Profit and Perfect Knowledge

[Scot Griffin]

Questions inspired in part by Jonathan’s “Ignorance Is Strength” post:

Would profit exist in a world characterized by perfect, symmetrical information?  If everyone knew exactly how much it costs to produce a particular product or service, why would anyone agree to pay more than that unless there was some benefit that flows to the buyer?  For example, if the buyer knew that all of the profits would be invested back into the business to expand production and further reduce the cost of the product, it seems plausible the buyer would be willing to pay more than the cost of the product.

On the other hand, if the only reason the seller wants to make a profit is because a lot of people on the stock market are betting the seller can do so (which is what really happens after IPO; no capital flows to the company; it’s just a series of bets shorting the stock), why would anyone agree to pay the seller a profit?  The absentee owners do nothing and are not part of the costs of production.

Another way to think of it is Strategic Sabotage implies a certain amount of monopoly power, which implies a monopoly “tax” is built into the price of every product and service on the market today. Many people claim taxation is theft, but at least taxes levied by the government go to pay only the costs of government services and institutions. Why aren’t profits viewed as taxes, or even worse than taxes because we don’t get anything in return for them?

I’m not trying to take things down a Marxist or anarchist (Property is Theft!) path. What we call the “free market” used to be referred to as “free competition,” the process where competition between sellers (who create supply), buyers (who create demand), and sellers and buyers (over the amount of profit) results in fair prices.  Wouldn’t perfect knowledge eliminate the basis for this kind of competition, which is based almost entirely on the power the seller has over the buyer due to the buyer’s ignorance of the cost of production?

Topic

[ishi crew]

Your first question ‘would profit exist…”? in my view  was proven by Arrow and Hahn or Debreu in the negative decades ago.

Likely i think it can argued it had been proven in the negative many times before that .   Critique of general equilibrium and in a sense neoclassical econ to me comes down to the fact pointed out Hahn, Debreu and others almost immedicatley after  they proved their result was their model didnt describe the real world which is why profit  exists.

so one can say actually existing capitlism where profit exists is due to either greedy and deceitful people, or as you say in your last sentence just ignorant people who make mistakes .

[Jonathan Nitzan]

Scot Griffin wrote:

Would profit exist in a world characterized by perfect, symmetrical information?

Let’s assume that: (1) profit is a manifestation of power; (2) power depends on the use/threat of (i) physical force and (ii) mental/emotional control; and (3) perfect, symmetrical information removes (ii). With these assumptions, profits will depend only on the use/threat of physical force and therefore will be greatly reduced.

However, a world of perfect, symmetrical information is a logical impossibility.

It is impossible because (1) if there is even a whiff of free-will, the future is unknowable; (2) “knowledge”, even of the past, depends, often greatly, on open-ended interpretation; (3) human beings do not have access to all facts, theories and interpretations — and even if they had such access, they don’t know how to tease “perfect” information out of it; (4), and crucially, even if in principle some human beings can have access to all facts, theories and interpretations, and even if they can objectively combine them, in practice, they can always block others from accessing such information, perfect or otherwise….

This is why neoclassicists assume perfect information: it enables them to misunderstand and misrepresent the world, perfectly.

 

• This reply was modified 3 years ago by Jonathan Nitzan.

[Scot Griffin]

My question of whether there would be profit in the presence of perfect information was about ethics, not economics.

Indeed, I would argue that the questions that launched political economy related to ethics, as well.

In the related concepts of “free competition,” “free market” and “free enterprise,” the word “free” is meant to signify the ABSENCE of (i.e., “freedom from”) coercive power. While the concept of coercive power increasingly became identified solely with the state, at the founding of the United States (and the writing of The Wealth of Nations), the concept clearly encompassed power wielded by individuals, and even as late as the 1930s and 40s it was being applied to corporations, as well.

Liberalism at its core claims to abhor coercive power wherever situated. Neoliberalism only abhors coercive power situated in the state that does not benefit capitalists.

Anyway, as I see it, liberalism by its own logic and with some exceptions must reject profits in the presence of perfect, symmetrical knowledge because the owner the goods to be sold is using the fact of ownership to extort payment he is not due (theft). This is just monopoly power in the most transient and raw sense.

