Robert Shiller Has Arrow-Debreu Derangement Syndrome

I know it’s dangerous to judge an article by its synopsis, but Harvard Business Review articles, unlike their academic cousins, are designed to be easy-breezy, so there is much less risk in taking one of its previews at face value. Here is what the HBR says Yale economist Robert Shiller presents longer form in its January-February edition:

Corporations use a combination of debt and equity to finance their investments and operations. Nations, in contrast, rely exclusively on debt. When a nation’s economy stalls and its debt continues to grow—you may have noticed this happening a lot recently—disaster looms for the country’s taxpayers. This is why Europe is in turmoil right now. But things don’t have to work this way.

Here’s an audacious alternative: Countries should replace much of their existing national debt with shares of the “earnings” of their economies. This would allow them to better manage their financial obligations and could help prevent future financial crises. It might even lower countries’ borrowing costs in the long run.

National shares would function much like corporate shares traded on stock exchanges. They would pay dividends regularly. Ideally, they’d be perpetual, although a country could always buy its shares back on the open market. The price of a share would fluctuate from day to day as new information about a country’s economy came out. The opportunity to participate in the uncertain economic growth of the issuer might well excite, rather than scare off, investors—just as it does in the stock market.

Mark Kamstra of York University and I have mapped out how these new national shares could work. We propose that they pay a quarterly dividend equal to exactly one-trillionth of a country’s quarterly gross domestic product, the simplest measure of national earnings. We could call these shares “Trills.” A Trill issued by the U.S. government, for instance, would have paid $13.22 in 2010, in four quarterly installments. The payoff in future years would vary, of course. If the economy surprised us on the upside, dividends would go up; if it slumped, dividends would fall.

Shiller has done some useful work on the psychology of bubbles, which one would think would make him leery of seeing yet another market as a solution to every problem. He appears to have contracted Arrow-Debreu Derangement Syndrome. For those of you lucky enough never to have encountered it, a brief synopsis from ECONNED:

The scientific pretenses of economics got a considerable boost in 1953, with the publication of what is arguably the most influential work in the economics literature, a paper by Kenneth Arrow and Gérard Debreu (both later Nobel Prize winners), the so-called Arrow-Debreu theorem. Many see this proof as confirmation of Adam Smith’s invisible hand. It demonstrates what Walras sought through his successive auction process of tâtonnement, that there is a set of prices at which all goods can be bought and sold at a particular point in time.42 Recall that the shorthand for this outcome is that “markets clear,” or that there is a “market clearing price,” leaving no buyers with unfilled orders or vendors with unsold goods.

However, the conditions of the Arrow-Debreu theorem are highly restrictive. For instance, Arrow and Debreu assume perfectly competitive markets (allbuyers and sellers have perfect information, no buyer or seller is big enough to influence prices), and separate markets for different locations (butter in Chicago is a different market than butter in Sydney). So far, this isn’t all that unusual a set of requirements in econ-land.

But then we get to the doozies. The authors further assume forward markets (meaning you can not only buy butter now, but contract to buy or sell butter in Singapore for two and a half years from now) for every commodity and every contingent market for every time period in all places, meaning till the end of time! In other words, you could hedge anything, such as the odds you will be ten minutes late to your 4:00 P.M.meeting three weeks from Tuesday. And everyone has perfect foreknowledge of all future periods. In other words, you know everything your unborn descendants six generations from now will be up to.

In other words, the model bears perilous little resemblance to any world of commerce we will ever see. What follows from Arrow-Debreu is absolutely nothing: Arrow-Debreu leaves you just as in the dark about whether markets clear in real life as you were before reading Arrow-Debreu.

And remember, this paper is celebrated as one of the crowning achievements of economics.

Even though it is pretty obvious that Arrow-Debreu does not have practical applications (Phil Mirowski reports that Debreu published the theorem even after being told it was Turing non-computable), economists still fetishize “completing markets”, which is code for coming closer (which is still not at all close) to the Arrow-Debreu fantasy of complete markets by introducing yet another scheme to trade…..something….particularly if it relates to the economy. (We also discuss how another, less celebrated economic paper of the 1950s, Lipsey and Lancaster’s Theory of the Second Best, demonstrates that efforts to come closer to an unattainable ideal state can actually make matters worse).

Shiller himself, as his latest scheme attests, has been keen to promote new trading markets. He is the Shiller of the Case-Shiller index. And he didn’t develop it to see his name in the papers every month when the index is updated. The monetization opportunities come via developing investment products related to the index. And that usually depends on reasonably active forward/futures markets developing around a new index.

The problem with all these new markets is for deep enough trading to occur, you need natural buyers and sellers. There are a lot of cool sounding products that never take off because there is really only one side of a trade, a hedger who wants to lay off risk that no sane person would take because it is too hard to model and price it. As Amar Bhide noted in his book A Call for Judgment:

Commodities exchanges are always trying to develop and launch new derivative products. They have new product groups comprising members of the exchanges and full time staff who try to systematically gauge demand and design contracts that will have the broadest possible appeal. Nevertheless, most new products fail to attract and sustain the level of interest necessary to maintain an active market. As mentioned in the previous chapter, derivative products that were introduced with much fanfare, but failed to survive, include futures on the CPI, the municipal bond index, and the corporate bond index.

