The macro foundations of microeconomics

After a group meeting yesterday, I was talking to my supervisor in front of the receptionist.

Me: I only asked that question, because I knew nobody wanted to go first. I thought I would act like a fool and encourage discussion.
Receptionist: And you do it so well.

And my timing seems to be good too.

I actually love this sentence:
“Most notably, in a competitive GE with full information, no externalities and so on, prices of goods reflect the social opportunity cost of producing them”

Lets parse it out – in a competitive (meaning perfect competition which hardly ever exists) GE (a fleetingly unlikely event) with full information (given the limitations of the human brain not even theoretically possible), no externalities (we all live on separate planets) and so on …..

i.e. before you even come to the bit you want to reject, you have made four absurd assumptions.

The standard GE model takes full employment (in an appropriate technical sense) as given, and derives a whole series of fundamental results from this. Conversely, if the economy can exhibit sustained high unemployment, there must be something badly wrong with standard neoclassical microeconomics.

Lest readers mistakenly forms the impression from this post that economists have completely overlooked unemployment in GE models. They have not. There are plenty of GE models (and, heavens!, dreaded dynamic and stochastic GE models) where unemployment is a major component.

The standard GE model doesn’t have the sort of imperfect decision-maker where “nudges” can substantially affect the savings rate, either…

Isn’t this just the Theory of the Second-Best? i.e. if we place a Pigouvian tax on an externality but firms have market power, we may correct the externality but by reducing output we exacerbate market power in a way that it is actually welfare decreasing? But in this case, we replace “firms have market power” with “agents are involuntarily employed,” and now the Pigouvian tax potentially changes the amount of involuntarily employment? At least that seems like the corollary to the burying notes in coal mines example. Microeconomists have thought about second-best issues for like half a century, so maybe there’s a more fundamental point here that I’m missing.

more:
James R Crotty (via Reuters Counterparties, filed under “Wonks”):
http://triplecrisis.com/the-man-who-won-a-nobel-prize-for-helping-create-a-global-financial-crisis/
Justin Fox (via FTAlphaville):
http://hbr.org/2013/11/what-weve-learned-from-the-financial-crisis/ar/pr

Chatham–I know nothing about MMT beyond the fact that it is a heterodox theory in economics, so maybe your first cited comment was bizarre, but what was wrong with the following__

“It does make sense in that there are obvious things that could falsify Darwinism: bunny rabbits in the Cambrian, an organ of irreducible complexity. These things have never been observed, but as Darwin himself noted, even one of the latter would tear his theory to shreds. ”

That’s a pretty standard (and correct) response made by defenders of evolution against creationists who take the line that Darwinism is unfalsifiable. His point, made in the next sentence which you omitted, is that neoclassical economists don’t point to similar observations that would falsify their theories. Is that the part that is silly? Because you forgot to include it.

I would question the statement that most micro economists believe that the world is anything like the model you just described. If that was the case no one would study how to use policies to correct externalities (environmental economics), asymmetric information (health/labor economics), irrational actors (behavioral economics). This “scientific crisis” you describe took place a long time ago and economists have been trying to understand these types of issues for decades. Simplifying microeconomists as people who take the Arrow-Debreu model as fact is intellectually dishonest.

Chatham–I know nothing about MMT beyond the fact that it is a heterodox theory in economics, so maybe your first cited comment was bizarre, but what was wrong with the following__

The first comment is bizarre because almost every time I’ve seen Krugman talk about the Euro lately he’s mentioned the idea of an optimal currency area. To say that it’s something he talked about in the 90’s before he was left disarmed by the fact and forced to plagiarize from the MMT (“we might seem to be marginalized, but the most famous economists steal from us because they secretly know we’re right!”) is rather strange.

That’s a pretty standard (and correct) response made by defenders of evolution against creationists who take the line that Darwinism is unfalsifiable.

Eh? Irreducible complexity is an ill-defined creationist idea that assumes a drop of ignorance outweighs an ocean of knowledge. If scientists found a complex organ they couldn’t immediately explain the evolutionary origin of, they’d spend time trying to understand it rather than saying, “that’s it! Evolution doesn’t exist!” Likewise prehistoric bunnies.

I also don’t see the use of holding Darwin up as an expert, but his “18 problems with economics” post suggests that he thinks individuals who are viewed as the originators of an idea have some sort of magical connection to the idea.

His point, made in the next sentence which you omitted… you forgot to include it.

I just didn’t want people to know The Truth.

…is that neoclassical economists don’t point to similar observations that would falsify their theories. Is that the part that is silly?

It’s silly when he’s responding to a comment that compared economics to biology, implying that unlike theories in biology, economic theories are non-falsifiable because neoclassical economists provide theories that are non-falsifiable. Neoclassical economics is not the totality of economics; none of the economists I read call themselves neoclassical (and they do provide examples of how their theories could be proven false).

“Washington has spent the past three-plus years in terror of a debt crisis that keeps not happening, and, in fact, can’t happen to a country like the United States, which has its own currency and borrows in that currency.” — Paul Krugman, in his column today in the NY Times.

Sounds like MMT theory to me. I am willing to accept that both some mainstream and some non-mainstream economists did not expect the Euro to survive without severe problems.

The idea that the use of the terms “neoliberalism”, “neoclassical economics”, or “neo-classical economics” is suspect is just stupid. Furthermore, Auld, in the comments section, falsely accuses another commentator of calling him a Nazi. Nobody should take this intellectually impoverished clown seriously or care if numbered items in his list apply to you. (I admit to a bias here.) Those who would like to see (too broad a group of) academic economists disrespected by others would want Auld to keep up his decades-long behavior.

UnlearningEcon: If you asked Chicago-school macroeconomists that question, 100% would give (old) Keynesian economics as an example of a falsified theory. It’s the central myth in their origin story.

@23 UE – I’m sympathetic to a lot you’re saying, but stuff getting taught isn’t an argument. Newtonian physics and even the Bohr model of the atom are still taught, and that’s in disciplines with much clearer delineations of established knowledge and falsification.

Newtonian physics and the Bohr atom are taught as useful approximations to much more accurate theories. Furthermore, the domain of applicability for Newtonian physics and Bohr atoms is very well-defined, as compared to the domain of applicability for economic models.

You fellows want falsified?

“Market economy” is false.

Thank you for playing.

“Irreducible complexity is an ill-defined creationist idea that assumes a drop of ignorance outweighs an ocean of knowledge. If scientists found a complex organ they couldn’t immediately explain the evolutionary origin of, they’d spend time trying to understand it rather than saying, “that’s it! Evolution doesn’t exist!” Likewise prehistoric bunnies.”

You should blame Darwin for that–he’s the one who said that his theory could be disproven by the existence of an organ that couldn’t have evolved in a gradual step-by-step process. Perhaps he was being dishonest–it’s very hard to show an organ couldn’t have evolved. Behe just coined the phrase IC and provided some bogus examples. As for Cambrian bunnies, of course that would falsify evolution, or else reveal the existence of time machines or godlike beings with a sense of humor. That’s why creationists are so eager to find human footprints in Jurassic rocks.

From reading Krugman, rightwing economists don’t seem to acknowledge any test that would falsify their theories. Shown fossils of Cambrian bunnies, they would pretend they were trilobites.

Bruce Wilder covers most of what I was going to say.

I’ll reiterate because maybe I’m not as nuanced as he is:

1) Like it or not, macroeconomists who get involved in policy matter quite a bit, because they have the power (e.g. Reinhart & Rogoff) to justify policies that cause enormous misery to many many people.

2) Microeconomists who don’t want to be tarred with that brush need to either start policing the dubious standards in macroeconomics, or they need to start splitting their discipline off. You can’t belong to the same professional bodies, publish in the same journals, feed off the same tenure tracks and then disavow any responsibility.

3) Further, the average microeconomist (and we get a lot of them in UK “health economics” so I’m speaking from a history of dealing with them) seems very prone to apply knee-jerk market theories to anything they don’t know much about. Again, if they don’t want to be tarred, they need to stop dipping in the tar barrel…

Some of the points on that Chris Auld list are insane. “Neoclassical” is just what people outside the mainstream call the mainstream. Since “neoclassical” originally meant “marginalist” and since the mainstream analysis is part of a direct intellectual tradition that began with the marginalists, it even makes sense.

“Neoliberal” is a standard name for a certain political philosophy about markets and regulation.

“The sooner we realise that the entire discipline is in a state of scientific crisis the sooner we might start to do something about it.”
I don’t really understand why economics would be categorised as a scientific discipline rather than as one of the humanities in the first place. Given economic structures are largely culturally determined rather than natural, and that these structures change over time, and that an observer would have to take into account things like practice and individual agency, the object of study itself doesn’t seem appropriate to the scientific mode at all.

@chatham

If you want to get over term,s, jargon and wordplay, I’m with you. However, my point is that mainstream economists all too often deny there is a mainstream – there is “science” and there is heterodoxy – and definitions like this are meant to show them that, yes, their approach is just one way of doing things.

@walt

Yes, but he is so amusing. That he managed (16) on my list in a review of Quiggin’s book is quite remarkable.

Bruce Wilder
I’ve long wondered (genuinely) what school of economics would you subscribe to? I find your critiques of ‘neoclassicism’ always interesting, but curious what you’d replace it with….

In my experience, nobody who applies micro theory to individual markets [e.g., to understanding a particular industry’s structure] worries about whether their application depends on the macro-economy being in general equilibrium.

That’s the point of the OP. The validity of the applications depends on implicit macro assumptions, but, as you say, this dependence is ignored. If the implicit macro theory is wrong, so is the derived micro.

As an amateur, self-taught marcoeconomist who has been following these debates since the 1990s, it strikes me that effectively the debate isn’t about micro vs. macro but on different macros which have different goals at the policy level.

In my mind Keynesian macro has held up, as Krugman points out. Prof. Quiggin’s zombie ideas which reappearerd after the recent crisis are an old-timey macro which echoed the ideas of the Austrians, the British Treasury View, and Mellon’s advice to Hoover: “liquidate, liquidate, liquidate.” Lowering unemployment and closing the output gap were not the goals unlike modern macro. Perhaps the micronauts have these unacknowledged, zombie ideas floating around in the background.

