Bertrand Russell’s Teapot and His Misreading of George Berkeley’s Philosophy

I recently picked up Bertrand Russell’s History of Western Philosophy to have a look at the argument he makes against the philosophy of George Berkeley. Frankly, I have never liked Russell. He is a clear writer — and a convincing one — but a poor scholar. He also has a tendency to read his own biases into the works of others as being ‘mistakes’.

Most of what Russell does is that he assumes that his own Rationalist worldview is the correct one and then shows how other worldviews are ‘incorrect’ by the standards of his own worldview. I do not want to be misread here because I am the first person to criticise a worldview based on its inconsistency or its nonsensicalness. But I do recognise when another person is holding a worldview different to my own based on a principle which we disagree on as a matter of temperament but not as a matter of fact or logic. Russell does not or cannot do this; he is, in almost every respect, an intolerant thinker.

This is particularly clear in his criticisms against Berkeley. In what follows I will show how these criticisms not only completely misinterpret Berkeley’s intent but also chalk up the difference inherent in Berkeley’s worldview as a simple ‘logical error’ when it is, in fact, a deeply contentious issue that Russell cannot deal with because doing so would make him less sure of himself and undermine the platform of Truth on which he purports to stand.

Russell begins his criticisms of Berkeley by likening the latter’s claim that an object of the senses must exist in the mind,

Berkeley discusses the view that we must distinguish the act of perceiving from the object perceived, and that the former is mental while the latter is not. His argument against this view is obscure, and necessarily so, since, for one who believes in mental substance, as Berkeley does, there is no valid means of refuting it. He says: “That any immediate object of the senses should exist in an unthinking substance, or exterior to all minds, is in itself an evident contradiction.” There is here a fallacy, analogous to the following: “It is impossible for a nephew to exist without an uncle; now Mr. A is a nephew; therefore it is logically necessary for Mr. A to have an uncle.” It is, of course, logically necessary given that Mr. A is a nephew, but not from anything to be discovered by analysis of Mr. A. So, if something is an object of the senses, some mind is concerned with it; but it does not follow that the same thing could not have existed without being an object of the senses. (p593)

What Russell is saying is that Berkeley does not prove by showing that an object perceived is always an object of the senses that therefore it logically follows that this object could not exist without the senses. What Russell forgets to add, of course, is the empiricist thrust of Berkeley’s argument. Berkeley is convinced that we should only speak of things that we can actually experience. He claims that should we be allowed to speak too much in abstractions then we will quickly find ourselves talking nonsense. By these criteria it is silly to talk about an object sensed by no one because such a thing has never been experienced and cannot be inferred directly from experience. Properly speaking it cannot even be conceived of in the imagination — any time I try to imagine an object not being perceived I only come up with an image of myself perceiving this supposedly unperceived object.

Russell would not agree with this, of course. Being a good mathematician Russell is perfectly content to speak in abstractions — provided, of course, these abstractions don’t offend his militantly atheistic sensibilities. But this is a difference of temperament, not of logic. Berkeley insists that empiricism is the best means to avoid errors whereas Russell thinks that we can indeed speak in abstractions… even though he seems to decide somewhat arbitrarily which of these abstractions should be allowed and which should not. This becomes even clearer in the next passage.

There is a somewhat analogous fallacy as regards what is con­ceived. Hylas maintains that he can conceive a house which no one perceives, and which is not in any mind. Philonous retorts that whatever Hylas conceives is in his mind, so that the supposed house is, after all, mental. Hylas should have answered: “I do not mean that I have in mind the image of a house; when I say that I can conceive a house which no one perceives, what I really mean is that I can understand the proposition ‘there is a house which no one perceives,’-or, better still, ‘there is a house which no one either perceives or conceives.” This proposition is com­posed entirely of intelligible words, and the words are correctly put together. Whether the proposition is true or false, I do not know; but I am sure that it cannot be shown to be self-contra­dictory. Some closely similar propositions can be proved. For instance: the number of possible multiplications of two integers is infinite, therefore there are some that have never been thought of, Berkeley’s argument, if valid, would prove that this is impossible. (ibid)

Note the last example of the integers. Here Russell completely misrepresents Berkeley’s argument because he doesn’t understand it. Berkeley would not claims that the proposition “the number of possible multiplications of two integers is infinite” is “impossible”. Rather he would criticise it as being an abstraction. He would say, “Well, Bertrand, let’s be very clear here on what we are talking about. This notion of infinite, is it just a thought floating around your head or is it something that actually exists? And even if it is just a thought inside your head can you clearly conceive of it? Me, I cannot conceive of something called ‘infinity’. It seems to elude my conceptual abilities. So, I think that talking about it as anything other than an abstraction is silly.”

This is the thrust of Berkeley’s argument and, in fact, Russell makes identical arguments when he promotes atheism. Consider his famous statement on the teapot,

Many orthodox people speak as though it were the business of sceptics to disprove received dogmas rather than of dogmatists to prove them. This is, of course, a mistake. If I were to suggest that between the Earth and Mars there is a china teapot revolving about the sun in an elliptical orbit, nobody would be able to disprove my assertion provided I were careful to add that the teapot is too small to be revealed even by our most powerful telescopes. But if I were to go on to say that, since my assertion cannot be disproved, it is intolerable presumption on the part of human reason to doubt it, I should rightly be thought to be talking nonsense.

Well, it would seem to me that the teapot that is infinitely small is very similar to Russell’s notion of infinity, is it not? After all, neither I nor Russell nor Berkeley can conceive of this entity called infinity yet Russell seems to take it on faith that it exists somewhere ‘out there’. Russell’s notion of infinity is identical to the teapot in his atheism example. He assures us that this infinity exists but he implicitly claims that it can never be experienced — either in reality or in our imaginations.

