Economics as Sociology’s Other

Rojas’s critique is an ad hominem argument against economists who think that sociology sucks. You can’t be on board with that and still think that sociology sucks.

Wasn’t the lesson of the recent troubles that macro and finance in their current states are pernicious or useless? On your view, Ian, is everything actually called economics is a waste of time or worse?

I don’t get it. Isn’t economics the branch of sociology that deals with how people make a living? How can you attack sociology without attacking economics?

I’m willing to consider that macro and finance may suck. My point is just that so-called applied micro isn’t really economics, as far as I’m concerned.

I guess I see a couple potential definitions of economics. One is that it’s the study of human behavior and interaction, with a focus on how the choices of different individuals affect each other. My preferred definition is that it’s the study of the allocation of scarce resources.

Psychology and sociology are about studying human behavior (I’m not one of them, so I don’t have a great definition of them). Obviously macro and finance also can’t ignore human behavior, but they’re concerned with a particular aspect of it. Macro and finance seem to me to be somewhat well defined, in the sense that we’re studying the behavior of the aggregate economy, how it allocates resources, etc.

On the other hand, applied micro seems concerned with studying almost any human behavior. I like clear lines between fields. Applied microeconomists, as far as I can tell, don’t. What they do runs into sociology and psychology.

Another way to put this argument is that it’s over questions versus methods. Applied micro people think econ is anything using econ methods. I think econ studies a specific set of questions, all having to do with allocating scarce resources (yes, I realize that if you stretch, you can fit all of price theory into this area, but please read charitably). Just because you use econometrics doesn’t make it economics. When I cite biometrika it doesn’t make me a biologist.

Separately, maybe macro is a failure. I’d like to think that the “success” of a field is determined to some extent by tastes and beliefs. It would be nice, though, if we could at least delineate the boundaries of fields based on definitions.

I don’t, here, want to get into an argument over whether the current state of affairs is an indictment of macro. I will point out one thing, though. Macroeconomists are constantly criticized for ignoring behavioral biases well known to psychologists. one is that people put too much weight on current information, and another is that they put too much weight on information that confirms their previous hypotheses. Sometimes I think that the current criticisms of macro may suffer somewhat from precisely those biases.

Ratcho is so like 1995. A discount brand of theory.

I think culture selects the social theory for dominance that is most conducive to obscuring those cultural and social forces that account for significant social action and social structure and yet are most vulnerable to human change. Thus American intellectuals are consumed by either ratcho or some version of sociobiology that make the editors of Playboy smile. This idea also explains the persistent presence of Freud elsewhere.

Where’s the soc/econ slash, is what I want to know.

economies of scales

Raven:
It is sufficient to use data as a basis for an economic model without having to impute motive to people’s behavior. If people tend to spend less during a downturn (even the employed) it makes no difference if they are doing this because they are being extra cautious or because they don’t want to seem indifferent to others hardships. The model should say that a X% change in the employment rate produces a Y% change in spending.

Those who impute motive are just revealing their own personal biases. Economists seldom do field research, especially measuring public opinion.

Rational choice theory informed Anglo-American deregulation of the financial sector, which contributed significantly to the massive disruption of the global economy. Furthermore, rational choice equated human motivation with self-interest in a way that undermined any and all practical attempts to subordinate markets to anything at all – it followed from rational choice theory that only markets can discover and deliver public goods justly. Sociologists may have been mistaken in their tactics but they were, and are, correct in their key criticisms.

They should have made, and they should make, their criticisms as plainly as possible and they should now tie them to the current historical moment. Rational choice theory’s intellectual hegemony should now be decisively ended in a campaign of imaginative ridicule, in my view.

The best explanation I’ve seen of rational choice theory is by Ted Rall at http://www.rall.com/gallery2/v/Cartoons/1-07-08.jpg.html

robertdfeinman If data shows that, say, cutting taxes by X% for some socio-economic sector produces Y% additional spending that is all one needs, what made these people act this way is irrelevant for economists.