Or rather, they aren’t forced to choose between different versions of macro – one of which is wrong in many of its claims – and can simply focus on the micro.

JQ@42 “That’s the point of the OP. The validity of the applications depends on implicit macro assumptions, but, as you say, this dependence is ignored. If the implicit macro theory is wrong, so is the derived micro.”
I’m not really knowledgable about these things to a great degree, but you seem to me here to be ignoring the interdependence of these two aspects as the subject (author) arrives at one or the other. If micro corresponds in some way to ideographic information (maybe I’m wrong here?), an adult will always make observations and record them with a certain set of explicit or implicit assumption, conscious or otherwise. Macro would seem to correspond to nomothetic (?), but while nomothetic assumptions conscious or otherwise will guide the selection and depiction of ideographic information, an attempt at giving a nomothetic account of things would be arrived at through the subject’s study of the relevant ideography. I’m not sure if I’ve conveyed that well, and I guess it’s an obvious kind of point, but you seem to be leaving the interdependencies between the two out…

John Quiggin: “The point can be made in more detail with respect to labour economics, finance theory, public economics and industrial organization. None of the standard conclusions of these fields of microeconomics can be assumed to be valid under conditions of sustained high unemployment.”

Aren’t the standard conclusions also invalid under conditions of any other divergent social cost as well? E.g. negative environmental externalities, etc? Wouldn’t the common-sense assumption (i.e. the non-economist’s assumption) be that an individual consumer’s preference to ACCEPT a high social cost is due to cognitive bias, ignorance, misinformation, and/or a really bad attitude?

@43:

“some 20th century German scientists viewed quantum theory as “Jewish physics.”

Werner Heisenburg.

@46:

Idiographic?

John Quiggin:

Most notably, in a competitive GE with full information, no externalities and so on, prices of goods reflect the social opportunity cost of producing them. This means, that, other than redistributing the initial endowments of property rights, governments can’t do anything to improve on the competitive market allocation of resources.

Once you have involuntary unemployment, all of this fails.

Yes, but it fails at full-employment too since the required assumptions are impossible to attain in the real world, and the model is not robust to even slightly relaxing many of it critical assumptions. And, the theory of the second-best lurks.

The claim the the Arrow-Debreu GE has absolutely no real world domain of applicability isn’t some new or heterodox claim, it has been made by GE pioneers themselves.

Fank Hahn:

One would have to be far gone in philistine turpitude not to appreciate the towering intellectual achievement which the existence result and the whole Walrasian edifice represents. Nevertheless, this should not blind us to the possibility that what is constructed there has little if nothing to do with the world which we inhabit. Nevertheless, it cannot be denied that the prospect of so many refining the analysis of states which they give no reason to believe have ever or can ever come about is scandalous. It is probably also dangerous.

Tim Wilkinson —

Digressions are half the fun …

Don’t disagree with the point you’re making. However, I wrote “non-collusive” for a reason: it summarizes the relevant legal constraint in most jurisdictions. Applied analysis is interested in the full range of legal outcomes … including the sort of tit-for-tat outcome you describe.

William @ 51:

Touche!

“that only microeconomics, derived rigorously from rational behavior, is real science.” – Paul Krugman today.

This is a key root of the problem, a very snobby and harmful definition of “science”. It’s not at all just, as they say, that all economics must be derived directly from microfoundations – as bad as that is, where we throw induction out the window, which has been incredibly powerful in scientific advancement. See: http://mainlymacro.blogspot.com/2012/03/microfoundations-is-there-alternative.html.

It’s that it has to be only a certain kind of deduction, where you must assume every microunit, i.e. person, is 100% rational, has 100% of all public knowledge in their heads, and has 100% perfect education and expertise in every area and sub-area, so they can always figure out what’s perfectly optimal, and with no time or energy cost. Not just only microfoundations is scientific, but only microfoundations that are very or incredibly unrealistic.

So, a key root problem is this extremely limiting and harmful snooty definition of “science” (that not coincidentially makes libertarianism and plutocracy look a lot better). What would be a much more useful definition, one that would create far more utility for society? How about just broadly, logical and truthful? The truth, itself, would have to be based on at least assumptions like what we see actually exists, the mathematical axioms, etc., but just basic commonly agreed assumptions like that, and the truths would often be probability based, and our best efforts, but at least that should be the effort.

This would include the models that dominate macroeconomics currently, because they are logical and true given their assumptions, but it would not include the false overly literal inferences to reality that these economists so often make.

And a nice definition of science like that would not just exclude often comically false overly literal interpretations to reality of freshwater and libertarian biased economists, it would also include microfoundations models that were based on more realistic microfoundations. What would such microfoundations look like? Please see my next comment.

@62 “So, a key root problem is this extremely limiting and harmful snooty definition of “science” (that not coincidentially makes libertarianism and plutocracy look a lot better). What would be a much more useful definition, one that would create far more utility for society? How about just broadly, logical and truthful? ”

Although I suppose anyone may change the meaning of any word like Humpty Dumpty in Alice in Wonderland, if we simply take the concept of science (give it whatever name you wish to), I still fail to see why one would classify economics as a science unless one chooses to classify every discipline and body of thought as science.

Logic and truth are not typically only the properties of the pure sciences. Nor, in terms of a critique of libertarianism and plutocracy, are they necessarily involved in value judgements, in determining the good from the bad, the wise from the unwise etc.

Scientific seems to have come into use in early modern English through compounding the Latin scientia (knowledge – from Greek and Indo European roots to split) and ficus (making) to translate Aristotle’s epistemonikos which he contrasts with doxastikos. Epistemonikos “deals with the universal and the necessary, the body of facts resulting from demonstrations are universal statements that are always true.” (Hanley, Being and God in Aristotle and Heidegger). Doxastikos on the other hand was held to relate to an opinionative logos.

Btw, the fundamental difference between Chris’ post and UE’s is that Chris says “these are bad arguments” while UE says “these are bad people“. At best UE should put in a lot of instances of “some” in his post. That’s mostly why Chris makes valid points while UE is just trolling.

A secondary, but telling ,difference is that in his post when Chris provides links for support he links to actual examples of bad arguments. UE mostly just links to his own past posts, which makes it look like there’s some kind of support or reference, but it really is just circular self important posturing.

“The basic problem is that standard neoclassical microeconomics is itself a macroeconomic theory in the sense that it’s derived from a general equilibrium model as a whole. ”

I don’t think that there would be many economists questioning that. If you believe that the central bank can stabilize the economy, then you also must believe that the central bank can destabilize the economy. If there is any disagreement it is about what counts as stabilization policy. Is there a role for fiscal policy? Is there a role for financial regulation?

Anyway, isn’t most of the blogosphere just “circular self important posturing” ?

Well, alright then. There you have it.

It’s that it has to be only a certain kind of deduction, where you must assume every microunit, i.e. person, is 100% rational, has 100% of all public knowledge in their heads, and has 100% perfect education and expertise in every area and sub-area, so they can always figure out what’s perfectly optimal, and with no time or energy cost. Not just only microfoundations is scientific, but only microfoundations that are very or incredibly unrealistic.

There go those nasty axioms again, always rearing their head. Turns out, when you start from demonstrably false assumptions, your theory might not end up reflecting what actually happens! Who coulda thunk it, except for, you know, most philosophers ever.

I don’t buy into the idea that falsification is the defining principle of science. Have we learned nothing from Kuhn or Lakatos? But it does play a role, at least in the way sciences go at constructing and solving their problems.
In economics, there is a strangely broad area in which falsification is countered by assumptions that are granted to be fictitious. However, there are certain notions that are flourished about as if they surely must be true. For instance, preferences in the neo-classic paradigm, codified by Arrow and Debreu, are invariant and logically sorted by a simple transitivity rule, so that if preference a is preferred to b and b to c, a is preferred to c. The reason for this, it turns out, is that the transitivity rule is pretty. There is no test ‘in the wild’ that has ever reproduced this theorem.
Is it then thrown out? No, it is not thrown out.
What does happen, though, is that such fake insights – and here I’d include the maximizing behavior supposed to be the only factor necessary for an economy among individuals – are incorporated in policy that does nudge people towards more, say, maximizing behavior. Economists are always experimenting on populations, but they like to pretend that they aren’t, that that is only done by those nasty central planner types. What nonsense. In fact every economic policy suggestion is an experiment. Neo-classical economics just codifies certain experiments that have been run on the population since I’d say capitalism got upon its hind legs. In themselves, it is true, economists aren’t that important – but just as theologians in the Middle Ages created the theoretical structures needed for subduing peasant populations and changing their customs, economics is important for the way it works on the self-understanding of people under capitalism. Its greatest successes as a hermeneutic have been in Anglophone countries, which probably has a very complex sociological explanation – perhaps having to do with family dynamics. I think the great success of economics as a discipline has not been the light it throws on capitalism, but the way it makes people think that the typical subject is not someone so embedded in a family and community that far from thinking about his or her self-interest, most of his or her time and energy is spent thinking about and doing things for others – which is how most people I know simply live – but a robust profit maximizer. The true egoist is a rarity in nature and society. It isn’t just that we satisfice – I would say that it is a rare person who sits down and thinks of what she actually is and deduces her self interests from that. In the eighteenth century, perhaps, there were people who were doing that in their chateaux, like De Sade, but otherwise it just isn’t happening. Individualism is a nice credo, but it simply doesn’t crop up much in reality.

I was going to write that John’s premise that microeconomics assumes macro claims is complete nonsense for obvious reasons: microeconomics makes some assumptions which then can result in various macroeconomic properties — it’s completely the reverse of the causality that John implies.

“In the sky” tried to point this out gently, by reminding John that you can make microeconomic assumptions (e.g. price rigidity) that result in unemployment even in microeconomic models. But John didn’t get the hint, and continued with the nonsense that microeconomics makes macro assumptions.

Now Krugman makes the same mistake, so if Krugman can be an idiot about this point, then maybe it needs to be made explicit.