Russell is intolerant because he is confused. His own zealous proclamations about religion can easily be applied to many of the mathematical and ontological ‘truths’ that he holds. And it was only by misreading the work of George Berkeley, which would have demonstrated this to Russell clearly had he managed to actually grasp the arguments, that he managed to hide this fact from himself.

Update: Here is Berkeley’s own response to Russell’s attack from the former’s A Treatise Concerning the Principles of Human Knowledge,

But, you will insist, what if I have no reason to believe the existence of Matter? what if I cannot assign any use to t or explain anything by it, or even conceive of what is meant by the word? yet still it is no contradiction to say that Matter exists, and that this Matter is in general a substance, or occasion of ideas; though indeed to go about to unfold the meaning or to adhere to any explication of those words may be attended with great difficulties. I answer, when words are used without a meaning, you may put them together as you please without danger of contradiction. You may say, for example, that twice two is equal to seven, so long as you declare you do not take the words of that proposition in their usual acceptation but for the marks of you know not what. (p75)

This is fantastic example of Russell’s own blindness. In thinking that those he disagrees with do not have answer for his criticisms because they were not thinking in the same advanced register as himself, he completely ignores that the thinker has actually anticipated his rather obvious criticism.

Comments on Feyerabend’s ‘Against Method’ II: Revolutions in Subjectivity

In my previous commentary on Feyerabend’s book I criticised him for being incoherent in his understanding of the relationship between the philosophy of science that he is actually expounding and his own philosophy which he thinks to be materialist but which is quite evidently not. In this commentary I seek to clarify what is actually taking place in the conceptual revolutions that Feyerabend documents in the book. He argues that these are revolutions in ‘language’ and ‘concepts’ but I think when they are examined closely it is obvious that they are rather revolutions in subjectivity.

In chapter 7 Feyerabend documents how Galileo overturns the contemporary arguments against the idea that the earth is in motion. Galileo’s detractors pointed out that if you drop a ball off a tower it will fall straight to the ground — we will find the ball directly underneath the spot from which it would be dropped. They said that if the earth was indeed moving then the ball should fall off to the side — that is, we would find the ball quite far off to the side from the point at which it was dropped.

Galileo retorted that this was poor reasoning. He asked his interlocutors to consider what might happen if we were in a moving vehicle and we dropped a ball (this is not actually his example but it will suffice). Obviously it would fall downward in the vehicle and end up directly underneath the point at which we dropped it. The same then must be true of the moving earth. The earth is then analogous to the moving vehicle.

Feyerabend recognises well that Galileo had completely disturbed how people conceptualised the world with this argument. He is absolutely correct in saying that despite Galileo’s reasoning being correct what he was saying begged an awful lot more questions than it answered. And he is also correct when he says that Galileo’s argument was one that he concocted almost entirely in his own imagination and was not at the time subject to ‘falsification’. But what I think Feyerabend misses is what is really going on here. And what is really going on is a revolution in subjectivity.

Galileo’s interlocutor at the time would have easily been able to conceive of a ball being dropped in a moving vehicle because he could imagine himself standing outside of such a moving vehicle and watching the momentum of the ball. It was not nearly so easy subjectively to put oneself in the position of an observer looking at the earth from the outside. Indeed, the only reason that Galileo and other scientists were able to make such an imaginary leap was because, in looking through their telescopes, they were able to conceive of points in distant space that conceptually someone else might look back upon them from.

What Galileo was asking of his readers was that they think at a higher level of abstraction than they were used to. The readers were, in the eyes of those at the time, being asked to put themselves in the position of a God that existed off of the earth itself. To Galileo and others who spent their time looking through telescopes this might not have been too much of a leap as they could conceptualise a point far away from the earth looking back upon it, but to everyone else at the time the only position which they might imagine off of the earth would have been the position of God. Thus what Galileo was asking for was, in fact, a revolution in subjectivity; a revolution in how people imagined that they were situated in space.

I fear that many readers will not really understand how fundamental this revolution was. In order to do so you really have to put yourself in the position of a person from Galileo’s time and appreciate that they organised their conception of space in an entirely different way. They stood on an unmoving landmass, above them stars that rotated around them and above and beyond this sat God watching over this tiny little universe which he had created especially for Man to inhabit. Galileo told them that is was the earth itself that was moving — and what’s more in doing so he asked them to engage in a thought experiment that forced his reader to imagine themselves occupying a position that was usually associated with God looking down upon the earth. In order to “get” Galileo the reader quite literally had to imagine themselves occupying the position of a God’s Eye view of the world.

While Feyerabend seems to me unable to quite express what is taking place here he nevertheless makes an effort when he writes,

Viewing natural phenomena in this way leads to a re-evaluation of all experience… it leads to the invention of a new kind of experience that is not only more sophisticated but also much more speculative than the experience of Aristotle or of common sense. (pp75-76 — Emphasis Original)

What Galileo kicked off was a tendency for thinkers to abstract at higher and higher levels — there thoughts becoming ever more speculative and detached from experience. People would eventually, with the onset of materialism in science proper, begin to conceive of their emotions and their very being as abstract objects existing in the world independently of themselves — a neuron here, a secretion of serotonin there. This would, as the Church recognised in Galileo’s time, eventually lead to a sort of naive atheism as people began to think that all possible points in space and time could, in their imaginations at least, be occupied by any individual. And indeed this ‘individual’ was now nothing but a bundle of genes passive in the face of a deterministic Science (a ‘dividual’, rather than an ‘individual’, perhaps?). Thus there became nowhere left for God to reside as everything was already revealed in peoples’ now highly abstracted imaginations.