The problem is that there is not enough data to do such kind of inferences. We have reliable macro data since the end of WWII. Most of the data is quarterly and if we exclude the Korean war, we are left with about 220 data points. There is no way to do reliable statistics with this amount of data because:
1) The structure of the economy itself is changing. For example medium run per capita growth rate has been changing quite a bit.
2) The knowledge of the way the economy works (or perceptions of knowledge) actually affect the economy.
3) People make decisions based on expectations – so a statement “cutting taxes by X% changes spending by Y%” can never be the whole story, it often is a very small part of the story.
4) For the reasons above (expectations) when we want to exploit relationships of the sort above for economic policy, they tend to break down. (Goodhart law)
5) How do we make decisions that will affect the structure of the economy as a whole? Health care is more than 15% of US GDP; reforming it will throw out the window all these reduced-form relationships.

So we need a theory that incorporates individual behavior. We don’t need to impute motives, but we do need a theory of what individuals want that is invariant to policy.

“But it seems to me that the more canny Bourdieuvian strategy would be to treat rational choice – with all its flaws and unrealistic assumptions – as one of many approaches to the explanation of human behaviour, all of which have flaws and unrealistic assumptions.”

Or better yet, see Michel Callon’s Laws of Markets essays from 1998… (updated and programmatised into the Social Studies of Finance). All this Soc vs. Econ browbeating gets ever so tiresome.

I’m with dk.au. This is tiresome. This blog of all places should champion the notion that lumping an entire discipline (with all of its factional conflict and friction) into one strawman is a fool’s errand.

You guys are working furiously to conflate the work of financial analysts, CEO’s, fed chairmen, theoretical microeconomists and macroeconomists. All, evidently, are thrall to the same Randian twist on rational expectations that Easy Al was. In order to make this claim we need to ignore work done on the EMH (Which, by and large, confirms the weak EMH and disconfirms the strong and semi-strong EMH, rather than just lampooning all forms as illigical), behavioral economics (or you have to coopt their struggle for recognition and centrality as a thorough critique of economics as a whole, which it is not), auction theory (understanding and policy applications of this help markets function the world over), econometrics (as infuriating as most of the discourse in econometrics is, they and most empirical statisticians are actually tacking the problem of assuming normality in distributions) and other work within the discipline. We need to ignore the very likely possibility that if we opened up a random article in a top ten economic journal we would very likely find a cogent analysis, rather than this imagined substitution of fealty for inquiry. Questions about how we measure unemployment, how we decompose the determinants of change in unemployment (e.g. can we figure out how much of a lagging indicator unemployment is, rather than just declaring it to be so), questions about what behavior borrowers exhibit at different levels of observed credit risk (and what those behaviors signal about underlying motives, far from simply assuming an underlying motive), questions tackling the oft-stated claim that national borders limit trade as much as tens of thousands of miles separating countries. Clearly these must be the work of the socially and culturally deaf.

More to the point, there are hundreds of economists who recognize the fragility of their models or who undertake to make the simplifying assumptions you vilify only when they may be justifiable (e.g. a no arbitrage condition is a weaker statement than an assumption of rationality and may be defensible for a number of conditions).

Shall I tar sociologists with the brush of fruedian analysis or marxian fixation? Is it fair to declare the profession in crisis because unjustified assumptions about phallo-centrism play part of some anaylises?

Let’s take a different tack. There are plenty of economists (to say nothing of policymakers and businessmen) who hide normative claims in positive research (or alternately, ignore their presence), adopt a model of the world on the basis of their political leanings or (possibly more seriously) foreclose avenues of research which do not conform to a strict set of methods. There are plenty of reasons for these problems (and this is hardly an exhaustive list), but they aren’t unique to economics. We can also say that economists, businessmen, and policymakers were caught up in the real estate bubble.

What we can’t do is blame the complications of derivatives on economic modeling (an implicit claim here), we can’t necessarily blame the bizarre developments in international finance on the discipline itself (though there are some problems there, most notably the unspoken claim that errors from agents would be uncorrelated across agents and time and that correction of errors would occur from some normally distributed term…but that is a lot to unpack). We can’t abstract “economics is bad” from “lots of people are doing bad economics” without some serious intellectual work on our part. We also can’t (especially without evidence) pretend as though economists are performing some inferior version of sociology because they play with numbers. And that seems to be the flavor of this thread.

