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The Economics Reinvented Group.

They asked me for input, for which I am honored. I have some questions indicating I have not grasped what they are saying, and am hereby requesting clarification.  Quotes from anyone in italics, Smiling Dave in regular font.

1. Give & Take Economics redefines the model of how individuals make decisions. It replaces the idea that they solely balance external prices and quantities in a scarcity-driven trade-off with the notion that they make an internal psychological trade-off of how much cost they’ll bear to obtain benefit. On this intuitive foundation, decisions are modeled with a pragmatic Leaning X diagram. The theory goes much further however, to also redefine the way individuals interact with each other. It expands the classic supply and demand curves into give and take curves, which places all social agreements (including economic transactions), within this context of individuals mutually balancing personal total cost (PTC) and personal total benefit (PTB). [Source]

I’m not sure what exactly is new or different in their basic approach from that of AE [ = Austrian Economics]. Didn’t Mises already write that people act to better themselves, doing what they think will get the job done? Didn’t he already write that bettering yourself doesn’t have to mean have more money? Aren’t the concepts of opportunity cost and risk used all the time by Austrians?

2. This new framework has major implications. It makes equilibrium impossible and explains how booms/busts and fads/counter-fads occur—something that current theories can’t address.

I thought AE gives a very nice account of booms and busts. And their explanation is mysterious. All it says, as I grasp it, is that the lemmings decide to run in one direction, because they think they’ll make money, then decide to run in the other direction. I don’t see where there is any predictive value in this explanation.

AE, on the other hand, does predict business cycles, to a certain extent, in that it claims that whenever you get a huge increase in the money supply, a boom followed by a bust is sure to happen within a few years.

So my questions are, what do they see wrong with AE’s explanation? What is the predictive value of their explanation?

3. Rothbard critiqued this lemming theory long ago. May as well quote him, from America’s Great Depression:

Overoptimism and Overpessimism

Another popular theory attributes business cycles to alternating psychological waves of “overoptimism” and “overpessimism.” This view neglects the fact that the market is geared to reward correct forecasting and penalize poor forecasting. Entrepreneurs do not have to rely on their own psychology; they can always refer their actions to the objective tests of profit and loss. Profits indicate that their decisions have borne out well; losses indicate that they have made grave mistakes. These objective market tests check any psychological errors that may be made. Furthermore, the successful entrepreneurs on the market will be precisely those, over the years, who are best equipped to make correct forecasts and use good judgment in analyzing market conditions. Under these conditions, it is absurd to suppose that the entire mass of entrepreneurs will make such errors…The prevailing optimism is not the cause of the boom; it is the reflection of events [=money printing] that seem to offer boundless prosperity.

There is, furthermore, no reason for general overoptimism to shift suddenly to overpessimism; in fact, as Schumpeter has pointed out (and this was certainly true after 1929) businessmen usually persist in dogged and unwarranted optimism for quite a while after a depression breaks out.[30] Business psychology is, therefore, derivative from, rather than causal to, the objective business situation. 

My question is, how do they reply to Rothbard’s critique?

4. It also produces a powerful tool that we can use to immediately determine the effectiveness of policies and institutions—coupling analysis—based on the notion that most social problems result from social coordination failure, where PTB and PTC are decoupled across individuals and populations.

I agree with this. But isn’t it a well known concept, what economists call moral hazard? In short, if you are gambling with other people’s money, you will take wild risks. My question is, what is new here?

5. Decoupling results primarily when populations disengage enough to allow the formation of powerful intermediaries (including government and business); a situation that has resulted in our current strained models of capitalism, socialism and representative democracy.

Indeed, the problem with socialism and democracy is that you give one group control of another group’s money. But how did capitalism get in that list? And why do you say capitalism, aka a free market, is strained? If you hang around the msies.org website long enough, you’ll see how govt meddling [an unfree market] is the underlying cause of economic strains.

Summing up, I think these guys have their hearts in the right place. I think they do identify many problems the main stream pooh-poohs. They are not the guys you’ll see Smiling Dave attack mercilessly, like the many hacks and frauds that abound. But I do think their theory, and certainly all their conclusions that differ from AE’s, have some ‘splainin’ to do.


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