Conceptually, rejecting profits that are not re-invested in a business should not run afoul of other liberal ideals, if one recognizes that goods made for sale are meant to be alienated, i.e., commercial goods are not protected by unalienable rights because they are not simply property.

Returning to the underlying ethics or philosophy, the world had market economies long before capitalism. That’s because markets serve the vital function for any society as the means for the distribution of goods, services and money, but how much should access to markets cost a society?

 

[ishi crew]

JN—I think what i consider the best ‘neo/classicals’  –the ones who did the theory—Arrow, Hahn, Samuelson, Mantel, Debreu, Sonnenschein..–i dont think either misunderstood or misrepresented the world anymore than anyone else before or after.
I think they were quite  clear that they were making an ideal model which did not apply to the real world  .   They just understood their model and made no claims about the real world.   (and it later turned out there was more to be understood about their model than they knew.)

(Though maybe not Samuelson –i think only later did he say his models of trade and the stock market weren’t realistic.
I actually took his famous  ‘random walk model’ of the stock market as an anti-capitalist theory–because he said you couldnt make any money off ‘informed’ speculative investing—hence there is no reason for wall street to exist, and any one who  pays a fund manager is stupid., If he had been taken seriously —which he wasn’t or at least his conclusions were ignored–wall street wouldnt exist really .   Of course people noticed you could make money in the stock market so they knew the theory wasn’t correct.   This  could be  because either the market is imperfect or hedge fund managers, etc are scam artists or smarter investors than others–probably all of these . )

Physicists make ideal models is all the time as a first approximation.

Its  really their disciples  –‘lesser theorists  (the creators i think mostly stayed in the clouds out of reality)—who took this ideal model and then applied it to everything as if it was true.   But this is like blaming Adam Smith for capitalism, Marx for Stalinism, even anarchosyndiacalists (G Sorel) for fascism, Darwin for ‘social darwinism’, Newton for reductionism and materialism, Boltzmann for global warming, and Einstein for relativism,  postmodernism,    post structuralism. and critical  legal theory.

just as there is vulgar marxism (i think there are still alot of living practicioners–the kind of thing you hear at rallies and occasionally see in academic journals and book),    vulgar darwinism  (same) ,    vulgar capitalism (most libertarianism/anarchocapitalism/austrian economics–i include M Friedman in this class) ,  there is vulgar neoclassical economics  –this is what you  see alot last i looked in Am Ec Rev, JPE, QJE.   Actually vulgar neoclassism is what you really see in newspapers , hear on radio or see on tv.  Krugman is high vulgar neoclassiscsm; Mankiw etc. are journalists with academic positions.
(Actually I dont enough of their stuff to know if thats all they do .)

(Lucas is his own category — his theory could not be vulgarized (approximated or made into some caricature of itself —it was already phrased into the most fundamental caricature beyond vulgarization.   Unlike the others Lucas basically denied it was an ideal model–it was reality.)

There is also vulgar quantum physics—Deepak Chopra, new age physics.  Dont blame the originators for that.

Actually some neoclassical econ is ok–its like classical mechanics and there still plenty   of problems to be solved that way.  But these are like engineering— if you make a machine thats not how the universe works and most physicsts dont claim it does (though a few do).
(Also  CM still has open  problems-so its possible something fundamental will come out of those.)
Neoclassical might work for grocery shopping.
But there may be open problems.     People used to say classical physics was ‘deterministic’ which in many ways it is–but not all. Simiarily it may turn out neoclassical economics in some cases isn’t what its called and considered to be.
I sort of thought the HUMBUG and SMD theorems already showed this.

It sort of like saying Hilbert’s program to  find a set of axioms so that one could prove every true statement was realized by Godel–who proved there are unprovable  statements.

——————
I do think the high the high theorists did mostly look the other way when others were saying their theories were saying things they didn’t say.
It may be like Soviet russia (and a little bit in nazi germnany) when some physicists decided to let politicans use their theories to support their politics.

[Jonathan Nitzan]

ishi crew wrote:

I think what i consider the best ‘neo/classicals’ –the ones who did the theory—Arrow, Hahn, Samuelson, Mantel, Debreu, Sonnenschein..–i dont think either misunderstood or misrepresented the world anymore than anyone else before or after. I think they were quite clear that they were making an ideal model which did not apply to the real world . They just understood their model and made no claims about the real world.

