PERSON Person 2 1
Person 3

The diagram above shows a simplification of people giving money to one another (given by the direction of the arrows) where person 1 gives money to person 2 who gives money to person 3 who then gives to person 1 again, and so on. In the presence of feedback in the system (where everyone buys goods from each other) we believe that there is this central abstract mechanism at work. Formulation of a network of people who give money to each other by way of a transformation matrix which gives the percentage of money that each person gives to each other in the elements of the matrix leads one to confirm that this structure is likely to be a realistic mapping of model to reality. This system can be considered as a iterative map:

Y(3)= aY(2) = aY(1) : time=1

Where Y(x) is the income of the x^th person in the network and a is an assumed equal proportion of income that is given to the next person. If a is greater than 1, in other words more money is given each time than the initial income then there is an ever increasing tendency to the network. Such an example is where there is debt allowed in the system, whereby a person spends more than their income by borrowing. Where a is less than 1, i.e. where there is saving, then this economy eventual grinds to a halt as less and less money is transferred each time.

Putting Y(3) in terms of Y(1) we see the simple result:

 

Y(3) = a²Y(1)

Thus as time passes the rate of increase of the system where a is greater than 1 is increasing (since the derivative of the equation is greater than 1). Thus this system has a tendency to boom because of feedback. In the presence of debt there comes a time in the economic cycle where the debt repayments come to reduce the value of a, thus the system then suffers falls in money flow, thus a recession.

Economists have long accepted that their analysis is not perfectly real, but their most common refrain is that this is because there is nothing better to replace it with. Here we see that we can certainly find insight from developing analysis of real mechanisms that are generated from the pervasive structures of the reality. If we get the structure correct, both in terms of mapping reality into abstraction and then mapping abstraction back to reality, then we see from this example that there is a realistic hope that such a research strategy could be fruitful. We do however, need to develop the basic research, the conceptual categories that we define to allow us to talk. Without language one cannot discuss reality.

We need to talk about the structure that generates processes to understand where to begin in our analysis. A complex is a set of interacting agents in a system which gives rise to processes though not exclusively. No individual agent has control of the results of the complex, they may even know these effects, they may even suffer because of it. Yet they hold to it as if they were imprisoned in structure. This is not to say that there can be no change to this structure, it is simply that the bonds of the complex are widely held and the ability to bring change to the complex is difficult, perhaps because there are so many people in it or perhaps because people who reject the complex lose their ability to affect the structure. We muse later on the cause of consensus, which we believe is in some ways a desire for coherence among equal people, so that once a structure exists it may not necessarily lead to change of itself even when its members are not completely at peace with it. This is not to exclude other explanations, for example the memetic property of humanity, that is that people simple copy others, or the learning aspect, whereby people are socialised by education and family power structures into having a coherent intersubjective reality.

Foucault argued that the world was the result of historical structures such as prisons, psychiatric hospitals and the intellectual complex of psychology, the state, that created the very terms of words that form our consciousness both individual and social. From these examples we can hypothesise that processes have an impact on language and therefore thought in addition to the relations and organisation of humanity. Language needs more systematic analysis in terms of its structure of interaction as well as in the dynamic process of convincing someone and altering of opinion involved in transferral of a message from one person to another.

But in terms of economics, we must see that processes also have material impacts. The process of hypercapitalism, whereby banks find ever smaller numbers of low risk individuals to lend to yet need to continue the cycle of credit and deposits weaken their prudence in lending and therefore less financial sophisticated people become heavily indebted. The process of property speculation leads to people only selling their house if they make an acceptable return. Thus there is continual house price rises. A complex of social relations leads to this house price rise becoming seemingly cemented into the public psyche. Inflation is a similar complex of wage bargaining institutions, government and business.

In respect of policy creation, one can analyse complexes and their resultant processes and effects on policy objectives. Coupling processes together, perhaps through the creation of complexes can be used to influence material results for the economy and indeed for social policy.

Marx can be understood not for his contribution to truth but rather for the process he created using the then nascent free working class. By latching onto a current and logic of liberalism, that is of equality, and bringing it to the fore of his belief that this should be an economic equality, brought the interests of the working class against those of capitalism. This lead to the development of a conflict in society. The essence of progress is that the logical extension of a belief are the next step in action. We assert that change is often in the direction of consistency and coherency. The idea of progress is that there must be change. Consider the similarity with Islamic theology where the process is to create further extensions of sacred rules to new areas using the original directions though clearly without much discussion on the spirit of the law. Here the motion of change is determined by the structure meta-narrative and resultant institutions of Ulema (Islamic theologians) based on the ideas of Shafi’i.

