[PEN-L:8320] Re: Re: Re: Bengali famine

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

The trouble with economists is that they tend to make general declarations based
on narrow specific options.
In fact, several additional rational expectations comes to mind off hand.
1) the money lender may require you to buy a life insurance policy and make him
the beneficiary, even if he expects you to die.
2) the money lender may hedge the financial implication of your death with an
arbitrager, making it the notional value, so to speak.
3) the money lender may find your story good advertisment for his humane lending
policy and your defaulting on the loan through death may bring him more profit
from additional borrowers.
4) the money lender may have inside information of the pending devalution of the
currency he is lending you and have swap your loan for an appreciating currency
to an unknowing or knowing counter party way before you die.
5) etc., etc.
The market is complex, and there is always a scheme behind a scheme.  That's why
Wall Street has been hiring physicists, mathematicians and astronomers, (more
than economists, I may add) to get help in chaos theory and boundariless
environments, stochastic processes and what have you.  In a broad sense, every
transaction is link to an equilibrium through its complex network and everything
has something to do with the price of eggs in China.

I do not know the details of the Bengali famine, but it is safe to bet that if
it happened under a functioning market, it happened because it's occurance was
profitable for someone somewhere, because that is how markets work.  Markets
exist for some to maximise profit and others to minimize loss.  For a market to
exist, there need to be a difference of honest opinion, the buyer thinks its
going to go up and the sellor thinks its going the go down. The complexity comes
from the schemes behind schemes in making that calculation.
Professor DeLong's explanation of market functions is neither instructive nor
enlightening.

Henry C.K. Liu

Brad De Long wrote:

> >In an earlier missive in this thread, I wrote: >>Sen and de Long are saying
> >that even with close-to-perfect markets (or even perfect ones), people can
> >starve, simply because they don't have enough money to buy food when the
> >price goes up. That's a pretty damning indictment of markets, but it
> >doesn't explain why people don't have the money. <<
> >
> >After writing this, the little neoclassical homunculus in my head (a result
> >of college and graduate school indoctrination) woke up and said: "wait a
> >'sec. If markets were _really_ perfect, as in the Arrow-Debreu Walrasian
> >General Equilibrium Model, no-one could starve. After all, the potentially
> >starving person could borrow money on the perfect futures market, taking
> >advantage of his or her potential to earn wages in the future
>
> ... if you are going to earn wages in the future, then yes. But even in a
> perfect-capital-markets world there are two rational-expectations
> equilibria: one in which the money lenders think that you are likely to be
> dead, hence don't loan you any money, and you die; a second in which money
> lenders think that you will remain alive (and will be able to find
> employment at some wage), lend you money to buy foo, and you live.
>
> These two equilibria both maximize different objective functions--different
> weighted sums of individual utilities. But they are both equilibria: there
> is nothing in the formalism to say that the market will attain the "nice"
> one...
>
> Brad DeLong
>
> -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
> "Now 'in the long run' this [way of summarizing the quantity theory of
> money] is probably true.... But this long run is a misleading guide to
> current affairs. **In the long run** we are all dead.  Economists set
> themselves too easy, too useless a task if in tempestuous seasons they can
> only tell us that when the storm is long past the ocean is flat again."
>
> --J.M. Keynes
> -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
> J. Bradford De Long; Professor of Economics, U.C. Berkeley;
> Co-Editor, Journal of Economic Perspectives.
> Dept. of Economics, U.C. Berkeley, #3880
> Berkeley, CA 94720-3880
> (510) 643-4027; (925) 283-2709 phones
> (510) 642-6615; (925) 283-3897 faxes
> http://econ161.berkeley.edu/
> <delong@xxxxxxxxxxxxxxxxx>