Personally, I discounted Krugman as a clown after he suggested nationalizing the banking system during recent financial crisis but after this article he gained my respect back,Paul Krugman, How Did Economists Get It So Wrong?

QuoteOriginally posted by: acastaldoAfter spending a pleasant Saturday in Manhattan I was on my way back to Connecticut. I was in a subway train that was about to leave the station and the doors were closing when a 'gentleman from uptown' thrust his arm between the doors. The doors do not reopen automatically, but the failure to close prevents the train from leaving. Noticing this the driver after a few seconds commanded the doors to reopen, and after an announcement "please do not hold the doors" closed them again. And the train was on its way with a new passenger on board.This is a good example of an activity that is personally profitable (the gentleman saved himself 3 minutes of waiting for the next train) but socially destructive (more than 100 people were delayed by 15 seconds each). Naturally the people who run the subway understand this and that is why it is forbidden (why the regulation is not enforced is another matter).It's not enforced because most people on the train see something of themselves when they see the perpetrator. That is, they excuse the perpetrator's personal profit relative to their loss because they know that they too might want/need to jump on a train just as the doors are closing at some past or future time. It's also not enforced because enforcing it would further delay the train (i.e., waiting for the subway police to arrive to arrest the perpetrator).It would be interesting to study the cultural dimensions to this. Would a tardy Swiss or Singaporean rider put their hand in the door? Would the Swiss or Singaporean subway passenger (or operator) excuse such an action?The point is that the calculus of social value is locally socially constructed and can't be objectively analyzed or centrally planned no matter how smart Krugman thinks he is.

stuartsimpson:I am glad that you agree with me "there is plenty to take issue with" in Krugman's article.I would like to point out though, the point of this topic, at least when I first post it, is to analyze the logic in Krugman's piece. We all know a crisis happened. Everybody is searching for an explanation and for the hidden cause. You say the size and complexity of the financial instrument MAY be a culprit. The very air we are breathing may be THE culprit. The spirit of tsar Nicholas II could the one roiling the economy. And the top prize for blame assignment goes to, drum roll, spreadsheet . Those may well be. Anyone with nary half a brain can throw out some half baked hypothesis. Now show me the rationale, show me the proof, buttress your claim. That's the part I am getting at. What I am attacking is the twisted, to say the least, logical construct of Krugman's article. The absurdity is people like Charles Schumer tries to ban high frequency trading before he even knows what it is, with the same enthusiasm and religious fervor with which Taliban bans music and arts, designating them as the root of all human evil and corruption.I trust the reason you brandied out about the credentials of "a nobel prize winning economist, the head of the FSA and the CEO of Goldman Sach" was not to substitute reason with medals. I can just as easily amass an army of nobel laureates, heads of think tanks, CEO's of corporations who express diametrically opposite views. Most incredible, people take what Lloyd Blankfein said at face value. Don't you think it is just a cheap political ploy to allay people's resentment towards Goldman Sachs and lesson the political pressure the bank faces? If he truly thought the profits the bank made were ill gotten, why didn't he simply give them up to his rivals, or surrender them to IRS as unemployment funds, or donate to the starving children in Africa? Maybe crude political charade does work. Aside from that, I will not bother you with a quote from Einstein on supposed experts and authorities. I hope the discussion on Wilmott does not degenerate into a beauty pageantry of credentials and heresays. You don't think logic and reason is too stringent a yardstick for accepting or rejecting an argument, do you?

acastaldo:I am glad you brought up a real example. Let's analyze this, shall we? Since you seem to have posed the situation as a social issue (which I would not have done) and predicate the decision to whether or not to delay the train on the social value calculation (which is irrelevant and impossible), let's look at the implication of this line of argument. You implicitly define society as this trainload of people, 100 or so. It begs the questions: 1. Are you excluding the 'gentleman from uptown' from the society? Is he not a member of the society? Are you excluding him because he is the minority? (Think of the implication of that!) 2. Suppose you do accept our gentle citizen from uptown as an honorable member of the society, let's do some arithmetic of the social value for this society of 101. The upstanding 'gentleman from uptown' did gain 3 minutes, to say the least, usually much longer waiting for a train, in my experience, while the other 100 people lost 15 seconds. How do you propose the social arithmetic should be done? The gain to the society = -100*15+180? Do you give equal weight to the time each person gains and looses? If that's the case, now suppose you are the only one on the train and there are 100 people outside grabbing onto the train door, for 10 minutes, would you be glad that they get on the train, or even more than willing to hold the door for them, though you are going to be late for an intercontinental flight? What if that 'gentleman from uptown' is a surgeon clutching an icebox with a transplanting kidney rushing to a dying patient in the hospital at the next stop, and the 100 people already on board are just coming back from a merry drunken party to go to the next evening frolick? Shouldn't the surgeon get a few more points for his time than the merry making party hoppers? I suppose it requires no less a brain than Von Neumann's wired to a network of supercomputers calculating social values just to do the subway conductor's job deciding when and how long to open the subway train door and delay or speed up the train.

Krugman's article has a very valid point, hasn't he? "Economists get It so wrong", because they rely on deeply flawed mathematics / thinking. Schopenhauer once said mathematics begins where thinking stops, and that is very true of (mathematical orientated) economics, especially in the heads of 'quants'. It should be easy to verify that almost all front-tests (predictions) of economic theories fail / have failed. The events of 2008 prove this beyond doubt I believe. Logic >> Maths

@macrotrade: if you would like to discuss the subject knightrider posed, to wit: is krugman right/wrong in saying some financial activities are privately profitable but socially unprofitable and how can we tell given that we cannot compare utilities or aggregate them into a SocialWelfareFunction, you are welcome. If you want to pretend you are George S*r*s why don't you go somewhere else (perhaps a psychiatric clinic?)

