Tuesday, April 23, 2013

Lars P. Syll — The state of modern macroeconomics – indescribable misery

Lars explains in some detail what is wrong with dominant neoclassical approach to macroeconomics and what needs to be done. It really comes down to Paul Davidson's criticism of assuming ergodicity in modeling a non-ergodic environment, which is akin to trying to sledgehammer a round peg into a square hole.

Unlike physical systems, social systems operate in terms of feedback and so the future does not necessarily resemble the past in a predictable way, no matter how sophisticated the statistical analysis — as Keynes pointed out decades ago in his criticism of econometrics. Economies, being people-based hence reflexive, are organic rather than mechanistic, so mechanistic modeling does not apply. Methodological atomism is a dead-end.

Lars P. Syll's Blog
Lars P. Syll | Professor of Social Studies and Associate professor of Economic History at Malmö University

Macroeconomics is not a pure science. It is a policy science, or better, an aspect of poli sci, to the degree it can be called a science. It is also normative in addition to positive, in that it is concerned with policy issues to the degree that government is involved, which in modern economies is in a huge way. As such it is a part of policy studies in general and need to be approached as such.

Here is a slightly edited response in an email exchange with Roger Erickson yesterday that speaks to this:

Roger: "How do you get people to explore their options? Clarity of purpose first! Then any and all methods become coincidental, rather than ideological. The same message is enshrined today in OBT&E. However, if left to name only, every named effort is always in danger of becoming it's own form of religion - rather than retaining it's function."

In my view, this requires a meta-disciplinary approach to policy studies. The departmental model of the university is in the way of this. It results in the compartmentalism of knowledge, with the result that knowledge workers end up working in closets instead of forums.

This is being realized in the area of consciousness studies, where a new field is emerging and attracting the whole range of scholars from the sciences, humanities and arts. Realization of the need for this unified approach came about for several reasons.

First, consciousness is foundational to experience, hence our awareness of self and world. It is also involved in our personal and social construction of the "world," which is not merely given but structured, for instance, in accordance with the prevailing cultural worldview as colored by subcultural affiliations and personal tendencies.

Secondly, the so-called hard problem of consciousness is reconciling quantity and quality in a comprehensive explanation. How color is perceived as qualitative based on quantifiably measurable differences in wave frequency and interference is a simple instance of this as yet unexplained conundrum. Science is essentially quantitative in its approach to a fundamentally qualitative world. Hence, the question arises as to whether a scientific explanation of consciousness is even possible when it is the field on which quantity and quality meet.

So the two major issues are the nature of consciousness and how it works in relation to a subject as a "person" and the object(s) for the subject as "reality." The problems involved in explaining consciousness are far from resolved but now there are a lot of very smart people working together on potential solutions. 

On thing is quite certain. Consciousness involves complexity and therefore emergence. It is fundamentally non-ergodic even though "rational." "Rational" cannot be equated with "ergodic" unless one is willing to hold also that consciousness is inherently non-rational, which is anti-humanistic. Most scientists are humanists, so that is not palatable to them. This dilemma is quite comparable to the state of most orthodox economists, which they "solve" by positing a rational representative agent.

A similar approach to the current approach to consciousness studies is needed to policy studies, in that many similar issues arise with respect to how consciousness manifests in various societies and the ways in which individuals contribute to manifesting social phenomena, where both consciousness and context are determinative. The challenge lies in capturing the relevant information and using it to its full potential for social optimization. Presently, there are a number of different fields that are concerned with aspects of this but there is little if any integration.

At present, policy is determined by policy wonks well versed in poli sci and history, academic economists using assumption-based models, business people applying business principles to government, and politicians interested in the next election, where the criterion is fundraising ability. These people are mostly working at cross purposes, and they are neither listening to heterodox opinion in their own fields, nor acquiring information and advice from other relevant fields like sociology. Moreover, there is no reconciliation of monetary economics with the rest of policy studies.

Economist Kenneth Boulding is an interesting example. Working from the Forties into the Eighties to develop an integrated approach that also brought in monetary economics, he quickly realized that he was going to make no headway in the economics profession, so he went his own way and co-founded General Systems Theory.

"Systems theory studies the structure and properties of systems in terms of relationships, from which new properties of wholes emerge. It was established as a science by Ludwig von Bertalanffy, Anatol Rapoport, Kenneth E. Boulding, William Ross Ashby, Margaret Mead, Gregory Bateson and others in the 1950's. Systems theory, in its transdisciplinary role, brings together theoretical principles and concepts from ontology, philosophy of science, physics, biology and engineering. Applications are found in numerous fields including geography, sociology, political science, organizational theory, management, psychotherapy and economics amongst others."Bertalanffy's General Systems Theory by Gregory Mitchell

General Systems Theory is being applied in psychology and consciousness studies, where Boulding is well recognized. How many economists have even heard of him? Interestingly, through Randy has and has written on his work.

So the groundwork has already been done in systems theory and monetary economics and the foundation laid. No the question is how the superstructure gets built on that foundation, considering the powerful interests heavily vested in the status quo and therefore aligned against change, especially holistic change that runs counter to privilege and favoring special interests. Here is where issues of power come in. See, for instance, Michael Perelman, "The Power of Economics and the Economics of Power," and The Power Elite by C. Wright Mills.

I would be pessimistic about change in the face of these obstacles if were not for the vise that is tightening, one face of which is looming resource shortage as the emerging world comes on line and the opposing face is the increasing pace and attendant consequences of global warming. Given the fragility of the financial system due to lack of understanding of monetary economics and rampant corruption, this trend could be greatly exacerbated. Humanity is at make or break it moment, and a whole lot of younger people globally realize this, and see their futures hanging in balance. So there is reason to hope that sense will prevail and humanity will pick up the tools that it has already developed and are available.

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