It isn’t just committees of futures exchanges that have a hard time. Robert Shiller has been trying to promote trading in contracts on housing prices for at least a decade. Many versions have been tried. None has been traded actively.

Apparently exchange trading involves what are known as ‘network externalities’. Successful contracts which are liquid attract more traders which make them even more liquid. Illiquid contracts wither away.

Furthermore, although there is considerable luck in whether a contract succeeds, success also requires, according to the CME’s Leo Melamed, “planning, calculation, arm-twisting, and tenacity to get a market up and going. Even when it’s chugging along, it has to be cranked and pushed.” To make the CME’s S&P 500 contract a success, Melamed called in all his chits: every trader for whom Melamed had done favors was asked to trade the future; every member of the CME was asked to spend at least 15 minutes in the trading pit; and Melamed himself spent as much time trading the S&P contract as he could.

Such efforts can only be devoted to a few contracts. Doing this for tens of thousands of OTC derivatives is out of the question.

To Shiller’s particular concern, about overleveraged European countries, he seems unfamiliar with the idea that their plight is the result of their lack of control over their own currencies. And as Greece reminds us, their is a long tradition of state defaults and restructurings, although the process is more fraught than the well established Chapter 11 bankruptcy format.

And as Thomas Ferguson pointed out, you could achieve pretty much the same results as you would from Shiller’s scheme by instituting socialism. But something so straightforward eliminates all the opportunities for private parties to take their cut.

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76 comments

  1. Jim Sterling

    Equity’s not that different from debt. Companies like to
    sell shares of the company because it’s a cheaper source of capital than a loan. But the downside of it is that while you can pay off a loan eventually, you’ll be paying the owner of a share forever.

    If these national shares were given out equally and non-tradeable, that would just be the same as socialism, as you say. If they were given out unequally, and/or tradeable, we would soon see them all the property of the rich minority. For the love of God, don’t they own the government enough?

    1. Yves Smith Post author

      Talk to any corporate finance professional or consult a textbook. The cost of equity is higher, not lower, than the cost of debt. Why would companies issue debt at all? Interest is tax deductible, and separately, the fact that debt is usually issued in the form of a bond (fixed payments of interest and principal, which is senior to equity in the event of bankruptcy) means they have greater certainty of payment and demand lower returns.

        1. prostratedragon

          Usually posed as “the capital structure puzzle.”

          Answer: Although one can always make up reasons after the fact, nobody knows, in general, why business firms maintain certain structure, which includes not knowing why they issue equities at all, apart from obviously tax-driven situations (citations of the article linked above). Of those I’ve read, the Harris-Raviv “theory of Capital Structure” from the cite list is a pretty nice overview, and as always Fisher Black helps keep things in perspecitve with “Noise.”

      1. F. Beard

        You make my point that corporations have incentives to NOT share wealth and power. Instead, it is cheaper to borrow from the counterfeiting and usury cartel, the banking system.

        As usual, the banks are at fault.

      2. Nathanael

        Yves, the cost of equity accrues *later* than the cost of debt. This is the fundamental difference; debt requires earlier repayments than equity.

        This has very profound results, including the result that great efforts are made to scam the equity-holders out of their payments during the interim period.

        1. F. Beard

          This is the fundamental difference; debt requires earlier repayments than equity. Nathanael

          Equity require NO repayments at all! The shareholders are the owners of the corporation. Why would they wish to drain resources out of their own business?

    2. F. Beard

      But the downside of it is that while you can pay off a loan eventually, you’ll be paying the owner of a share forever. Jim Sterling

      Not necessarily. A share owner is a part owner of the corporation. Why on earth would he wish to diminish the value of his own property by taking dividends?

      Preferred stock owners are the true villains – permanent parasites. Even the name, “preferred”, reeks of class privilege.

      1. Nathanael

        Consider a declining industry — oil drilling, for instance. If I were invested in that, I would want to take all the money out in dividends while pursuing an orderly liquidation of the company, what with it being in a dying line of business.

        Then I could go put the money into a new business which WASN’T dying.

        Corporate culture means the oil companies are incapable of redirecting the money into a new business internally; they suffer from the sunk costs fallacy, like most incumbent businesses, and are unable to change the corporate attitude. They need to pour the wealth out in dividends and shut down so that the money can be invested in rising businesses.

        Get it?

        1. F. Beard

          Corporate culture means the oil companies are incapable of redirecting the money into a new business internally; they suffer from the sunk costs fallacy, like most incumbent businesses, and are unable to change the corporate attitude. Nathanael

          In the case of the oil companies, there is still plenty of need for investment in oil extraction technology. “Peak oil” does not mean “no oil” “or little remaining oil”. Also, I see nothing in the “corporate culture” of oil companies that would preclude them getting into the oil syntheses business.