Today, however, these abstractions have congealed into a dogma of their own. People accept the often inconsistent and fantastic propositions that scientists put forward based purely on the authority and supposed wisdom of said scientists. Some of these propositions are just as bizarre and run just as counter to experience as any miracle that the Medieval Church might have come up with but just like with those old miracles such counter-intuitive claims lend Science an aura and mystique that solidify its authority over the minds of men. While many of the more fantastic claims of Science today are likely exaggerated — perhaps they are simply material for science fiction writers — people nevertheless defer to them without understanding them.

Meanwhile, at a lower level of discourse, haphazard statistical studies are pumped out for mass consumption. These tell people either titillating pseudo-facts such as that drinking alcohol makes you more conservative or platitudes about the differing opinions that men and women have toward sex. Others hint at the ‘fact’ that becoming vegetarian will enhance your sex life while still others — those on the more outlandish and highly methodologically suspect end of the scale — tell us that legalising pornography will lower sexual violence.

These are truly the folklore of today and when you scratch the surface of most of these studies, with their dubious deriving of effect from what often seems an a priori or pre-determined cause, most of them turn out to be no more sophisticated than the folklore of old — and there can be no doubt that they serve the same anthropological purpose. All this can be chalked up to harmless fun, however, with a wink and a nod toward the perpetual presence of human folly perpetuated by men in lab coats in a supposedly enlightened age.

Even more dangerously, however, people confer this same authority and prestige on certain groups of social scientists who actually influence political issues of the day and help shape policy — most notably economists. These people then construct the most absurd and perverse conceptual systems imaginable and foist them on governments as a series of rules by which we should live our lives. That is how today, running directly from the abstractions of Galileo, the light that Science once shone upon the world from high in the heavens is now creating shadows everywhere. And it remains to be seen whether these abstractions — now reified and imbued with what has become a power that is not allowed be questioned — will usher in another Dark Age.

Addendum: A commenter on Facebook has asked me to clarify what I meant when I spoke about the more fantastic aspects of science that I thought bizarre and similar to mystical explanations given by the Church. Here I will give one example: the “multiverse” or the idea that many parallel universes exist. This seems to me far too speculative to be anything more than science fiction. Here is a nice quote from the physicist Paul Davies who raises similar epistemological objections as I might,

For a start, how is the existence of the other universes to be tested? To be sure, all cosmologists accept that there are some regions of the universe that lie beyond the reach of our telescopes, but somewhere on the slippery slope between that and the idea that there are an infinite number of universes, credibility reaches a limit. As one slips down that slope, more and more must be accepted on faith, and less and less is open to scientific verification. Extreme multiverse explanations are therefore reminiscent of theological discussions. Indeed, invoking an infinity of unseen universes to explain the unusual features of the one we do see is just as ad hoc as invoking an unseen Creator. The multiverse theory may be dressed up in scientific language, but in essence it requires the same leap of faith. (My Emphasis)

Comments on Feyerabend’s ‘Against Method’ I: Real Materialism Versus Marxian Materialism

I am currently rereading Paul Feyerabend’s excellent book Against Method. It’s a very good book and I find myself in agreement with an awful lot that is in it. I have noted, however, that the argument suffers in some places because of the author’s lack of concern about rigour.

In fact this is a constant problem in the book and it stems from the manner in which the author thinks. Feyerabend insists that empiricism as commonly understood is wrong. In a watered-down version of empiricism we must test theories against facts and if the facts refute them then we must throw away the theory. In plain empiricism then, the facts come first.

For Feyerabend, however, science often proceeds by making bold assertions that are only really proved after the fact. He thinks that the main process involved in scientific discovery is what we might refer to as ‘play’ — that is, the play of ideas, concepts and theories against themselves until a new constellation of thought emerges. I very much so agree with this approach but as I said it does lead to the risk that one might lose rigour. It also opens the way for people to somewhat arbitrarily push theories that are incoherent in the hope that they will someday be supported by some mixture of empirical relevance and consensus.

Feyerabend articulates in the third chapter what might be called the ‘paradox of dogmatic empiricism’. He makes the case that theories often generate their own facts — or, to put that differently, that certain new facts cannot be discovered without changing one’s theoretical apparatus. As I have written on this blog before I entirely agree with this assessment.

But such a view leads to the conclusion that it is perceptions that are primary. What I mean by that is something like “truth is in the eye of the beholder”. It is only by looking at something in a particular way that the relevant facts can be illuminated. That seems to imply either one of two things: (i) that there exists no real ‘material’ or ‘external’ world at all and that to be is to be perceived, this is the radical idealist position or (ii) that the ‘material’ or ‘external’ world is dependent on some ‘spiritual’ or ‘internal’ world, this is the dualist or rationalist position.

To be absolutely clear in what I am saying, Feyerabend’s argument implies that our theoretical preconceptions are like spotlights illuminating certain parts of our reality. But this must mean that they have a primacy — either they are all that really exists (radical idealism) or they are primary in relation to some external, material world (dualism/rationalism).

Later in the book, however, in chapter 12 Feyerabend appears to try to use his argument to justify a materialist position which he himself seems to hold. But if such a materialist position is indeed true then how on earth can our perceptions — that is, the theoretical ‘filters’ that we apply — matter at all? Surely, if all that IS is immediately given to us in the form of material reality and our consciousness is simply an outcome of material interactions — i.e. it does not play an active role in the world — then Feyerabend’s idea that theories have primacy over facts is wrong.

The reason for this confusion, I think, is because ‘materialism’ means two different things today. The first meaning — which is the correct meaning — is the materialism of the mechanists. I think here of the likes of Richard Dawkins, the biological determinists and the neuropsychologists. In times past we might have also referred to their cousins, the eugenicists and the phrenologists. This is true materialism as it holds that consciousness is wholly the product of physical forces that operate outside of our control. This is the materialism that George Berkeley was arguing against in the 18th century when he first proposed radical idealism.

