Monday, May 5, 2014

Cameron K. Murray — Micro-foundations don't escape Lucas Critique


The fundamental flaw in conventional economic (econometric) modeling is the assumption of regularity that is supposedly supplied by microfoundations. "Microfoundations" assumes rationality and it is rationality that gives individual behavior regularity across individuals. It is the basis from assuming a representative agent as the totality of agents, disregarding supposedly irrelevant differences. Since all agents act rationally, it can be assumed, for example, that they are utility maximizers, and operate regularly irrespective of policy change and institutional difference.

This assumption is contradicted by empirical research in social science. The relationships of elements of a system, in this case individuals, are as important or more important than the individuals themselves in determining system outcomes. Murray cites a report of recent research by Joseph Henrich, Steven J. Heine and Ara Norenzayan of the University of British Columbia, The Weirdest People in the World, that calls into question the suitability of economists making assumptions based on personal introspection about rationality or even relying on psychological research on a limited population. "

As the three continued their work, they noticed something else that was remarkable: again and again one group of people appeared to be particularly unusual when compared to other populations—with perceptions, behaviors, and motivations that were almost always sliding down one end of the human bell curve.

In the end they titled their paper “The Weirdest People in the World?”(pdf) By “weird” they meant both unusual and Western, Educated, Industrialized, Rich, and Democratic. It is not just our Western habits and cultural preferences that are different from the rest of the world, it appears. The very way we think about ourselves and others—and even the way we perceive reality—makes us distinct from other humans on the planet, not to mention from the vast majority of our ancestors. Among Westerners, the data showed that Americans were often the most unusual, leading the researchers to conclude that “American participants are exceptional even within the unusual population of Westerners—outliers among outliers.”

Given the data, they concluded that social scientists could not possibly have picked a worse population from which to draw broad generalizations. Researchers had been doing the equivalent of studying penguins while believing that they were learning insights applicable to all birds.
 Fresh economic thinking
Micro-foundations don't escape Lucas Critique
Cameron K. Murra

Also, as Rumplestatskin, The basic flaw in all economic modelling

The question then becomes, is conventional economics descriptive or performative? Is neoliberalism assumed in the assumptions as a norm?

 

2 comments:

Unknown said...

If man is not a utility maximiser, no "science" can then be based on "individual choice."

On the other hand, if only 10% of household budget is "individual choice", who cares whether they are maximisers or not. Why is that important?

Tom Hickey said...

There's a problem defining utility maximization wrt to the real world rather than through generalizing economists' introspection.

Economists assume that utility is exclusively material when a great deal of what humans choose does not fall chiefly under the category of material goods or even economic good that are not material goods in the sense of stuff. Real goods and financial claims are way down the ladder on Maslow's hierarchy of needs, for instance. Only those dominated by a preference for material acquisition and financial wealth that are utility maximizers in the economic sense of utilitiy. Even goods that are not exclusively or even chiefly material or chosen primarily for financial gain, like education, are not chosen for economic utility. People education themselves for other reasons than acquisition, and people also choose careers as much if not more wrt disposition than acquisition.

People chose chiefly dispositionally rather than economically and there many types of disposition. For example, a great many people dispositionally choose simple living over acquisition. This preference has even created a significant sector of the economy both formally and informally. Some of the participants find disutility in accumulating personal or family wealth and prefer to share gains with the community in order to increase shared or common utility. So-called primitive societies were often based on this preference as a cultural norm. It's not purely a matter of altruism in all cases, either, but involves systems thinking about the importance of social fabric in quality of life.

Secondly, the concept of maximization must therefore be considered in terms of optimization, that is achieving dispositional harmony wrt to a constellation of needs and wants. Different people and groups seek to optimize utility comprehensively in very different ways, and only a few of these seek to maximize material utility in the sense of accumulating real wealth and a balance sheet with lots of equity. Those that prefer to be accumulators of wealth include only a minority of a population.

From the point of view of social science and the systems approach, generalizing material utility maximization is an unwarranted assumption, and from the perspective of ethics and social and political philosophy it is a pernicious doctrine not only socially, politically and economically, but it is also destructive of individual character.