          They need to pour the wealth out in dividends and shut down so that the money can be invested in rising businesses. Nathanael

          Nice try but bogus. If you wish to get your money out of a what you think is a failing corporation then sell your stock. The new owners maybe able to succeed where the old ones did not. Plus, the new owners need not have the “corporate culture” of the old owners.

  2. Middle Seaman

    Arrow-Debreu is a mathhematical theorem with very clear mathematical assumptions. It’s a milestone in economics because it demonstrates that an idle marketplace behaves as a capitalist system we envision (that does exist either). Whether it is computable or not seems to me to be irrelevant.

    Schiller’s “solution” is funny because it ignores the real world and offers a solution that applies only to Arrow-Debreu kind of idle world, while pretending that it is a practical solution.

    1. Michael Sankowski

      We should also note Debreu also is did the Sonnecheim-Mantel-Debreu Theorem which should have relegated microfounded macro to the dustbin of history.

      Somehow his work in support of complete markets is everywhere but his Theorem which destroys freshwater econ is largely ignored.

    2. hyperpolarizer

      I am not an economist, but a scientist, who, having trained originally in biomedicine, then migrated to engineering and medical electronics. Mathematics (of a fairly advanced nature — what people sometimes call ‘higher mathematics’) figures largely in my work.

      The notion of a theorem in economics is difficult for me to get my head around, if only because — in my simplified view — there is no basic economic fact or transaction without entry of a human factor. I grant that there are people in the world who believe that human behavior, as applicable in economics, can be reduced to a set of mathematical axioms. To me, this involves either patent absurdity, or else the intellectual creation of a stylized and restricted automaton — call it ‘homo economicus’ of such limited capabilities as to be useless for the prediction of human behavior in any realistic way.

      Oh, I grant that automata can be designed to mimic certain behaviors of living organisms, but the greed and aspiration and irrationality of economic actors as I see them (myself included) simply defies any reduction worthy of the name ‘theorem.’

      1. ECON

        It is true that “the entry of the human factor” in economics has been assumed away in a variety of ways for tractable reasons but inherent in the medical field known to medical people and researchers much is assumed as well. Pylori bacter was made evident to mainstream press to the derision of the research community. Cancer cell research has undergone a total revision in what was accepted 10 years past and become ever more complex.

        1. hyperpolarizer

          Agreed. But there is also the fact that a piece of electronic gear is described essentially by laws of physics, which operate without human agency.

          Admittedly our mathematical attempts to utilize and manipulate these laws depend upon our limited human understanding; but our success may be witnessed in such diverse manifestations as the accuracy of GPS readings (which depend upon Einsteinian general relativity) or the detail of MRI images, which are reconstructed by Fourier transformation, or the functioning of the computers with which we are interacting, which depend upon the quantum band-gap theory of semi-conductors.

  3. Ransome

    Money is stock of a country. Investigate Landbank schemes. Owners pledge their land and receive dollars. They use the money to improve the land And pay taxes. Bundles of mortgages become dervatives of money. The landowner must pay land taxes to support money, they must, pay a mortgage to support money derivatives. Inflating land values beyond the ability to sustain blows the scheme up. This is why land is perpetually taxed and why IP should be taxed as property to maximize it’s value or cause it to be released to the public as community property for national growth. Taxes on land and income cause a desire to improve. Lowtaxes on unearned income encourage asset destruction.

    1. Ransome

      New Englanders summed it up. Will it pay?

      Low taxes on unearned income encourage unproductive or destructtive behavior. It is why Hedge Funds and PE are called Locusts.

  4. Caliban

    As usual, for the author everything comes down to defending socialism by attacking every idea on free markets every where that dares raise its head. The State is always right and we should all be permanent hyper-regulatory straightjackets overseen by the latest mindless devotee of Karl Marx and all free market economists should be burned at the stake as anti-Marxist witches or be stoned in public places by mental midgets whose minds have been burned away by stupid ideologies that have done more to damage humanity than anyting else in history. Perhaps someone should write an article titled: Yves Smith Has Adam Smith Derangement Syndrome

    1. PaulArt

      I would say that you wouldn’t know Socialism if it was brought to you on a silver plate with water cress around it.

    2. nonclassical

      ..yet another victim of ameriKan exceptionalism, who has no idea regarding other western democracy….should get out a bit…

    3. scraping_by

      Actually, Socialism sounds most plausible when someone defends markets. From the make-believe world of mainstream economic modelling to your own adolescent personal attacks, average citizens with a bit of real world experience can see the intellectual basis of crony capitalism as smoke and mirrors.

      Sales patter depends on being loud, fast, and demanding immediate commitment to be effective. Write it down, let people read and think for a moment, it doesn’t work. You’re trying to sell the idea that calling out mainstream economics is socially stigmatized. Unlike Faux News, here you don’t get the loud microphone and the kill switch.