The second meaning is what might be referred to as ‘Marxian materialism’. This, I think, is what Feyerabend has in mind in chapter 12. The problem is that Marxian materialism is not really materialism at all. It is a hodge podge of half-understood idealism and assertions about the nature of society. In actual materialism consciousness is subordinate to external physical forces — i.e. we live in a determinate universe. But in Marxian materialism consciousness — class consciousness — is THE activist force in history and can be shaped by the revolutionary vanguard.

One can find this in all the Marxian literature, from Lukacs to Althusser. The concern is always with ‘ideology’, ‘class consciousness’ and so forth. But a true materialist would laugh at this. “Consciousness,” they would say, “is simply a product of genetic traits, it does not play an active role in history. We are all just machines subject to physical laws. It really doesn’t matter much what we think. This is, after all, just an outcome of the movements of atoms and so forth.”

In Marxian materialism, on the other hand, consciousness is assumed to play an activist role. “Men make their own history…” Marx writes at one point. But if this is true then Men cannot be wholly subject to a material reality outside of themselves. The Marxian will then typically respond “ah, you have misread your Marx…” (a typical refrain) “…his was a dialectical materialism, it took account of the interaction between consciousness and material reality in the form of the dialectic.” Well in that case it is not materialism at all. Indeed, it would be more accurately classified as “dialectical dualism” as it reconises two substances that are dialectically intertwined — that is, Consciousness/Spirit and Matter.

These mistakes plague philosophy today and they arise, as I have insisted before, because people do not understand the debate between George Berkeley and the materialists/dualists. Since that time idealism has become synonymous with the abstractionism of Hegel, when it was an anti-abstractionist philosophy in Berkeley, and materialism has become an empty signifier meaning anything and everything.

Thus it is that self-proclaimed materialists organise conferences on consciousness and socially constructed realities while not seeing that in actual materialism, to paraphrase Thatcher, there is no society because there are no emergent properties. There are only atoms and genes swirling around in a pre-determined vortex over which Man has no control.

OMG Tapering!

Well, it seems that the Fed has finally decided to initiate the much talked about ‘taper’ of the QE program. The proposed taper will wind down asset purchases by $10bn a month. That means that they won’t actually stop or reverse purchases, rather they will just slow the rate at which they make said purchases.

For those who don’t follow the financial news tapering has been talked about on literally a daily basis in the press. And yet it is widely assumed to make no difference to most markets, as can be seen by the stock market rally that accompanied the Fed’s announcement.

There are two things that are particularly odd about all the tapering talk — two things that are tied up with one another. The first is that there is talk at all. If tapering evidently makes rather little difference to the markets and the economy then why do the press and financial analysts talk about it endlessly? The answer to this is rather simple: it is the nature of the press and wider society to talk about people and institutions that are perceived to wield power.

Human beings have a fascination with power, prestige and hierarchy. People basically exist within a system of symbols and these symbols are hierarchically organised — these symbols may be rather obvious, as in the case of the King’s throne and crown, or they may be more subtle, as in the case of Bernanke’s ‘Chairman’ title, but no matter what form they take they always operate in the same fashion.

The people living in such symbolic systems must reinforce them by constantly introducing and reintroducing them in day-to-day discourse; if the King’s subjects stopped talking about the King he would lose his power rather quickly. Authority must be given constant support in and through daily discourse. The Marxist philosopher Louis Althusser claimed that Blaise Pascal once said of religious belief: “Kneel down, move your lips in prayer, and you will believe”. I have never been able to source this quote but regardless of whether Pascal said it or not the logic is perfectly true. It is through the perpetuation of the discourse of power and authority that power and authority are enforced and reinforced.

Our modern day press basically functions in the same way; to a very large extent the press is an institution that reinforces the power dynamics of broader society by constantly introducing and reintroducing the names and titles of those in power. This is why, for example, politicians can basically make stuff up and the press will report it in an acritical way: such statements are not subject to verification because they have a different ‘truth value’ to normal statements in that it is their very utterance from a position of authority that lends them weight.

The second thing that was rather odd about all the tapering talk was the constant reference to the supposed fact that it had never been done before, that we were entering uncharted waters and that it was hard to predict what effect such tapering might have. This was just complete and utter rubbish.

In actual fact, as I noted on FT Alphaville back in April, a far more extreme version of tapering was undertaken by the Japanese central bank (JCB) in early 2006. In this period the central bank didn’t just slow the rate of purchases as the Fed are now doing but instead shrank their balance sheet. And what were the effects? I cannot find any serious effects in the data.

As I noted in that post there was no obvious correlation between QE and inflation or the exchange rate or GDP growth. The shrinking of the JCB’s balance sheet also appears to have had no effect on the stock market which continued to rally until the onset of the financial crisis in late-2007/early-2008.

So, why is no one reporting on this? Surely this should be a worthy news item. Given that barrels upon barrels of ink that are expended daily reflecting on the significance of the taper surely the press should be interested in considering a far more substantial move away from QE. Not really. That would be the equivalent of revealing that the emperor has no clothes.

Imagine if every day Bernanke was asked by the press something like: “Chairman, the Japanese central bank reversed their QE program in 2005-2006 and it appears not to have had very much effect on the economy or the market. Isn’t it reasonable to assume that your far less substantial tapering program will not make any difference?” Bernanke, being a rational person, would have to agree and this would then shut down the whole dog and pony show. The press would have nothing to report on, the power structure would not be reinforced and the tedious chatter that constitutes the markets would crawl to a stop.