I suppose one metric that needs highlighting is the substantially superior academic acheivements – grades, etc. – required to be admitted to an Econ Ph.D compared to a Sociology Ph.D. Ergo, the Economics profession is, to be blunt, much smarter than Sociologists.

I don’t have the data in front of me, but from memory Economics comes about fourth in GRE scores, while Sociology near dead last, beating only Education Ph.D students.

Harsh facts to quote perhaps, but fair.

Looking at the Beckert and Streeck paper, I think the sociologists could have benefitted by talking to some neo-liberal economists. Their analysis is topsy-turvy, they talk about the rise of economic liberalisation as causing doubts about the possibility of political control of the economy, while my understanding of the history is that economic liberalisation was the result of growing doubts about the possibility of political control of the economy, driven mostly by the combination of the economic difficulties of the 1970s, the failure of Africa and India to grow rapidly, and the economic failures of communism.
Of course they are talking about Germany and I only had one German professor at university, who focused on econometrics and labour economics, so for all I know German economists were not engaged in the debates amongst English-speaking economists until the 1980s. But it does seem unlikely to me that the Germans would embark on liberalisation and only then start having doubts about the efficiency of governments.

Beginning in the 1980s, however, the vision of the economy as a politically controllable wealth-creation machine became increasingly dubious. Rapid expansion of markets in the course of economic liberalization … In the process,
the idea of political control over the economy gradually gave way to a suspicion that in
fact it had increasingly become the economy rather than the polity that determined the
fate of society.

(page 10 of the linked pedf).

Adam Hyland 06.23.09 at 5:09 am

“You guys are working furiously to conflate the work of financial analysts, CEO’s, fed chairmen, theoretical microeconomists and macroeconomists. All, evidently, are thrall to the same Randian twist on rational expectations that Easy Al was.”

Yeah, right. It wasn’t like Chicago and Harvard were not right there with Easy Al and all of those other guys, supporting the deregulation and persuading everybody that the markets were self-regulating.

Although I guess we’d better get used to the “I wasn’t there; they photoshopped me into that picture” story from neoliberal economists; they’ll be pulling that one for the rest of their miserable lives, along with “It would have worked if the Evul Librulz hadn’t screwed it all up”.

Barry,

It’s that sort of breezy dismissal that I’m arguing against. Economics really is the ‘other’ in this discussion because we seem capable of ascribing unified motive and action to this broad and diverse discipline. Even your use of the phrase “neoliberal economists” belies some fudging. What is a neoliberal economist? Is it someone who believes in the Washington consensus WRT to development (that’s what a neoliberal economist was 10 years ago)? Is it someone who believes that deviations from rational expectations are the rare exception (in which case might I suggest using the word neoclassical?)? Or is it someone bringing a political viewpoint to bear on a set of social questions? That seems most likely. If that is the case, we conveniently ignore economists who don’t happen to be anti-government republicans. Economists who embrace the rather uncontroversial view that government ought to supply public goods and attempt to correct market failures but otherwise markets to a better job of allocation than governments can. If you are waiting for some rejection of that position, don’t hold your breath.

There is plenty wrong with the teaching and practice of economics, but I defy you to find a modern social science without much wrong with it.

Well, I’ll reveal my own personal hobby horse. Economists should not be offering policy prescriptions. And this goes double for pundits and politicians who misuse economic models and selective data as a way to promote their own personal preferences.

Policy choices is, ultimately, based upon one’s ethics. In broad terms there are two popular views these days.

The role of the state is to foster the common good.
The role of the state is to maximize individual opportunity

The first leads to regulation, social services and limits on individual behavior, especially in areas such as excessive wealth or power accumulation.
The second leads to a strong police/legal structure to guarantee the rights of property accumulation and just enough communal spending to ensure that commerce can exist. Even this has been open to debate. The railroads were created as government sanctioned private enterprises, while the roads were not.

Once you know which vision of society you are fostering you can then get economists to model the factors that will best achieve those aims. It is when “economists” make ethical choices, but disguise them as claims about human nature or economic efficiency or whatever that we end up at cross purposes.

Ethical goals first, implementation second. Admit your biases.