Krugman’s other point, that historically, people used to take math-heavy microeconomics seriously only because of the need for macro economics is similarly without any weight: macroeconomics still does not have any prospect for being a science (There are strong negative aggregation results and “anything-goes” results that make the prospect of microfoundations for macroeconomics hopeless. Without microfoundations, the stochastic assumptions needed for doing empirical work are just pulled out of one’ s hat: i.e. they are unscientific. Furthermore, relaxing the hyper-rationality assumptions only increases the degrees of freedom of the system, which makes the negative aggregation results and the “anything goes” results only stronger, so that is not an available alternative for microfoundations.)

On the other hand, there is no reason why a microeconomic theory, limited to a well defined domain, cannot be scientific: you just model enough of the details of the situation until you get something more or less scientific. Of course, General Equilibrium will not get you there and neither will any psychological theory (even if you have a scientific psychological theory that describes correctly the mean and variation of some psychological index for the the entire population, the people making important economic decisions are often selected from the tails of that distribution; so you can not just assume that all important economic decisions are made according to the psychological theory) But it should still be perfectly possible to made scientific models of very concrete microeconomic situations.

An interesting juxtaposition of comments, these last two (75 and 76, at the time I’m writing this). To paraphrase my understanding of Alex K’s contribution, he seems to be insisting that as long as we bite off small enough pieces, we can chew on as much reality as we like — and avoid messy things like psychology. Rakesh Bhandari, on the other hand, does a nice job of hoisting Samuelson on his own petard, but I wonder if he notices that Samuelson’s dump the ball into the box and pray, followed by his but aren’t we all screwed anyway? bears an eery resemblance to some of the old Soviet academicians’ debates about central planning.

In reading discussions of economics, macro or micro, I sometimes get the feeling that some people know too much, while others — like myself — know too little. Politically speaking, that might be a corrosive rather than explosive formulation, but it could easily be just as damaging to our hopes of doing better bye-and-bye.

“Alex K’s contribution, he seems to be insisting that as long as we bite off small enough pieces, we can chew on as much reality as we like — and avoid messy things like psychology.”

Whether we need psychology or not depends on the situation. If we want to model the behavior of people buying in a supermarket, then psychology might be useful, as the shopping population is representative enough for the general population. Although even then, you might need to make assumptions about the culture of the population. The silly tricks marketers play on the US population might not work as well for the price conscious population of China.

But if you want to model the some high-impact decision making, then psychology is not all that useful, as the people making those decisions are not representative of the psychological profile of the general population.

Alex K. @ 79

…the people making those decisions are not representative of the psychological profile of the general population.

Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft where we are hard, and cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to understand. They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves. Even when they enter deep into our world or sink below us, they still think that they are better than we are. They are different.

To all of which I say: bollocks. That doesn’t make me Hemingway, but then I’ve never needed to be.

Alex,

There are strong negative aggregation results and “anything-goes” results that make the prospect of microfoundations for macroeconomics hopeless.

Well then, I’ll ask on Roger’s behalf (and mine.) Would you explain what you are talking about here?

(I see a parallel between conservative arguments against, for example, regulation of financial transactions and the dismissive swipes at macroeconomics here. “Regulation? Impossible to fully and fairly implement, so why bother?” “Macro? Impossible to fully model reality, so why bother?” … Krugman, to take the best example I know of, understands that economics is an approximate science. Of course it has limitations, but if you dismiss the whole thing what are you left with? Cult-of-the-day?)

Alex @ 83

It’s not about the very rich William.

No, it’s not. It’s about unjustified assumptions, chief of which is that people with the power to make decisions are a) uniquely qualified to make those decisions, and therefore, b) unlike the rest of us in significant ways, and c) as, such, prima facie proof of the futility of involving anyone without power in the decision-making process.

Psychologists make all sorts of wacky interventions in our understanding of how human beings work, as often as not because they’re chasing the same acknowledgement as scientists that economists are. Nevertheless, to decide that the psychology of a trained mathematician, even acting in his official capacity, is not only different from, but superior to that of a randomly-selected member of the great unwashed is quite simply a bridge too far. Do you really think that advertising executives are unaffected by the billboards that they themselves have had a hand in creating? If so, I doubt you understand as much about how economics works as you claim. It’s not your reasoning I doubt, you understand, but your premises.

Alex K is aggressive without being meaningful. However, I am a little encouraged by the fact that I’m cast outside with ignoramuses like Krugman.
Even so, he is a pretty good example of what is wrong with economics. The outrage that the vulgar would dare to intrude on occult secrets such as are possessed by the Great Alex is a rhetorical bit that you see all the time in the writings of the humoral physicians in the 17th century. How dare you interfere if you can’t distinguish the ileaster from the archaeus, and you have completely messed up the categories of the semina and the vesicles through which the animal spirits travel, in conjunction with the house of Jupiter, which can only be got by the most minute mathematical and scientific modeling! .
It is typical of the primitiveness of economists, from the perspective of sociology or psychology, that they think they can make claims like Alex K’s claim about mathematicians, without actually referencing a single empirical study, or even understanding how they are done. “The silly tests psychologists use for testing the answers of the general population regarding computing some expected value will work very differently in the department of mathematics. If the decisions makers are selected from departments of mathematics, then psychological results about how people make certain decisions will not apply to them.” This is delightful: true early modern thinking, in which experiment is disdained in favor of deduction. Many an alchemist or astrologer could agree entirely with the sentiments expressed in this form of thinking.
I don’t think all economics still resides in the pre-scientific age, but Alex K. is not so untypical as all that. One would have to do a larger study to see whether he’s an outlier or a more typical specimen of what passes for economic science nowadays, of course. But it would be interesting to see.

William Timberman@89 – If that’s Alex’s implicit assumption then it’s easy to see why he’s down on “psychology” by which i think he means behavioural economics. Anecdotally, I’m not sure if Monty Hall qualifies as a cognitive puzzle but no less than Paul Erdos himself got it wrong.

@86 “Krugman, to take the best example I know of, understands that economics is an approximate science. Of course it has limitations, but if you dismiss the whole thing what are you left with? Cult-of-the-day?)”
What do ou mean by an approximate science exactly? Approximate means close but not the same as far as I am aware, so you seem to be saying that economics is close to a science but not a science?? And therefore, if it is not a science, what is it? You seem to be saying that it’s not a science, but if one were to allow it were not a science it could therefore only be a cult-of-the-day, presumably phrased as such to show a disdain for all that is not science (better to masquerade as science than the alternative)…

Ed @5 and 71: I think you could build up a decent knowledge in non mainstream economic theory out of few books. They aren’t exactly introductory textbooks, but none should be too hard. I’d recommend

For macroeconomics: Lavoie, M (Introduction to post-keynesian economics); Snowdon, B. & Vane, H. (Modern macroeconomics: its origins, development…), Lopez, J. & Assous, M. (Kalecki) or just go for Kaleckis originals papers or Theory of Economic Dynamics, they are not hard and very straightforward.

For microeconomics: Sylos-Labini, P. (Oligopoly and Technical Progress); Steindl, J. (Maturity and Stagnation in American Capitalism); and for a critique of neoclasical micro SRAFFA, Piero. The laws of returns under competitive conditions. The Economic Journal, v. 36, n. 144, p. 535-550, 1926.

Hope this is of any help, good luck

As expected, Roger Gathman comes up with just hot air.

The same person will make the same mistakes: you can’t see your own mistakes until you’ve become someone different to the person you were when you made them.

Until that time, the logic of people pointing out your errors is going to look erroneous to you: you’ll see the errors you made, but from the inside, reversed.

I mean, yes, it’s possible that you’re right and the other person is wrong… but logically you’d expect errors to be evenly distributed, that in roughly matched company you’ll be making about the same number of errors as the next bloke, no? If you [believe that you] are getting strike rates significantly above fifty percent in disputes, it’s pretty solid evidence that you’re missing your errors.

Ronan(rf) @ 40: . . . what school of economics would you subscribe to?

I’m an institutionalist. I think about political economy — the system of production and trade — as being structured and governed by institutions, the traditional primary topic of sociology (not that I know anything about sociology). Paul Krugman’s blogpost in response to the OP by Quiggin is worth looking at, for a brief precis on what happened to the institutionalists, who once dominated economics. It is a very useful complement to the OP. Krugman basically says that Keynes and Samuelson killed institutionalism, and that was, in his opinion, mostly a good thing, because the institutionalists talked too much and couldn’t come to a conclusion. In relation to Quiggin’s point, Krugman says — correctly, imho — that the apparent success of Keynes’ prescription, as carried out in WWII, combined with Samuelson’s codification of neoclassical economics into a Euclidean geometry, eliminated the institutionalists from the academy. John Kenneth Galbraith was the last prominent public intellectual with an institutionalist viewpoint; the hapless Arthur F. Burns the last Fed chairman trained with an institutionalist approach to the business cycle.

The institutionalists were the field workers of economics, the people, who went out and looked at what was going on and tried to understand it descriptively and operationally. In the days before government statistics departments created vast databases of survey research, they were the ones, who painstakingly assembled tables of iron production or unemployment rates, or traced out the historical ups and downs of the business cycle; in fact, the institutionalists were largely responsible for creating those government statistics departments. The first generation after the war — people like Samuelson himself — had been taught by institutionalists, and had a fund of factual knowledge and appreciation that reality did not conform to theory. Even the pre-Friedman Chicago school of George Stigler et alia knew that the real world was necessarily messier than their theoretical idealized analysis. But, people of Krugman’s generation did not have that appreciation or acquaintance, and economics, as a discipline lost its balance, becoming top-heavy with theoretical analysis, especially after the failures of the first efforts at macroeconomic forecasting with computer models.

Krugman’s caricature of institutionalists, confronting the Great Depression with helpless wordiness, is deeply ignorant as well as unfair. In fact, they were very busy with the institutional agenda of the New Deal — they, or their ideas, were why the New Deal could acquire an institutional agenda. They were structuring Social Security and Unemployment Compensation and reforming the Stock Market with the Securities and Exchange Commission and banking and finance with the FDIC and Glass-Steagall; they were reforming electricity with public utility regulation and public power projects; they were restructuring agriculture with the Agricultural Adjustment Act — the second version of which is surely one of the most successful instances of industrial policy ever implemented; commercial aviation was restructured with the FAA and CAB and commercial broadcasting with the FCC.