It’s not just that power and hierarchy are reliant upon discourse but also that discourse is reliant upon power and hierarchy. Without power and hierarchy people would have to think for themselves — a terrifying prospect. It’s far, far easier for people to fall back on handed down truths — even if these handed down truths are not truths in the factual sense. As a wise man once said: “Welcome to the human race.”

The Theory of the Monetary Circuit: A Critique

In a series of comments on my previous post involving myself, Neil Wilson and Oliver it became clear quite quickly how closely my asset-pricing framework is tied up with the Post-Keynesian theory of endogenous money. Oliver suggested that I look into the Theory of Monetary Emissions (TME) — a forerunner of the modern ‘Circuitist school’ of monetary theory. In this post I consider how and why my approach differs from the Circuitist theory through a reading of Sergio Rossi’s excellent paper The Theory of Monetary Emissions which can be found in A Handbook of Alternative Monetary Economics.

I will not here deal with the theory of the monetary circuit itself. It is, in all respects, basically identical to the Post-Keynesian theory of endogenous money and can be summarised aptly in the phrase: loans create deposits. Where it departs from the latter is, and this will prove important in what follows, in its tendency to think primarily in terms of models — a tendency which readers of this blog will know I find objectionable. For me good theory starts from the ground up and the desire to build little models should take a back seat.

The first place in which my approach and the TME differ is in what we count as ‘income’. In the TME, as in the national accounts, ‘income’ is only the income that arises out of real production. Rossi cites Cencini in this regard,

[T]hrough the payment of wages, money and output meet, fusing in a unique object called ‘income’. By putting money and output together, money acquires a real content [hence value], and output is given a monetary form. In other words, money measures (numerically) goods, and goods define the real content of money. (p124)

I should also note that I don’t really like the Marxist or even Hegelian overtones that sometimes appear in Circuitist theory. Phrases like ‘the real content of money’ strike me as being far too metaphysical and should, I think, be abandoned. Such observations will tie in later on when I discuss my project as being to establish a general theory that can be ‘plugged in’ to basically any other theory.

Anyway, that aside, it is clear that my definition of income differs from the TME definition. In my framework I discuss two different concepts: real income/savings/investment and financial income/savings/investment. The former bears an identical definition that the Cirtcuitists and the national accounts hold to — namely, money spent into circulation that contribute to real production/output/aggregate demand. The latter, however, is that money which is spent into circulation merely to engage in the exchange of financial assets and thus drive their price.

Financial income can, of course, have effects on real income. If I buy a portfolio of shares this year worth $10,000 and sell them next year for $20,000 my purchasing power has increased by $10,000 which it would otherwise have not. My consumption will likely rise too; in economics this is called the ‘wealth effect’. The reason that I refer to this as income is because, for all intents and purposes, it is. The $10,000 I make in capital gains is no less or more income to me than the $50,000 I make in the same year in the form of a salary.

I really see no reason for not referring to it as income. Certainly I see good reason for not counting this capital gains as part of output — otherwise stock market rallies would directly increase GDP which would be absurd. But I think to pretend that this is not income of some form is a bit silly. It clearly is income and we can make this point without counting capital gains as part of GDP; that is, we can do this by counting my original purchase of the shares as financial investment (If) and the money I accrue from the sale of the shares the next year as financial savings (Sf) and then we distinguish these from real savings and investment (Sr and Ir, respectively).

This provides us with a much ‘cleaner’ framework in that we can use many of the old national income identities in a slightly modified but ultimately familiar way. So, for example, total income in a given period will be both financial and real investment plus consumption,

But real income — that is, output/GDP — will only be real investment plus consumption,

Now, the second place where the TME and I substantially disagree is how we conceptualise price changes. For the TME inflation and, one would conclude, asset price inflation are ‘pathological’ phenomena. Again, this reeks of metaphysics to me. What on earth do the TME adherents mean by ‘pathological’? After all, some inflation may be a good thing in a capitalist economy for any number of reasons. And it is not at all clear that changes in asset-prices are inherently pathological — indeed, I would argue to the contrary: they are an ever-present and extremely important aspect of a functioning capitalist economy even though they can get out of hand from time to time.

The Wikipedia article on ‘Quantum Economics’, another name for TME, sums up this metaphysical view of inflation nicely,

Inflation is the situation where global demand numerically exceeds global supply. This situation is at odds with the logical quantum identity between demand and supply – inflation is pathological. To have inflation there must be some money devoid of purchasing power, which quantum economists call empty money, that increases or inflates global demand only numerically without altering the substantial identity between D and S.

What the TME really mean by ‘pathological’ is, so far as I can see, what many economists who, to my mind, have taken a wayward path mean by ‘pathological’; that is, something like “a phenomenon that does not fit neatly into my theoretical framework”.  To me this is a very wrong-headed approach to good theorising and reminds me of what the German philosopher Theodor Adorno said of the error of a priorism in contemporary philosophy when he wrote in his Aesthetic Theory,

It is no accidental failing on the part of individual thinkers… that today philosophical interpretations… fail to penetrate the construction of the material to be interpreted and instead prefer to work them up as an arena for philosophical theses: Applied philosophy, a priori fatal, reads out of material that it has invested with an air of concretion nothing but its own theses. (pp446-447)

This seems to me precisely what the TME adherents do when they consider price changes to be ‘pathological’ when they are, in fact, absolutely essential aspects of any capitalist economy. What the TME adherents are doing is sneaking normative judgments in through the backdoor and proclaiming: “capitalist economies should function as our models says they should function and anything that doesn’t fit in the model is a pathology”. As Adorno wrote, this “reads out of material that it has invested with an air of concretion nothing but its own theses”.