      Some advice: stay in the shadows and imply brilliant ideas. And don’t try the cool-kid-sneering-at-the-nerds (dweebs, dorks, punks) act here in the big world.

      You kill what you love, dear.

    4. Eric L. Prentis

      “Free Market Fundamentalism” is a sham, not supported by valid science, perpetrated by the status quo 1% elite, to steal form the 99%.

    5. Yves Smith Post author

      You seem unable to see the simple point that what Shiller proposed is tantamount to socialism, with unnecessary operational complexity. You are shooting the messenger.

      1. F. Beard

        You seem unable to see the simple point that what Shiller proposed is tantamount to socialism, Yves Smith

        Actually, almost pure fascism. Government’s function would be to pay dividends to private interests.

        1. skippy

          Government’s function would be to pay dividends to private… *citizens*.

          Skippy… addendum of thought.

  5. Eric Titus

    What a ridiculous idea!
    To start, @off_leash points out that whereas shareholders are the legal “owners” of a company, equity on a government really doesn’t mean anything unless it’s a anti-democratic government.

    Shiller tries to make shares mean something by tying shares to GDP, which seems like a terrible idea. Not only is GDP an imperfect indicator, it also isn’t something the government can do that much about.

    But Shiller’s comment seems exceptionally weird given that it contradicts practically every other approach to economics. Monetarists and other laissez faire economists would oppose making the state the steward of the economy. Austrians would point out all the political problems and potential for corruption. Heterodox and neo-Keynesian economists would point out that the government is a “special” entity that already has an excessive number of tools at its disposal: it acts as the lender of last resort, controls the supply of currency, sets the baseline interest rate, etc.

    The only people who’d agree with Shiller here might be a weird brand of behavioral economist/public goods economist, who sees the market as a way for governments to effectively deal with problems without eliminating the role of government.

    Shiller’s invocation of Greece seems somewhat bizarre as well. What Greece is dealing with is a perfect storm of political problems: citizens don’t want the government drastically shrunk because it is one of the main employers, the rich don’t want to pay taxes, and the EU won’t allow them to default or inflate away debt. Would Shiller’s system make all these problems go away? Would trills create their own problems? I wonder where he’s been getting these ideas from, because Shiller used to be more sensible. I guess he’s been drinking the behavioral economist kool-aid.

  6. Benign

    And the shareholders would have as much say in the running of America, Inc., as shareholders of corporations do today, no doubt, which is about none. Management has succeeded in insulating themselves from the owners while they loot the corporate treasury.

    But this is just the status quo in a new guise. American voters don’t get a say in how the country is run now.

    Shiller has always been a shallow thinker, unable to think outside the neoclassical economics box. He tells fairy tales, in other words.

  7. Michael Sankowski

    I am not so harsh on Schiller. Usually making things easily tradable makes them easier to monitor.

    I will say having worked directly with his firm on new products they are aware of the difficulties in getting new products traded.

    This GDP equity share approach has always seemed boneheaded to me. Why would anyone want to sell them? How would they be issued? If you do an NPV calculation on this much of a dividend, the trills get to be quite valuable.

    I think Yves does a slight disservice here by conflating Arrow-Debreu with making new markets available. Not that Arrow-Debreu is anything less than a sick joke, and it’s true this all could be accomplished more simply with a healthy bout of socialism. Rather that new markets shouldn’t be evaluated with Arrow-Debreu as a background.

    1. scraping_by

      “Usually making things easily tradable makes them easier to monitor.”

      Sounds a reasonable proposition, but that comes up against the very real opacity of any exchange. It’s inevitable there are insiders and outsiders, even without rules to make it an unbreakable line. The insiders have agendas that take no notice of outsider interests, or indeed, or outsiders existence.

      In the end, the trading world has no necessary connection with the real world. One can posit second and third order effects, maybe even model up a few decimal points along the vector. However, in the end, the financial economy, outside a little initial parasitism, operates out of the big world’s sphere.

      It’s called the shadow banking system for a reason.

  8. JKH

    There’s reference to creating “excitement” with this new product. I’m not sure investors require much excitement right now, given that they’re hoovering up trillions in bonds at record low rates.

    And whether the currency is fiat or convertible, any issues relating to inflation or solvency in the convertible case don’t really change just because you have something that is in effect perpetual floating rate debt. There may still be pressures to tax in an inflation environment, regardless of the design of such an instrument.

    Apart from the ostentatious but superficial niftiness of this idea, what is it supposed to achieve?

    1. nonclassical

      “what is it supposed to achieve?”

      optimism…in the face of reality that U.S. $6.5 trillion, world $16.5 trillion per year economies have been destroyed for over 3 years on the way to 10-20 more…as state’s economies spiral downward from less wages=less revenue.

      it’s intended to generate “free market should regulate itself” fundamentalist optimism…

  9. Bam_Man

    Ummm….Isn’t this the same argument that was made to support the viability of fiat currencies back in 1971? That the money stock “didn’t have to be backed by anything because it represented the productive capacity of the economy”?

