[swatow]

It would be a good thing because following the principal of maximizing profits is what is most socially beneficial, in the absence of externalities. And jobs are not an externality.

You have only calculated one side of the equation. You haven't considered how investors would have reinvested that money, and the jobs that this would have created. We can and should develop a theoretical framework that allows us to predict both sides of the equation. Such a framework exists and is called general equilibrium theory, which predicts that profit maximizing companies maximize social utility.

[dragonwriter]

> It would be a good thing because following the principal of maximizing profits is what is most socially beneficial, in the absence of externalities.

"In the absence of externalities" is a pretty enormous qualifications -- very few real world exchanges have no externalities.

> Such a framework exists and is called general equilibrium theory, which predicts that profit maximizing companies maximize social utility.

It predicts that, in a market with rational actors (as defined in the rational choice model -- utility maximizers with perfect information) and no externalities, a Pareto efficient equilibrium will be achieved. But Pareto efficiency means that for anyone to do better, someone would have to do worse. This is not the same as maximizing social utility (while it seems obvious that the point of maximum social utility must be a pareto efficient point, it is not clear that all pareto efficient points maximize social utility.)

And, of course, the conditions in which it makes those predictions (both the perfect information part of the rationality condition, and the no-externalities condition) don't reflect real world decisions very well.

[swatow]

Externalities don't invalidate the entire theory, they just mean that adjustments have to be made in the cases where there are externalities. Hence my emphasis on the fact that a person losing their job is not an externality.

I think you read my sentence as "(following the principal of maximizing profits is what is most socially beneficial) in the absence of externalities" where what I meant was "following the principal of (maximizing profits (in the absence of externalities)) is what is most socially beneficial".

Classical economics with optimal "Pigovian" taxes can be thought of as a first order approximation to reality.

Also, you can produce any Pareto efficient outcome from free markets + redistribution. In practice things aren't quite so simple since redistribution has some deadweight loss (e.g. some estimate that it costs $1.30 to the economy to raise $1.00 in taxes).

EDIT: rewrote after a better understanding of the parent. EDIT 2: added more explanation.

[mpyne]

> Externalities don't invalidate the entire theory, they just mean that adjustments have to be made in the cases where there are externalities.

Are your adjustments the epicycles upon epicycles hammered onto ancient astronomy's theory of mechanics to make the orbits of the planets appear to work? Or are they like the relatively slight adjustments to Newton brought about by Einstein?

I personally feel that any discussion of sociological issues cannot be reduced simply to linear optimization problems, which implies the former view for me.

[swatow]

I think the best analogy is that general equilibrium theory is a zeroth order approximation to reality, and optimal (Pigovian) tax theory is the first order approximation. You might think a priori that no simple model can tell us much about sociological issues. All I can say is that I was very skeptical before I studied economics, but the theory is actually very compelling. I would recommend looking more into it (e.g. textbooks on micro or macro).

There is this strange disconnect where educated people who don't know much economics believe that economists have become tools of the ruling class, and therefore don't need much consideration. And economists are so stuck in their bubble that they don't believe that any educated person would completely reject economics (e.g. I specifically asked them if they thought that reasonable people could disagree with my original post, and they said no).

[dragonwriter]

> Externalities don't invalidate the entire theory

The model is a simple deductive truth only when its premises -- which include actors that behave strictly according to the rational choice model (including perfect information) and the absence of externalities.

Neither of these is generally true in the real world.

> I think you read my sentence as "(following the principal of maximizing profits is what is most socially beneficial) in the absence of externalities" where what I meant was "following the principal of (maximizing profits (in the absence of externalities)) is what is most socially beneficial".

Both have the failing when being applied to the real world that they silently assume the assumptions of the rational actor model, including perfect information, and either way they present problems when used as a statement about a real-world decision in which externalities are present (though the exact nature of the problem differs between the two.)

> Classical economics with optimal "Pigovian" taxes can be thought of as a first order approximation to reality.

Not justifiably. I'd agree that approximating optimal Pigovian taxes is a worthy goal for government policy, but I don't think that there's any justification for assuming that actual government policies do that.

(In fact, given the distribution of power over government policy that would have to occur for that to be true, there's a pretty good reason to assume that its not even approximately true.)

Further, the behavioral model underlying classical economics are a tolerable first order approximation of reality in select markets, and useful baseline from which, via different circumstances in other markets which explain variation, to explain the behavior that occurs in other markets were they aren't good as such an approximation, which (aside from the prominence of ideologies which are justified by giving that model too much weight) is why its still taught.

> Also, you can produce any Pareto efficient outcome from free markets + redistribution.

Making many of the same assumptions with limited and occasional connections to real behavior that underlie your previous statements, starting with the rational choice model (including perfect information), this is true.

Not sure what your point is with it, or how it is supposed to be germane to the discussion.

[ThomPete]

It is an externality when they don't get it back or loose income to keep it. And that is in reality what is happening.

[swatow]

That's not what is meant by an externality in economics. See http://en.wikipedia.org/wiki/Externality

[ThomPete]

I am aware of what is meant by externality in economics however economics have a lot of blind spots, the consequence of technology being one of them which makes it an externality for exactly that reason.

[swatow]

ok so your point is that when technology creates long term downwards trends in the value of labor, anything that decreases the value of labor can be thought of as an externality?

