Economics

"Unless the fundamental categories of economics such as ‘property’ were to be redefined in a radically personal way the liberal rationalist curse which had established economics as a scientific discipline cut off from human interests would proliferate. Economic models … have failed to incorporate any meaningful index of individual benefit other than the original utilitarian one, … the index of increasing income or an increasing flow of commodities."

"Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time. The object of a model is to segregate the semi-permanent or relatively constant factors from those which are transitory or fluctuating so as to develop a logical way of thinking about the latter, and of understanding the time sequences to which they give rise in particular cases. Good economists are scarce because the gift for using "vigilant observation" to choose good models, although it does not require a highly specialised intellectual technique, appears to be a very rare one."

"Unlike Hegel’s progress model of history, which moves by stages, each containing its own logic of growth and decline, the economic model develops as the simple function of one money-variable over time, with a long-term trend which increases monotonically."

"The three most dreaded words in the English language are 'negative cash flow'."

"Money not spent on a luxury one considered even briefly is the equivalent of windfall income and should be spent accordingly."

"Happiness is a Positive Cash Flow."

"Many of the stories economists tell take the form of models—for whatever else they are, economic models are stories about how the world works."

"The circular flow diagram separates the economy into the business sector and household sector. The business sector supplies products and demands resources used in the production process. The household sector demands products and supplies resources used in the production process."

"In many parts of the economy, stabilizing forces appear not to operate. Instead, positive feedback magnifies the effects of small economic shifts; the economic models that describe such effects differ vastly from the conventional ones. Diminishing returns imply a single equilibrium point for the economy, but positive feedback – increasing returns – makes for many possible equilibrium points. There is no guarantee that the particular economic outcome selected from among the many alternatives will be the “best” one."

"Gambling is a kind of tax: a tax on stupidity. A tax on greed. Some money changes hands at random, but the net cash flow always goes one way - to the Government, to the casino operators, to the bookies, to the crime syndicates. If you ever do win, you won't have won against them. They'll still be getting their share. You'll have won against all the penniless losers, that's all."

"60 Minutes is the most successful television series of all time, measured by almost any standard, not the least being cash flow. One year, in fact, the profit generated by 60 Minutes was said to have been all the money made in prime time by the CBS Television Network. It has been honored for dozens of awards for outstanding television journalism."

"Focusing on cash flow is the best way to determine whether the proposed project is feasible."

"The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality."

"Ecological rationality uses reason – rational reconstruction – to examine the behavior of individuals based on their experience and folk knowledge, who are ‘naïve’ in their ability to apply constructivist tools to the decisions they make; to understand the emergent order in human cultures; to discover the possible intelligence embodied in the rules, norms and institutions of our cultural and biological heritage that are created from human interactions but not by deliberate human design. People follow rules without being able to articulate them, but they can be discovered."

"The development of a global economy has not been matched by the development of a global society. The basic unit for political and social life remains the nation-state. International law and international institutions, insofar as they exist, are not strong enough to prevent war or the large-scale abuse of human rights in individual countries. Ecological threats are not adequately dealt with. Global financial markets are largely beyond the control of national or international authorities."

"The ability to accurately predict cash flow is the best, most universal, and most consistent standard for financial management across all nonprofit institutions, regardless of size and mission."

"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised."

"A quantity growing exponentially toward a limit reaches that limit in a surprisingly short time."

"When there are long delays in feedback loops, some sort of foresight is essential."

"The bounded rationality of each actor in a system may not lead to decisions that further the welfare of the system as a whole."

"There always will be limits to growth."

"Ecologists and economists made unlikely partners -- indeed, these disciplines have often appeared at odds with, and determined to ignore, each other... The modeling of ecological communities or systems seemed purposely to leave out the human economy.6 At the same time, economists either took for granted or ignored the principles, powers, or forces that ecologists believed governed the world's natural communities. The market mechanism, or competitive equilibrium, that mainstream economists studied assigned no role to the natural ecosystem.7 Ecological economics sought to embed the study of economics within a larger understanding of how ecosystems work."

"Ecological economics is the name that has been given to the effort to transcend traditional disciplinary boundaries in order to address the interrelationship between ecological and economic systems in a broad and comprehensive way."

"K. William Kapp's book "The Social Costs of Private Enterprise" was one of the first economic treatise that called attention to the ecological and social external costs of the market economy. His book is considered one of the origins of and a foundation for ecological economics."

