodology - Equilibrium, what do we expect at equilibrium, is the important question for the economy, disequilibrium can only exist for short periods, the economy has a strong centering force to return to equilibrium.

NAIRU - close to the natural rate of unemployment. Unemployment is either frictional, voluntary or structural, since there will always be some of each, zero unemployment is not possible, there is a natural rate of unemployment toward which the economy converges. The output gap is calculated in part by the difference between the natural rate of unemployment and the official unemployment rate, U-3.

Ricardo Equivalence Theorem - increased government debt results in reduced household spending, consumers save more to pay for the future taxes that will be required to pay off the public debt, hurting the present economy. Therefore it is not possible to stimulate today's economy by issuing debt. It is better to pay as you go.

Loanable Funds Theory - the natural interest rate. The natural interest rate is the one that balances savings and investment, and clears savings, that is uses all of it for productive investment. Money has no utility in and of itself.

Say's law - supply creates its own demand, the economy is supply side lead, savings precede investment which must precede demand, demand is always correct because prices based on supply and demand assures that it will be on aggregate across the whole economy. Once again, money has no utility in and of itself.

Crowding out - taxes displace investment in the private sector. And the resultant government spending displaces demand in the private sector.

Inflation is a monetary phenomenon - too much money creates inflation, inflation is proportional to amount of money in the economy.

The labor market determines the level of employment, labor is a commodity, lower labor cost will mean higher employment. Higher labor costs produce disemployment* because the marginal productivity becomes less than the wages paid. Higher costs for labor means that there are fewer jobs. * unemployment + the number of unemployed who have stopped looking, U-4

A well behaved production function - profits are a cost of production, just like labor, and the costs are equal to the marginal product from the capital investment.

Savings creates investment and provides the bank reserves needed for loans. Profits are the reward for savings, for abstinence from consumption. Savings and the resulting investments are a result of the time preference of consumers, savings are deferred consumption, consumption put off into the future.

Average variable (unit) cost (AVC) curves are "U" shaped, so that the marginal product cost (MC) for the last item produced is greater than the AVC - the law of diminishing (marginal) returns overtakes the economies of scale, savings as fixed costs are spread over more units produced.

Marginal analysis and a priori reasoning trumps reality - if the empirical data doesn't fit the theory then there is an unknown factor corrupting the data.

Comparative advantage - a nation exports goods that it has an advantage making and imports goods that others are better at making, everyone profits, but free trade and free movement of capital are required. If a high trade deficit results it is due to non-trade related problems, misallocations, in the economy, such as "sticky" prices and wages and government intervention.

Reallocation from consumption to investment and from public investment to private investment will always lead to superior economic outcomes. The private sector is always able to do governmental functions more efficiently and at a lower cost than the government itself. This is so obvious that we don't even have to study it. Just like the proposition that tax cuts for the rich don't increase the federal government debt load, rather it is spending on welfare and entitlements and not on defense or corporate welfare.

The aim of the economy is to reach a state of Pareto efficiency where resources are allocated in their most efficient manner including labor which is as close to full employment as possible and where individuals are maximizing their utility, a state when the economy delivers maximum social justice. Pareto efficiency doesn't imply equality or fairness however. Pareto efficiency is when the added benefits of some comes at equal costs of others.

And I have saved the best for last, my pathetic, incomplete understanding of Supply and Demand setting prices. Supply and demand are the primary way that prices are set in a competitive market. The price for a good or a service will vary until it reaches a stable value at which the quantity of the good or service demanded by consumers at that price equals the quantity of that good or service that suppliers are willing to provide at that price. A price at which both the price and the quantity produced and consumed are at equilibrium. Relationships: If demand decreases or supply increases a surplus develops. If demand increases or supply decreases a shortage develops. If there is a surplus the price must go down. If there is a shortage the price must increase. If the price goes down either the demand must increase or the supply must decrease or some combination of the two. If the price goes up either the demand must decrease or the supply must increase or some combination of the two. For some products and services the demand is easy to change and very sensitive to price. We say the demand is elastic. Likewise, the supply for some products and services can also be elastic, easy to change and sensitive to price. Demand and supply can also be inelastic, hard to change and insensitive to price. Dependencies: The quantity is dependent on the price, even though price is usually plotted on the Y-axis, defying the mathematical convention. The price is dependent on the demand if the supply is inelastic. The price is dependent on the supply if the demand is inelastic. If both the supply and the demand are elastic the price is dependent on both. If both the supply and the demand are inelastic the price is indeterminate. In neoclassical economics supply and demand setting prices is sufficient market discipline to control any bad behavior in the economy but only in the absence of the interference of the government. Aggregate demand is a continuous, downward sloping function, just like the demand for a single product.