Many neoclassical economists hide behind this Teflon veil: it’s ‘just math’.

The high and low priests who engage in this type of ‘just math’ call themselves economists, not ‘mathematicians’. And I think it is wrong to say that they do not intend their models to apply to the real world. They don’t speak about abstract X, Y and Z entities, but about social concepts such as rational agents, markets, utility maximization, productivity, growth, income, etc (as well as the ‘distortion’ that upset these pristine social concepts). They also tend to be highly biased in favour of capitalist ideology, both in terms of the questions they ask and the answers they give. Last but not least, they never turn down a Nobel Economics prize, least of all on the grounds that they are ‘not economists’ and that their theories are not about the ‘economy’.

So when economists assume ‘perfect information’, I think they are convinced that this concept represents how the world works or at least should work, and that it should be the basis on which economists could, at some point, be able to understand it. In doing so, they mislead themselves and their followers to never look at many of the things that actually mater in capitalists society. In my view, this is the main reason why they are heavily supported and often exclusively subsidized by corporations and governments.

I doubt that any of this can be said about theoretical physics, at least not in this harsh way.

For more on these issues, see our “Capital Accumulation: Fiction and Reality” http://bnarchives.yorku.ca/456/

 

• This reply was modified 3 years ago by Jonathan Nitzan.

[Scot Griffin]

Calling neoclassical economics a religion isn’t an analogy, it’s a fact. In neoclassical economics as restated by neoliberals such as Hayek:

• The Free Market = God (an all-knowing, all-seeing, all-powerful entity);
• Capitalists = Kings (chosen by the Market, with all the divine rights granted thereby); and
• The State = mankind (who cannot question God or hope to understand or control him).

One of the many problems with economists (as opposed to physicists) is they never consider whether new assertions like “perfect knowledge” affect the underlying principles of their science. Symmetrical, perfect knowledge eliminates any claim to the absence of coercive power that animates economists’ concept of the Free Market because naked profits can only be achieved through extortion (theft) enabled by pretending alienable commercial goods are inalienable private property. This pretension is the ultimate source of capitalist power.

 

[ishi crew]

Comment on S.G. and J.N.

1.  SG—If viewed as an ‘ethical’ rather than ‘economic ‘ question, my view is in a capitalist system with perfect information one could have 0 profit or any other value.  It depends on what the ethical system is and who who determines what it is or defines it.

I might even say to me CASP  doenst distinguish economics from ethics. Power is both a social construct and has ‘real ‘ effects.–it determines what is real, and also sometimes makes it.

(I sometimes make and sell very modern art usiing the most current theories learned in art scchools (i didnt go to one but went to the regular college next door so there was overlap. ) So I know what real art is and make it—my current artworks  are whatever trash i see on the street–i put a price tag on the trash and because i’m known as a very ethical  authority on real versus fake art people buy these.   I warn them not to get to ripped off by unethical criminals selling fake art.
‘this beer can is real art, the other is fake trash’.
If people need confirmation i use some money to hire another vetted expert  who vouches for my art.     I come out with more money than before, but zero profit and we have perfect info iof you hire the right expert–its worth getting expert help.)

Profit  to me means you basically get more out (return) than you put in (either labor, or investment /finance capital, or other kinds–e.g. gasoline in your car.)
If you drive your car somewhere find some gas and come back with more than you used then you  profited .  If your ethical system says you have to pay for the gas but didn’t then profit of that kind is unethical.   It would be possible to design a capitalist system in which profit was impossible. Its an equilibrium system–noone can ever get more out than they put in.

But you could design an  ethical system also with zero profit where you get more out than you put in–but its not called profit.  You just say for example anywhere you go that God –who defines the ethical system, and what is right and wrong, and what is stealing versus ethical aquistion —–gives you as much gas you want without paying  for it.

Using some thing like god (or equivalently the invisible hand) to define the  ethical system is sort of the way people made slavery ethical, domesticating or hunting animals, ‘privatizing the commons’, running labor camps and factores—in this view there is no ‘forced labor’ or ‘coercion’.

(In my virew, actuall;y Captialist markets are free with no exploitation, by definition–only people like marx see exploitation.
Captialists see ‘volunteered slavery’ (famous song by Rahsan Roland Kirk) as just a job descrition or occupation –peopple are ‘free to choose this job’. If they didnt want it they wouldnt have it–they would have taken another –eg ‘master’.
Same for  authoritarian leader or dictator under stalinism—stalin was just the a member of the dictatorship of the proletariat with a specific job.    Everything was held in common  but and everyone was equal but jobs and what individuals had differed.