Indeed, one might say that the TME falls somewhere close to the old natural rate of interest theory or Austrian business-cycle theory in that they seem to imply that ‘bad’ credit expansion that does not increase ‘real production’ will result in some sort of inflationary chaos that disturbs what would otherwise be a perfectly balanced system. That perfectly balanced system, I would say, only exists in their own imaginations.

In my framework asset-price changes — and that includes demand-pull inflation which is effectively just a higher bid for a good or service — are perfectly non-pathological. Yes, they may do damage to the system as a whole when taken in the context of a given economic constellation, but they may also provide the system with increased growth potential, for example, or better income distribution. It all depends. We cannot make an a priori judgement about such issues based on simplistic models as the TME adherents do. Rather we must understand the phenomena in as clear a manner as possible and then use this understanding in a pragmatic manner whenever we encounter such issues in reality. This, again, is why I refer to my theory as a general theory — and this is why the reader will find it devoid of normative and metaphysical language.

Laying a Solid Foundation for My Theory of Asset-Pricing

In the comments my previous post concerning my theory of asset prices – comments that have, I should add, been extremely productive so far – Nick Edmonds raised some questions as to whether I was dealing with stocks and flows. After a bit of back and forth I realised that what we were dealing with touched on some of the fundamental problems that I noticed with my theory just prior to publication. Therefore, in this post I am going to lay out in very clear terms exactly what we are dealing with and then briefly consider what implications this slightly altered approach has for one of my key conclusions – namely, what I have termed ‘the paradox of speculative profits’.

First and foremost there was some confusion about what I meant by ‘financial saving’ in the paper. I’ve decided that the best way to approach this is to work with my original intuition: financial saving will be any income accrued through the sale of financial assets. As the original paper already stated (note that government includes the central bank here),

What that means is that if I, say, take out a loan of $100 and buy $100 worth of assets from you my investment causes an equivalent rise in your savings. The same is the case for government purchases of financial assets and any taxes levied on these assets. All this is basically identical to the typical Keynesian macro-aggregate identity. Are we talking about stocks or flows? Well, we can talk about either so far as I can see.

So, how might we calculate this build-up in financial savings? Well, let’s take it from a stock point-of-view. Let’s also pretend that all assets are bought using borrowed money to avoid the problems that arise from buying assets using already existing savings. We can put down a simple formula to calculate this (note that for the rest of this post I will ignore the government side to avoid complications)**.

What that means is that financial savings/investment is equal to the sum of all realised bid prices. In order to conceptualise this it is probably best to give an example. Imagine that in a given period we have three distinct bids for an asset. These run as follows,

What this means is that there was three distinct sales of a financial asset in our imagined economy – it doesn’t matter whether this was three sales of the same asset or three sales of different assets of the same type. The sum of all these realised bids will be the amount of financial savings/investment in our economy; in this case, $330.

Now, there is also a different variable that we must consider to fully understand the dynamics here: namely, the final value of the asset in the final period. As Ramanan pointed out in the last post’s comments, this is something like the capital gains from a rise in the price of an asset. At the end of our period it is clear that the asset has risen from $100 to $120. The end value of all assets – i.e. the rise in capital gains – will be the number of assets outstanding times the final realised bid price. Or,

Let us imagine now that in our hypothetical economy there were only three of the asset in question. That means that the total end period value will be $120 times 3 or $360. This, again, is a final stock measure.

Now, how does this relate to my theory? Well, it should be clear that the final realised bid price in a given period is equal to the price level generally. So, we can now convert what we have laid out into the language of my article (note that I am dropping the small delta elasticity variable and no longer equating price with financial savings/investment – this relates to the flaws I pointed out in my original post),

We already know, of course, what the formula for this price on the demand side is. So, we can now put this in here (note that I am introducing time periods to make the exposition clearer),

While this is certainly a fairly substantial revision of the theory – one, in part, that I had been considering when I published the paper – most of the results obtained in the original still hold, albeit in a modified form. The paradox of speculative profits, for example, will now be dependent on the price expectations that each investor had at each successful bid. Thus, in contrast to how I originally formulated the theory, there will no longer be an aggregate of “average expectations” and so forth. Rather, each successful bid will have its own specified version of equation 1.5. I will discuss this in more detail in a forthcoming post.

While I think the above framework is much clearer and consistent than what I originally laid out and also avoids the problems that I noted when I published the paper it is by no means complete. The other variables – taking account of supply-side effects and ‘real’ demand-side effects for ‘impure assets’ – must be added in and I am still working out how to do this properly. The above, however, provides a firmer base from which to do it.

Comments welcome, as always. They were rather helpful in forcing me to write out the above in detail. I appreciate that as, until now, I have been working on this completely on my own and while I think I have most of the intuitive problems solved formalising these is very difficult to do without the criticism that spurs clarification and the illumination of errors.

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**Apologies in advance for any poor use of algebra. Input welcome on this front.

Changes Versus Levels in My Asset Pricing Theory

In my previous post a commenter, ivansml, made a point about one of the first equations in my paper. He was discussing the following equation,

Ivansml pointed out that this was problematic because in order for the change in price — Pft – pft-1 — to be negative, expenditure — Eft — had to be negative, which is nonsensical. He is quite correct. After a bit of back and forth I think we realised what the problem here is: I’m confusing levels and changes.

The correct equation for the price change would be as follows,

Or, more simply,

This makes the equations that follow make far more sense, as we convert the change in expenditure into changes in price expectations. This does raise the issue that when I introduce my supply-side and ‘real’ demand-side variables these should also probably be expressed as changes. I will consider this when I try to alter these in line with the self-criticisms laid out in my previous post.