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History and the evolution of the economy and of capitalism supports the theory of the free market. The history of the free market;

Primitive man had to provide everything for his family.

Naturally some people were better at specific tasks than others.

People started exchanging things that they produced for things that someone else was better at making.

They bartered to establish relative values of goods to exchange.

This was the birth of the free market.

The exchanges were hampered because some things were available or were needed only at certain times of the year.

This is known as the "double coincidence of wants" problem.

A third commodity as an intermediary was introduced into the exchange to overcome this problem.

This exchange commodity had to be available at all times of the year.

This exchange commodity had to have universally accepted value.

This exchange commodity had to be easily divisible.

Finally precious metals, gold, silver and copper best served this purpose.

This was the birth of money.

This lead to the perfect money, the gold standard.

This happened spontaneously all over the world in every culture proving that the free market is natural, self-organizing and self-regulating.

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Show

I do realize that many of you would argue that the gold standard is not perfect money and that the government has a natural role in intervening in the economy by manipulating the fiat money supply to stabilize the economy, monetarists for example, followers of Milton Friedman.

But the majority here who argue for the existence of the free market seem to lean toward the Austrian/Libertarian side which is heavily pro-gold standard so I included the case for the gold standard in the historical progression. After all more than half of the population of the US and one of the two major political parties disagree with you and I and support a return to the gold standard, money that is really worth something, according to them. Like neoclassical economics and its free market the case for the gold standard is equally bogus.

To be fair, I don't know of any neoclassical economists who call for a gold standard monetary system. It is pretty much an Austrian and Libertarian economic delusion.

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History also provides the explanation of why governments interfere in the economy and why that interference is so toxic. The history of government intervention;

From earliest times people had to band together to provide protection from others.

As the bands, tribes, got larger it became necessary to police the members of the tribe itself and later to protect the tribe from outside threats.

This gave birth to government, a full time authority over behavior.

This government realized that it could enrich itself and its favored others by asserting itself into the exchange of goods and services, the free market.

As the government and the market, the economy, both naturally became more complex the government asserted itself further into the economy.

It is government interventions into the economy that prevents its operation as a natural, self-organizing, self-regulating free market.

The government interventions into the economy are the source of all of the failures of the market because the market is denied its necessary freedom to self-correct.

This is happened spontaneously all over the world with every type of government proving that government intervention in the market is unnatural, universally evil and counter productive.

No worse example exists of the evils of government than the government's forced abandonment of the perfect form of money, the gold standard.

The government replaced gold with valueless paper, fiat money which they use their authority to force people to use.

The government prefers valueless paper money so that they alone can produce any amount of money that they want to.

Printing too much fiat money devalues the money robbing savers, creditors and investors, the good and righteous actors in the economy, and rewards debtors and the prolific, in a word, the deadbeats.

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This is the case for the existence of the 100% natural free market* as I understand it.

* or about as close as it gets

I have been told that this a pitifully small part of the neoclassical economics because I don't really understand it. It is time for those who believe this to now embarrass me totally and to list what I have missed.

Because as it is, I believe that this is an interlocking house of cards. Really none of the above are unimportant elements added to the theory for fun but rather are critical parts of it required for integrity of the theory as a whole.

The entire theory is bogus. Some of the elements above contain small grains of truth, but the whole is not only improbable, it is impossible. It is a closed and unscientific theory, a self-reinforcing tautology.

I am not alone in my views. There are more of us every day.

