[quetzalcoatl]

Neoliberalism doesn't make any claims about greed at all. It does make plenty about efficiency though.

And it was not invented to prove anything about Smith - he, along with Marxian economists, was proven wrong on the LTV decades before neoliberalism was a thing.

Economists don't "prove" anything. They only succeed in establishing a framework. Unlike physics, their paradigms are only notionally subject to real world confirmation.

[wat0n]

Go on. How can the LTV explain the paradox of diamond-water?

[quetzalcoatl]

It is, however, a mythical construction, as there never was a paradox for Smith and his successors. In showing why the story of the diamonds and water paradox is a fable, the purpose of this article is to provide a historical perspective on its construction. It will be argued that the fable is one of a series of attempts, dating from the early nineteenth century, to stabilize the meaning of Smith's diamonds and water paragraph in a theory of value and distribution. While the paradox reading of that paragraph dates from the first edition of Jevons's Theory of Political Economy, the fable itself was a product of the twentieth century. After elements of the story began circulating from the 1920s, it was given a canonical representation in the first edition of Samuelson's Economics (1948). The subsequent success of the fable is a striking illustration of how a textbook illustrative device can recirculate, via lectures and other textbooks, to achieve the status of a professional myth.

Doctoring Adam Smith: The Fable of the Diamonds and Water Paradox
Michael V. White
History of Political Economy
Duke University Press
Volume 34, Number 4, Winter 2002
pp. 659-683

I don't really have anything against this type of thought experiment, but it's quite silly to believe it proves anything. At best, you could claim economic 'theories" are not provable in any reasonable sense, as long as you extend your skepticism to marginal theories of value. I don't consider the "Theory" part of MMT, for example, to be legitimate, even though I'm sympathetic to some of its political positions. I'm not a Popperian hard liner when it comes to theory, but the smug arrogance of neoclassical practitioners practically begs for a hard take down.

Robert Solow (1984): Conversations with Economists: “Suppose someone sits down where you are sitting right now…

…and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon. Now, Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then you have tacitly gone along with their fundamental assumptions; your attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous–that is, by laughing at it–so as not to fall into the trap of taking it seriously and passing on to matters of technique.

The fundamental crime of modern economics is that it doesn't make an explicit commitment to be human-centric, as its first principle. It treats economic phenomena as independently real and not radically contingent on the human society in which they are embedded. MMT is guilty as well by constantly arguing with Napoleon over cavalry tactics.

[wat0n]

Ok, so according to that text one can say Paul Samuelson provided us with the contemporary interpretation of the paradox. How does it justify LVT again? This seems like a red herring.

I also find it hilarious when heterodox guys accuse mainstream economists of being "out of touch". Excuse me? Mainstream economists are, by far, the ones that have been most concerned with empirically testing their models.

[quetzalcoatl]

Personally I lose no sleep over LVT. It's not immediately critical to any relevant question I need economists to answer. It's not their theories that concern me, it's their intentions.

[wat0n]

What would their intentions be?

Continuing with Samuelson, you may want to see some of the forecasts about the Soviet economy he would include in his textbook.

[ckaihatsu]

Ok, so according to that text one can say Paul Samuelson provided us with the contemporary interpretation of the paradox. How does it justify LVT again? This seems like a red herring.

I'd like to note that *all* economics derives from the labor theory of value:

Like nearly all economists of his age, Smith followed the labor theory of value. Labor theory stated that the price of a good reflected the amount of labor and resources required to bring it to market. Smith believed diamonds were more expensive than water because they were more difficult to bring to market.2

https://www.investopedia.com/ask/answer ... aradox.asp

---

I also find it hilarious when heterodox guys accuse mainstream economists of being "out of touch". Excuse me? Mainstream economists are, by far, the ones that have been most concerned with empirically testing their models.

Whatevs.

Game theory

In game theory, transaction costs have been studied by Anderlini and Felli (2006).[19] They consider a model with two parties who together can generate a surplus. Both parties are needed to create the surplus. Yet, before the parties can negotiate about dividing the surplus, each party must incur transaction costs. Anderlini and Felli find that transaction costs cause a severe problem when there is a mismatch between the parties’ bargaining powers and the magnitude of the transaction costs. In particular, if a party has large transaction costs but in future negotiations it can seize only a small fraction of the surplus (i.e., its bargaining power is small), then this party will not incur the transaction costs and hence the total surplus will be lost. It has been shown that the presence of transaction costs as modelled by Anderlini and Felli can overturn central insights of the Grossman-Hart-Moore theory of the firm.[20][21]

https://en.wikipedia.org/wiki/Transacti ... ame_theory

[11] Labor & Capital, Wages & Dividends

Spoiler: show

[wat0n]

Diamonds are quite obviously far, far cheaper to transport to the public than tap water. Yet even today they are also far more expensive.

I'm not sure about what transaction costs have to do with empirically testing your models.

[ckaihatsu]

Diamonds are quite obviously far, far cheaper to transport to the public than tap water. Yet even today they are also far more expensive.

To me the diamonds-and-water scenario is simply a discussion of exchange values, versus use values.

He [Adam Smith] determined "value in use" was irrationally separated from "value in exchange."1

https://www.investopedia.com/ask/answer ... aradox.asp

---

I'm not sure about what transaction costs have to do with empirically testing your models.

