The rationality assumption grounds the ergodic axiom necessary to make economics appear similar to physics. However, this is just begging the question by assuming a priori what is needed to produce the desired result, which is anti-scientific. Samuelson's assumption of rationality is not much different from that of Mises in Human Action.
Karl Popper was willing to admit "the principle of rationality" as a heuristic device.
The 'principle of rationality' (or 'rationality principle') is coined by Karl R. Popper in his Harvard Lecture of 1963, published in his book Myth of Framework [1]. It is related with what he called the 'logic of the situation' in an Economica article of 1944/1945, published later in his book The Poverty of Historicism[2].There is a great difference between a heuristic device and a self-evident principle logically and methodologically. The first is used constructively in both science and engineering, while the latter is the basis of philosophical reasoning that begins with "first principles."
Following Popper the 'logic of the situation' is the result of reconstructing meticulously all circumstances if you are trying to understand a historical event. The 'principle of rationality' is the assumption that people try to reach their goals. Both the reconstruction of the 'logic of the situation' and the application of the 'principle of rationality' constitute an important method of understanding that seems to be useful in all social sciences. It is the method of creating theories due to our knowledge that men and women usually have goals and usually try to reach their goals. If this method is applied to a particular situation it results in a theory which can be proved as right or wrong. Although the 'principle of rationality' is not applicable to (natural) science there is no methodological difference between science and social sciences because both sciences are getting explanations by inventing theories which can be proved.
Popper called his 'principle of rationality' nearly empty (a technical term meaning without empirical content) and strictly speaking false, but nonetheless tremendously useful [3]. These remarks earned him a lot of criticism because seemingly he had swerved from his famous Logic of Scientific Discovery. — Wikipedia.
Economics departments — turning out generation after generation of idiot savants
Lars P. Syll | Professor, Malmo University
20 comments:
So what's the difference between admitting, e.g., the heuristic "utility" of the "rationality assumption" and the sort of "gadgetism" that Lars Syll has been taking Krugman to task for?
One has to start somewhere and all models involve making some assumptions. Assumptions can be recognized as heuristics (pragmatism), or they can be postulated axiomatically (formalism) with the further assumption that they are self-evident first principles (realism), synthetic a priori propositions (Kantianism), theoretical hypotheses themselves, or inductively well-established results of observation or experiment (empiricism).
Different cases call for different approaches.
A heuristic approach is used to elicit further information. An axiomatic approach presumes that the axioms contain all relevant information so that all that needs to be done is to unpack it into theorems that follow deductively. An inductive approach treats assumptions as hypotheses themselves and tests them against data before building a model using them as starting points.
All these approaches are used in science, but what characterizes science and make it different from ideology is that the results are compared with what is being modeled. If the model takes precedence over what is being modeled, then it's ideology.
So there is nothing wrong with using gadgets in thinking or as a teaching aid. But the gadget should fit the case. ISLM is a gadget, and so is Y = C + I + G + NX. Determining which to use is determined by the subject matter. Both are useful in teaching about the history of economics, but the usefulness of ISLM in a contemporary macro context is somewhat questionable, although as circuit has pointed out, it can be adapted to current context, too.
The difference in choosing ISLM and the income-expenditure model is preference for monetary or fiscal policy. So ISLM may not necessarily be wrong if one understand the present context and uses it appropriately. The question is whether ISLM or income-expenditure is more useful as a heuristic.
This is significant because it determines what kind of approach will be taken to flesh out the model. Getting the more appropriate model out of the starting gate is a lot more efficient, and results will be more effective wrt to policy, which is a major function of macro.
Those predisposed to monetary policy will make one choice (ISLM in this example) and those predisposed to fiscal will make another (income-expenditure). Not that this is an arbitrary choice, however. Advocates of each will emphasize the strengths of their choice and the weakness of the others.
It also important as a teaching tool and to make points simply. Using heuristics and gadgets in blogs is particularly appropriate owing, first, to the scope, and secondly to the sophistication of the readership. Launching into complicated mathematical models isn't going to cut it in blogging. That's best left to citations for those who care to follow up on details.
It reminds me of the story of the plumber who is called out on a complaint about noisy pipes and who when he gets there, walks around listening, then taps on the pipe with his wrench and says "All fixed, that'll be $200. The lady of the house says, "but all you did was tap on the pipe." The plumber says "I charged you $5.00 for the tap and $195 for knowing where to tap."
