Reddit reviews Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism

R1:

Today I bring you this WaPo Op-Ed on how the Carrier deal will return business norms back to ones that favor labor and community because firms will fear Trump’s wrath. Here the author offers a distorted view of America’s past, a dysfunctional view of how contracts and norms interact, and a wayward portrayal of economists as unable to fathom agents and systems which do not follow strict mathematical functional forms.

>There was a time in America when there was an unwritten pact in the business world — workers were loyal to their companies and successful companies returned that loyalty by sharing some of their profits with their workers in the form of higher wages, job security and support for the local community.

The author wistfully describes a past that did not exist when businesses and workers in long term marriages because it was what was right and good for the community.

At its heart this period existed because unionization (or more accurately worker bargaining power) made it possible. Certainly on the point of loyalty, unionization decline is the largest contributor to declining tenure (see Bidwell. As unionization fell, this loyalty also disappeared.
However, unionization's decline can largely be explained by the rule of law (right-to-work laws, unionization process etc.) though governing and business norms played a role (to be discussed).

With bargaining power largely reduce, workers had additional difficulty (for better or worse) attempting to hold their jobs in the face of international pressures and especially technological change as countless economist (Autor just to name check one) have documented.

>modern day economists tend to ignore such shifts in social norms because they can’t quantify them in the same way they can quantify trade flows or technological innovation or changes in educational attainment. They assume that social norms change in response to economic fundamentals rather than the other way around.

This is the sort of things that can ruin my work day as a nominally institutionalist style economist. To begin, several Nobel prize winning economists have done significant work studying norms formation and effects such as North, Ostrom, Akerlof, Akerlof again!.

Beyond this, others have built off these works (Ostrom was focusing on the importance of norms, but not specifically addressing the problem) to try to model norm development in game theory example.

In fact, in Samuel Bowles’ Microeconomics, discusses in detail the way contracts influence the norms and institutions of exchange (Chapter 8, p. 265). The long and short of Bowles’ discussion is that norms are well understood, evolutionary, and in the absence of complete contracting have significant influence on the results of exchange.

Norms matter greatly to economists in the event that contracting is incomplete. One would hope, it seems in vain, that contracting between the federal government and American firms is more complete than most contractual situations.

>the new norm is not longer acceptable, and [Trump] intends to do whatever he can to shame and punish companies that abandon their workers.
>He may even have to make an example of a runaway company by sending in the tax auditors or the OSHA inspectors or cancelling a big government contract.

Many economists see the potential change of market norms that will result from government contracts suddenly being less than 100% enforceable as a problem. Coming back to Bowles, he notes that said norms “are sustained by the structure of the market and other social interactions in which traders routinely engage.” If having government contracts and enforcement become less predictable is to be the new norm of enforcement, surely the market response will be to ask government from some premia in contracting to account for uncertainty. New firms may avoid starting their business under the supervision of this government altogether.

Tyler Cowen points out that the new norms that would arise likely involve more complex contractual agreements to skirt restrictions, degradation of U.S. tech advancement, a ramping of favoritism to levels not seen since the Harding administration, potential de facto capital controls, or at best a politicization of the economy with no real rule of law effects.

>Teddy and Franklin Roosevelt understood that. So did Ronald Reagan when he fired thousands of striking air traffic controllers and set back the union movement for several decades.

Perhaps most crucially, the author here references a variety of Presidents who enforced their support (or lack therefore) for labor, but did so through the rule of law via various anti-trust acts, the championing and enactment of a large set of labor relations legislation, and the decision to enforce laws enshrined in code 15 years prior that had been previously ignored. As opposed to potentially undermining the rule of law as Trump does by leveraging government contracts and regulation.

A bonus on this point is that—though Reagan’s actions may have signaled willingness from government to support changing business norms by supporting them through rule of law—unionization’s decline had already begun years prior to the changes in business norms Reagan’s ruling supposedly incited.