Robert W

How’s Anwar Shaik going with publishing data on ‘the tendency for the average rate of profit to fall,’ ‘the increasing immiseration of the proletariat’ and the consequent revolution? ;)

Ha, ha. I am neither an economist nor a sociologist. I think you guys should meet under the West Side Highway and settle this once and for all. No guns or knives, just bring your chains of logic and maybe an invisible fist.

“Economists should not be offering policy prescriptions.”

But then who would you rather have offering prescriptions? There’s a space for scholarship between politics and pure science. It seems to me that there are different kinds of economics here: (1) economics as a purely descriptive and theoretical practice and (2) economics as an aid to policy-making. You object to calling the second area economics. Then what would you call it? And even descriptive and theoretical economists are going to focus on matters of more personal interest.

As to the broader issues: maybe the reason sociologists have not changed their critique is because many economists have been repeating their mistakes for three decades. In a New York Times interview, J. K. Galbraith commented, “[the failure to predict the mortgage crisis is] an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.” So perhaps “Wrong, wrong, wrong, wrong, wrong!” is an appropriate position to take. There is an ethical dimension to willfully wrong-headed and dishonest scholarship, after all.

http://www.philosophy.ed.ac.uk/staff/clark/pubs/pdf-icon.gif

I believe you want another link, maybe http://www.philosophy.ed.ac.uk/people/clark/pubs/Economic.pdf

Joe, you’ve linked to a lovely .gif of an icon that says .pdf, not an actual .pdf document.

Haha, yeah, that would be the one:
http://www.philosophy.ed.ac.uk/people/clark/pubs/Economic.pdf

is a nice gif though.

The Raven: is because many economists have been repeating their mistakes for three decades

A remarkable claim by you and Galbraith. For a start, how do you define mistakes, and how do you define successes? Also, what do you mean by the same mistake? The world is never the same place twice, so policy responses are never the same twice, if a policy response works once and not another time, does that count as a mistake only the second time, or both times? If a central bank over-eases one time and then under-eases the next, does that count as repeating the same mistake? How about if it over-eases twice but based on different sets of evidence each time? And what does it take for a policy to be classified as a mistake? If say, the central bank was aiming at inflation of 2.1% but instead got inflation of 2%, can that be fairly counted as a mistake? If a country grows by 7% instead of 8%, is that evidence that the policy advice was mistaken?

Now Galbraith was giving an interview, and perhaps this material is presented elsewhere and the newspaper cut it. But why would you to present that interview as if it’s something useful all by itself, without bothering to track down more convincing evidence? I mean, unless I know how you identify something as the same mistake (a necessary step to supporting a claim that many economists have been repeating their mistakes) I can’t use that information, either to rebut you, or to change my mind about the economics profession. You’ve made yourself open to the charge of not-even wrong.

So perhaps “Wrong, wrong, wrong, wrong, wrong!” is an appropriate position to take.

Nope, just saying “wrong,…, wrong” is terribly uninformative. For example, take Galbraith’s assertion here that “many economists have been repeating their mistakes for three decades”. How does that help me improve as an economist? He doesn’t even define what he means by mistakes. And saying “wrong, … wrong,” is also bad for your reputation – anyone can just call something wrong, so you haven’t distinguished yourself from the more deranged internet users.

And while we are at it, have any sociological theories been disproved wrong? How many sociological theories are even capable of being disproved – the basic requirement for being a science?

There is an ethical dimension to willfully wrong-headed and dishonest scholarship, after all.

Somehow though for critics of economics, this ethical dimension only applies to economists, not to the critics. You quote a scathing remark about economists making mistakes, but don’t mention that, say, on this very thread, Hind got the predictions of rational choice theory for the production of public goods dead wrong. Why is that?

On the common saying: ‘that may be true in practice but it doesn’t work in theory’…

Raven @25 :
“The model should say that a X% change in the employment rate produces a Y% change in spending.”
Um, didn’t some economist named Friedman get a Nobel for exploding a model like that, involving inflation and employment? The type of reasoning you are arguing for is appropriate for, for instance, computing the behavior of large numbers of similar molecules, which have very limited memory, and seldom exchange information in any complex way. It’s not appropriate for predicting the behavior of information systems.