Even Krugman’s smug assertion that the American experience — of WWII spending ending the Great Depression — vindicated Keynes, leaves many aspects of that experience unexamined. The spending was not simply running a government deficit — it involved comprehensive price controls, forced savings and a sweeping, radical change in the distribution of income (sometimes referred to by economists as the Great Compression), and though much of the spending was on explosives, which made burying pound notes in an abandoned mine look sensible by comparison, the U.S. directed enormous private and public investment into plant and infrastructure — this is in contrast to the U.K., which consumed its capital base during the war, making the economic experience of the late 1940s and early 1950s in Britain compare much less favorably to the “depression” of the late 1930s. If that experience had been the lesson, Keynes would be forgotten. So, it is “complicated” after all.

Friedman’s ideology was tailor-made for an agenda of dismantling the institutions of the New Deal — he simply denied that those institutions had anything to do with how well the economy functioned in the 1960s. The heavily disguised authoritarianism of conservative libertarianism became the favorite interlocutor of the know-nothing neoliberalism of a college-educated elite, who were tired of class warfare and hanging out with trade unionists, racists and machine politicians. But, I digress.

Theory has gone out of fashion and lots of young economists are trying to make a career out of “empirical” work, including field or case studies, and this will tend to contribute, I suspect, to an unintended revival of institutionalist perspectives, as will general dissatisfaction among the public with the outcomes of the ill-designed institutional reforms of the neoliberals. The revival of institutionalism has been going on for a long-time. They gave Oliver Williamson’s long and lonely quest to keep the English language in use in economics and to make something of the 1962 seminar he took with Herbert A Simon and Kenneth Arrow the honor of a faux Nobel, so there’s some prestige potential. The Public Choice and law and economics folks — the other half of the Chicago school — have dedicated themselves to reviving institutionalism, so there’s support on the intellectual right. The maturing of game theory and behavioral approaches means there’s a rich “toolkit”, as the academics would say, for assembling an institutional interpretation of the economy (dare I say, hermeneutics? no, I can’t do it — it’s too horrifying). I live in hope that some bright young MMTer will stumble onto Martin Shubik’s three volume magnum opus on a dusty library shelf, and the revolution will be on.

Bruce, you make good points. I think that there are further points to be made regarding the institutionalists and the progressives in the first decade of the 20th century. The Great Depression was by no means the first great depression in American history. It was the institutionalists, in alliance with progressives (when that term was not a watered down label for liberals) who put into place the fed, the department of commerce, the first laws regulating interstate commerce, labor law reform, etc. The Keynesians have a bad tendency to think that everything began in the 1930s, because, well, that is when Keynes wrote his General Theory. But depressions happened well before that time. The architecture of the New Deal – everything that you mention – was backgrounded in the experience of 20 years before. Unfortunately, that architecture is in bad need of an overhaul, and instead of having a strong institutionalist base to call upon, we have well, mainstream economics, which is manifestly terrible at understanding regulation, institutions and enterprises. No surprise, then, that we keep coming up with gallimaufry solutions like ACA.

Axioms — however much they may look to our prejudiced intuition like nearly self-evident propositions — function as a way to bound the problem. That may contribute to enabling our limited powers of reason to solve the problem, but it leaves solution as well as the problem bounded.

The classic example is Euclid’s parallel lines. Lots of problems are easier to solve, if we assume parallel lines can extend indefinitely across a plane; it makes the plane, flat, in a simple way, which is very convenient, but also limiting. If you are Einstein imagining yourself riding on the cowcatcher of a train travelling at the speed of light, the absurdities imposed by axiomatic parallel lines become obvious, as you try to imagine shining a flashlight in the direction the train is travelling: is the light of the flashlight travelling faster than the speed of light (the speed the train is travelling)?

Will there ever be one DSGE model to rule them all? I feel comfortable saying, “no”. That there are economists, who apparently can not work out the severe limits of this modeling approach, does give pause.

“Godel is indeed about incompleteness – he showed that, if you want a complete system of math, in which every true theorem can be deduced from the axioms, you’re out of luck. Of course, this doesn’t stop you deriving theorems or doing all the stuff that mathematicians have always done.

Similarly, SMD show that if you want to derive a model of the entire economy, including aggregate demand and supply functions , from standard micro foundations, you’re out of luck unless you’re willing to make some unappealing simplifications, such as a representative agent.”

This is all perfectly fine, except for the word “similarly.”

If, as some here have proposed, you want to get rid of Friedman’s “assumptions do not matter” then your macroeconomic models need to have some microfoundations — not necessarily microfoundations in General Equilibrium, but microfoundations nevertheless. If SMD (and a plausible equivalent to SMD, for economic actors exhibiting a variety of modes of irrationality; with some negative aggregation results added) precludes any form of non ad-hoc microfoundations, then you’re back to “assumptions do not matter.”

“Assumptions do not matter” might be a plausible approach if macroeconomists could exhibit some spotless predictive empirical record, in which case we would throw up our hands and claim that some macroeconomic model “just works” so it must represent some emergent property of economies.

Alas, macroeconomic prediction does not have a spotless record.

Sometimes it seems to me that a large part of the problem is not with being “scientific” (whatever that means), but with trying to combine consideration of urgent practical problems with an approach grounded in high theory. There is no fundamental problem with seeking a unifying theoretical understanding of things. Perhaps if persisted in long enough it will yield results (it did for alchemy, and also for medicine, although in both cases it took a few centuries). It will certainly give rise to the odd clever insight. As an academic pursuit it can do no real harm.

BUT, if the subject is messy, complex, dynamic, uncertain and so on in all the ways actual economies or societies are, it is more practical to recognise that our current theories are hopelessly over-simple. In this case, there is no substitute for close examination of the actual case – what I take to be Bruce Wilder’s institutional approach, grounded in the details of the actual economy. In other words, to approach the economy as an artisan does his or her materials. With real knots, lumps, and impurities, unreliable suppliers and limits to workability.

The 30s and World War II are a case in point. Paul Krugman’s comment shows, as Bruce says, an astonishing ability to wave over the details. It was not just that the government boosted aggregate demand, it was that the government identified and invested in very specific sectors in response to very specific identified problems. Sure it was noisy and sometimes missed the mark – it was very untheoretical in ways that are anathema to the rigorous mind. It was heavily political, and so subject to all sorts of compromises. It worked.

What we need is a clear understanding that, while theoretical economics is fascinating, it has very limited applicability to our actual problems.

@100 “Friedman’s ideology was tailor-made for an agenda of dismantling the institutions of the New Deal — he simply denied that those institutions had anything to do with how well the economy functioned in the 1960s. The heavily disguised authoritarianism of conservative libertarianism became the favorite interlocutor of the know-nothing neoliberalism of a college-educated elite, who were tired of class warfare and hanging out with trade unionists, racists and machine politicians. But, I digress.”

I’m not old enough to have memories of the 1960s myself, and I dare say they were different in Australia in many ways from the US, but the 1960s socio-economy, particularly as it went on seems to have been characterised by a lot of extreme social divisions and violence – Indochina overt and covert warfare, (using the bodies of young men), various protests against Vietnam, civil rights struggles, assassinations etc etc

I think American Pastoral (the only Roth I’ve read) posited that the off-shoring of labour at the time by business owners was directly responsive to the civil rights movement. The two bodily (rather than rhetorical) options taken by the daughter figure – bombing, total non-violence – could possibly be taken to point in some way to the subsequent appeal of pop po-mo neo-liberalism….

I think maybe each science has a different relation to the general definition of science, and they are located at different points in a continuum from exact historical description to precise prediction.

Economics might never be a precisely predictive science. There would be at least two different real reasons for that: 1) chaotic outcomes from n-body computation, and 2) new emergence of different (and often higher) logical types of ideas, innovations, and institutions.

1) N-body computation results are understood from early in science.

2) The second reason poses problems in mathematical prediction in another way, because the innovation or institution is a rule set that is logically incommensurate to the transformations or transactions it rules. They are different logical types: market transactions are about quantities of money; rules are about transparency and responsibility to common expectations, willingness and outcomes. They cannot act on each other, i.e. arithmetically transform each other, in the same equation.

So then, what are the options for formulating a scientific fundamental about institutions, to try to match this fundamental to reality? One idea is to think of it as a mechanical algorithm, and perform both the transactions and the rules by doing so in tandem reiteration. But then, we see something like a game theory tree, (after all, a game is an institution too,) but it quickly branches out to an infinite continuum of choices, and so we have to limit it for the real finite world, by inventing something like the concept of “bounded rationality”.

Instead, I think that a much simpler solution is to go at the problem from both sides at once. Start with the fact that there are two, co-equal, forms of economic growth. One form maps over the transactions, and the other form maps over the rule set: A) growth by specialization and trade, and B) growth by the reduction of the cost of making those trades, by the institution that the trades are under (or, the reduction of the transformation costs by the institution that the transformations are under, e.g., the work flow at a business firm).

Reducing the trade costs serves to increase the volume of trades (or transformations) between the specializations. This looks like an enormous source of growth. (Coase cited a paper by other economists which found that transaction costs, despite our efforts to ease them, still equal around half the GDP.) Why is reduction of trade costs co-equal to specialization and trade? Because this institutional cost-saving, at one level of transactions/ transformations, becomes the comparative advantage of a specialization that may be traded at the next level up. It is a combined effect. There is a hierarchy, with a tandem alternation of equalizing and maximizing at each level, and it goes in both directions along this following nesting: [ individual ]-[ firm ]-[ agglomeration ]-[ government ].

It can easily be understood when pictured in one model, though that model is not mathematics, it is para-mathematics or exomathematics:
http://www.youtube.com/watch?v=BXr5VjQ0OXE&list=PLT-vY3f9uw3AcZVEOpeL89YNb9kYdhz3p

Surely this cannot be predictive, but the visual is a more efficient description, which is a hallmark of science. Ernst Mach comes in around here somewhere… Also it might help to cure the rhetoric of market primacy, which is to think of markets as the main thing, and institutions as impingements upon it. This is not only wrong, it has finally become intellectually inhibitory as it is poisoning everyone.

all knowledge is approximate

Should have read, all communicable knowledge is approximate.