    Yes, so go right ahead and issue yet more paper claims on the “productive capacity of the economy”, we’ll just call it “equity” this time.

    Infinite varieties of “new and improved” fiat ponzi-paper, to replace the older versions that have been depreciated to near worthlessness.

    The fact that crackpot ideas such as this are now popping up in academic journals tells me that this is how they intend to keep the “game” going.

    1. j.grmwd

      Which fiat currency is it that has depreciated to near worthlessness? I am willing to take off your hands any of the worthless yen, pounds, euro or dollars that you may still have floating around.

      1. Bam_Man

        I did say near worthlessness.

        The 1913 U.S. Dollar has been depreciated to a current value of less than 2 cents. I would be happy to send you some of mine when its value is a bit closer to zero – which given current fiscal and monetary policy insanity won’t be long.

      2. Up the Ante

        “Which fiat currency is it that has depreciated to near worthlessness? ”

        Where have food prices inflated in the U.S. ?

        Where will gasoline be over $5 a gallon ?

        Similar questions.

    2. F. Beard

      Fiat currency is backed by the taxation authority and power of government. Gold-bugs can only dream (and scheme) of such a backing.

  10. Mark Morss

    Just to address some of the foregoing remarks about socialism and general equilibrium anslysis, it may be useful to point out that socialism in no way necessitates an increase in state power or even increased state supervision of markets. It merely proposes that state power be used for different purposes than at present, and that the state supervise markets toward the benefit of different groups of people than at present.

    It is a myth that markets either are or can be free of thoroughgoing and pervasive state influence, influence that is inevitably directed toward the benefit of those market participants most in favor with the state. Lurking behind every Marshallian partial equilibrium analysis is an all-important set of state policies designed, whether directly or indirectly by effectively ceding regulatory power to dominant agents (these are the ones praising “free” markets), to direct the benefits of exchange in a given direction. This statement applies just as well to markets that are supposed to be highly competitive as it does to supposedly imperfect markets.

    Partial equilibrium analysis however is useful and possible. What is not useful or possible is general equilibrium analysis, which is founded on the false notion, not only that there can be such a thing as a free market, but also that markets in general are free.

    There is no possible world in which someone, either the state or some powerful agent effectively sanctioned by the state (the Mexican drug cartels for example), will not use power to channel the gains of trade. So it is time to stop talking about free markets and start talking about to whom the gains of trade should flow.

    1. Fiver

      Can’t see this being adopted by the Overlords unless they saw it as another dual-purpose financial technology Screwpliers i.e. “These nifty little items are kickass, high-performance wealth pumpers through their entire life-cycle. Megaclams of juicy bogus profit front-loaded for your new lifestyle, with a backside herdovercliff bang that keeps you in peaches for good.”

      Reminds of Goldman’s/Clinton’s long efforts to monetize carbon emissions – gigantic payoff potential from a financialized faux-“green” bubble, riding on generating present “profits” while the “environment” is atomized into “n” thousands of uncoordinated, independent project “enterprises” with no hard and fast targets, no global treaties or oversight, and no limit to strain-on-credulity projects with no role for governments’ public planning, but unlimited scope for public harm as ultimate bearer of the consequences of failure – and money means nothing in a f-up as big as failing to deal with Climate Change.

      I note a couple references to socialism. It’s a remarkably market-friendly “socialist” that would ever go for this sort of garbola. I for one have not much use for yet another way of monetizing a current/future population’s presumed economic activity in a way that commits them to do ever-more-stupid things to avoid the various systems failures we keep feverishly laying out in front of them.

  11. Mel

    Isn’t this what sovereign bonds are? When they’re payable in The Currency, which per MMT is a right to draw against the GDP

    ?

  12. RPL

    I think in fairness, one should note that their early work notwithstanding, both Arrow and Debreu did a lot of work demonstrating that the conditions for an Arrow-Debreu equilibrium don’t really exist in the real world and embraced, as a practical matter, the Theorem of the Second Best. After all, Arrow did as much work on market failures such as asymmetric information and externalities (see his famous paper from the early 60’s on the market for health care) as he ever did on other topics. And as another commenter pointed out Debreu was effectively dismissive of the idea of micro-foundations in macro analysis and was acutely aware of the fact that the idea that there is a unique set of market clearing prices is a fantasy. The fact that other people mis-interpreted their result and have embraced aspects of it mostly because it conforms to their personal beliefs and ideology does not really justify the dismissive tone towards two of the great thinkers in economics history. I suggest going after Casey Mulligan instead, though maybe he is too easy a target.

    1. ECON

      Right on. As an aside Keynes was not a theory-driven economist as he lived through and experienced first hand from WWI to WWII the economic-political events and even the noted W. Lucas conservative economist said he would have never bet against Keynes success for all others were midgets in comparison. The economists to follow were mathematical in analysis.