The next day the noise is back. The lady calls the plumber, "The noise is back, what now? The plumber says "I'm sorry, but your problem is a special case, it's called a liquidity trap and there's nothing that can be done, short of an act of congress."
Furious, the lady calls the law firm of Sylls and Sylls, and wails, "This plumber says my pipes are in a liquidity trap and that he can't do anything and he's keeping the $200 I've already paid him.
"Well, Ma'am the good news is we've been on to plumber Krugman for some time and he's not going to get away with his pipe tapping scam for much longer," purrs Mr. Sylls.
Ha! Avoid Tripzoid with New Improved Gizmoid?
Thanks for your post, Tom! That gave me some important grounding in a subject matter that was more than a tad obscure to me before.
"One has to start somewhere and all models involve making some assumptions."
Here is Hamilton's big one:
"The prosperity of commerce is now perceived and acknowledged by all enlightened statesmen to be the most useful as well as the most productive source of national wealth, and has accordingly become a primary object of their political cares. By multipying the means of gratification, by promoting the introduction and circulation of the precious metals, those darling objects of human avarice and enterprise, it serves to vivify and invigorate the channels of industry, and to make them flow with greater activity and copiousness."
Talk about irrationality....
Here's one from Thomas Aquinas, paraphrasing Aristotle:
" A small mistake at the beginning become a great one by the end." — De ente et essentia
"One has to start somewhere and all models involve making some assumptions"
And each one adds uncertainty to the model... no matter how much data, how good you fit, patterns and data, how passionate, fervent and urgent the need for reform, the models aren't capable of predicting anything more than one or two measurements into the future. Yet social science and economics remains mired with people who won't accept the limits and think they have magic secret sauce despite the impossibility.
Best not to start anywhere. Avoid making predictions with predictive models which can't predict anything of value.
Humans are trapped in "bounded rationality." Or as the medievals would have said, "knowledge is in accordance with the mode of the knower."
So are caught between the Scylla of uncertainty, both ontological and epistemic, and the Charybdis of either empty formalism or credulity.
The way to navigate through this dilemma is pragmatic, using heuristics and adjusting course as called for by conditions.
It's similar to plotting a voyage by sea. One lays out the course and corrects as best one can for currents, but weather is an unknown, especially on an extended voyage in a possibly tempestuous climate. So one know from the outset that much adjustment will have to be made as one reckons position along the way in light of changing conditions. But one still plots a course initially instead of just heading out to sea without chart or sextant.
There are two ways of doing economics. One emphasizes the process and the other the result. The first emphasizes the "law of the market" that determines the result, which cannot be known in advance, but only the presume that the most efficient way to it whatever it may be is through the free market as information processor.
The second way is to set objectives and use all means available to achieve them, including government intervention.
The first sails into uncertainty and lets the destination be set by prevailing conditions and the skill of the captain and crew, confident that the optimal result will happen naturally, while the second uses a heuristic approach in guiding the ship on course to a chosen destination by artifice.
Of course, it would be simpler and more direct proceed trough the stratosphere by rocket ship, but that may not be an option that is available yet. Perhaps it will be when a sufficient degree of AI is achieved to relax the limits of bounded rationality.
"The way to navigate through this dilemma is pragmatic, using heuristics and adjusting course as called for by conditions."
When I watch people like Mosler or Gundlach who have been masterful at predicting future economic conditions time and again, they do exactly as you describe, Tom. I've never seen them pull out a DSGE model or an IS-LM diagram as evidence!
I don't know about Gundlach but Warren has a conceptual model in his head that keeps him "in paradigm." It's his method of orienting within the context of the observable.
See OODA loop.
I assume you consider that your way out of the dilemma you postulate is a purely practical one, in view of the more or less unavoidable limitations of your mode as a knower?
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Regarding this matter of the mode of the knower and ocean navigation, see this:
http://nrccc.org/site/Topics/Issues/Oceans/Metaphysics-and-Polynesian-Navigation-by-James-Barr-2009.pdf
Very good point, Kevin. This report does indeed relate to both the mode of the knower and "human nature." The wisdom teachings of the world all contain similar reports of different levels of knowledge based on levels of awareness, along with a lore about developing more subtle levels of awareness.
This is actually my area of specialization. The task is distinguishing the relevant from the trivial and superstitious.