Rakesh Bhandari @ 73, 77 . . . 109

Equilibrium analysis is a really powerful way to think, because it helps sort out, proportionately, all the forces and counterforces involved. To derive an equilibrium analysis requires a constraint as a starting point, some fixed limit that must be satisfied. Everything is balanced to satisfy the constraint. Consider, as an example, the analysis of how the movement of a stream of gas around an airfoil could generate lift. Bernoulli pioneered the analysis of fluid dynamics, using conservation of energy as a constraining principle. Euler is credited with the amazing feat of deriving an analysis of a no-viscosity fluid being turned by a plane, which satisfied at once, conservation of mass, momentum and energy. Euler is credited with a lot of things, really, because he was really, really good at derivations of this sort.

The Classical economists knew that they needed some kind of constraint, some kind of fixed standard, to derive an analysis. That’s what Ricardo was trying to do with the Labor Theory of Value, find that fixed standard, that constraint, which would allow him to derive an equilibrium analysis.

The Neoclassical economists of the marginal revolution gave up on finding a constraint or conservation law, and simply assumed equilibrium obtained, and proceeded with their analyses from there. Comparative statics was born. It’s a “natural” or homeostatic equilibrium, the product, not of a conservation law, per se, but of a regulated process approaching equilibrium as an attractor or set point. For Walras, that process was tatonnement, a double-auction with an all-seeing and infinitely patient auctioneer calling out prices and quantities until equilibrium equating, and exhausting, supply and demand obtained. For the American, Irving Fisher, it was something closer to the fluid dynamics of an hydraulic system — he studied under an engineer expert in hydraulics, and focused on the constraints of a gold standard. But, the failure to find a constraint with which to do a formal derivation meant that all depended on the equilibrium obtaining, without really having a good account of exactly how or why it would obtain. The details of the all-important equilibrium had to be both obscured and fiercely defended.

Keynes, bless his black liberal heart, upended this happy vision of the economy as a system in, or tending toward, equilibrium, by stumbling onto a limit, a constraint: full employment of resources. Full employment of resources is a qualitative standard for efficiency (idle resources imply the possibility of a costless Pareto improvement) and a quantitative standard for equilibrium: unemployment of resources implies markets have failed to clear. Something about the system of money, prices and markets (or “markets”) has to be seriously out of whack, if high unemployment persists.

The whole enterprise of neoclassical economics, though, depends on equilibrium obtaining of itself, and that equilibrium must be “natural”, aka magical and obscure.

I really don’t know what to say beyond that. There’s a history of how the neoclassical synthesis, building upon J.R. Hicks’ kludgey interpretation of Keynes, became the doctrine of the American Keynesians. Ultimately, though, I think I gave the correct answer @ 28: “Market economy” is false. Never mind asking what the alleged “equilibrium” looks like, where’s any kind of definition of the “market” metaphor, applied so loosely and universally in the assertion of a market economy? I look around and see very few “markets” within spitting distance of the kind of exhaustive auction Walras imagined. That’s not a criticism of Walras, per se; I imagine he thought he was working out some concepts, not describing in detail, reality. What rational people do with models like Walrasian general equilibrium or Arrow-Debreu is use them to notice all the many, many ways the actual, institutionalized world doesn’t look at all like them; that sort of learning from contrast can be really useful and productive of insight.

We do live in a political economy of distributed decision-making, but money prices, formed in anything like a market, are not our sole, or even dominant coordinating mechanism, nor, at any particular point in time, are all the “markets” working demonstrably well, clearing or tending toward equilibrium. As Oliver Williamson’s book title put it: markets and hierarchies. And, the hierarchies predominate, in case you haven’t noticed. Most prices are not arrived at by tatonnement; they are administered by bureaucracies. And, the prices administered, are administered, precisely because increasing returns to scale and sunk cost investments mean that, over the relevant range of output, marginal cost is less than average cost and decreasing — conditions that preclude a market-clearing equilibrium in price. By a strict neoclassical standard, there can be no market equilibrium; its existence is excluded. I guess those can be termed, “sticky prices”, but the welfare implications are a good deal more nuanced that you’ll find any appreciation of, in Woodford.

In relation to the OP’s insight, it seems quite plausible to me that the Great Depression was prolonged, precisely because the high rate of unemployment put general downward pressure on wages, at a time, when technological and productivity trends would seem to imply that the only feasible full-employment equilibria would be at higher wage rates. Wages had to rise, despite the deflationary pressure, for the economy as a whole to be able to reach a full-employment equilibrium.

In addition, some important markets were malfunctioning very badly, and had to be institutionally restructured, before their price formation, so to speak, could be relied upon. Electric utilities were one such case, and the case that contributed significantly to the stock market crash. Agriculture was a huge problem area, where a large fraction of the population was sinking hopelessly into poverty; technological and productivity trends were very positive in agriculture, but required the sector to shed resources, while making substantial sunk cost investments — commodity prices were highly unstable — there was no discernible equilibrium — and under great pressure from the elaborating food processing industries. And, the rapid advance of industrial areas of the U.S., relative to Europe, in the aftermath of WWI and under the new financial dominance of the U.S. and the constraints of the reparations regime, created further barriers to stable, general equilibrium in the global markets, financial and trade alike.

In the GFC of 2008, the administration of the systems for making mortgage loans, and securitizing those loans, broke down. I’m not sure what the point is, of endless blathering about these problems, as if there was a housing market, except to obscure the truth. Honoring such efforts to obscure, I suppose, is why a central bank would give a faux Nobel to Fama and Shiller, but we’ve already discussed that.

But perhaps you meant being rather than knowing?

Peter T @ 110

Speaking for myself, I would not consider institutional economics to be atheoretical, just because it focuses on concrete and particular situations and solutions. An architect with no understanding of structural engineering (or aided by a structural engineer with no physics), would be a very dangerous decorator.

The actual economy has to be structured to deal with the limits to our knowledge and understanding, with what we don’t know, including what we don’t know that we don’t know. Axiomatic, deductive reasoning is not capable of comprehensively modeling genuine uncertainty, even though it may demonstrate the logical necessity of dealing with uncertainty and risk. That’s the leap that experience and skill must make: the structural engineer analyzes the loads and stresses and their distribution in line with the dictates of his theory, then he buys some insurance, by making things thicker here and there, introducing some redundancy, etc.

Arrow-Debreu demonstrates general equilibrium under uncertainty requires perfect insurance, such that no actor errs due to risk aversion: every actor bets the mathematical expectation and realizes the mathematical expectation, regardless of what actually happens. That’s far from practically possible, but it would seem to indicate a high value to pervasive provision of social insurance, to contain desperate or risk-averse behavior. Why the economists touting the theoretical goodness of general equilibrium reasoning are not all socialists I could not tell you.

It seems to me that the economist-touts of the theoretical goodness of GE reasoning are not all socialists because they’re agnostic about outcomes. For economists, what we’re aiming at as a civilization, what concept of the good we should endorse, has always been, and perhaps will always be, someone else’s business. (With the usual few notable exceptions, of course.)

Then again, look what happens when everybody decides to get into the act. Economists — and not only economists — are suddenly without identifiable patrons. Panic city. It would be nice, I suppose, if we all recognized the limits on human behavior, understood where those limits placed us and everyone else in the scheme of things, and had the wherewithal to abide by that understanding. In the real world, though, creating the one DSGE model to rule them all might actually prove to be an easier task.

Bruce, I got curious about Martin Shubik and found this gem, A Curmudgeon’s Guide to Microeconomics. From the conclusion:

Unfortunately, microeconomics is probably not an elegant subject when really well done. In order to keep us going, every now and then it is a good idea to set almost all parameters equal to one or zero, keep everything convex, and make a few further simplifications here and there, and for this price we can be rewarded with some nice convergence theorem. The Invisible Hand appears, pats us on the head, and we feel elegant. Beyond that it is necessary to go back to the miasmal swamp of reality.

Andre Cieplinski @96: Thanks. Just to be clear, I didn’t mean primarily for me, though I admit of not having read everything on your list. Rather, I have the impression that the biggest problem with economics is what is included and what is included in economics 101, or the courses taken by almost everyone who then continues with a career in business, politics or the right wing commentariat. How much practical impact does it have if there are this or that heterodox research on higher up levels that only reaches a tiny number of those taking economics? I think the best remedy for this would need to be systematically constructive: construction of textbooks that practically can replace Mankiw etc at the introductory level. Shouldn’t a big chunk of the discussion of the problem in economics be aimed at forwarding that goal? But that doesn’t look to be what is happening.

John Q,

would you be kind enough to school me on SMD?

My current understanding is that those results say you cannot start from general micro foundations and be sure you’ll end up with nice downward sloping market demand curves you can use to do standard macro. On the other hand, you may well end up with downward sloping demand curves (it’s not ruled out). So if you think – for some reason other than having started from individuals and aggregating – it makes sense that market demand curves slope down, there’s nothing to stop you using that in macro models, and it’s not necessarily inconsistent with microfoundations.

So SMD leaves some wiggle room. Saying you cannot build up in general, or under weak assumptions, and derive the result of downward sloping demand curves, is not the same thing as saying nobody should be doing macro with downward sloping market demand curves and imagine what they are doing is consistent with microfoundations.

But as fear my current understanding is wrong – if so, I’d like to find out sooner rather than later.

Also – and now I am thankful for internet anonymity because I might really be about to make a fool of myself – the way I currently understand SMD is to think that if a price of a commodity rises, in GE people who aren’t endowed with it might buy less but those who are will be richer and being richer might demand more the commodity themselves, so you cannot say market demand will fall at higher prices.

If that’s right, I’d be interested in your thoughts on what market demands for what commodities might not be downward sloping in reality, and how that would matter. My guess is: labour.

oh, I don’t know whether you saw the recent Econ Journal Watch, but I thought this quote from Arrow was interesting. He thought of “general equilibrium as an ideal to be achieved by a mixture of private enterprise and public planning and regulation;”

ZM @ 117

Krugman’s conclusion that you give seems to me to assume that national economies are not interrelated to a very significant extent, are not related to geo-political matters, and that the material resources of the planet are not finite.