A key social process for development of non-industrial countries involves the creation of a working class and an accumulating capitalist class. We must see that in many LDCs (Less Developed Countries) the migration of agricultural farmers to cities has resulted in some cases in the enlargement of a working class. Examples include Pakistan and China in recent years. The key to capitalist development is the existence of these basic classes as social groups, which springs from idea maps of these groups and social structure that defines, reproduces and maintains these groups as real things. The capitalist class needs to have an accumulatory or covetous idea of being (that is how they see themselves as an objective or a rule of maximisation of saving). The working class often needs to be a consumer of capitalist goods and therefore an essential point needed for accumulation of the capitalist class is for there to be a market for production, which the working class provide in part. We see that once the insertion of the idea of capitalism and the necessary institutional structures of it are in place then the process of production, accumulation, consumption can begin to draw in non-capitalist classes into the system. A hypothesis of Africa’s lost decades of development is that this matrix of institutions, the capitalist class, the working class, and the value adding processes of the firm (in terms of technology, social organisation, markets and marketing, business strategy, the lack of government intervention into the ‘beliefworld’ of the society) has not been tackled coherently by actors including government.

What we see here in abstract terms is that ideas and social structures (such as rules, strategies, beliefs, essentially idea maps, lifeworlds and the synthesis of these two- the ‘beliefworld) can create and alter social processes. This general policy point must be fully internalised for the practitioner to obtain the most benefit from these essays.

2. The role of falasafa (philosophy) in Economics

Many economists ascribe a key role to theory for informing and structuring theoretical developments in the literature. Without theory one would not know what data to collect and how to put this together. Yet where does theory start? We suggest that the impatience to produce results leads economists away from Truth, the true system that is present in reality. The essential seed of knowledge is philosophy (falasafa), the first academic subject. Going back to the roots of knowledge in order to better avail oneself to the Truth is we argue, essential.

The argument is stated that we need to ground our analytical work in reality, as objectively as we can. If we do not begin in reality, although we may end up in theoretical constructs, we can have a hunch that we may never be near to the truth. The story of people with blindfolds; one who felt the trunk of an elephant and decided it was a rope, another who felt the leg and decided it was a tree, all of whom were wrong. Philosophy provides the historical academic legitimacy for this approach of rationally working hard on one’s most closely held concepts, delving into basic matters, and constructing theory based on that. We can see the role of philosophy informing physics, untangling the issues raised by quantum mechanics. So we suggest an analogy between economics, which uses physics’ mathematics in much of its theoretical work, and physics. By discussing the very basis of what we are doing, keep our mind on where we are, as a zen master we have greater hope of overcoming the past analytical misfortunes of economics.

For example, economics debates often structure around key concepts. Perfect competition is overturned by Williamson’s transactions cost approach. But perfect competition is kept as the surrounding analytical structure, and this is misleading. If the economists had taken the falasafa approach and started with the question, “what are the salient features of the system we are considering?”, then we believe that this empirical observational approach would be bringing about a debate structure that has a better chance of reaching the Truth. This concept of structure of debate conditioning knowledge development is the argument of Thomas Kuhn’s theory of knowledge in respect of “paradigm shifts”. We can take this further and see that debate’s course through time will be generated by structures of society, whether it is the rules of the language that ideas are communicated in or if political economy affects that actual choice of who is a valid person to produce knowledge and participate in the debate. So economics has taken a strongly mathematical turn since the 20^th Century, perhaps because it produces arguments that reduce the number of people involved in the debate due to the ever increasing complexity of the mathematical language that is used to communicate in the debate. Those who argue in a different set of terms are disciplined or rejected with to the refrain ‘this is not rigorous or analytical’. Thus the debate of economics is structured to maintain itself. There is no valid argument why the ‘rigorous analysis’ in other words putting economics into mathematics is necessarily going to lead one to the truth. The argument why logical reasoning from true assumptions will lead to true answers underlies the belief in mathematical economic theory, yet the mathematics is not suitable for society and distracts the basic problem of identifying the actual structures that exist and do effect outcomes in society.

From the rule ‘economic theory must be rigorous (mathematical)’ we see here an interesting fact, that conversations in the debates often repeat a similar set of refrains and junctures that lead to a certain structural stability to the social organisation of knowledge production and the path it takes. This is considered later when we look at long lasting social elements and propose the analytical tool of conversation trees, that is abstracting conversations between people that lead to a formation or reproduction of a social structure.