I actually could argue capitalism operates with perfect information even if it doesnt look that way.

This is like the ‘least action or shortest path principal ‘ in physics   (and there are many attempts or papers applying these to econ).  A particle has perfect information about the easiest or shortest path when it goes down a hill even if it may not look that way–same with planets–they know exactly where to go.

———————

JN—I read ‘Capital accumulation’ and also looked at a long video from 2015 on same topic   (which also discussed the employment situtation for CASPers, and described the idea of creating a non-academic research institute of some kind.

I basically agree with these to a large extent except maybe for some terminology.

If I had the stamina i’d write a long essay on these.  (I could probably write an essay on each paragraph or at least many of them.  Its possible these would  offend most if not all economists and physicists–as well as theoretical biologists. ‘Heterodoxy on steroids’ .  ‘Which side of the surface of the earth or the circle are you on? )

Theoretical bioloigists to some extent are like the ‘teflon economists’.
Except they call themselves biologists studying important problems relevant to health research because if they called themselves mathematicians they wouldn’t get funded.

‘this theorem  contains N Utils of   the cure and required N SNALTs to make’. ‘For optimum health combine it with my other theorem’.

To some extent biologists use ‘ftiness’ in place of utility’ (and there many math analogies).  Biologists sort of know fitness cannot be really defined except locally. (Like the value or utility of my art.  )  (There is a hige semi-math literature on this which overlaps with econ. )

The physics analogies i think could use some work—there are many similarities between the fields though physics and biology because they  seem to have alot more predictive power (computers work, vaccines can be made)  and often are very complex   they are harder to criticize.       Bu there is similarity.
Both fields have alot of stuff of questionable ‘utils’.

(The new winner of a Mccarthur genius award at Harvard in econ [edited] got his grant for doing some complex statistics to determine if there is discrimination in employment, and also whether field tests of things like vaccines are accurate.  While the latter study i think is worthwhile, sometimes discrimination doesnt need alot of heavy math to discern.   So some studies of that are just math dressed up as some sort of ‘social activism’.
Maybe he could see if his algorithm can detect discrimiation in academic publishing.)

————
It would be nice to have a study group on these topics –but i would  read CASP along with many other things if i had a study group.

Regarding creating a non-university research center of some sort I’ve also been trying and  spectacularily  failing to do this for a long time–i even applied for some grants for ‘independent researchers’ (which i basically knew would be denied because while they theoretically came from different places, they all basically had the  same 2 main sources of funding—  which also fund mainstream university research. )

—

 

• This reply was modified 3 years ago by jmc.

[jmc]

ishi crew,

As you can see, our forum is open to the critique of ideas. But please try to be conscious of what some of your tangential comments imply. I can take responsibility for the edit above–the race and sexual orientation of the economist is not relevant to them using neo-classical economics.

[ishi crew]

JM– i realized those details were basically irrevelevant  so sorry about that.

My  point was just that because in the case of academia (or politics, etc.)  one has some dimensions of diversity doesn’t mean you are  doing your best in other areas.

From my brief glance I’m sort of surprised CASP doesnt appeared to have been reviewed much  by some people in the field –S Bowles and H Ginitis for example have  a 2007 paper on power (which I think is compatible though uses different terminology and also doesn’t deal with what i view as the very ‘macroeconomic’ kind of data seen in CASP— BG seem to focus on power in microeconoic situations.
My own sort of interest is how the micro- phenomena translate into the macro.)

But i’d also say that while I dont really know the details I did find an essay by K Arrow from 1978 in Dissent Magazine called ‘a cautious case for socialism’.  (free online).

While that may just have been just platitudes, at least that essay doesn’t   promote any view that the US economy or any other operates under perfect competion and information.  It discusses the very mainstream socialist and other views about elite control of corporations and assymetries of power.  (Arrow says even capitalist  shareholders of corporations (which often include unions)  dont have much  power to control the elites who run them,  much less workers).

