Fw:Re: Re: [OPE] The micro dimension of the Financial Crisis.

From: Michael Williams <michael.williams.j@googlemail.com>
Date: Mon Nov 10 2008 - 15:02:44 EST
This may have not gone to the list

----- Original message -----
Sent: 2008/11/09 10:45:31
Subject: Fw:Re: Re: [OPE] The micro dimension of the Financial Crisis.

Alejandrow A writes:

----- Original message -----
Sent: 2008/11/09 10:09:52
Subject: Re: Re: [OPE] The micro dimension of the Financial Crisis.

"3) PRESCRIPTIVE/MANDATORY MODELS: this is the nature of the models behind the “derivatives” that caused the financial crisis. Why they failed? Because mathematics only can deal with classical environments characterized by: A) absence of externalities, B) absence of local saturation of preferences, C) total divisibility of factors of production, D) convexity or absence of increasing returns to scale, and E) temporal homogeneity."

I have yet to see even the outline of an argument that it is either derivitives or models that caused the crisis. The relevant derivitives, primarily Credit Default Swaps, in this context are simply forms of hedging, i.e. insurance. (The players avoid calling them this in order to avoid concomitant regulation of the market.)

It is simply not true that externalities, local preference saturation, factor indivisibility, convex production functions, etc. cannot be modelled. All of these phenomena can be mathematically expressed. The deletrious affects that generate crises come not from models per se, but from their inapproriate use. In particular from the ignorance of the need for concretisation of abstract models to incorporate abstractly contingent phenomena as relevant in particular domains of application. For example, both the 1998 and the 2008 failures in derivitives markets were driven by lack of appreciation of the possibility of rapid onset of liquidity famines. I have already indicated that behavioural mistakes based on hubris, greed, criminality, incompetence and loss of bottle (one might add) by players who shouldn't have been able to enter the game, can explain liquidity crises.  Further explanation of those behavioural traits, of course, needs reference to biological and social determinants of behaviour to concretise the abstract assumption of rationality.



A. Agafonow

De: GERALD LEVY <gerald_a_levy@msn.com>
Para: Outline on Political Economy mailing list <ope@lists.csuchico.edu>
Enviado: domingo, 9 de noviembre, 2008 1:10:37
Asunto: RE: [OPE] The micro dimension of the Financial Crisis.

> Just as Dickinson described the situation several decades ago: >  “The most efficient statistical service in the world will not make it possible to predict,

> without a large margin of uncertainty, whether spots will be more popular than stripes

> next season.



Hi Alejandro:


That shouldn't be a problem since it shouldn't  take a year to change the design of

clothing from spots to stripes.  There asre relevant technological advances which

can speed the process both of production and ordering.


On the production side,  there are integrated CAD/CAM technologies employed

throughout manufacturing. Furthermore, more efficient  'lean production' systems

decrease the need for excessive inventory and allow for faster changes in batch

composition.  The consequence is that the 'lead time' required for such minor

changes in output composition has been drastically reduced.


On the ordering side,  advances in communications technologies (including

the Internet and the cell phone)  allow for consumers to make their preferences

known on a 'just in time' basis (this dovetails nicely with the just in time advances

in production technologies).  Most people wouldn't at all find it difficult to

decide this week whether they prefer a shirt with spots or stripes next week.

Hence, Dickinson's claim is being made irrelevant by technological



> How a new film or musical play will go, what will be the reception of a

> novel, a gramophone record, or a mechanical ‘Mickey Mouse’.”


People can be asked in advance to make reservations and output composition

decisions can then be based on their clearly stated preferences.


One of the positive developments in the USSR was that concerts, musicals,

films, etc. were often made freely available to workers. Indeed, performances

were often in the factories themselves.


In any event, you should consider - once again - how technological advances

affect this process. For example, books and records can be replaced with

digital books and digital recordings. This drastically lowers the production

- and, especially, the reproduction - costs (not to mention the shipping costs).

If someone wants a book or a recording, then all they will have to do is

download it.


We need to think of socialism as it is now possible in the 21st

Century and not be limited in our vision to what was experience in the

20th Century. It is a new world, Alejandro. A new world that Dickinson

did not live to see.


In solidarity, Jerry

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