Sunday, October 31, 2004

Interesting Bits in Keynes' General Theory, Part 2

The value of feedback:

This quote is from the preface. It occurs to me that all too often we fall into this trap, and that even administrations of the richest country in the world can fall into this trap.

"It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one’s ideas to a conclusive test either formal or experimental."

Saturday, October 30, 2004

Interesting bits in Keynes' General Theory, Part 1:

First things first: It's called the "General Theory" to distinguish it from the "Classical Theory."

Keynes thinks that the classical theory is only useful as a static theory: that is, it will work out the distribution of resources assuming that all of these resources are being fully employed.

"Fully employed" means that the economy is at the edge of the production possibilities frontier. It doesn't mean that there can be no further productivity gains if the frontier itself is expanded, for example by finding a way to make the labor market more flexible.

An economy is at full employment if the wage rate equals the marginal product of labor. That is, if the output generated by hiring the most recent worker is equal to his or her wage. At the same time, it must be the case that the wage equals the marginal disutility of labor. That is, that if you lower the wage just a tiny little bit, then workers are going to drop out of the labor force because it just isn't worth the trouble to show up at work.

I recently heard a quote from a physicist. It shows that physicists agree about at least one thing: the second law of thermodynamics.

"If someone points out to you that your pet theory of the universe is in disagreement with Maxwell's equations, then so much the worse for Maxwell's equations. And if your theory contradicts the facts, well, sometimes these experimentalists make mistakes. But if your theory is found to be against the Second Law of Thermodynamics, I can give you no hope; there is nothing for it but to collapse in deepest humiliation"---Arthur Eddington

I wonder if there is something like the second law of thermodynamics in economics.

I'll have to think about that. Perhaps I can be convinced that there is.

Government as a Joint-Stock Company

Here's a way to look at democracy. I'm lifting it from a question I heard somebody ask at a conference.

Why not think of voters as shareholders in a corporation? The corporation is the government, which has a monopoly over the provision of some public goods, such as defense, etc.

Votes are "shares" that are distributed equally among the eligible population, who choose the management of this corporation.

Update: I just found out from Chris Dillow that this is not really a new idea. Indeed John Stuart Mill made the analogy long ago...

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