Knowledge is structured in consciousness, and reality appears differently in different states and stages of consciousness.
For example, I was having dinner this evening with a Sanskrit professor and translator this evening and we were taking about a particular text. He said that the English translator uses the word "consciousness" to translate thirty seven different Sanskrit terms delineating different aspects of consciousness for which there are no English equivalents. The same is true of most other wisdom traditions. As a result a lot of the subtlety is lost in translation.
Re: your Sanskrit professor, I used to have, and have unfortunately lost, a long paper written by a Sannyasin, translated by Alain Danielous and published in "Brahmavidya," the Journal (which may still be extant} of the Adyar Library. It had many such terms nicely translated--all of them would have, or could have, been rendered as "consciousness." Modern languages lack the resources for a fully developed metaphysical technical vocabulary. They are very good for practical matters, however.
Regarding the article on Polynesian navigation, aside from the understandable reticence of the navigator, no doubt he would have been at a loss to properly communicate his science in English, for want of the necessary verbal nuances and technical vocabulary.
Anyone who has studied an ancient language, such as ancient Greek, Sanskrit, Arabic, or even the Amerindian languages, will have had the experience of being at a loss to find adequate equivalents for many terms.
Oops, that should be "Danielou", without the final s, as in my typo.
Hmmm! Re Sanskrit Professors and 37 different Sanskrit terms for consciousness (and all of the wisdom teachings): let us say there is a poor Indian farmer,illiterate and uneducated, but has actually experienced all of the 37 aspects of consciousness and a few more, and is established in such. Probably more than subtlety is lost in translation ....?
This is something I find extremely challenging - trying to convey some sort of impression of the difference between the mind and the heart in a human being!!
Good point, JR
Ancient wisdom traditions were chiefly oral and many if not most were written down only recently, often by Western scholars. Regrettably, some, perhaps much, has been lost.
Ancient people had prodigious memories. They may have been illiterate but they were not unlearned. Even today there are instances of young children having memorized the entire Qur'an. This is true of all the knowledge and arts of ancient traditions, and the learning process is the same today in many places. I attended a performance of classical Indian dance (Bharata Natyam) some time ago, and the youngest performer was a child of the teacher, age three.
In ancient traditions the teaching process is progressive. First, children learn the basic level, then they learn that there are different levels of and that the learning process involves progressing though these levels, not merely externally but also internally.
Realization is imparted by direct transmission. This is not something confined to myth and ancient lore. There are also contemporary reports. For example, Meher Baba reported that he was realized instantly by direct transmission, with no previous spiritual learning or practices, although he did have some spontaneous experiences prior to this. He was a nineteen year old college student Pune, India, in 1914 when an old Sufi woman known as Hazrat Babajan kissed him on the forehead. source, removing the veil of limited mind that conceals self-knowledge.
Here is his report on the knowledge of the realized.
There cannot be anything hidden from the One who is everywhere present, for He is everywhere. And it naturally follows that when there cannot be anything hidden from this One He must also be All-Knowing, knowing everything.
The infinite-Knowing is 'seeing' everything at one and the same time, and seeing it NOW. It is that Knowledge which does not begin and does not end; which is indivisible and continuous, and to which nothing can be added and from which nothing can be subtracted
It is that Knowledge which makes God at this moment know that which He knew when it occurred countless aeons ago, and makes Him know that which will occur countless aeons hence; that Knowledge which makes everything known to God simultaneously and NOW. It is the Knowledge of the Perfect Masters and the Avatar.
In terms simpler to you it means that which you as individuals know at this moment I knew aeons ago, and what you individuals in ages to come will be knowing at a particular moment, I know now.
Meher Baba, in The Everything and the Nothing, 33, p. 58
Kind of what I had in mind. Pity that dear old Sufi lady couldn’t kiss a few heads of state on the forehead! Tell them like every parent tells their kids: ‘don’t fight – or be mean to your sister/brother’!
Imagine if she'd kissed a juvenile Dick Cheney?
He might have wiped off the kiss in horror, shot her in the face, and run straight home to smother the indignity with a barrage of kisses from his own gun-totin' mama.
For TomH, DanK and all the other folk on this website that care:
Prem Rawat sets out the case for 'Peace is Possible' and the necessity for 'Peace First'[12:34min] - applies a little bit of history of India and the Ramayana to our personal lives, and the modern world ....
Thoughts from Mizapur
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