We could call 'transaction costs' an *externality* because it simply can't be *predicted* in advance, as the model illustrates.

This might be termed the mechanism of transmission for the dominance of large fish over small fish -- mergers and acquisitions, ultimately.

[ckaihatsu]

[T]ransaction costs cause a severe problem when there is a mismatch between the parties’ bargaining powers and the magnitude of the transaction costs.

[When] bargaining power is small), then this party will not incur the transaction costs and hence the total surplus will be lost.

https://en.wikipedia.org/wiki/Transacti ... ame_theory

This is similar to what happens in a poker game, if a player can't match the going bet amount.

[wat0n]

What do transaction costs have to do with testing models against data?

[ckaihatsu]

What do transaction costs have to do with testing models against data?

The data is all around you.

The scenario provided is realistic -- any joining of capital with labor tends to yield a profit, which is a 'surplus' above the original costs of producing the commodity.

Yet the 'transaction costs' for labor are usually *burdensome* -- housing, commuting, education, raising children, etc. -- yet there can be no enjoyment of the 'surplus' by labor, usually just by default, given prevailing management-labor relations of income inequality.

Labor doesn't even have a seat at the table, unless there's some modicum of collective bargaining.

[wat0n]

I still don't get your point @ckaihatsu. Yes, transaction costs matter - it's one reason why businesses exist to begin with - but what does that have to do with testing models against data?

[ckaihatsu]

I still don't get your point @ckaihatsu. Yes, transaction costs matter - it's one reason why businesses exist to begin with - but what does that have to do with testing models against data?

Um, are we obligated to talk about *your* thing now?

Just because you're fixated on something doesn't mean that the discussion / exchange simply 'resets' to your tangential topic of choice.

I think you're thinking of the wrong kind of 'model' -- you're talking about *research*, to build up a model like that of genetic evolution. That isn't the same as a thought-experiment 'model', like anything from game theory, like the example provided.

[wat0n]

Thought experiments can be useful to understand the implications of your model. You can even go beyond just thinking inside your head and run computer simulations too.

This does not substitute testing these models against real world data.

And that research angle of course is important. Marx himself claimed his theory was a scientific one, after all, and that's something Marxian and mainstream economists share: They claim to want to explain economic behavior and not just do politics. Well, doing so obviously requires research.

[ckaihatsu]

Thought experiments can be useful to understand the implications of your model. You can even go beyond just thinking inside your head and run computer simulations too.

This does not substitute testing these models against real world data.

And that research angle of course is important. Marx himself claimed his theory was a scientific one, after all, and that's something Marxian and mainstream economists share: They claim to want to explain economic behavior and not just do politics. Well, doing so obviously requires research.

Okay, I'd say 'go for it'. I won't stop you.

[late]

Okay, I'd say 'go for it'. I won't stop you.

He has a point, without showing the world your idea not only works, but is better than what we have now, it remains DOA..

[ckaihatsu]

He has a point, without showing the world your idea not only works, but is better than what we have now, it remains DOA..

You haven't even shown that you have an *understanding* of my politics -- you've only been *dismissive* by using the term 'fantasy' -- so your point is moot.

[Steve_American]

Doctoring Adam Smith: The Fable of the Diamonds and Water Paradox
Michael V. White
History of Political Economy
Duke University Press
Volume 34, Number 4, Winter 2002
pp. 659-683

I don't really have anything against this type of thought experiment, but it's quite silly to believe it proves anything. At best, you could claim economic 'theories" are not provable in any reasonable sense, as long as you extend your skepticism to marginal theories of value. I don't consider the "Theory" part of MMT, for example, to be legitimate, even though I'm sympathetic to some of its political positions. I'm not a Popperian hard liner when it comes to theory, but the smug arrogance of neoclassical practitioners practically begs for a hard take down.

Robert Solow (1984): Conversations with Economists: “Suppose someone sits down where you are sitting right now…



The fundamental crime of modern economics is that it doesn't make an explicit commitment to be human-centric, as its first principle. It treats economic phenomena as independently real and not radically contingent on the human society in which they are embedded. MMT is guilty as well by constantly arguing with Napoleon over cavalry tactics.

A few things in support of MMT.
1] The only policy MMTers demand is the national Job Guarantee Program, which a doubt you grok. I'm not sure what the difference is between "political positions" and "policies MMT wants".

2] AFAIK, only MMT only uses 100% true assumptions in its "proofs" of its assertions.
. . . All other Economic Theories include many false assumptions, and in logic no proof can have any false assumptions in it. Therefore MS Econ. Theories have never been proved and they also don't line up with econ. history either.

3] What is it that you reject about MMT?
.

[ckaihatsu]

Steve -- devil's advocate here -- would you like to address the fact that debt is a real quantity, and that creditors have an interest in collecting on their loans? (Also that overextended assets / bad loans / toxic debt / junk bonds, will be less attractive to buyers going-forward.) (March 2020.) The same goes for the U.S. balance sheet.

Now that the U.S. and other countries have rapidly increased their debt in the past few years, what do you think about *solvency* concerns among such nation-states, and how might all of these national balance sheets be resolved internationally, do you think?

Is it time for another Plaza Accord?