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Modern economic thought and research in the US covers the range in economics from 'M' to 'N.' me

Indeed, the typical graduate macroeconomic and monetary economics training received at Anglo-American universities during the last 30 years or so, may have set back by decades serious investigations of aggregate economic behavior and economic policy relevant understanding.

Willem Buiter, 2009, former member of the Monetary Policy Committee of the Bank of England, the UK's equivalent of the US's Federal Reserve Bank.

... Richard Posner, a judge and a senior lecturer at the University of Chicago School of Law ... (before the Great Financial Crisis) was a stern defender of free markets and Milton Friedman’s ideology. In his book, titled The Failure of Capitalism, Posner (2009) argues that deregulation went too far and that financial markets need to be heavily regulated, because banking has a systemic significance that other industries do not have. In a follow-up article, provocatively titled ‘How I became a Keynesian’, Posner (2009) goes further, arguing that ‘we have learned since September [2008] that the present generation of economists has not figured out how the economy works’.

Mark Lavoie, 2014, Post Keynesian Economics, New Foundations

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On the one side are those who believe that the existing economic system is, in the long run, a self-adjusting system, though with creaks and groans and jerks and interrupted by time lags, outside interference mistakes.... On the other side of the gulf are those that reject the idea that the existing economic system is, in any significant sense, self-adjusting."

Keynes, 1937, The Collected writings of John Maynard Keynes

… this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

Keynes, 1923, A Tract on Monetary Reform

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Economics is the study of the process by which society brings its available resources into production and how the distribution of that production among its members.

John Weeks, 2012

The political, intellectual and rhetorical retreat from Keynesianism has had enormous consequences. First, there has been a retreat from true full employment, which means that we live today with unwarranted unemployment. Second, the pre-Keynesian ideology of self-adjusting economies has reasserted itself and been used to rollback financial regulation, labor market protections, trade unions and the minimum wage. This has worsened income distribution and created a proclivity to boom-bust cycles. Third, the case for progressive taxes and a more equal income distribution have been rolled back as this is no longer viewed as part of the demand management policy agenda. Fourth and finally, the relevance of Keynesianism for globalization has been suppressed. Keynes was always cautious about free trade and skeptical about international mobility of financial capital because of the impacts on employment and the ability to conduct national economic policy.

Tom Palley, 2005, here -

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I don't intend to base my arguments against these fundamentals of neoclassical economics on them being absolutes. I understand that economics is a social science and that exceptions do not disprove the general rule.

I fully intend on going through each point and showing their weaknesses, if there is enough interest of course, I don't want to bore you. But for this thread I am doing nothing more than tabling my understanding of the support for neoclassical economics and its central idea that a free market does exist and that it is capable of and that it is the best way of controlling the very complex economy that we have today with nothing more than the simple mechanism of supply and demand setting a price.

 

[Cheerful Charlie]

Here it might be wise to mention the concept of a natural experiment. Supply-side economics failed under G. W. Bush. And applied to Kansas by Governor Brownback, SS has failed. Also in Jindal's Lousiana. I can never understand how so many can ignore these natural experiments. Until I read some far right economist's explanations. Full of rationalizations, bad logic, blame throwing and other ways of ignoring obvious facts. 450 top economists including 10 Nobel laureates warned Bush his tax cuts would not achieve the goals he set for that and would create massive deficits. They were ignored and turned out to be right. I think being right counts for something when arguing economics. I find all of this discouraging, its like slapping down bad creationist arguments again and again.

 

[Nice Squirrel]

You didn't say the words "It's Econ 101" so you are not demonstrating compete ignorance.

 

[fromderinside]

Don't quote me on this but I think right wing economics preceded creationist argument for origins.

 

[untermensche]

There can be no pure experiments in something with as many variables as the US economy.

All we can say is that it has nothing to do with "free enterprise".

The US economy is a government supported enterprise with massive government spending on research and development, called "defense" spending.

The modern commercial jet, the basis of modern tourism, provided by government research.

The computer. The cell phone. Also provided by massive government research.

No talk of the US economy can exclude this major and essential component.

Corporate Socialism in the guise of defense spending.