I don’t see this at all. Of course national economies are related. Of course resources are limited. (!) But Krugman’s analysis is disciplined by political realities. He is, in effect, trying to answer the question, where should we place our next footfall? Minds of less discipline have a tendency to squabble about where we should be walking 10,000 paces hence.

in Where/What/Whom is the locus of non-communicable knowledge which is not approximate, but, presumably, true?

In the mind, of course! (“Where is the mind” is not necessarily a meaningful question.)

133, 135

We’re stuck with the division of labor, no doubt about it, but I would argue that as a result economists, for all their pretensions to scientific rigor, are subject to the same limited horizons as the rest of us are, and in general, aren’t a whit more humble about it. What’s more, they’re equally adept at crossing over into the normative, no matter how heavily they tread on other areas of expertise in the process. So what us ignorant leftists with the lovely Marx-scented stories are up to should be considered self-defense, not vandalism — if, that is, if economists treasure objectivity as much as you guys say that they do.

It’s not about the value of science, or of objectivity, still less is it about if you’re so smart, how come you ain’t rich. It’s about economists who appear to be asking for a deference that recent world events suggest they haven’t earned. Messy interventions by outsiders like those you so dislike in this thread may be annoying, but they appear to be necessary, even among economists themselves, exactly as the last sentence of the OP says. Look at it this way — we’re from the rest of the world, and we’re here to help you.

Eh, sorry..first 6 lines are from a completely different comment..

“How does one distinguish between people who are “well-informed, but miss the mark for one reason or another” and people “who, after thorough study and/or substantial worldly experience, disagree with In the sky”?”

Why they are one and the same Cranky.

I do not accept that “a set of prices *exist* that will result in markets clearing” is a result in the Arrow-Debreu model. It is not clear that markets are or can be defined in the model. I am aware that Debreu (1959) provides, in the style of Bourbaki, a definition of so-called “private ownership economics” and a proof of the existence of a so-called “market equilibrium”, given certain conditions. But what that has to do with actually existing capitalism or markets is unclear to me.

Quite a bit of literature on administered prices discusses the relationship between the markup over costs, retained earnings, and investment plans. I suppose the bit about retained earnings is a recognition of the lack of unlimited amounts of external finance being available and of differences between finance obtained by borrowing and diluting existing shares.

As I understand it, the famous paper by Miller and Modigliani shows that, in their model, whether firms borrow or sell shares is immaterial to the firm. And a quite a bit of literature introduces one friction or another into the model to try to explain why firms care. Can you cite a theorem showing that restricting the availability of credit will imply that an equilibrium exists under the conditions Bruce is describing, including increasing returns to scale?

I have seen many defenses of mainstream economics that rely on the existence of pluralism in advanced research. Many of these defenses acknowledge most undergraduate teaching in economics is problematic. So, if one wants to understand existing economies, rather than what economists teach students, it is not clear that one should pay any attention to mainstream introductory textbooks.

Mattski, of course your 143 is easier for people of good will to endorse than your 135, but the contrast between them leaves some doubt as to whether it’s you or I who’s confusing our knowledge with our values.

I’m reminded of BW’s observation about what walking through a supermarket tells us. In mine there’s ten feet of shelf space, mid-shin to collarbone, devoted to different brands and formulations of toothpaste, all of which are within a penny or two of the same price, except for the store brand. Is price what’s clearing the market here, and, metaphorically speaking, at what price is it doing so? Or how about Detroit’s decades-long response to inferior quality control in its products? (examples provided upon request) Did they lower the price, or increase their investment in product development? No, they increased the advertising budget and complained about union wages. Should we be consoled by the fact that GM, Ford and Chrysler nearly went out of business as a result? What do U.S. foreign-aid purchasing stipulations legitimately have to do with clearing the market for F-16s? One might even be justified in asking what we’re talking about when we talk about a market for F-16s — unless it’s talking through our collective hats, of course.

I’m all for science, mattski, but when economists appeal to us on the basis of their scientific credentials, I think we’ve earned the right to a certain skepticism. God knows that the central planners of the grand Soviet experiment got plenty of perfectly justified attention on that score. What is it that makes the Friedmans of our own capitalist dreamworld immune, especially when they climb into bed with the Pinochets, and claim that they’re doing so on the basis of scientifically-derived best practices?

Irrelevant questions? Maybe so, at least insofar as they get entangled in a debate on the significance of the SMB theorem. But one person’s irrelevance is another’s pressing concern, and on the Internet, it isn’t only the masters who get to say who’s the dog.

Make that SMD theorem. To many entanglements with server message block errors in my past, perhaps, or maybe its just aging neurons that are to blame.

Au contraire, Ronan, a chara, I was not being dismissive of Bruce. I placed him in the “well informed but somewhat off the mark” category, and intentionally listed him as a contrasting example to the “mostly bullshit” category. I’m not sure how you see that as being anything but disagreement (i.e., not dismissiveness).

As for the snark, suffice it to say that it causes neither tears on my pillow nor pain in my heart. Alas I do take it as an indication of the type of fellow internet traveler I’m talking to. Much like YouTube comments and debating with members of Stormfront, when unnecessary snark pops up, I find it’s a good sign that I’m essentially wasting my time. So on that note: I’m out, and apologies to Bruce if he thought my comments were dismissive.

Mattski@134
“I don’t see this at all. Of course national economies are related. Of course resources are limited. (!) But Krugman’s analysis is disciplined by political realities. He is, in effect, trying to answer the question, where should we place our next footfall? Minds of less discipline have a tendency to squabble about where we should be walking 10,000 paces hence.”
Yes, of course! I’m not clear on this, but by saying Krugman’s analysis is disciplined by (US?) political realities are you intending to imply he is a knave?
Where we should place our next footfall would depend on our understanding of where we have been, where we are, and where we determine we will be going (10,000 paces hence). And yes, I am certainly not politically disciplined as Krugman is, and yes I do not think the US should be going in the general direction it seems to be taking.

“”in Where/What/Whom is the locus of non-communicable knowledge which is not approximate, but, presumably, true?””
“In the mind, of course! (“Where is the mind” is not necessarily a meaningful question.)””
First. Evidently, there is not the mind but many many minds (unless you happen to be particular sort of Cartesian who not only equates being with the cogito, but also the trueness of one’s cognition with having cognition – but then again, assuming you don’t think you’re writing to yourself you would accede to the trueness of the existence of other minds in this case anyhow).
I think this is a meaningful if (Descartes aside) completely obvious point.
Second. Presumably if you are speaking of non-communicable knowledge you would mean knowledge with comes to the mind before being codified in language or expressed in the timbre of one’s voice, one’s facial/bodily expressions etc?
Third. What are your reasons for thinking this non-communicable knowledge is always and necessarily true? And does this hold for only your mind, or for the minds of others as well?

Bruce Wilder @129
“Marx said, “the country that is more developed industrially only shows, to the less developed, the image of its own future.” In large part, however, this prediction would still fall under Durkheim’s dictum that “a science of the future has no subject matter.””

mattski @ 149

…in addition to making wildly unjustified assumptions about human nature

Is the idea that human beings are rational agents — or can be reduced to rational agents for certain very important theoretical purposes — any less wildly unjustified than the idea that history is the ultimate driver of human development? In any event, I appreciate your extending a hand in my direction. Consider it taken. Peace.

@154, @155
“154: any less wildly unjustified than the idea that history is the ultimate driver of human development?

Trying to keep track of the negatives in there and avoiding quoting Lukacs…

Yes, when history is understood as a subjective process rather than as an external burden.”

I haven’t read Lukacs so I don’t understand that reference, and the negatives have confused me. Are you saying you agree that history (as praxis and as interpretation) is subjective rather than an (only? who could argue this?) external burden?
Also, I don’t entirely agree that Marx was strictly an historian – it is a very specifically teleological thing that he undertook….

Or, to put it another way, the world scribbles in our mind, and our mind returns the favor by giving us the wherewithal us to scribble on the world. Given the millions of us past, present and (one hopes) future, this is a helluva Gestalt to untangle. As far as I can see, no one has successfully accomplished that formidable task to date, and I doubt anyone is likely to succeed at it in the foreseeable future, except perhaps in part. It’s a chicken and egg thing….

And no disrespect intended, by the way, to those have given, are giving, or will in the future give it their best shot. If we really need heroes, they will certainly do.

@157,158 Thank you William Timberman, that makes it clearer.

@159 Thank you for your reply Mattski.
“How do you navigate if your feet are not on the ground?”
If you found yourself entangled in the woods, you might try to climb the tallest seeming tree to get your bearings before setting out perhaps?

” I am not making a claim here, only suggesting another way of looking at it.”
Keeping with the tree theme:
“II
I was of three minds,
Like a tree
In which there are three blackbirds.” Wallace Stevens

“The experience of eating an apple is not the same as a written description of eating an apple”
Disregarding the apple from the proverbial tree, eating an apple consciously combines being and knowing in the one deed (here I intend to imply that experience is not the same as [but also not entirely opposed to] knowledge – one at once eats an apple and observes the sensations of eating an apple and may wander into the meanings of eating an apple, or wander into wondering about horse racing or some such instead) – writing about eating an apple is indeed not the same as eating an apple.

“True and false are values ascribed to propositions.”
True and false are not only used in this way. I might describe a person as true or false for example.

“Experience is direct knowing.”
Surely this depends on the person (subject) who is experiencing something (plus I think you probably mean to include observing here as well, which is different again), the person’s experience of the action (if someone tells to me a thing which is false [in mistake or lie] I might directly experience it as either true or false – my experience is not necessarily a direct contact with the thing in itself), and the person’s knowledge of the experience which is temporal and generally extends from the subjective experience to reflections far from the experience itself. In sum, I’d argue that to experience a thing is not equal to knowing it.

“We only have problems with truth and falsity when we attempt to render experience into some symbolic format” Unless we are raised by wolves we are always acculturated beings. As we experience something we almost always experience it symbolically at the same time – it is much more difficult and far less common to attempt not to render something into a symbolic format.