    2. Yves Smith Post author

      Please reread what I wrote. Nothing I said is at odds with your comment. Although I do think the Turing non-computatble part is a non-trivial problem, since it would seem to vitiate the claims made re the theorem simply qua theorem.

      Plus the record is not as cut and dried as you suggest. Debreu initially disputed (or at least muddied the water on) the idea that the theorem had no practical application:

      But Debreu knew all along that the meaning of equilibrium is open for interpretation. Already right after publication of his article with Arrow, on November 8, 1954, Debreu reacted to Koopmans‟s objection that the existence proof does not help any kind of empirical analysis. The fact that it is empirically underdetermined, or, in other words, leaves open several interpretations, Debreu considered, not a weakness of the proof, but its actual achievement.

      I conceive of AD as exhibiting the general and abstract feature of a market economy. It is natural that the model has several possible interpretations and it is in fact one of its most interesting characteristics. For example, I have shown last year how a proper interpretation of the symbols gives a theory of uncertainty without any change in formalism. As for the time horizon, I made allusions in New Haven to several interpretations. The simplest one consists in thinking of an economy with no next period and where the length of life of a consumer is implicitly determined by the x1 he chooses. None is fully satisfactory and I am afraid it has to be so. (DPC 10, Folder Existence…)

      Some 20 years later after his work with Arrow, Debreu indeed proved rigorously that the existence proof really had no strong implications. Simplifying results from Hugo Sonnenschein and Rolf Mantel, he proved the structural indeterminacy of excess demand functions. Debreu was hardly surprised, but others continued praising and blaming him for holding to the opposite. For these results, as critical as they were, never entered the consciousness of those economists who began referring to Arrow and Debreu as the benchmark of rigorous research.

      http://economix.fr/pdf/workshops/2011_competition/T-Duppe.pdf

  13. Ed

    Mark Morss makes the argument, and makes it very convincingly, that I wish I had made.

    George Bernard Shaw defined socialism, in his article in the Encylopedia Brittanica on the topic, as “equality of incomes”. But I think that is a minority view. Really the word has become a tool of rhetoric with little content. But something close to a substantive definition that most people would agree on would be “unrestrained use of government powers over the economy, including welfare, public ownership, taxation, and regulation, to further greater equality.”

    But usually I see arguments against socialist type proposals as arguments over whether this or that power over the economy should be used, rarely have I seemed them framed around the objection of greater equality. This is despite the fact that all these powers have been used by right wing corporatist type states, at least in part to increase inequality. Though in the United States, I get the impression that most of the opposition among the general public to various policies from the left amounts to the objection that they will benefit racial minorities.

    1. j.grmwd

      The dictionary definition of socialism is a type of social organization in which ownership and control of the means of production, capital, and land etc. are vested in the community as a whole. “Unrestrained use of government powers in the pursuit of greater equality” really belongs to the right’s caricatured definition of socialism.

  14. Hugh

    This is just intellectual masturbation on Shiller’s part. He’s no doubt trying to recover and repeat some of the glory from those heady days when more people believed his bullsh*t.

    Forgive me but what is the connection between the US economy which is private, or at most public-private, and the US national debt which is governmental?

    We live in a kleptocracy where our elites own virtually the whole of the economy already, where 80% of Americans hold only 7% of the country’s wealth, where the kleptocrats already control the government. Why would they buy into such a dumb*ss idea unless they thought they could use as a vehicle for looting as well? But given their current predominant position, why would they bother?

  15. Susan the other

    Is there a difference between trills and our currency? So do trills just neutralize the monetization of debt? Sorry. Totally confused as usual. One question tho’ : For this to work we shouldn’t we assume full employment? And then when we don’t have full employment we don’t have to pay? Or? Maybe they should be Quads.

  16. Tucson Tre

    I think we are ignoring the additional risks this precedent would set.

    Once you establish national shares the next step is to separate the voting stock from non-voting stock. The voting stock would create a board of directors which could run this country like a corporation to maximize profits and reward shareholders. Complete disregard to domestic justice concerns would be sanctioned as a part of efficiency. Less efficient forms of government – such as a three part system with oversight provisions could then be officially disposed of in order to maximise productivity.

    Yes paranoid — but it doesnt seem too far removed from this proposal.

  17. Min

    Shiller: “Countries should replace much of their existing national debt with shares of the “earnings” of their economies. This would allow them to better manage their financial obligations and could help prevent future financial crises. It might even lower countries’ borrowing costs in the long run.”

    Here is a thought. Countries should replace some of their existing national debt with newly coined or printed money. That would lower their borrowing costs, both immediately and in the future. :)

    1. F. Beard

      Countries should replace some of their existing national debt with newly coined or printed money. Min

      Why just “some”? All national debts should be paid off with brand new fiat and all further borrowing by nations ended permanently.