 

[coloradoatheist]

There is a lot there, and I am not sure how many people will go through each ltem with you.

But dismal had a disagreement with you when you said that in increase in price of a worker would have no change in the demand for workers at the new price.

I have had issues with you saying that the 4% effective tax rate change from 1980 has had that much bearing on the economy over the last 25 years. As unter said, we do thousands of things for the economy and they've all had an affect.

 

[laughing dog]

You didn't say the words "It's Econ 101" so you are not demonstrating compete ignorance.

Or "This is learned in the 1st half hour of basic economics".

- - - Updated - - -

There is a lot there, and I am not sure how many people will go through each ltem with you.

But dismal had a disagreement with you when you said that in increase in price of a worker would have no change in the demand for workers at the new price.

Well, as anyone who paid attention in ECON 101, the change in the wage does not cause a change in demand for labor but a change in the quantity demanded of labor assuming the demand for labor is not completely inelastic.

 

[laughing dog]

This questioning of the theory based on empirical knowledge is the reverse of what most neoclassical economists do, for them the preservation of the theory is the most important thing because the whole theory only makes sense if it is accepted whole. It is a house of cards, the interlocking theories support each other. It is intellectual sunk capital.

This is untrue. Economics - neoclassical, Post-Keynesian or otherwise - is about using models to describe and analyze market activity, human activity or the economy. Good economics of any school understands that models are, by definition, simple tools that need to be adapted to the specifics of the situation in order to be effective. Good economics in any school uses empirical analysis to either adapt a model or refine it.

Much of the "economics" on the internet is poor economics, because it takes the simple theoretical models as exact descriptors.

 

[coloradoatheist]

Or "This is learned in the 1st half hour of basic economics".

- - - Updated - - -

There is a lot there, and I am not sure how many people will go through each ltem with you.

But dismal had a disagreement with you when you said that in increase in price of a worker would have no change in the demand for workers at the new price.

Well, as anyone who paid attention in ECON 101, the change in the wage does not cause a change in demand for labor but a change in the quantity demanded of labor assuming the demand for labor is not completely inelastic.

I guess that's the argument because the law is based on the idea being demand being the quantity purchased and not just the desire for it. Though I am trying to remember what dismal said since he said almost every male had the demand of waiting to later supermodels.

 

[BH]

Don't quote me on this but I think right wing economics preceded creationist argument for origins.

and in particular

supply side economics

I know a lot of small business people and talking to them leads me to think they do not know much about economics overall. They just know how how to run their own businesses and about their little niche. Most businesses are not that big. Not knocking them or anything just making an observation.

I used to go to church with a man very well off. He made his money in the car selling business for Ford and Toyota and co-owned two dealerships with his brother. He told me he and his brother never cracked open a more advanced book about economics than just the most basic. They did read a couple of employment law books and a banking book. They just learned what little the did about overall economics as they went.

I think the politicos are simply telling the small business people what they like to hear and most honestly don't understand that the uber right wing stuff is as bad as the extreme left wing stuff. They want to hear they are important, and that they should not have to pay as much taxes,the big bad government wolf should leave them alone, and so forth. Same as everyone else.

 

[Horatio Parker]

I'm reading "Debt" by Donald Graeber, from that it appears there's a lot of myth in economics.

Adam Smiths speculations about the origins of money have been passed down whole, but they're unsupported by the record.

Money and credit existed as far back as history records.

Money, markets and government are related.

Primitive societies don't barter within the group; they share. And inter group bartering was limited to specialty items and was highly ritualized.

Much human behavior is communal.

Assigning exact value to things in order to ascertain whether a debt has been paid seems to have arisen more from the body of law surrounding indemnities than from commerce.

Commodity money has almost never circulated at the value of its material.

Remember economics is a branch of sociology.

 

[Bomb#20]

Here it might be wise to mention the concept of a natural experiment. Supply-side economics failed under G. W. Bush.