Robert Shiller’s ‘National Equity’ Program: Upsides and Downsides

Two years ago Robert Shiller wrote an interesting proposal for countries to replace their national shares with national equity. He’s not the first to float such an idea. On the economics groups that I’m a part of I’ve seen such a proposal more than once.

On the one hand I like the idea. On the other I think there are serious problems. I like the idea because it might change the way that government spending is perceived. If a government issued equity rather than debt there would be an immediate reframing of the implications of their spending beyond their current revenues — after all, who has ever got upset that a solid company issued too much debt.

I also very much so like the automatic adjustment mechanism that Shiller talks about when he says that dividends on such shares should be a function of outstanding GDP (note that he calls such shares ‘trills’),

Speaking of Greece, what effect could Trills have had during the Great Recession and its aftermath? Greece’s real GDP fell 7.4% in 2010. If its Trills were leveraged substantially—say, five to one—then the dividend paid on them would have fallen by about 40%. This would have done much to mitigate the crisis, making it easier for Greek taxpayers to bear. It would have given Greece a bailout without any international hand-wringing or broken promises.

So, what are the problems? Well, Shiller himself hints at one but doesn’t follow it through. He writes,

If international investors ever acquired a good fraction of a country’s corporate shares, the country would have an incentive to raise the corporate profits tax on those shares or regulate them to lessen their value.

Actually I think Shiller misses a key difference between the difference of the nature of equity and debt here: if I own, say, 20% of a company’s shares, I own 20% of their company. This is not the case with debt. If a single company acquires a large amount of a country’s ‘trills’ then it would have a substantial ownership of that country. What we are talking about here is giving private individuals and corporations the option of buying countries.

To my mind this is an extremely dangerous concept. This would mean that very wealthy individuals or large corporations could, for example, buy up a majority share position in a small country. It would then possess ‘voting rights’ in making decisions about that country’s future. I don’t think I need to spell this out to anyone why this might be a very dangerous concept.

My other problem with Shiller’s proposal is that, while I think it looks nice in retrospect, it can’t really solve our current problems. If, for example, Greece issued national shares right now the price of these would crash when they hit the market. Just issuing shares alone will not restore confidence in a country’s ability to service its payments — whether these be interest payments or dividend repayments.

Considerations of the Relationship Between Price Elasticities and Expectations in Price Formation

As I have already written in my introduction just after I had sent off the final draft of my paper I noticed a rather glaring error. This error can be best understood by comparing equation 1.10 and equation 2.10 from my paper both of which I shall reproduce here. (Note that a guide to the algebraic terms used can be found at the very beginning of my paper).

Note that equation 1.10 represents how the price of what I call in the paper a ‘pure’ financial asset — say, a company bond — is set, while equation 2.10 represents how the price of what I call in the paper an ‘impure asset’ — that is, one that has a financial and a real component (say, oil or gold) — is set. The difference is rather obvious. In equation 1.10 all that matters is (a) the price expectations variable in its complete form, that is the series of variables in the middle of the right-hand side of the equation and (b) the supply variable in its complete form, that is the series of variables at the very end of the equation. The intuitive meaning of this is that the price of a pure financial is set only based on expectations and increases or decreases of a supply of this asset.

Equation 2.10 tells a different story. First of all, we have two expectation terms. The first is the same as the one found in equation 1.10. This denotes the amount by which investors think that the price will rise purely due to financial considerations. So, let’s say that there a large group of speculators who think that gold is going to rise in price as people become more anxious about central bank actions. This will be reflected in this term. The second term, however, refers to the extent to which investors think that the price will rise due to real market considerations. So, let’s say that there a group of speculators that think that the real demand for gold is going to increase because a new technology has emerged in some line of production that requires gold to work or, alternatively, say that gold is becoming more fashionable in the jewelery market.

In reality, these two terms have a great deal of overlap. Imagine, for example, that the demand for gold increases suddenly in India because of fears of inflation. Generally we would tend to attribute this increase in demand to the financial component of our equation. In India, however, while gold is used as a store of value the manner in which this is done is cultural — brides, for example, are endowed with gold jewelery as part of their dowry. But the distinction between whether the jewelery is thought of as an asset and whether it is thought of as a decorative product is murky to say the least. As The Jewelery Company website notes,

Gold jewellery is simultaneously a status symbol and instrument of adornment as well as an investment.

I think, however, that despite these complications it is didactically useful to separate notionally financial demand from real demand. It allows us to conceive of the fact that markets for ‘impure assets’ are part determined by what investors think is taking place on the financial side of the market and part determined by what is taking place on the real side.

The real problem that I discovered, however, is in the price elasticity terms that are used in these equations as represented by the lower-case delta (the Greek letter that looks like a small ‘d’). What do these terms mean? Well, think about it this way: if 100 new assets are introduced in a market in which the price is $100 per asset what effect does this have on the price? This will depend on a number of different factors such as the stock of assets outstanding in the market at any given point in time and the effect this introduction of new assets has on expectations.

So, we include a price elasticity term. Let’s say that the introduction of 100 new assets onto the market — which will be represented in the equation as setting the qZ term to 100 — has the effect of decreasing the price by $10. We can then set the price elasticity term at 0.1 and we will get precisely this outcome.

The problem here is twofold and interrelated. First of all, the price elasticity term does not work in the same way for the price expectations variables — that is, the variables denoted by Pes — as it does for quantity variables like qZ. This is because price expectations variables are self-fulfilling. If the market thinks that the price is going to rise by 20%, given a few qualifications regarding market confidence and profit expectations, the market will basically rise by 20% as investors pile in. Whereas in the case of quantity a certain amount of an asset is created or destroyed and the price effect responds to this creation or destruction. We might say, then, that the price expectations variables are active while the quantity variables are  passive.