  18. F. Beard

    National shares would function much like corporate shares traded on stock exchanges. They would pay dividends regularly. Robert Shiller

    Baloney in the case of a monetarily sovereign nation and all nations SHOULD be monetarily sovereign.

    Mr. Schiller, the purpose of nations is not to collect usury for bond holders or to pay dividends to stockholders. That’s pure fascism.

  19. Alejandro Nadal

    Hi Yves, I am an admirer of your work And this is why I am amazed that you talk about what you call the “Arrow Debreu” theorem and state that “it demonstrates what Walras sought through his successive auction process of tâtonnement that there is a set of prices at which all goods can be bought and sold at a particular point in time”.
    This is absurd. First. The 1954 (not 1953) paper published in Econometrica does not (repeat, does not) deal with anything resembling a tâtonnement process. Their paper uses a fixed point theorem to prove the existence of a general competitive equilibrium, not the convergence to that equilibrium through a tâtonnement process. In that proof of existence there is no time, and there are no dynamics involved (as in the case of an adjustment process).
    In other woods, Arrow-Debreu in 1954 use differential topology to demonstrate the existence, but not the formation of equilibrium prices.
    You are right when you say that many see in this work the proof of Smith’s invisible hand metaphor. But this is why general equilibrium theory remains so strong, because people “believe” it is rigorous but its problem is that it is unrealistic.
    But first, the study of the dynamics of the formation of equilibrium prices was an utter failure (as anyone who has studied the theorems of Arrow-Block-Hurwicz, the work of Scarf and the Sonnenschein-Mantel-Debreu theorems knows). And second, the proof of existence is also fatally flawed, but vey few scholars have taken a closer look. For one critique, see the paper by Benetti-Nadal-Salas in my web page http://www.nadal.com.mx. Until you read that, please stop talking about the “Arrow-Debreu” theorem as something that is rigorous but unrealistic!

    1. Yves Smith Post author

      For someone accusing me of inaccuracy, you did not read what I wrote. Please REREAD the text:

      Many see this proof as confirmation of Adam Smith’s invisible hand. It demonstrates what Walras sought through his successive auction process of tâtonnement

      It says WALRAS used tâtonnement to try to find what we would now call a market clearing price (I mention tâtonnement to refer the reader back to an earlier discussion). Nowhere does it say AD used tâtonnement. So your discussion of the nature of the AD proof is not germane, since it addresses a straw man.

      You then proceed to make another attack (basically to say you say you prefer other critiques of AD, particularly, natch, your own). That in no way invalidates the criticisms I made, despite your harrumphing. In case you missed it, both ECONNED and this blog are meant for intelligent laypeople, not professional economists, so if a simple but accurate criticism will do the trick, it is preferable for my purposes to more sophisticated ones.

      Debreu claimed in a 1952 article for that Proceedings of the National Academy of Science, that a paper “has been used by Arrow and Debreu to prove the existence of an equilibrium for a classical competitive equilibrium system…” and claimed it was in press at Econometrica. Yet it was not submitted to Econometrica until May 1953. While Debreu was apparently actively talking up the paper in 1952 and 1953 (it was scheduled for a 1953 conference but apparently not presented then) you are correct re the Econometrica date and I will revise the text to clear that up.

      1. slothrop

        But your argument then is based on a false assumption. Adam Smith’s “invisible hand” was NOT a metaphor for price equilibrium.

        The term is mentioned ONCE in “Wealth of Nations” in the chapter on mercantilism, what we call today “free trade.”

        “Invisible hand” is a metaphor for what is referred to by some as “home bias” or “enlightened self-interest,” as the natural “home bias” of manufacturers to choose the home country for “his own security.”

        It seems this hackneyed phrase justifying the “free market,” and perhaps the entire intellectual edifice of the dismal science, is itself a self-serving (and pollyanna) misinterpretation of one simple passage:

        >>By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. <<

        NAFTA indeed. If Adam Smith came back to us he would walk up to Paul Krugman and punch him in the face.

      2. Alejandro Nadal

        Hi Yves, I followed your advice and re-read the relevant passage. You may be right that a simple but accurate critique is more than enough in the context of a blog designed for intelligent laypeople. But then again, you may be totally off the mark. A simple but accurate critique may still be INCOMPLETE. And that is the point I’m trying to make. It’s not that I prefer my strand of criticism. It’s that the most efficient and strongest critique you can address to a model is that it is inconsistent and contradictory, and that it fails to prove the point for which it was built. All models are more or less unrealistic as they simplify reality. You insist on the lack of realism of the AD model, as the key problem. This is wrong in my humble opinion. The problem with the AD model is that in spite of all the absurd assumptions we are requested to admit, the model simply does not deliver the goods. It does not present a proof of existence that makes economic sense, and it does not demonstrate how market forces lead to equilibrium. Thus, it fails in the field where it claims to be impeccable, the field of logical consistency. In addition, yes, you are right, it is extremely unrealistic. Propagating the false notion that AD is a rigorous model contributes to consolidate its (still) dominant role in academia and, in fact, in policy making. And finally, don’t forget, Keynes was distorted and recuperated precisely because he did not complete his critique of the Classics.
        Again, congratulations for your excellent blog. Take a look at my entry in the http://www.triplecrisis.com on stability and existence of equilibrium. That blog is also for intelligent laypeople.