Statements like this puzzle me. How are you being any different from the people who say Keynesian economics failed under Johnson and Nixon? Which supply-side economist told Bush he could have a war in Iraq and not pay for it? Which Keynesian economist told Johnson and Nixon they could have a war in Viet Nam and not pay for it? As far as I can tell, the way "natural experiments" in economics evaluate theories is by seeing what happens when the politicians ignore the advice of this type of economist instead of ignoring the advice of that type of economist.

 

[Bomb#20]

I have been accused, most recently by dismal and coloradoatheist, but certainly by others over the years, as not understanding the most basic, elemental economics. ... I have decided to expose my ignorance for all to see and to suffer the derision that I justly deserve for that ignorance. I have listed below my understanding of basic economics, Econ 101, neoclassical economics, marginalism, the dominant paradigm, mainstream economics, or as I am going to call it, since this is my thread, free market fundamentalism,...

It is commonly referred to as neoclassical economics, to both point out its roots in the classical economics of Smith, Ricardo, Mill, Malthus, Marx, etc. and to point out the break with classical economics starting in the 1890's with Marshall, Clark, Wicksteed, etc. ...
The problem is that the neoclassical economic theories are wrong.
...

This is my poor knowledge of basic, neoclassical economics. Please review it and comment where you feel appropriate to correct me. ...
Let's start out with a statement of the proposition of the theory -

There is a natural, self-regulating*, self-organizing* free market based on market clearing prices* reached by the balancing of supply and demand through barter-like exchange*, that price reached that equaling the marginal cost* of the last product produced, possible because of the prefect competition* that would result if only we could eliminate government intervention from the market except to enforce contracts and to provide security from both external and internal threats but not to police the markets to prevent abuses by market participants because the discipline from supply and demand setting prices will eliminate all* market abuse. This free market* is the fundamental basis of capitalism, it is part and parcel of capitalism itself, without a free market* capitalism doesn't exist and can't exist. The free market, unbridled from the burden of government intervention* will provide the best possible outcomes because it will produce the best utilization of scarce resources*, including raw materials, land, labor and the scarcest and most important resource of all, financial capital for investment, by assuring that all of the components going into the production are rewarded at their true value.* That this mechanism supports the natural tendency of the free market toward a general equilibrium of full employment, the lowest possible costs of goods and services* while achieving the maximum amount of social justice possible.* * or about as close as it gets

[td="align:right,width:80"]
FMF-0
[/td]

This is the free market position advanced by the vast majority of economists today and economic schools from the anarchist capitalistic Austrians on the far right through the neoclassical schools, fresh water, politically conservative, monetarist economics on the center right all of the way to the center left New Keynesians like Paul Krugman, although in varying degrees and with somewhat less enthusiastic and incomplete support from some.

This is the elegant theory of Marshall and his contemporaries that was made possible by the theory of marginal utilization, that what is important to the economy is the last or the marginal, not the aggregate. For this reason its proponents all across the spectrum are often called "marginalists."
...

So your basic approach to understanding theories you despise is what, observing how creationists try to understand evolution and imitating them? Dumping everything you've ever heard a free-market supporter say into a Cuisinart and setting it on puree? Assuming that if Lumpenproletariat said it then Marshall preached it and Volker recited it as catechism?

So much for the derision. Now for your ignorance. Let's start with one of the most basic, elemental concepts. "True value" is a notion from classical economics. There is no evidence for the existence of any such quantity as the "true value" of any component going into production; accordingly, no such quantity plays any role in neoclassical economic theory. Along with marginalism, that's the crux of the break with classical economics.

 

[SimpleDon]

Here it might be wise to mention the concept of a natural experiment. Supply-side economics failed under G. W. Bush. And applied to Kansas by Governor Brownback, SS has failed. Also in Jindal's Lousiana. I can never understand how so many can ignore these natural experiments. Until I read some far right economist's explanations. Full of rationalizations, bad logic, blame throwing and other ways of ignoring obvious facts. 450 top economists including 10 Nobel laureates warned Bush his tax cuts would not achieve the goals he set for that and would create massive deficits. They were ignored and turned out to be right. I think being right counts for something when arguing economics. I find all of this discouraging, its like slapping down bad creationist arguments again and again.