“And at that point we are removed from the experience we’re trying to communicate.” With words almost always – spontaneous laughter, a hand clap, an involuntary cry – not so removed. But often what we are trying to communicate is not the thing itself but our thoughts on the thing – so I might ask then are we ever (whilst conscious) really removed from the experience of our thoughts…. Of course, one may not try to communicate one’s thought in writing, but may try to dissemble – and we are back to the start of your reply again – is some one an exemplary being, a fool, or a knave?

@161:

Mr. Market as Gosplan super-planner, eh?

In my untutored opinion, macro-economics doesn’t have micro-foundations, and if there is a need for “foundations”, it’s at the meso- level: i.e. inter-sectoral dynamics.

I don’t understand notsneaky’s characterisation of an representative agent here – it seems almost tautological. Surely, C, I etc. refer to aggregate phenomena and are not thought of as a single agent behaving in some way?

(that should be “2006 published version”)

notsneaky, you couldn’t adjudicate on my questions/ramblings #132 could you? I’d like to improve on my current position.

Notaneaky, In the sky:

Would you agree with the following?

The operational meaning of microfoundations is a formalization in terms of constrained maximization. If your model begins with an equation of the form “X maximizes quantity Y subject to conditions Z” then your model is microfounded. If not, not.

It seems to me a lot of useless arguments if we could agree that the term microfounded, as used by economists, simply describes models with this particular structure.

I meant “arguments could be avoided if if…”

Robert, would you work more if you were paid less, even after the time given to change jobs or retrain? I think supply and demand curves make enough sense intuitively to accept monotonicity per variable.

Experience is direct knowing.

This is tangential, but I would argue there’s no such thing as “direct knowing.” First of all, perception is highly mediated by experience, various priors from already learned things, and so on. As such, you never perceive anything “directly,” because there’s no such thing; everything is filtered through a complex processing stream, and by the time it arrives at the point of conscious experience, it’s no more “direct” than when I tell you the directions to my house.

@176 People do this – sometimes not out of choice but need ( involuntary unemployment etc) and sometimes by free choice ( people that want to work in a particular job, perhaps in welfare, education or creative arts for example). Monotonicity is not a very good thing to accept, and it’s odd to think its acceptable intuitively unless you’ve never entered into dialogue in your life.

Here is a link to a paper by Abu Turab Rizvi which explains the link between SMD and microfoundations.

JW Mason : “The operational meaning of microfoundations is a formalization in terms of constrained maximization. If your model begins with an equation of the form “X maximizes quantity Y subject to conditions Z” then your model is microfounded. If not, not.”

That may the actual usage of many macroeconomists, but it’s a pretty poor one. I don’t think that DSGE models with representative agents are microfounded just because they use constrained maximization.

I also don’t buy the attempts to restrict the negative results regarding the possibility for microfoundations just to results about microfoundations in General Equilibrium.

Macroeconomics can not have microfoundations in GE because imposing rationality as the only restriction on economic actors is not a sufficient condition for restricting the behavior of various aggregates. If you want to eliminate the rationality restriction, then you have even more degrees of freedom for your actors, hence even more freedom for specifying the behavior of your aggregate quantities — which is precisely what you do not need if you want to provide microfoundations for some macroeconomic model dealing in aggregated quantities.

@176
For salaried employees – working more and getting paid less is a daily fact of life. On a per hour basis every incremental hour worked results in that outcome.

The two obvious reasons millions of salaried employees choose this are 1) failure to work the incremental hours results in dismissal with a massively negative utility function or 2) working the incremental hours increases the chance of a promotion with the potenital to recoup in future earnings some of the hours given now.

Robert,

I’m not clear on what you mean by “market” supply and demand. If you’re talking about a market for a particular good then I think you’re wrong. First, since you’re talking an endowment economy, there’s no “supply” function (well, it’s a vertical line). You can have all kinds of funky individual demand functions (with the usual properties) and there’s absolutely nothing that stops you from adding them up and for that market the market demand function will be “well behaved” – downward sloping, monotonic all that. m(p)=x1(p)+x2(p). Then m'(p)=x1′(p)+x2′(p). Of course holding wealth constant.

The difficulties arise when we don’t hold wealth constant. If wealth effects are present you just cannot consider a simple market in isolation. Then a change in price not only moves people along their demand curves but redistributes income, shifting the individual demand curves. That’s where the result comes in that the excess aggregate demand curve can do funky things, if the shifts and the movements along interact in weird ways. But it doesn’t make sense to discuss the SMD theorem in a context of a single particular market. It’s general equilibrium.

If you’re just using the word “market” for “aggregate” (across goods and individuals) then sure, that’s what we’re talking about.

Not sneaky,

This may, or may not, help with “market demand” from above paper:

Technically, Sonnenschein stated two versions of the problem… In first version each individual receives some nominal income , whereas in the second they each receive a fixed endowment….
The first case corresponds to the market demand problem; what is considered in the second is the agents excess demand, demand as the difference between the agents desired consumption bundle and her initial endowment.
In both cases, aggregate demand depend on prices and initial endowments. The main question, however, is the characterization of aggregate demand as a function of prices.

Alex K.,

The Rizvi paper doesn’t really address the issue at hand. That paper is really about how the research program (Dreze etc.) to turn real general equilibrium theory into a new kind of macroeconomics failed. It failed because it turned out that it was really difficult to incorporate sticky (fixed) prices and imperfect competition into the framework in a consistent way. Among other things. Rizvi focuses on why those attempts failed because of the SMD result. Yes. But as far as I understand it, those attempts failed for a whole number of reasons.

More or less, it’s like the whole “rationality” assumption. There’s one way to be rational (your preferences are complete and transitive). And a whole lotta ways to be irrational. If prices are flexible then they’re flexible, Walrasian auctioneer and all. But if they’re not flexible then there’s dozens of ways for them to be sticky. You got to come up with rationing rules etc and those are more or less ad hoc, market specific or institution dependent. Same with how you characterize imperfect competition (the tension between Bertrand and Cournot being an obvious example). So even if there was no such thing as the SMD theorem it would be very very hard to make real GE into a macroeconomic theory. But there is such a thing as the SMD theorem and it’s the *snort* that the econ GE/macro Gods have after they’ve humiliated you in other ways.

I still don’t see how the SMD result is related to the aggregate demand of standard macro, whether it be of the old school Keynesian variety or the NK DSGE variety. I think that John Q is right in that as far as macro people are concerned it’s more or less something we should note, acknowledge, then ignore and move on to other things. Like asking whether we really need something being maximized to do macro or can we built the models from aggregates on down.

The Chiappori paper linked by Luis seems more relevant but yeah, I got to work through that one slowly.

Put it another way – any kind of self respecting modern macro (not to be confused with MMT) wants to have sticky prices and imperfect competition in it. You’re not going to get that out of real general equilibrium, SMD or not. Which isn’t to say that real GE is no good. It’s just a different research question.

Bruce wilder @189, Thank you, that clarifies the statement for me.

There is no such thing, or there are impediments in the way? It seems to me helpful to distinguish between sense perceptions, the intellect and the imagination. Yes, we are deeply conditioned by past experience, nevertheless our eyes see only light, dark & color. Our ears only sound, etc. I would say that the quality of our perception, the degree to which it is obscured by intellect and imagination, is both subject to change and something we can actively develop if we choose to. Indeed, meditation is a technology fitted for this purpose.

Sure, you can condition your perceptions. People learn to hear music, for example. But think about what it means to say that there are “impediments” in the way. In the way of what, exactly? The entire act of perception is simply (or, not so simply) a complicated information filtering process that your brain performs. In a very literal sense there is no perception until that process happens. That’s why speaking of “direct” or “immediate” or “unimpeded” perception makes no sense; perception is just process, and its outputs are not accessible outside of the process itself. Whatever meditation does, it’s not actually overcoming this problem.

But without getting too fussy about it, there is good reason why we consider experience to be at the root of knowledge. When you want to hire the best sea captain for your boat, you want (in Socrates phrase) “the one who knows.” Years on the ocean is going to be a prerequisite for having this kind of knowledge, as opposed to–say–learning seamanship in a classroom.

I don’t see how that’s relevant. Yes, of course experience is important; who says otherwise? I’m just pointing out that there’s no such thing as “direct experience” of anything. That’s a kind of naive 18th century empiricism that made a lot of sense before we had any idea about what’s going on in the brain, but it makes no sense today and should be discarded.

ZM @ 160

I was of three minds,
Like a tree
In which there are three blackbirds.”

:^)

If you found yourself entangled in the woods, you might try to climb the tallest seeming tree to get your bearings before setting out perhaps?

Yes. But the problem with this metaphor, I think, is that the future is out of view no matter how “high” we think we’re climbing! So instead, let’s hone our walking skills, keep our eyes on the terrain in front of us and use our values and beliefs to set our general course. That’s my metaphor about why I like Krugman’s approach.

my experience is not necessarily a direct contact with the thing in itself

Yes. We spend a lot of our lives in our intellect. We are social creatures, we love to talk to each other, debate, disagree etc. When we’re using language most of our attention is in our intellect, not in our senses. So, our minds are using symbols to represent the world, and we are essentially creating a shadow reality to represent and help us negotiate the real world of things. (I believe this is where Plato’s parable of the cave comes from… the double-edged sword of language.)

it is much more difficult and far less common to attempt not to render something into a symbolic format.

Yes, this is our conditioning. But our “bright moments,” the moments when we feel most alive, are moments when our minds are especially clear and focused on their object. Maybe it is a sunset, a kiss, a sound (a song?) or even a thought (Einstein had many of these it seems!) But we feel most alive when our minds are focused on an object and this is a skill we can develop in ourselves, and in the process gain insight into the nature of our thoughts, which are typically repetitive and not terribly insightful.

Jerry,

That’s why speaking of “direct” or “immediate” or “unimpeded” perception makes no sense; perception is just process, and its outputs are not accessible outside of the process itself.

So, your level of alertness is even and unchanging? You never feel duller than usual or more lucid than usual? When you feel particularly alert and alive, is this the upper limit of what is possible? Or is it possible that you could improve on that? I admit I can’t really make sense of the latter part of the above statement.

I’m just pointing out that there’s no such thing as “direct experience” of anything.

I think you’re being argumentative without a clear purpose. Have you ever tried to hit a baseball with a bat? Play the violin? Anyone who has experienced moments of clarity and mastery knows full well about direct experience.