The study of economics is not one that lacks an understanding of how norms influence market interactions. Though I am not as well versed in studies accounting for changes in norms mathematically, I’d wager someone here could produce good examples of studies that do just this through the use of good instrumental variables.

The Carrier deal will likely change norms in business actions, but those are likely to be related to businesses’ certainty in contracting with government during the Trump presidency. Just as is seen in Trump’s cabinet, the only people left to provide work will be those certain they can take advantage of information asymmetry to get a better deal from U.S. governments. Any mass effort to enforce job retention on a scale much more massive than the Carrier deal will be enacted via law and will be just as harmful to business culture as Cowen and other economist predict, but it will be the changes to contractual enforcement that drive these results and not revolution in norms spurred on by backroom dealing.

>>modern day economists tend to ignore such shifts in social norms because they can’t quantify them in the same way they can quantify trade flows or technological innovation or changes in educational attainment.
>They assume that social norms change in response to economic fundamentals rather than the other way around.
This is the sort of things that can ruin my work day as a nominally institutionalist style economist. To begin, several Nobel prize winning economists have done significant work studying norms formation and effects such as North, Ostrom, Akerlof, Akerlof again!.

I think your formatting failed there, it appears like one quote, whereas I think the seconds part is supposed to be your response. Pretty confusing to read.

Thinking Fast and Slow

Shiller and Akerloft have a book on behavioral macro that I haven't read but have heard mentioned.

Dean Baker, one of the most prominent Keynesians writers, correctly identified the housing bubble in 2002 and was the most vocal voice during the bubble build up.

Robert Shiller, another bubble predictor and author of Animal Spirits, co created the Case Shiller Home Price Index, which is the basis of Peter Schiff's and other Austrians prediction of the housing bubble.

Animal Spirits by George Ackerloff and Robert Shiller is a really good one. It sort of expands on Keynes' ideas about human psychology and subsequent unpredictability of the macroeconomy. Pretty interesting read. Pretty easy and non-technical read.

There really isn't a substitute for taking a class and working through a textbook. A free textbook is online at http://www.introecon.com/, and you can check out MIT's courses using their open course software at http://ocw.mit.edu/OcwWeb/Economics/index.htm .

If that's not your speed, a good book might be Akerlof and Schiller's Animal Spirits: http://www.amazon.com/Animal-Spirits-Psychology-Economy-Capitalism/dp/069114592X/ref=sr_1_1?ie=UTF8&s=books&qid=1265504406&sr=8-1 or Justin Fox's "The Myth of the Rational Market" http://www.amazon.com/Myth-Rational-Market-History-Delusion/dp/0060598999/ref=pd_sim_b_4

>If those PhD's were out there making markets more efficient it would be different.

Even if they were making markets more efficient, they would still be better utilized discovering more physics. This is something that people tend to forget: without the input of scientific advancement, the free market or any other system really wouldn't do much. Every period of sustainable growth in US history has been based around a new technology (e.g. trains, electricity, cars, radio, tv, airplanes, computers, internet). Growth occurs when there is a gap between what scientists and engineers can build and what is currently deployed in the economy. This is why China is growing so fast right now (they are deploying technologies that everyone in the US already has, especially cars). For the most advanced economies to grow, we need to do more science so we can expand that gap between what is possible and what everyone already owns.

>But most of the "financialization" that has occurred has been because those PhD's were ultimately utilized to make the markets more opaque and overly complicated.

I agree. I personally think things like high-speed trading should be banned. It gives an unfair advantage to those that can afford a $10 million compute cluster with a fiber connection within a few miles (to minimize latency) of the NYSE. We need a new rule that has like a randomized 10 second delay (meaning something like a normal distribution with a mean of 10 seconds and a stddev of 5 seconds) after an order is placed to kill high speed trading. I think the claims that high speed traders provide extra needed liquidity is horseshit. A slightly slowed down system would still have plenty of liquidity. And think about that for a second: should stocks be as liquid as cash? I don't think that is really that important. I mean, we already have rules like circuit breakers and other things. So, encouraging the ability to pull out everything as fast as possible really isn't that smart in my view. All it does is make the market less stable (see the Flash Crash).