Supply side economics is a part of market fundamentalism, because its base assumption is that the modern, industrial economy is supply side driven. That it was always and always will be that capital is a rare resource that must be allocated among competing uses, that there is no growth without investment, and that largely means investment in the stock market.

All of these are wrong. In the modern industrial economy capital is just money, the economy creates as much of it as required. It is hardly a limited resource. The economy is demand driven, there is no investment without unsatisfied demand. Business investment in the real economy of providing the goods and services that we depend on to live and that 99% of us depend on for jobs have almost nothing to do with the stock market. The investment decisions are made by the professional management of the company largely with retained earnings, the proceeds from corporate bond sales or bank loans, with little to no regard for what the investors in the stock market think.

 

[SimpleDon]

I have been accused, most recently by dismal and coloradoatheist, but certainly by others over the years, as not understanding the most basic, elemental economics. ... I have decided to expose my ignorance for all to see and to suffer the derision that I justly deserve for that ignorance. I have listed below my understanding of basic economics, Econ 101, neoclassical economics, marginalism, the dominant paradigm, mainstream economics, or as I am going to call it, since this is my thread, free market fundamentalism,...

It is commonly referred to as neoclassical economics, to both point out its roots in the classical economics of Smith, Ricardo, Mill, Malthus, Marx, etc. and to point out the break with classical economics starting in the 1890's with Marshall, Clark, Wicksteed, etc. ...
The problem is that the neoclassical economic theories are wrong.
...

This is my poor knowledge of basic, neoclassical economics. Please review it and comment where you feel appropriate to correct me. ...
Let's start out with a statement of the proposition of the theory -

There is a natural, self-regulating*, self-organizing* free market based on market clearing prices* reached by the balancing of supply and demand through barter-like exchange*, that price reached that equaling the marginal cost* of the last product produced, possible because of the prefect competition* that would result if only we could eliminate government intervention from the market except to enforce contracts and to provide security from both external and internal threats but not to police the markets to prevent abuses by market participants because the discipline from supply and demand setting prices will eliminate all* market abuse. This free market* is the fundamental basis of capitalism, it is part and parcel of capitalism itself, without a free market* capitalism doesn't exist and can't exist. The free market, unbridled from the burden of government intervention* will provide the best possible outcomes because it will produce the best utilization of scarce resources*, including raw materials, land, labor and the scarcest and most important resource of all, financial capital for investment, by assuring that all of the components going into the production are rewarded at their true value.* That this mechanism supports the natural tendency of the free market toward a general equilibrium of full employment, the lowest possible costs of goods and services* while achieving the maximum amount of social justice possible.* * or about as close as it gets

[td="align:right,width:80"]
FMF-0
[/td]

This is the free market position advanced by the vast majority of economists today and economic schools from the anarchist capitalistic Austrians on the far right through the neoclassical schools, fresh water, politically conservative, monetarist economics on the center right all of the way to the center left New Keynesians like Paul Krugman, although in varying degrees and with somewhat less enthusiastic and incomplete support from some.

This is the elegant theory of Marshall and his contemporaries that was made possible by the theory of marginal utilization, that what is important to the economy is the last or the marginal, not the aggregate. For this reason its proponents all across the spectrum are often called "marginalists."
...

So your basic approach to understanding theories you despise is what, observing how creationists try to understand evolution and imitating them? Dumping everything you've ever heard a free-market supporter say into a Cuisinart and setting it on puree? Assuming that if Lumpenproletariat said it then Marshall preached it and Volker recited it as catechism?

So much for the derision. Now for your ignorance. Let's start with one of the most basic, elemental concepts. "True value" is a notion from classical economics. There is no evidence for the existence of any such quantity as the "true value" of any component going into production; accordingly, no such quantity plays any role in neoclassical economic theory. Along with marginalism, that's the crux of the break with classical economics.

So you don't think that neoclassical economics assumes any true value of any product in the economy that might or might not be equal to the market value, the price? What if I called it the "economic value?" Then would you agree that it is a part of neoclassical economics?