QuoteOriginally posted by: Traden4Alpha[The point is that the calculus of social value is locally socially constructed and can't be objectively analyzed or centrally planned no matter how smart Krugman thinks he is.That doesn't mean it can't be analyzed using democratic discussion and common sense -- no matter how much smarter you think you are than Krugman.

QuoteOriginally posted by: FermionQuoteOriginally posted by: Traden4Alpha[The point is that the calculus of social value is locally socially constructed and can't be objectively analyzed or centrally planned no matter how smart Krugman thinks he is.That doesn't mean it can't be analyzed using democratic discussion and common sense.Perhaps, although democracy has problems with assigning proper proportional voting if the profits and losses are not equally shared across the voting population -- some folks vote who should have no say and others who are severely affected have only their "fair" one vote."Common sense" is OK, although it is too often just a synonym for "do it my way because I think I'm right."In the train case, the contextual issues introduce so much variance of profits and losses that no blanket rule will optimize social good and any in-the-moment democratic discussion will only delay the train more than just letting the tardy rider on. The only solution is the societal norm -- some societies probably think nothing of holding the door (and may even expect it as a matter of decency) and others hold diametrically opposite norms.

An aspect always missing in these debates about speculation: How is the money being redistributed? Since speculation is a redistribution of wealth, is money going from poor to rich, from have-nots to haves? This side of the question seems to always be missing. And then, what's the overall effect on the velocity of money?Generally speaking can we imagine that most speculation in the financial markets generally leads money up the food chain, helping to aggregate wealth at the very top? Everything seems to facilitate this, not by evil design but simply by the nature of business. Bigger money buys better talent, lower commissions, better information.But if there's supposed to be a meritocracy and the markets are supposed to price as best they can, then equality among participants should be important. Even commissions should be equal regardless of size, with provisions for bona fide market makers I suppose.

An aspect always missing in these debates about speculation: How is the money being redistributed? Since speculation is a redistribution of wealth, is money going from poor to rich, from have-nots to haves? This side of the question seems to always be missing. And then, what's the overall effect on the velocity of money?Generally speaking can we imagine that most speculation in the financial markets generally leads money up the food chain, helping to aggregate wealth at the very top? Everything seems to facilitate this, not by evil design but simply by the nature of business. Bigger money buys better talent, lower commissions, better information.But if there's supposed to be a meritocracy and the markets are supposed to price as best they can, then equality among participants should be important. Even commissions should be equal regardless of size, with provisions for bona fide market makers I suppose.

QuoteOriginally posted by: day4nightGenerally speaking can we imagine that most speculation in the financial markets generally leads money up the food chain, helping to aggregate wealth at the very top? Everything seems to facilitate this, not by evil design but simply by the nature of business. Bigger money buys better talent, lower commissions, better information.Yes, but there is also the nature of unregulated capitalism and the corruption of government that accompanies it. This facilitates the upward transfer of wealth in much the same way as any other unpoliced mob monopoly.

acastaldo:Finally, I got through to somebody that "we cannot compare utilities or aggregate them into a social welfare function". The task is impossible. Speaking of wasteful activity, the effort expensed constructing one is one of them. Moreover, any serious and forceful attempt at it will on the contrary induce tremendous harm. Examples of the malicious consequence of the latter abound. Fascist and communist regimes are but a few manifestations.In a free market where the properties rights including the sanctity of contracts are strictly observed and upheld, and constituents of the market are free to trade, no dilemma will arise. The train incident is a cut and dry case. There are 100 possible cases of breach of contract between each passenger already on board and the train company (I say possible, it's hard to bring a case when the token of $1.25 does not seem to entitle you departure and arrival time accurate up to seconds within the nonexistent schedule. It will be different if you charter a private jet.) There is a case of tresspassing and possible property damage the "gentleman from uptown" perpetrated on the train company. We can dispense with any futile notion of social utility or welfare function, which is self contradictory and in all likelihood pernicious.

day4night:What is your definition of redistribution of wealth? According to the source I checked, it "specifically refers to when assets are seized" involuntarily "from one entity and transfered to another entity" without compensation equal in value. Trades in the exchange or OTC baring any fraud are voluntary and exchanged under the agreed upon prices by all parties involved, with no coercive seizure. Therefore, the trades are no redistribution of wealth. The only redistributions of wealth under coercion are thievery and robbery, arbitrary exorbitant taxation and government subsidies, such as the $700 billion or more TARP, the economic stimulus package and the subsidies to the big three automakers. What is your definition of food chain? Equality of what? Income, talent, gene makeup? Have you faced off against Andy Roddick on a tennis court on "equal" footing, tried dating the same model George Clooney has set his eyes on "fair and square", or tackled the same problem Stephen Hawing or Edward Witten is working on? Another serious case of muddy concepts...

@macrotrade: acastaldo is a bit too harsh, but is the reason Krugman's rant appeals to you that you are gleeful that you can finally shed the burden of playing with all those squiggly Greeks? What the h**l is "Logic >> Maths"? What do you care which is larger, since you appear to neither have nor want either?

QuoteOriginally posted by: knightrider@macrotrade: acastaldo is a bit too harsh, but is the reason Krugman's rant appeals to you that you are gleeful that you can finally shed the burden of playing with all those squiggly Greeks? What the h**l is "Logic >> Maths"? What do you care which is larger, since you appear to neither have nor want either?To adapt a phrase from the worlds most successfull investor: beware of geeks with greeks. That by the way was part of the point of Krugman's article. But I am sure you will never understand it. Obviously I am in the wrong forum, because Quantitative Finance in this case means nonsense finance.