And most importantly, killing high speed trading will restore some confidence that the market isn't rigged. Capitalism and the stock market needs legitimacy if it is to be stable.

>why has the Fed never been audited by an independent 3rd party?

Because the central bank is supposed to be independent under most theories of central banking. I do think that old actions by the bank (say anything over 5-10 years old) should be opened up though. Although, in the long run, I'd prefer moving towards a more Chartalist system (meaning the central bank directly funds the treasury instead of doing open market operations, and the money supply is simply controlled by the size of the government debt and the amount of taxation) and I'd be fine having the central bank's books open in that case. However, the current system, with the primary dealers and open market operations, needs some secrecy or else all kinds of games can be played.

>Why has Fort Knox not been audited since the 1950's?

Link? I know there are conspiracies about Fort Knox being empty, but I'd like to see what legit sources you have on the topic.

>All for the same reasons, to keep up the illusion that the ponzi scheme is working.

Pretty much every form of a financial system is an unstable Ponzi scheme. That's the nature of finance. And yes, that includes a 100% reserve gold standard system too, because people will always find a way to game it if there is a profit to be made. That's the Animal Spirits (btw, if you haven't read the Shiller/Akerlof book, I highly recommend reading it as soon as possible: http://www.amazon.com/Animal-Spirits-Psychology-Economy-Capitalism/dp/069114592X/ref=sr_1_1?ie=UTF8&qid=1292475145&sr=8-1).

You need a completely different lens to think through.


https://www.amazon.com/Extraordinary-Popular-Delusions-Madness-Crowds/dp/1539849589/ref=sr_1_1?keywords=the+madness+of+crowds+mckay&qid=1571933428&s=books&sr=1-1
https://www.amazon.com/Animal-Spirits-Psychology-Economy-Capitalism/dp/069114592X

Animal Spirits link

I'm an economics grad so I've got a fair amount of understanding in all this. The main thing I would say is that while you're arguements are definitely not wrong per se, they are very optimistic.

One of the main things that I noticed from studying university economics opposed to more basic high school economics classes, is that there are so many theoretical ideas about capitalism and anarchism that make sense. However, you apply these ideas to the real world and the majority of them fall dead in the water because it is so easy for economists and just generally smart, analytical people such as yourself to assume that everyone else is as rational and unimpulsive. You'd be surprised how many people make poorly imformed choices that negatively affect society as a whole. It isn't something I can sum up on here (if it was, my degree would have been a huge waste of tens of thousands of pounds), but if you're interested I would definitely suggest studying economics. If you're past that stage in your life though, the link below is to a book that I think you'd find hugely insightful. Keep in mind this is a link to UK amazon though.

http://www.amazon.co.uk/Animal-Spirits-Psychology-Economy-Capitalism/dp/069114592X/ref=tmm_pap_title_0

Anyway, I've enjoyed our chats. All the best!

Ever read Animal Spirts? https://www.amazon.com/Animal-Spirits-Psychology-Economy-Capitalism/dp/069114592X

There is a part of the economy that is driven by how people feel about the future. Yes, if companies start laying off droves of people reality will overcome any optimism created by things like this. But why do companies lay off people? Because sales are down. Not usually because they think sales might go down.


Thinking sales might go down reduces capital expenditures. We are already seeing that - companies have hired people to manage a increase in demand, but not increased capital improvements because they think things will turn for the worse.

nope there are plenty of systems that specifically take into account that people can sometimes fuck up, random things happen, people are irrational beings with animal spirits

https://www.amazon.com/Misbehaving-Behavioral-Economics-Richard-Thaler/dp/039335279X

https://www.amazon.com/Animal-Spirits-Psychology-Economy-Capitalism/dp/069114592X