I don't despise neoclassical economics, it is a brilliant theory. It just has little to nothing toward explaining the economy that we have today. It is the "creationist argument" of economics. And like the creationist argument against natural selection and evolution its purpose is not to be explanatory but to preserve a ideology and a the status of largely useless social structures, religion and the role of gods in the case of creationists and the importance of the wealthy investor class in the case of neoclassical economics.

I will remove any reference to "true value" and use "economic value." Anything else?

 

[Cheerful Charlie]

I note the Laffer curve as a rationalization for steep tax cuts aimed at the wealthy has never worked as promised. But Laffer is still around peddling his own brand of snake oil. The promise is that the tax cuts will pay for themselves by boosting the economy. But that nevr works. Again, Kansas. Brownback told us that his SS type tax cuts would be like adrenaline to the heart of Kansas's economy. It ain't. Its a disaster. How many such failures do we have to see like this before Americans abandon Laffer's curve?

This is what discourages me, the fact that ideology trumps facts and obvious truth's. Economics is often the triumph of ideology over facts and common sense. What is Trump offering? More of the same and his followers eat it up. Even if sober analysts tell us his plans will create $10 trillion in debts over 10 years. For these sorts of people, studying economics simply arms them with more irrelevant ideas to us a rationalizations at why failed ideas like SS economics is not really a failure. "Kennedy cuts taxes and his economy did well!". But never mind SS economics has failed repeatedly since Nixon adopted trickle down theory which morphed into SS.

 

[coloradoatheist]

Here it might be wise to mention the concept of a natural experiment. Supply-side economics failed under G. W. Bush. And applied to Kansas by Governor Brownback, SS has failed. Also in Jindal's Lousiana. I can never understand how so many can ignore these natural experiments. Until I read some far right economist's explanations. Full of rationalizations, bad logic, blame throwing and other ways of ignoring obvious facts. 450 top economists including 10 Nobel laureates warned Bush his tax cuts would not achieve the goals he set for that and would create massive deficits. They were ignored and turned out to be right. I think being right counts for something when arguing economics. I find all of this discouraging, its like slapping down bad creationist arguments again and again.

Supply side economics is a part of market fundamentalism, because its base assumption is that the modern, industrial economy is supply side driven. That it was always and always will be that capital is a rare resource that must be allocated among competing uses, that there is no growth without investment, and that largely means investment in the stock market.

All of these are wrong. In the modern industrial economy capital is just money, the economy creates as much of it as required. It is hardly a limited resource. The economy is demand driven, there is no investment without unsatisfied demand. Business investment in the real economy of providing the goods and services that we depend on to live and that 99% of us depend on for jobs have almost nothing to do with the stock market. The investment decisions are made by the professional management of the company largely with retained earnings, the proceeds from corporate bond sales or bank loans, with little to no regard for what the investors in the stock market think.

Every economy since the beginning has been about it's desire to consume. The economy is to distribute scarce resource resources to the end consumer. But what seperates our economy from the past and from the poor ones is not our ability to consume, it's our ability to produce.

 

[coloradoatheist]

I note the Laffer curve as a rationalization for steep tax cuts aimed at the wealthy has never worked as promised. But Laffer is still around peddling his own brand of snake oil. The promise is that the tax cuts will pay for themselves by boosting the economy. But that nevr works. Again, Kansas. Brownback told us that his SS type tax cuts would be like adrenaline to the heart of Kansas's economy. It ain't. Its a disaster. How many such failures do we have to see like this before Americans abandon Laffer's curve?

This is what discourages me, the fact that ideology trumps facts and obvious truth's. Economics is often the triumph of ideology over facts and common sense. What is Trump offering? More of the same and his followers eat it up. Even if sober analysts tell us his plans will create $10 trillion in debts over 10 years. For these sorts of people, studying economics simply arms them with more irrelevant ideas to us a rationalizations at why failed ideas like SS economics is not really a failure. "Kennedy cuts taxes and his economy did well!". But never mind SS economics has failed repeatedly since Nixon adopted trickle down theory which morphed into SS.

And one of the biggest problems of economics is finding a way to measure the variable changed, the time period for it, and what you define as being a success.