    2. craazyman

      If you sit on a fixed-point Arrow Debreau will it prick you in the butt like a splinter, and if so, will an invisible hand pluck it out?

      Jesus. How can somebody ask that kind of a question on a serious topic? I man c’mon Man!

      I admit it’s only a theoretical inquiry and has no real world application, but if you think long enough about it, it might reveal something about the real world! Or at least take up your idle time until the wife comes home. Either way, it makes sense the way some things make sense when they achieve a self-consistency in a world of their own and become distracting pains in the ass.

  20. Fiver

    Can’t see this being adopted by the Overlords unless they saw it as another dual-purpose financial technology Screwpliers i.e. “These nifty little items are kickass, high-performance wealth pumpers through their entire life-cycle. Megaclams of juicy bogus profit front-loaded for your new lifestyle, with a backside herdovercliff bang that keeps you in peaches for good.”

    Reminds of Goldman’s/Clinton’s long efforts to monetize carbon emissions – gigantic payoff potential from a financialized faux-”green” bubble, riding on generating present “profits” while the “environment” is atomized into “n” thousands of uncoordinated, independent project “enterprises” with no hard and fast targets, no global treaties or oversight, and no limit to strain-on-credulity projects with no role for governments’ public planning, but unlimited scope for public harm as ultimate bearer of the consequences of failure – and money means nothing in a f-up as big as failing to deal with Climate Change.

    I note a couple references to socialism. It’s a remarkably market-friendly “socialist” that would ever go for this sort of garbola. I for one have not much use for yet another way of monetizing a current/future population’s presumed economic activity in a way that commits them to do ever-more-stupid things to avoid the various systems failures we keep feverishly laying out in front of them.

  21. Parvaneh Ferhadi

    «Corporations use a combination of debt and equity to finance their investments and operations. Nations, in contrast, rely exclusively on debt.»

    Until not so long ago, most nations relied almost exclusively – or at least to a very high degree – on something weird called taxes (which is income) to finance their investments and operations.
    So nations that finance themselves exclusively with debt does not exist.

    Also most companies do finance themselves by a mix of income (like sales of product or services) and debt (equity is also a form of debt).
    I think companies that finance themselves exclusively do exist either.

    1. F. Beard

      (equity is also a form of debt) Parvaneh Ferhadi

      I don’t see how. In the case of common stock, the representatives of all the existing owners of that corporation decide to sell additional shares in it. Upon purchase, the buyers become new co-owners. So where is the debt? All I see is a debt-free sale.

      I am really hot on the idea of common stock as a pure private money (ineligible for government debts) form because it is democratic in principle and usury-free. Nor is common stock as money subject to bank runs since common stock is normally non-redeemable.

      1. Parvaneh Ferhadi

        With share(s) you own part of the company, the money you give them is not a present to the company.
        In most cases the understanding is that you can hand in your share(s) to the company and they’ll have to pay you for them.

        With publicly traded companies as far as I am aware no one does that, because it is easier to just sell them on the secondary market (e.g. the stock exchange) if you want to get rid of them.
        With privately held companies, it still happens regularly.

        Thus it is my understanding that equity is an obligation (i.e. debt) of the company towards the equityholder, that’s why it is on the passive side of the balance sheet.

        1. F. Beard

          In most cases the understanding is that you can hand in your share(s) to the company and they’ll have to pay you for them. Parvaneh Ferhadi

          That would depend on individual corporate policy. It sounds absurd to me. Example: Suppose only 10% of a corporation’s assets are liquid. The other 90% is in a factory. Now suppose that 15% of the shares are to be redeemed. Is 5.56% of the factory to be liquidated somehow without destroying much more than 5.56% of its production capacity? That is why it is absurd to allow the redemption of common stock. It would be like disassembling a working machine for scrap.

        2. JIm Sterling

          Suppose the investor in a startup had a 50% share in the company. Would it not make exactly as much sense for the original starter of the company to be able to compel a purchase of the remaining 50% by the investor, as it would for the investor to be able to compel a purchase by the starter? Then again, at what price is the investor allowed to demand this buy back? The original price of the shares? The current book value? The current market value? For that matter, what is the current market value? Does anybody know?

          No, it makes no kind of sense to see the part-owner of a company as a sort of creditor. The only thing you can do with your share if you don’t like owning it is find someone willing to buy it from you.

          That can be the the original owner, if they’ve become flush with cash for some reason, and they feel like it. But remember, the reason they offered investors a share in the first place was because they wanted capital to grow the company, and didn’t have it handy.

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