I’ll grant that a lot of contemporary economics involves investigating areas where an assumption – rationality, perfect information, homogeneous agents - is violated. But usually this is only done one at a time, preserving the other assumptions. However, if almost every assumption is always violated, and if each violation has surprisingly large consequences, then practically any theory which retains any of the faulty assumptions will be wildly off track. Consequently, I would suggest that rather than modelling one ‘friction’ at a time, the ‘ideal’ should be dropped completely. Theories could be built from basic empirical observations instead of false assumptions.
I’m actually not entirely happy with this argument, because it implies that the economy would behave ‘well’ if everyone behaved according to economist’s ideals. All too often this can mean economists end up disparaging real people for not conforming to their theories, as Giles Saint-Paul did in his defence of economics post-crisis. The fact is that even if the worlddid behave according to the (impossible) neoclassical ‘ideal’, there would still be problems, such as business cycles, due to emergent properties of individually optimal behaviour. In any case, economists should be wary of the as if argument even without accepting my crazy heterodox position.
The fact is that reality doesn’t behave ‘as if’ it is economic theory. Reality behaves how reality behaves, and science is supposed to be geared toward modelling this as closely as possible. Insofar as we might rest on a counterfactual, it is only intended when we don’t know how the system actually works. Once we do know how the system works – and in economics, we do, as I outlined above – economists who resist altering their long-outdated heuristics risk avoiding important questions about the economy.
Unlearning Economics
Economists and the ‘As If’ Argument
12 comments:
But, then economists couldn't disparage the current administration, or excuse the current administration because of what the past administrations did. They could actually be proven wrong, and they'll NEVER go in for that!
"...Reality behaves how reality behaves..."
My argument from the get-go.
The Sectoral Balance identity (and therefore MMT) is a model of a closed system of currency units...a model of reality...
...from which many things follow that one can count on to be within the domain of the unique and repeatable events.
No other economic model or collection of models can (has) achieve(d) this.
Neoclassical economics is like observing what happens at a few turns of a road race in order to determine what will happen for the race as whole.
MMT observes the whole race.
Neoclassical economics assumes that the participants in a market are identical atoms that interaction without friction. Why? Computational convenience. Modeling an actual market is intractable with their level of math chops. Then they adjust the simple system with "epicycles." Finally, they scale up micro to macro. The math works though, so they are happy.
See Lars Syll, Forecasting Errors
Tom, what is the appropriate level of math chops?
Tom, what is the appropriate level of math chops?
I think that Steve Keen is attempting to lead the way, vimothy. Also folks working with agent-based modeling and complex adaptive system, like Santa Fe Institute.
Ronald Coase ended his Nobel lecture with this observation:
My remarks have sometimes been interpreted as implying that I am hostile to the mathematization of economic theory. This is untrue. Indeed, once we begin to uncover the real factors affecting the performance of the economic system, the complicated interrelations between them will clearly necessitate a mathematical treatment, as in the natural sciences, and economists like myself, who write in prose, will take their bow. May this period soon come.
But I know economists with PhDs in, for example, theoretical physics and maths. Are you saying that these people don't have the necessary mathematical ability to do economics, but Steve Keen does?
http://en.wikipedia.org/wiki/Mathematical_maturity
But I know economists with PhDs in, for example, theoretical physics and maths. Are you saying that these people don't have the necessary mathematical ability to do economics, but Steve Keen does?
Steve is working on funding software that would be developed by folks with the chops. Steven seems to understand his own limitations. As we saw here some time ago, he was working with math Phd at Field Institute at the time.
I think that the day of people working alone in these kinds of issues that require huge models is over. As a matter of fact, the people that are using big "treasury" models now are treasury depts and cb's, and Goldman Sachs. We need a Bell Labs for econ.
Vimothy, check thisout from Lars Syll. Lars writes a lot about math and econ.
The simplest physical systems, like a balloon full of gas, are what physicists call ergodic. This means their time and ensemble averages are identical. But complex systems can be non-ergodic, and this is true of many economic models – like those that describe how stock prices move and how national economies grow. Economists, investors and analysts should grasp the nettle of non-ergodicity and deploy the mathematical machinery developed in the twentieth century to handle it. — Alex Adamou
For Pete's sake! Much of this discussion skips over the difference between an all-seeing agent in a system and a system of dumb actors tuned by practice.
No "component" in any physical, chemical or biological system we know of is mathematically capable of knowing what it's system knows.
That holds for components & systems from quarks-in-hadrons to atoms-in-molecules to molecules-in-amoeba and on to humans in cultures.
Every system is an analog computing system - human cultures and markets too. The intelligence & peak computation is held in the pattern of inter-component discourse. And, unpredictable group intelligence waxes and wanes through group practice, NOT through any other means of calculation.
By the time any human is able to calculate most anything about it's own culture, the added degrees of freedom of that culture have already made the calculated result negligible to Adaptive Rate.
Example: Photons don't "know" where to go, or why. Ditto for humans. We just polish our ability to "fall" down local and global resource-throughput gradients. Better analogy is surfing. You never calculate where & how to surf. Rather, you practice rapid-response adaptations to transiently chase successive waves.
That's all summed up in the following phrase. "We have zero predictive power, yet seemingly inexhaustible adaptive power."
The only thing we should bother calculating is our own Adaptive Rate. That way we can at least focus on continually building infinite flexibility in responding to unpredictable options.
Calculate, smalculate. The other post here posits a more useful view. "The Community IS the Currency."
http://mikenormaneconomics.blogspot.com/2013/04/chris-cook-community-is-currency.html
Actually, the community interaction content, patterns and tempo are the currency, but let's not quibble.
One key problem with economics is the users. Making assumptions and then failing to test them (except with the whole population) is NOT logic.
Logic implies "If-Then" statements.
If the initial "If" is only virtual, the output is virtual logic, not real logic.
All economic policy advice should come with a publicly-imposed warning label. "Warning: These ideas are pure speculation. Your experiences and outcomes may vary. Better to adhere to actual operations when forming your own conclusions."
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