It would seem self-evident that science should be grounded in reality. This is the essence of every other science apart from economics. The biologist starts with the microscope, the astronomer starts with the telescope. While economists argue that their assumptions are grounded in slow changing “obvious” behavioural tendencies, such as profit maximisation/self interest, which we must add are highly likely to be specific to a historical period of capitalism, recent work on complex systems and even simple systems with feedback of certain orders and relations (nonlinear dynamics) shows that looking at a single aspect of the system without considering the complete reality is misleading. An iterative map can show structural change in its dynamics given certain small parameter changes. Why do we assume that the economy is not so contingently defined in its outcomes?

Thus we argue that in order to revitalise economics, we must consider as our starting point, a close analysis of the relevant aspects of the system. You may ask, where should we start? Clearly economics is different to other sciences because it is its relevance to society that determines what it should be about. Clearly economics has responded to social influences in terms of the problems it chooses to look at, a terribly problematic issue for all economists. When there was the Great Depression, there was the answer from Keynes, when there was inflation, there was Friedman. When there was a political desire for free trade, there was Adam Smith. But we want to take this a stage further. By answering the key questions, problems and issues society and the world faces, we can provide a guidance and a light for humanity. Building our observations on for example a question, such as “how does the housing market work?”, which is highly relevant to today’s world, we can see various institutions; estate agents, business media, home owners, home sellers, buy to let investors, property developers, tenants, home buyers. The dynamic produced by an institution is what could be termed the dialectic, in other words the process of relations between institutions, which is defined as the units of analysis in society. Economics is observationally about flows, whether monetary, informational or in terms of assets, activity and beliefs. A key point to add to any analysis is where these flows feedback among institutions, gives rise to developments of various things such as consensus, value, sudden change like crashes or booms.

The role of falasafa in economics is ongoing, it is not just about setting the structure for the debate. Many debates depend on our terms and the contradictions in opinion are explained by this. The idea of “productive and unproductive” activity in an economy affects the rent seeking debate among others. Thus such a debate would benefit from falasafa’s wise intervention in defining productive activity. This question can be seen to depend on what we mean by the economy or specifically capitalism. Essentially we take the point that capitalism is about generating high, long term, growing levels of activity in society and among them, through monetary compensation and the corresponding affect this has on social status and reproduction of institutions like classes. We have a hypothesis for theory and empiricism to consider, which is that capitalism provides better results than state planning in many sectors of the economy because of the presence of feedback between flows and institutions that lead to growing yet often volatile results in statistics such as GDP, asset prices/quantity and thus wealth, employment, wages, profits to firms.

It would be useful to apply falasafa to the understanding of inflation. Consider for example whether the rise in price of a product due to better marketing of it, quality changes or just the passage of time providing greater popularity of it, is inflation or a rise in GDP?

Consider what falasafa can do for the question of growth in the money supply. Evidence shows that large increases in the money supply lead to hyperinflation in many cases. Falasafa thinking leads one to believe that the system of money flowing around the economy becomes unstable and ever increasing if money supply is allowed to grow considerably. Keeping a reasonably tight grip on the money supply thus leads to system stability, which may or may not be desirable. We consider later whether the historically generated concept of time value of money (discounting of cash flows with time) and debt with interest leads to this instability.

We have thus shown a few areas where more in depth thinking based on observational reality may lead one to consider a whole new debating and methodological process as well as give rise to a fertile market of theories competing for evidence. We can only hope that this is the way forward for economics.
3. Counterfactuals in Life History Livelihood Studies of Poverty

Abstract

A modern trend in the literature on poverty has been to extract life histories of the poor. These detailed narratives obtained through interviews have a weakness. They do not elucidate the counterfactuals in the life history, that is what would have happened if some factors were different and therefore do not give a good indication of the appropriate policy to be undertaken to provide escape routes from poverty. We outline an approach that can be used to show the alternatives through financial modelling in spreadsheets of alternative scenarios. Therefore advice and intervention can be structured by poverty eliminating organisations.

Argument

Life histories, or a narrative of the history of a poor person are frequently created by academics interested in understanding poverty. These are normally part of a larger livelihood analysis often combined with panel and cross sectional data to bring out qualitative facts. They also have the advantage of communicating the difficulties of the poor as well as giving tried and tested escape routes from deprivation.