Secondly, the price elasticity term is actually intimately tied up with the confidence term, which is represented in the equation by the small-case Greek letter gamma which looks like a small-case y. As I just said the amount by which a market price will respond to an increase/decrease in the quantity of an asset will depend on how this increase/decrease affects expectations. This means that there is a relationship between the confidence term and the price elasticity term.

This does not, however, mean that they are identical. The price elasticity term is an outcome of the confidence term, but the confidence term is not fully determined by the price elasticity term. Intuitively this is because there are things that can affect confidence that have nothing to do with increases and decreases in the quantity of an asset. A company, for example, might increase their amount of shares outstanding substantially but because investors expect that this company is going to use the funds for what appears to be an investment drive with great potential expectations may be positively reinforced by this increase in share issuance, thus not only offsetting the quantity increase but even causing the price to rise.

My mistake was to include the price elasticity term in the components of the equation that deal with price elasticities. In actual fact, the price elasticity term should only be included where expectations are not playing a role; that is, it should only be included in the last two components of equation 2.10 — those which deal with quantity supplied and real quantity demanded respectively.

This, however, leads to a further problem. Namely that these two variables cannot really affect the market price in the case of pure and impure assets until the following period unless they outweigh the speculative effects caused by the price expectations term. Put simply: in any given period it does not matter how much real supply and demand increase or decrease, rather all that matters is expectations unless the real supply and demand outstrip the speculative activity brought about by the expectations. Expectations, in a sense, ‘override’ real considerations unless these real considerations outweigh the expectations; so, even if the market is suddenly flooded with an asset its price will still rise if investors think that it will rise. It is only in the next period that these increases or decreases have any real effect on the price and this is only insofar as they affect expectations.

In a sense my equations were not radical enough. I was still working on the assumption that real supply and demand actually had a first order effect on price. But it is now clear to me that they usually only have a second order effect — i.e. they can only effect price by way of the effect they have on expectations. In order to deal with this we have to set a lag on these variables and then tie them to the price expectation variables in the period that follows them. But I think that this post is long enough, so I will save that for another day. The more I think about it, the more complicated it becomes to represent these dynamics in a neat manner.

John Carney’s Jobs Proposal: Cutting Satire or Accidental Self-Parody?

What is the essence of parody? The dictionary defines it as,

an imitation of the style of a particular writer, artist, or genre with deliberate exaggeration for comic effect

But definitions aside, I think that everyone knows a parody when they see one… right? Parodies are usually undertaken to mock those you disagree with. But what about when something looks like a parody, feels like a parody but actually might not be a parody at all? Well, that’s usually referred to as an ‘accidental self-parody’.

I came across one such accidental self-parody today in the field of economics. Last year John Carney — a strange conservative supporter of MMT that works at CNBC — published a piece called A Modest Job Guarantee Proposal: Domestic Servant Subsidies.

The title, of course, mimics one of the most famous political-economic satires of all time — namely Jonathan Swift’s A Modest Proposal for Preventing the Children of Poor People From Being a Burthen to Their Parents or Country, and for Making Them Beneficial to the Publick which is more typically known as A Modest Proposal. The famous work is a parody of some of the tracts that mean-spirited ‘reformers’ of the day were publishing and in it Swift suggested that poor Irish children should be taken from their parents, because they cost too much to feed, and be prepared as food for the well-off.

Carney’s title seems to echo this. As Wikipedia states,

In English writing, the phrase “a modest proposal” is now conventionally an allusion to this style of straight-faced satire.

But if you read Carney’s article it is clear that it is not a satire at all. Indeed, he is absolutely serious about trying to get the unemployed to clean his dishes for him as part of government policy. He is not joking — he is not mocking the insular, selfish conservative who lacks empathy and thinks that others are only there as a convenience for themselves — no he really thinks that this is a viable idea. He thinks that it would avoid the problems of centralisation inherent in the Job Guarantee — although one wonders why domestic service came to Carney’s mind, why not give tax breaks to people to donate to the arts, for example… is it because Carney had to put on the washing before sitting down to write his piece?

Carney also engages in that same conservative trope that is often wheeled out to justify nonsense,

No doubt some will object to using domestic service as a buffer stock economic stabilizer, on the grounds that it would be demeaning to workers. But this only displays a prejudice against domestic service on the part of those raising the objection. In reality, there is a long and dignified history of domestic service that demonstrates such positions need not be demeaning.

This is a funny argument and you can replace “domestic servant” with all sorts of different jobs to achieve the same rhetorical effect — “sex worker”, “pornographer” and so on. The point is not that we are judging those who choose to do these jobs, rather we are judging whether the government should have a mandate to encourage employment in this particular sector.

The question raised by a program that is being put in place by a democratically elected government is this: since we are providing a massive incentive for unemployed people to do a given job is the best we can do to get them to clean Carney’s dishes for him? Is the US government really just an entity that exists to ensure that Carney doesn’t have to do his own washing?

And now we’re back to the question of parody. Is Carney’s piece a parody? If we assume some education and literacy on the part of the author the title indicates that it is — i.e. if Carney was self-conscious in his use of the term ‘modest proposal’ and did not just think the phrase vaguely literary so he threw it in to lend writerly weight to his piece. The content seems to me rather satirical too. But I fear that it is not, in fact, a parody at all. It is, as I intimated earlier, an accidental self-parody.

My sympathy here, I suppose, falls with the American satirists. They must have a terribly hard time. Perhaps it is these hard-working people, starved of material by the likes of Carney, that deserve to be compensated with our tax credits. And with that, I redirect the reader once again to a non-satirical program which uses tax-credits to get the unemployed back to work.