Waste, waste, waste

Arjun Jayadev

A few years ago Suresh Naidu and I began to write, but sadly never completed, a paper that included a long discussion of conceptual measures of waste in economics.  I’m reminded of this because of Bill Janeway’s very interesting-sounding book that has recently been released. Bill’s talk at the inaugural INET conference introduced me to the idea of “Schumpeterian waste”: or the idea that in the process of innovation, one must encounter and accept periods of wasted resources. When Suresh and I were writing the paper, we spent hours trying to operationalize and provide some theoretical underpinnings for ideas of waste, but we never really felt like we had gotten it. But there were some ideas there, and so for all that effort to not go to, well, waste, maybe it’s worthwhile to write a blog post to keep it alive.

Economics is very theoretically comfortable with what may be termed `Keynesian’ waste. This is the degree to which an economy lies below its production possibility frontier. All the initial motivation for Keynesian Macro was the attempt to minimize this waste.

Bill, as mentioned, describes the phenomenon of `Schumpeterian Waste': or the waste in terms of resources that arises from the fact that some failure of firms is necessary for the proper functioning of capitalist dynamics. As his introduction puts it: “economic growth has been driven by successive processes of trial and error and error and error: upstream exercises in research and invention, and downstream experiments in exploiting the new economic space opened by innovation. Each of these activities necessarily generates much waste along the way: dead-end research programs, useless inventions and failed commercial ventures.” Bill suggests that there needs to be a break from concerns about financial returns and investment (thereby necessitating a role for government) in order for this to work effectively.

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Misleading Orthodoxy: Barter and the Origin of Money

Alejandro Nadal

Economic theory has a serious and embarrassing problem: it does not appear to have a rigorous and well-defined concept of money. This is why orthodox textbooks, when introducing money have to resort to a descriptive sleight of hand and state that “money is what money does”. They typically go on to say that it is the unit of account, the means of exchange and a reserve of value. But they fail to add that these functions are not exclusive of money.

That money poses a serious problem for mainstream economic theory is best exemplified by the fact that the most sophisticated account of interdependent markets (general equilibrium theory) does not tolerate the introduction of money (Hahn 1982). That’s an amazing headline story, one that should be taught in Economics 101.

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Peter Spiegler on “Economics-Made-Fun”

Arjun Jayadev

I normally blog about issues related to finance or distribution, but this time I thought I might try something somewhat different. I’m not particularly expert at questions of economic methodology, but found this paper to appear in the latest Journal of Economic Methodology by my very smart colleague at UMass Boston Peter Spiegler to be really interesting.

Over the last decade or so we have all had to endure (I use the term advisedly) what may be termed the ‘economics made fun’ (EMF) genre of books. The bestseller Freakonomics for example has had enormous success, selling over 5 million copies to date and launching a whole cottage industry of books  (some better and some worse that blended pop culture, armchair theorizing and quantitative economic methods to come up with surprising and ‘fun’  (counterintuitive or shocking) conclusions.

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Peter Spiegler on "Economics-Made-Fun"

Arjun Jayadev

I normally blog about issues related to finance or distribution, but this time I thought I might try something somewhat different. I’m not particularly expert at questions of economic methodology, but found this paper to appear in the latest Journal of Economic Methodology by my very smart colleague at UMass Boston Peter Spiegler to be really interesting.

Over the last decade or so we have all had to endure (I use the term advisedly) what may be termed the ‘economics made fun’ (EMF) genre of books. The bestseller Freakonomics for example has had enormous success, selling over 5 million copies to date and launching a whole cottage industry of books  (some better and some worse that blended pop culture, armchair theorizing and quantitative economic methods to come up with surprising and ‘fun’  (counterintuitive or shocking) conclusions.

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Hunting the Auctioneer

Alejandro Nadal

“For the Snark’s a peculiar creature, that won’t / Be caught in a commonplace way./ Do all that you know, and try all that you don’t: / Not a chance must be wasted today!

Lewis Carroll, The Hunting of the Snark

Of all the assumptions of general equilibrium theory, the Walrasian auctioneer may very well be the most important one. Because macroeconomics has been absorbed by neoclassical microeconomics, today the role of the auctioneer is also embedded in macro models. For example, the work of Lucas and Kydland and Prescott relies heavily on the presence of an auctioneer. It is therefore no exaggeration to say that this assumption runs through the spinal chord of orthodox economic theory, both micro and macro.

Although everyone seems to agree that this is not a good assumption, the auctioneer is also one of orthodoxy’s less well-understood figures. Both friend and foe repeatedly misunderstand its role and its intimate relation to stability theory in general equilibrium models.

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