They do not however give an indication of what would have happened if different courses and decisions were taken. In short, what are the choices of the poor and what are the necessary tendencies of different categories of poor’s life histories. This is known as the counterfactual. The term comes from the philosophy of physics and is used to understand the contradictions and problems of quantum mechanics. It’s application comes from the study of history. In order to suggest that say a country has had growing inequality due to liberalisation it is necessary to know what would have happened otherwise. It is certain that this is not something that can be found objectively, that can be measured with accuracy, however, an indication of the likely outcome could be found using a method used by financial analysts. In the financial world, practitioners often need to find out whether a project would be viable under different scenarios. In order to make an assessment of this they use spreadsheet models of the financial aspects of a project and run this under different assumptions.

We argue that this could be a useful way to expose the counterfactuals in the life histories of the poor. Simply, a model of the assets, income streams and outgoings are taken with the life history interview. An indication of possible income streams and asset accumulation is found by sampling regions with those opportunities that are accessible to the poor person who is being studied. It might be possible to find out that certain forms of education produced positive alternative life histories, though this would alter the outgoings and short term income of the subject. New ideas to find escape routes from poverty could come about.

Alternative viewpoints

The limitation and thus the thrust of future innovation in poverty research is to assess the macro impact of alternative life history strategies. That is for example, if everyone was to become a doctor then there would be oversupply and thus many unemployed, whereas the individual decision to become a doctor would improve the life history of the individual as well as her/his community. The need to niche (each person doing different things to make money) is therefore apparent from this statement, thus policy drawn from counterfactual life history analysis requires a heterogeneous policy outcome. This means that policy must find many different sources of incomes and assets for the poor with care taken that the collective result is not self-destroying.

4. Kaldor’s Laws vs Keynes

What would a synthesis of Keynes and Kaldor look like? The processes of supply are that different firms impact each other, though manufacturing does this better since a product can be mass produced. Thus a factory can produce over time many copies of a product which can have high value added. Therefore a manufacturing firm will have increasing returns to scale given a high demand for its product. Supply is assumed to not necessarily create its own demand. The fact that a company has fixed costs is the reason why there is increasing returns to scale, since at low levels of sales the company breaks even. At high levels of sale, where the product becomes a cultural contagion, profits are much higher. We posit that this is a more important channel of growth than the physical change in the amount of materials that can be made. This is clearly important but we believe that the financial supersedes the physical.

When we look at Keynes, i.e. demand feedback throughout the economy, we want to disaggregate this and look at individual firms and individuals each connected to each other with goods and money flowing between each other. Let us assume there has been a rise in the stock market, so there is more money potentially to flow around the system. The demand for a well marketed good rises and so industry grows. At some point it increases its scale, therefore there is more to invest in the firm. The key point is that it is because the firm is a value generating process, it adds substantial value to inputs, that means there is increasing returns.

The non-manufacturing sector will have an increase in its income from the expenditure of the workforce and owners of the manufacturing firm. Thus there is a rise in overall GDP. Since the manufacturer has increased profits there will be substantially more demand by those connected into the output of money from the firm for goods which are culturally contagious (e.g. phones, TV, computers, cars, homes, stocks) as well as services. Will this lead to greater productivity in the non-manufacturing sector? Clearly one must distinguish between products which are services (like hair cuts) and products which are not manufactured but are assets, such as houses and stocks. Also one must distinguish between physical productivity and profit per worker (price productivity).

If a firm makes more phones for every worker it has then there is a clear example of more physical productivity. However making phones is not what a firm does, making money is its essential role. If a firm makes a change to a phone that enhances its value to the customer, such as 3G, then it is increasing the profit per worker as well. One could say that this is about changes in quality, but we would say that quality is how well something works rather than what it does for the consumer, whether this is in terms of status (like a Rolls Royce) or in terms of changing their life (e.g. a mobile phone rather than a landline). When we measure productivity in growth accounting we often use GDP data which is partly caused by physical productivity and mostly caused by the amount of value has been added by the firm. Thus there is a lapse of logic in how economists talk about the supply side with monetary terms. Accounting for inflation has no effect on this, as if taking the price of a basket of goods that might be purchased by a consumer would make any sense, apart from eliminate some of the price feedback (the rise in prices due to the rise in prices) that occurs in this data. Inflation adjustment entails throwing the baby out with the bathwater since some price increases, such as for better innovations or marketing, are important to capitalist economic growth.