"In a world of perfect capital markets there would be no association between firm level investing activities and internally generated cash flows. If a firm needed additional cash to finance an investment activity it would simply raise that cash from external capital markets. If the firm had excess cash beyond that needed to fund available positive NPV projects (including options on future investment) it would distribute free cash flow to external markets. Firms do not, however, operate in such a world. There are a variety of capital market frictions that impede the ability of management to raise cash from external capital markets. In addition, there are significant transaction costs associated with monitoring management to ensure that free cash flow is indeed distributed to external capital markets. In equilibrium, these capital market frictions can serve as a support for a positive association between firm investing activities and internally generated cash flow."

"The new paradigm may be called a holistic world view, seeing the world as an integrated whole rather than a dissociated collection of parts. It may also be called an ecological view, if the term "ecological" is used in a much broader and deeper sense than usual. Deep ecological awareness recognizes the fundamental interdependence of all phenomena and the fact that, as individuals and societies we are all embedded in (and ultimately dependent on) the cyclical process of nature."

"Ecological Economics studies the ecology of humans and the economy of nature, the web of interconnections uniting the economic subsystem to the global ecosystem of which it is a part."

"Standard economists don't seem to understand exponential growth. Ecological economics recognizes that the economy, like any other subsystem on the planet, cannot grow forever. And if you think of an organism as an analogy, organisms grow for a period and then they stop growing. They can still continue to improve and develop, but without physically growing, because if organisms did that you’d end up with nine-billion-ton hamsters. There is a great video on this."

"# Emergent structuring, whereby participants discover or adopt certain similar strategies within bounded rationality and situations with certain opportunity structures and incentive structures. Social network and ecological properties result in relatively well-defined aggregate performance characteristics..."

"In the quantitative models that appear in leading economics journals and textbooks, nature is taken to be a fixed, indestructible factor of production. The problem with the assumption is that it is wrong: nature consists of degradable resources."

"There are two basic ways market organization is brought about... Some combination of the two is usual the case:"

"# Strategic structuring, informal or formal, whereby social agents, including the state, establish a rule regime regulating market access and transactions..."

"Even if we can never quantify [satisfaction or happiness]... as precisely as we currently quantify GNP,... perhaps it is better to be vaguely right than precisely wrong."

"From a more theoretical viewpoint, one can focus on the nexus between the present and the future. A financial instrument typically represents a property right to receive future cash flows. Such cash flows will, of course, come in the future – hence the economics of time must be understood. In many cases the flows are uncertain, hence the need for an approach to the economics of uncertainty. In addition, cash flows in the far future may depend on actions taken (or not taken) in the near future. This gives rise to the need for a theory of the economics of options (broadly construed). Finally, one needs information to estimate likely future outcomes, hence the requirement for an understanding of the economics of information. I define financial economics so that it embraces all four of these important, difficult, and fascinating aspects of economics."

"The central question for positive financial economics is valuation – what is the value today of a set of future prospective cash flows? The central question for normative financial economics is the appropriate use of financial instruments in a world in which values are set wholly or partially in accord with the principles of positive financial economics."

"Market valuations can differ substantially and persistently from the rational expectation of the present value of cash flows without leaving statistically discernible traces in the pattern of ex-post returns."

"Creative destruction can apply to economic concepts as well. And this downturn offers an excellent opportunity to get rid of one that has long outlived its usefulness: gross domestic product. G.D.P. is one measure of national income, of how much wealth Americans make, and it’s a deeply foolish indicator of how the economy is doing. It ought to join buggy."

"A final aspect of all open access orders is Schumpeter’s notion of creative destruction, one of the most powerful descriptions of a competitive, open access economy. When Schumpeter wrote Capitalism, Socialism, and Democracy in the early 1940s, the economic theory of perfect competition among atomistic firms (i.e., firms too small to have market power) had come under sustained attack as unrealistic. Large and powerful economic organizations dominated the new economy, and their behavior did not match the textbooks. Despite this dominance, the economy produced historically unprecedented, sustained economic development. Schumpeter asked, How could large businesses that were supposed to choke off competition and growth nonetheless generate such spectacular productivity increases in a world that seemed ever more competitive?"

"The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation-if I may use that biological term-that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism."

"Situations emerge in the process of creative destruction in which many firms may have to perish that nevertheless would be able to live on vigorously and usefully if they could weather a particular storm."