[Jonathan Nitzan]

ishi crew wrote:

From my brief glance I’m sort of surprised CASP doesnt appeared to have been reviewed much by some people in the field

For more on the relationship of mainstream and Marxist political economists to CasP, see “Manuscripts Don’t Burn” http://bnarchives.yorku.ca/641/, written to contextualize the rejection of our invited interview with Revue de la régulation: http://bnarchives.yorku.ca/640/.

[ishi crew]

JN—I sort of rejected reading your reply to a rejection because

1) it was 71 pages (someone ‘dogmatically’ into MMT rejected reading my 4 paragraph reply to one his posts on a ‘complexity science’ page because it was too long and his mind was decided that  MMT was the best and only theory that  makes sense)  and

2) i  noticed names like Althusser, Marx, etc. and i didnt want go down  dome rabbit hole into a sectarian feud–also i never heard of that journal (it might be one i avoid)

but then i looked at it–just skimmed and mostly  first 20 pages.   its a very interesting paper.  its the kind of thingi wouild read outside and may when i get a printer if i do. (i actually consider it ‘social physics’–and i actuually put Bourdieu and Foucault in that class , possibly derrida and lacan–i’ve obnly really read some of boudieue–others just skimmed –   and then  going way back (comte might be the easiest to classify but even he doesn’t fit into every box or solve every puzzle—thats the problem of quantum theory which has many names (spin, indistinguisable particles…) , kant , Berekely, etc.  There is a physycist  Y S Kim  who has papers on Kant , taoism, Feynman  and Eeinstein and a reactionary polish physicist also wrotes on related things. ).

I might have  some terminology and conceptual  differences (‘everything is finance’) but to me these are in a sense like the difference between a dollar and a euro or french and enliglish or quebecois .

For example about p 7-10 you go through 3 main ideas of marxists/neoclassical-liberals whic you say CASP disagrees with (and compare them to newtonian mechanics/flat earth theory etc.)  To an extent i dont think anyone believed in those theories or social versions since 1880-1930.   (Actually thats wrong –there   are still economists, political thinkers and biologists , maybe a few physicists–who still believe in those. But i mostly dont read those–i have met some with those views. .)

There are for example even ENDOGENOUS  SDGE models as you likely know. Very slight alterations of perterbations of old theories or equations  lead to very different universes (you’ve pro ably seen in chaos theory the discrete  logistic attractor–a fractal.)

(As an aside i think you meant Fourier Series not transform –but maybe ask someone who has taken calculus.   If you meant transform then  conceptually its harder  for me to visualize or understand  –one is like taking a rock apart into atoms or a sandwich into bread, lettuce and butter   ; the other is like taking it through time —the entire history of very atom in the rock, or the entire supply chain making butter, lettuce, bread and then combining them–at least thats my intepretation.)

(as another aside since i’m  someone somewhat into sapir-whorf idea it may be euros and dollars are fundamentally different even if exchangeable, and ‘a car ‘ in english is not the same as ‘le car’ in quevecois; same for ‘the car’   .    Noam Chomsksy might have views on that–he’d say they are all different as is every car except original one which Plato keeps in his universe or shwoing room. )

I wouldnt say finance is everything except in the sense  that in my view  there is already an existing (somewhat obscure) physics theory (which i barely understand)  which covers what you are doing.
More well known forms of the same theory (QFT and superstrings) which   some believe predicts everything in the universe (though its not accepted and they cant prove it –i think they did try to predict something.) QFT  does predict maybe 3/4ths of what is known (i’m not sure the economics version has been applied but the people who made it work in finance).

In  this theory utils are quanta–and noone knows what they are (some say matter, or space, or just numbers , or just measurements ( the way iq is measured with iq tests —‘we measured the number 3 to be  3’)–or combinations of these.    I saw a recent paper on this theme—claimed to derive all quantum theory from measurements. There are many on this theme–‘it for bit’ ( J Wheeler, Feynman’s prof).

SNALTs are what you use to combine the utils into a recipe —which you use to make things to sell—and get more utils (combined into products or money).
(in other words a diamond is a big Util made of subutils called carbon atoms–anyway thats my version–though it may be a different theory which is ok with me–i could myself be a casper the ghost.  )

Just as you can start with finance or superstring theory and get everything else, you can start maybe everywhere and get superstring theory—another hobby of some physycists. To me its really a matter of conveniance or convention where you start. Its like climbing a mountain—there are lots of routes.

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