Returning to our original discussion about whether services would increase in productivity, it is unlikely that they would improve their physical productivity except in the small way of improving skills in a workforce through greater practice. On the other hand, price productivity is likely to improve since profits are rising when there is greater demand and this may rise by an increasing amount per worker depending on how the capital labour mix for the provision of a service.

When firms are doing well in the economy the value of buying a stake in those firms increases. As a firm is sold, another may be bought by the owners thus bringing up the value of all firms if this occurs in a large way. In addition, other assets may be invested in by the people who are connected to the output stream of profit from the firm.

Given the strategy of banks to lend more to those with greater assets it would seem that a rise in demand filters through to more lending since asset prices would have increased. This raises demand in the economy.

Thus we see the progress of a pound throughout the economy that generates the expansive growth of capitalism.

 

5. Memetic house prices

Memetics is the study of units of information (meme) flowing around a society that reaches what has been understood in the economics literature as contagion, that is the widespread adoption of a belief or practice. An example of a meme is religion, which spreads widely as an accepted form of truth. Other examples are scientism and liberalism which are a widely accepted contagion in the Western world. Society is seen as a network of agents each spreading memes that they have internalised to others. A problematic point of this analysis is what happens when two equally credible memes that are mutually exclusive exist. Which one would dominate?

All that is necessary for a contagion to occur is the ability of an idea (meme) to spread between agents in a society. Structural aspects of a market, such as lack of supply of houses and the desire to compete for higher prices when supply is short, will be a driver for this spread of the idea of ‘rising house prices’. However, the covetous nature of modern society is also a part of the rise in house prices meme spreading, since people who did not desire more wealth would not look for higher house prices when they sell. The greed of society, modelled in consumer choice as monotonicity of the utility function, is itself a meme which has spread since the medieval times of Europe when such things were seen as sinful for the average person.

If such an analysis is correct then one might argue that it would be in the interests of house buyers to spread a meme that there are falling house prices. However, buyers are future sellers, that is they are co-opted into the house price rise meme by the belief that house prices will rise further in the future when they can sell. Thus there is a lack of competition among memes and therefore the housing market rises over time, even ahead of reasonable indicators such as house price to earnings ratios.

6. Economic theorisation

Bourdeiu’s cried out against the mathematical sickness of economics in its modern form. He talked of models that were description rather than deduction. In this he means we should take a more empirical look, though he is interpreted by us to mean casual as well as rigorous empiricism. By casual empiricism we mean the capability of the human mind to observe and note key facts that determine an object of interest. We will argue that deductive reasoning is no different to this approach, we posit that economists are preoccupied with obtaining ideological results and fit their ‘reasoning’ to the answer they wish to find. We consider the debacle created by Dinwiddy in showing that the State is as efficient as the Market using general equilibrium analysis. The key to understanding why Dinwiddy was able to turn the main thrust of economic theory on its head, a work of deep insight and imagination, is to understand that she put the state into the general equilibrium equations where the firm would normally be and replaced prices in this equation with a factor that could be determined when making a decision about how much resources the state should spend. This roundly put the whole of general equilibrium theory to its grave, since it becomes clear that the reasoning produces a result similar to the ontological argument for God. This is based on the assumption of man is imperfect and God is perfect. Since man exists, cogito ergo sum, God exists, since perfection has all of the positive qualities of imperfection. The flaw in this argument is that one could have a perfect imaginary island, which would then exist by virtue of the assumption of perfection even though it is imaginary. So to get back to general equilibrium theory, the firm is God in the ontological argument. It produces perfect results due to the nature of the logical machine that produces a deduction that is true but does not really tell us why firms are capable institutions for the production of goods. In essence in setting up the system of reasoning in a model one is applying one’s casual observations of the economy. For example, the idea that agents are profit maximising and the attached idea that this can be modelled as a mathematical maximisation problem.

The second issue is that a common desire of economics, even historical types, is to use rigorous empiricism to isolate causes of change. This should be the end result of economics but it is not the first stage of analysis, which is identification of the system in question. An example of rigorous empiricism is to essentially partition countries into those with high and low growth and then attach causality to any variable that is of high value in the high growth country set. For example, human capital is high in rich countries. It therefore becomes a result of regression analysis that human capital is seen to cause growth. On the other hand lack of corruption is high in high growth countries so this is seen as the cause of growth. Barro’s regression of inflation/growth to independence of the monetary authorities is another one. However, such analysis becomes tediously nonsensical when the many causes of growth are put together. If single exogenous variable regression gives us the confirmation of causality then why can one find many causes; lack of corruption, human capital, monetary institutional independence. The retort to this argument is that