Redistribution can counteract this effect. If productivity increases but it also increases inequality, then there is some level of redistribution that will correct the inequality while making everyone better off (in the sense that the number of people earning more than X increases for all X). Not exactly a theorem, but a rough consequence of general equilibrium theory. You might claim that this kind of redistribution is impossible, but there are countries (e.g Scandinavia and Aus/NZ/Canada/UK) that redistribute a lot more than the US.

[gjm11]

> general equilibrium theory, which predicts that profit maximizing companies maximize social utility

No, it doesn't. It can't, because "social utility" is visible to the market only through the proxy of willingness to pay. If you assume that the marginal utility of money is roughly proportional to 1/wealth (equivalently, that the utility you get from $X in wealth is roughly proportional to log(X)) then what the economy kinda maximizes is total weighted utility, where every person's utility is weighted in proportion to their wealth.

What markets give us (in theory, subject to various conditions) is a Pareto-efficient allocation of resources. And there's a theorem that says that (in theory, subject to various conditions) one can get any Pareto-efficient allocation of resources by doing a bunch of pure money-transfer operations and then letting the market do its thing.

That's nice, but it's only equivalent to saying that the market maximizes social utility if you regard those money-transfers as net-utility-neutral.

So, suppose I have $1M and you have $1K. Under the logarithmic-utility assumption above, an extra $10 for you gains you about as much extra happiness as an extra $10K for me. Consider a transaction in which I find 1000 people like you and pay you each $10 in exchange for what you consider to be $10 worth of inconvenience or pain; I have lost $10K but will be content if I get what I consider to be $10K worth of convenience or pleasure. So we have a possible transaction to which all participants are indifferent: I get a certain amount of happiness; 1000 people each get a roughly equivalent amount of unhappiness; and some money is transferred between us. If money transfers are net-utility-neutral, then by reversing those transfers we get another simpler "utility-neutral" transaction: X units of happiness for me, X units of unhappiness each for 1000 people. So long as they're 1000x poorer than me.

(Is that logarithmic-utility assumption reasonable? Not entirely. I think it's generally held that the marginal utility of wealth decreases faster than that, which would make the factor by which markets weight rich people's utility more important than poor people's utility greater. On the other hand: If we consider the wealth and utility of corporations as well as individuals, we might want to say that a corporation's utility doesn't drop off the way an individual's does. I haven't fully got my head around the right way to think about this so I'll stop at this point.)

[swatow]

There is another part of the theory which says that you get back the full set of Pareto optimal outcomes, by redistributing wealth (e.g. through taxes and welfare). Although see my comment above on the limits of wealth redistribution.

[jsprogrammer]

Does the framework predict monotonic utility growth? Does profit maximization occur instantaneously? Does it provide any guarantees on the timeframe required to experience maximal social utility?

[swatow]

>Does the framework predict monotonic utility growth?

I don't understand that question. I know the language of economics very well, but you're not using the terms in way that has an obvious meaning.

>Does profit maximization occur instantaneously?

Time is not really an issue in general equilibrium theory. E.g. the assumptions can be interpreted as saying that all companies make the decision that, at that time, given all information available, maximizes the expected value of the companies future time discounted dividends.

>Does it provide any guarantees on the timeframe required to experience maximal social utility?

Social utility is timeless. E.g. it can be restated to say that if you were to make a plan (where plan can include contingencies, e.g. if X happens, do Y) to maximize the (time discounted) total social welfare over all future time periods, then this plan would involve instructing all companies to maximize profit (in the sense of my answer above).

Basically, general equilibrium theory takes into account time, by adding dynamic programming. But this augmented theory is fundamentally the same as the theory when all consumption, production and trade occurs in one instant.

Minus all the econ jargon, I think you may have been hinting at the adjustment costs for the workers involved. There are indeed adjustment costs, but you can't speak about these costs in the same terms as the actual value of having a job. It's like comparing the cost of moving from one home to another, to losing one's home entirely.

[jsprogrammer]

>I don't understand that question. I know the language of economics very well, but you're not using the terms in way that has an obvious meaning.

I'm not sure if economics uses the term.

Monotonic growth would mean that the dependent value (in this case utility), never decreases as a function of the independent value (time, in this case). In other words, does this framework guarantee that total utility will never decrease, even in the face of events such as 110,000 IBM employees being fired?

>Time is not really an issue in general equilibrium theory.

Then what use does it have in a universe where time appears to be fundamental?

>E.g. the assumptions can be interpreted as saying that all companies make the decision that, at that time, given all information available, maximizes the expected value of the companies future time discounted dividends.

Is there any reason to believe that these assumptions are well founded? Companies are likely aware of a tiny fraction of the total available information and they likely can only understand an even smaller fraction of that information. How does the framework respond to grossly misunderstood and sparse information?

>E.g. it can be restated to say that if you were to make a plan (where plan can include contingencies, e.g. if X happens, do Y) to maximize the (time discounted) total social welfare over all future time periods,

Is it possible to make such a plan? My guess is that any practical attempt would fail for many reasons, including being unable to define what 'social welfare' means as well as not being able to acquire enough computational power to compute across 'all future time periods'.

>There are indeed adjustment costs, but you can't speak about these costs in the same terms as the actual value of having a job. It's like comparing the cost of moving from one home to another, to losing one's home entirely.

I'm not sure exactly where you're talking about here. What is the actual value of having a job?

[disordinary]

Trickle down effect doesn't work.