Allegory of the Cave

But I am hesitant to equate my focus on a thing/idea with direct access to the thing/idea because *I* am always and unavoidably the medium of my experience of something

Not direct access to the thing (I apologize if I said this) but direct access to experience. “The thing” is an idea. Our experience comes first, and we add layers of ideas on top of our experience.

As to whether our “self” is a “thing” mediating experience, I am persuaded that the only way to investigate the validity of this idea is to sit quietly and observe the mind. I can’t claim any personal insight here.

So, your level of alertness is even and unchanging? You never feel duller than usual or more lucid than usual? When you feel particularly alert and alive, is this the upper limit of what is possible? Or is it possible that you could improve on that? I admit I can’t really make sense of the latter part of the above statement.

I’m not really following this. Here’s what I mean when I say “perception is just process, and its outputs are not accessible outside of the process itself.” The brain is some physical information-processing mechanism. That’s a gross simplification, but it’s not entirely inaccurate. Perception is the output of that process in the very direct sense that “to perceive” something just is to send it through the appropriate pathways that deliver the “percept” to your conscious experience. Vision is a good example of this because it’s well known that the path traveled by the information delivered to your eyes (which are just lenses plus sensors) is quite convoluted. There are all sorts of streams of processing going on before you “see” anything at all.

The notion of “direct access to experience” is basically a clever illusion played by the brain. That is, if you feel sad, you don’t feel that you feel sad, you just… feel sad. And so on. There doesn’t appear to be any intermediate stage between the feeling and your recognition of it. This isn’t true, of course; the feeling isn’t some raw thing that exists separate from you and your brain, it’s as much a product of your brain’s operation as anything else. What you’re feeling is not something distinct from that operation, it just is the operation of your brain that is what feeling is.

I think you’re being argumentative without a clear purpose. Have you ever tried to hit a baseball with a bat? Play the violin? Anyone who has experienced moments of clarity and mastery knows full well about direct experience.

I am not a baseball or violin player, but sure, I’ve experienced moments of clarity and mastery. I’m not trying to be argumentative for nothing, I’m reacting to this particular bit from you:

If you believe–as I do–that ultimate reality is unknowable except through direct experience unmediated by symbolic representation, then clearly all knowledge is approximate.

I argue that this is false. That there’s no such thing as “ultimate reality” and in any case there’s no “direct experience unmediated by symbolic representation” that would get you to it. In fact, “direct experience” in this way is a kind of nonsensical term, because there isn’t any way to “directly” experience anything at all, since experience itself is a symbolic construct built up by your brain doing what the brain does.

“Adding layers” seems to me like the wrong metaphor.

Our eyes — the cones and rods on the retina — respond to light; they are sensors. Our “experience”, though, is mediated by our brains interpreting that sensory data into something like a computer’s virtual representation in a game. The color, green, is not a property of light of a certain wavelength; its a virtualization assignment made by our brains. Our brains make lots of calculations and guesses, to turn the clues afforded by a combination of binary vision, shadows, parallax, etc. into an experience of a 3d world.

When we do some science, including whatever you want to call economics, the differences include the conscious and social construction of both the “sensory” experience and the theoretical apparatus. We name things so we can discuss them, and we measure things, to make sense experience “objective”. As Hume noted, “cause and effect” in the mechanics of anything — even the physics of billiard balls — cannot be directly observed; mechanical operations and functional relationships are not in the sense data; they exist only “in our heads”, so to speak, because they are insights from theoretical analysis. We experience “cause and effect” as some things hidden inside a black box, which we can only infer by means of a theory that identifies the functional relationships among the things we can sense or measure.

I’d offer the possibility that the self is an epiphenomenon of being jarred by the failure of our theories to process the data stream adequately: the panic when trying to ride a bicycle for the first time, the astonishment at the tricks of a magician, or the frustration of talking to an economist about the economy, something he knows nothing about while claiming to know everything.

They can be ignored by positing a representative agent who’s maximizing something, or they can be ignored just by writing down ad hoc functional relationships between aggregates. But ignored be they must.

In a non-chaotic system modelling works. An approximately-correct description [but simplified] of the system gives approximately-correct results [but with missing details]. In a chaotic system this does not work: simplified descriptions quickly give uselessly-erroneous results. You can make your models, but if they don’t do the same thing the real object does what’s the point?

And this is something that people have been pointing out since we got a proper understanding of chaos and dynamic instability in… what, the mid-eighties? And we get answers like yours.

Mattski @ 199
Thanks, that makes more sense if I understand you’re not equating direct experience of a thing/idea with complete access to the thing/idea.

Alex K @203
I don’t know a lot about it, but looking at the human economy like a complex ecology (incorporating actions and materials/environment) sounds a little like the interdisciplinary discipline of Human Ecology.

From the Hunter School at CUNY:

“…introduction to the interdisciplinary study of human- environmental interactions as generally framed in 1972. The Editors’ Introductory Statement described their intention to publish research on “… the role of social, cultural, and psy- chological factors in the maintenance of ecosystems; effects of population density on health, social organization, environ- mental quality; new adaptive problems in urban environ- ments; interactions of technological and environmental change; and the genesis of maladaptations in man’s biological and cultural evolution …” (1971:1).”

Bruce Wilder @204

“The first mathematical analysis of bicycles suggested that this is also what keeps a moving bike on its wheels. But although the equations were written down in 1910, physicists always had nagging doubts about whether this was the whole story.

The most definitive analysis came exactly a century later. It involved an experimental bicycle that had all its gyroscopic effects cancelled out by a system of counter-rotating wheels. The effort of building such a strange contraption was worth it: the resulting paper was published the prestigious journal Science.

The publication plunged bicycle dynamics back into chaos. It turns out that taking into account the angles of the headset and the forks, the distribution of weight and the handlebar turn, the gyroscopic effects are not enough to keep a bike upright after all. What does? We simply don’t know. Forget mysterious dark matter and the inexplicable accelerating expansion of the universe; the bicycle represents a far more embarrassing hole in the accomplishments of physics.”

http://www.newstatesman.com/2013/07/mysteries-bicycle

It failed because the economy is a system of interacting dynamic equations, because interacting dynamic equations generate chaotic behaviour, and because simplified models of chaotic systems have extremely limited analytical applicability.

Which, to be fair, is only something that’s been widely known to us since, what, the seventies? Early eighties? By “us” of course I’m explicitly excluding Chris Auld, who got cranky with people on his blog pointing it out and who declared it a known problem he’d never, ever, ever respond to.

Colin, in all honesty, I expect the reason why Chris told you, or whoever, that he wasn’t going to respond to “chaos theory” talk, is because most of the time it comes up the people bringing it up have no idea of what they’re talking about. Either about “chaos” in general, or how it works in economics. They’re just trying to sound “smart”.

And who says the economy is “chaotic”? It might be, but I see no reason to make that assumption or evidence to have it as a conclusion. Just because there’s a whole bunch of interacting equations doesn’t mean that you automatically get chaos.

Fascinating thread. Can I come back to the point I made earlier @110. The issue is not theory per se, but the huge gap between all our formal theories and the messy reality. JQ kind of illustrated the point @ 131 – the link to optimal foraging theory is nice, and I am obscurely pleased to have acquired this snippet of knowledge, but optimal foraging theory will not tell you much about how to manage a nature reserve or a farm. Sure you can point to the way a mob of kangaroos move around and say “see – optimal foraging theory exemplified”. Then you can point again and say “see – optimal reproducing theory” and again and say “optimal predator-prey adjustment theory” and so on. And you will be right. It just won’t help you in any practical sense. And while you are arguing over which of these theories is better the roos will have moved on, or some sod will have shot them.

In the same way, arguments about microfoundations or which model are a distraction from the real problems and issues. Sometimes I have the feeling that they are a deliberate distraction, a way to avoid having political arguments, or to preempt their outcome. The strength of the institutional approach is that it directs attention to the details, which is where, in our present state of knowledge, the action has to lie.

Why is it, for instance, that the very notion of actually helping some specific sector because of its identified importance to the whole (political) economy is routinely met with cries of scorn? Whole classes of remedy are ruled out while we have the debate about which theory applies.

Chaos theory has become a metaphor for the poets, the way “relativity” became one, after Einstein — pretty soon people were talking about ethical relativism, which is going pretty far afield.

Entertainment around that. Even further afield.

Bowles’s “Microeconomics” textbook is really great. It’s not a critique like Debunking Economics or other “what’s wrong with economics” books. It’s sneaky. The problem with mainstream econ is that you start from a premise that individual self-interest leads to optimal outcomes. Sure, advanced econ is often about the exceptions to that, but the root of “the economic way of thinking” is still what you’d get if you read Milton Friedman’s “Free to Choose.” Not for a minute does Bowles let you think this way. Chapter One starts with a story:

Like the overnight train that left me in an empty field some distance from the settlement, the process of economic development has for the most part bypassed the two hundred or so families that make up the village of Palanpur. They have remained poor, even by Indian standards: less than a third of the adults are literate, and most have endured the loss of a child to malnutrition or to illnesses that are long forgotten in other parts of the world. But for the occasional wristwatch, bicycle, or irrigation pump, Palanpur appears to be a timeless backwater, untouched by India’s cutting edge software industry and booming agricultural regions. Seeking to understand why, I approached a sharecropper and his three daughters weeding a small plot. The conversation eventually turned to the fact that Palanpur farmers sow their winter crops several weeks after the date at which yields would be maximized. The farmers do not doubt that earlier planting would give them larger harvests, but no one the farmer explained, is willing to be the first to plant, as the seeds on any lone plot would be quickly eaten by birds. I asked if a large group of farmers, perhaps relatives, had ever agreed to sow earlier, all planting on the same day to minimize losses. “If we knew how to do that,” he said, looking up from his hoe at me, “we would not be poor.”

Only after he’s discussed the prisoner’s dilemma and the assurance game does Bowles introduce mutually beneficial gains from trade (he calls it the invisible hand game). By broadening the range of strategic interactions he’s able to dig into subjects that mainstream econ mostly ignores, like institutions and power. Bowles also dares to ask where preferences come from and how they change, rather than just take them as given.