 

[Cheerful Charlie]

I note the Laffer curve as a rationalization for steep tax cuts aimed at the wealthy has never worked as promised. But Laffer is still around peddling his own brand of snake oil. The promise is that the tax cuts will pay for themselves by boosting the economy. But that nevr works. Again, Kansas. Brownback told us that his SS type tax cuts would be like adrenaline to the heart of Kansas's economy. It ain't. Its a disaster. How many such failures do we have to see like this before Americans abandon Laffer's curve?

This is what discourages me, the fact that ideology trumps facts and obvious truth's. Economics is often the triumph of ideology over facts and common sense. What is Trump offering? More of the same and his followers eat it up. Even if sober analysts tell us his plans will create $10 trillion in debts over 10 years. For these sorts of people, studying economics simply arms them with more irrelevant ideas to us a rationalizations at why failed ideas like SS economics is not really a failure. "Kennedy cuts taxes and his economy did well!". But never mind SS economics has failed repeatedly since Nixon adopted trickle down theory which morphed into SS.

And one of the biggest problems of economics is finding a way to measure the variable changed, the time period for it, and what you define as being a success.

Did SS work well over 8 years of Bush's administration? Clinton left us with a good economy, Bush left us a smoking crater. Doubled the national debt and CBO gave his tax cuts 30% of the blame for that.

Sorry, but moving the goal posts like this is part of the problem. How many years do we have to wait for Brownback's economic program to bear fruit.?

CBO has stated that now, 24% of our deficits are due to Bush's tax cuts that Obama was unable to phase out due to GOP opposition. They howl and shriek about deficits unless its deficit creating programs of their own creation.


It's like the old Reagan joke.
“Next the psychiatrist treated the optimist. Trying to dampen his out look, the psychiatrist took him to a room piled to the ceiling with horse manure. But instead of wrinkling his nose in disgust, the optimist emitted just the yelp of delight the psychiatrist had been hoping to hear from his brother, the pessimist. Then he clambered to the top of the pile, dropped to his knees, and began gleefully digging out scoop after scoop with his bare hands. 'What do you think you're doing?' the psychiatrist asked, just as baffled by the optimist as he had been by the pessimist. 'With all this manure,' the little boy replied, beaming, 'there must be a pony in here somewhere!'”

We are still looking for that supply-side pony.

 

[coloradoatheist]

And one of the biggest problems of economics is finding a way to measure the variable changed, the time period for it, and what you define as being a success.

Did SS work well over 8 years of Bush's administration? Clinton left us with a good economy, Bush left us a smoking crater. Doubled the national debt and CBO gave his tax cuts 30% of the blame for that.

Sorry, but moving the goal posts like this is part of the problem. How many years do we have to wait for Brownback's economic program to bear fruit.?

CBO has stated that now, 24% of our deficits are due to Bush's tax cuts that Obama was unable to phase out due to GOP opposition. They howl and shriek about deficits unless its deficit creating programs of their own creation.


It's like the old Reagan joke.
“Next the psychiatrist treated the optimist. Trying to dampen his out look, the psychiatrist took him to a room piled to the ceiling with horse manure. But instead of wrinkling his nose in disgust, the optimist emitted just the yelp of delight the psychiatrist had been hoping to hear from his brother, the pessimist. Then he clambered to the top of the pile, dropped to his knees, and began gleefully digging out scoop after scoop with his bare hands. 'What do you think you're doing?' the psychiatrist asked, just as baffled by the optimist as he had been by the pessimist. 'With all this manure,' the little boy replied, beaming, 'there must be a pony in here somewhere!'”

We are still looking for that supply-side pony.

You are right that you don't have to wait forever. But the government can throw out multiple economic nets and one or two of them can be problems. SS doesn't just mean tax cuts, but it's come to mean that and the laffer curve is that the taxes are too high so with Kansas the 1% wasn't going to make a difference. However as dismal pointed out, the only way to know about Kansas is to have a wormhole and find out what happend in Kansas that didn't have a tax cut.

It's also interesting that the economists who do look at the supply side look at what happened during Reagan's time. So he came into office with a horrible economy, inflation over 2% and things turned around by the time he left.