"Schumpeter’s approach has an important implication for political behavior. If the constellation of economic interests regularly changes because of innovation and entry, politicians face a fundamentally different world than those in a natural state: open access orders cannot manipulate interests in the same way as natural states do. Too much behavior and formation of interests take place beyond the state’s control. Politicians in both natural states and open access orders want to create rents. Rent-creation at once rewards their supporters and binds their constituents to support them. Because, however, open access orders enable any citizen to form an organization for a wide variety of purposes, rents created by either the political process or economic innovation attract competitors in the form of new organizations. In Schumpeterian terms, political entrepreneurs put together new organizations to compete for the rents and, in so doing, reduce existing rents and struggle to create new ones. As a result, creative destruction reigns in open access politics just as it does in open access economies. Much of the creation of new interests is beyond the control of the state. The creation of new interests and the generation of new sources of rents occur continuously in open access orders."

"We are far from understanding how to achieve adaptively efficient economies because allocative efficiency and adaptive efficiency may not always be consistent. Allocatively efficient rules would make today's firms and decisions secure - but frequently at the expense of the creative destruction process that Schumpeter had in mind."

"Schumpeter argued that the economy was characterized by a process of creative destruction. An innovator could, through a new product or lower costs of pro duction, establish a dominant position in a market. But eventually, that dominant position would be destroyed, as another new product or process was invented. He worried that the giant corporations he saw being formed during his lifetime would stifle innovation and end this process of creative destruction. His fears, so far, have been unfounded; indeed, many of the largest firms, like IBM, have not been able to manage the innovative process in a way that keeps up with upstart rivals."

"Globalisation is highly selective. It proceeds by linking up all that, according to dominant interests, has value anywhere in the planet, and discarding anything which has no value or becomes devalued, in a variable geometry of creative destruction and destructive creation of value."

"We have far more people selling derivatives, index funds and mutual funds (as we call them) than there is intelligence for the task. I am cautious about prediction; I discovered years ago that my correct predictions are forgotten, the others meticulously remembered. But some things are definite; when you hear it being said that we have entered a new economy of permanent prosperity with prices of financial instruments reflecting that happy fact, you should take cover. This has been the standard justification of speculative excess for several centuries — for a good part of the millennium. My one time Harvard colleague Joseph Schumpeter thought inevitable and even beneficial what he called “creative destruction” — the cyclical process by which the system eliminates the people and institutions which are mentally too vulnerable for useful economic service. Unfortunately the process has larger and less benign effects, including the possibility of painful recession or depression."

"It's hard to overemphasize how important Ford's deregulation was. True, most of the benefits took years to unfold-rail freight rates, for example hardly budged at first. Yet deregulation set the stage for an enormous wave of creative destruction in the 1980s:..."

"These people are not interested in creative destruction, they are only interested in destruction. That leads to gas chambers. That leads to, uh, guillotines. That leads to millions dead. That leads to Mao. That leads to totalitarianism. Every. Single. Time."

"The developed economies are currently experiencing profound changes. A technological revolution is creating entirely new sectors, based on biotechnology, microprocessors, and telecommunications, whose prod­ucts are transforming business practices across the economy. A wave of managerial innovations has seen companies around the world adopt new forms of supplier-client relations, just-in-time inventory systems, quality control and team production. Economic activity is shifting from the industrial sector into the service sector. Capitalism seems to be in the midst of one of those 'cycles of creative destruction' that Schumpeter (1950) identified."

"I do not want to avoid immersing myself in trouble — to be a mess — to struggle out of it. I want to invent, to discover, to imagine, to speculate, to improvise — to seize the hazardous in order to be inspired. I want to experience the manifestation of the absolute — the manifestation of the unexpected in an extreme and unique relation. I know that only by following my creative instincts in an act of creative destruction will I be able to find it."

"Schumpeter’s work, his dynamic view of the entrepreneur and creative destruction has had a great impact on me. He indeed wrote a book, Capitalism, Socialism and Democracy, which intended to give a complex analysis of the two systems. But these two books, and a few others (e.g., some of Mises’s and Hayek’s works) are rather exceptional. A typical American textbook on economic systems is not written with the same ambition about capitalism with which I wrote about socialism. It doesn’t give you a general model of capitalism, including the characterization of the political, ideological, and social spheres."