Don’t know whether this disagrees or agrees with any underlying stance you may take Raven, but certainly the rather obvious problem to those of us who are not fully-indoctrinated neoclassical economists is that those who are seem to be engaged in the project of coming up with a coherent and interrelated set of generalisations of just that kind, and to be wedded to a reductive individualist model as the way to do it (after all, at the macro level there is a vanishingly small amount of data and a deafening amount of noise.) And that means having to have a very simple generic theory of individual behaviour, adding epicycles in a rather ad hoc way when they come to hand and seem unavoidable in a particular context. ‘We need to make predictions about aggregate behaviour in the capitalist system we are committed to, and the way to do is by positing people a bit like us, whose enthusiasm, hobby and bent is the leisurely and minute analysis of capitalistic decisions, drawing on extensive study of relevant factors.’

It’s not just the rational choice aspect (after all, the experiments prove that if the artificial set-up is explained and constrained sufficiently well to make the rational choice absolutely clear and distinct, people will – ta daa – take it!) – it’s not even just the selfishness assumption, which slides so determinedly from the relatively theory-free ‘what I want is what I myself want’ into the very substantive and self-fulfilling ‘what I want is what I want for myself [except – more epicycles – when I don’t count as an economic unit because I am for the moment just part of a larger optimiser like a household or a firm]’.

And there’s the lip service to the (strict) invalidity of underlying assumptions, and the periodic announcements that some little bit of tinkering has been discovered that gets everything straight again. Rationality is ‘bounded’, so, er, we add an irrationailty component into the model or something, and that somehow sorts everything out. Meanwhile – if things are as they were when I did A-level and briefly undergrad economics – the idea of revealed preference for the additional ‘goods’ advertisers provide by nakedly manipulating emotional responses is regarded as fine, and not at all wildly deranged.

And in any case, as soon as attention turns to results, it’s ‘well, this theory is an oversimplification, but we need some figures and it probably doesn’t make any difference if our premises are blatantly untrue…er, errors probably cancel out?’ The sober acknowledgements of how complicated things really are, how difficult it really is to amass and process reliable info, how little the thought processes of the economists’ subjects resemble those which the economists have painstakingly and single-minded constructed for them, just how much widespread altruistic choice would mess he whole thing up, etc, can stay in the bottom drawer in case it needs to be brandished – ‘oh yes, we’ve thought of that, look!’. I’m sure there’s some kind of variation on a Dorian Gray simile to be had there, but can’t quite see what it would be.

The really big mess comes with the final move in the relegation of welfare to specialist topic status, giving us ‘what I want is largely medium-sized objects that I can exclude others from and [grudgingly conceded] the opportunity to make use of them’, which also has its patchwork of ad hoc exceptions but is no healthier for it, and which seems to be based on a combination of ideology and convenience (‘what I want are things which econometricians can easily measure, politicians add up and business conveniently package for me. ‘ The whole thing is reminescent of JH’s ‘concessive utopias’ thread which (unlike things I don’t know much about) I couldn’t happily comment on with even the rapidly dwindling brevity on display here – but there is clearly such a thing as a utopia which is so unrealistic that concessions to reality utterly change its character and possibly destroy its whole point (rather than just amounting to interim contingencies, manageable complications or inessential imperfections). And what is being referred to as the rational choice model is (by this analogy) one of those.

My guess at what is going on: sociologists, who along with the rest of us are pretty well-aware of the defective nature of mainstream economics (insofar as it goes beyond ordinary reasoning + folk theory+ stats + accounting), are also well-aware that someone is bound to say ‘haven’t the economists got this one nailed?’. So they make an aside about why that’s not the case.

To ignore the unserious aspect of Henry’s ‘locus classicus’ proposal: why should sociologists have to interrupt their flow or blur their specific point, by having to adopt a canonical statement of a ‘party line’? In any case, the suggestion seems to assume a significant degree of coordination and confluence of interest among sociologists – this is where some might resort to such disreputable tactics as fatuous generalisation about ‘conspiracy theories’ and the ‘paranoid style’

Perhaps there’s a misconception that it is the responsibility of sociologists to perform the dissolution of the economics departments and distribution of their erstwhile occupants between business, bureaucracy and – for the select few – back to the philosophy department for a few more decades’ rethink.

Hmm this has been lying around for some hours since it fell stillborn. On refreshing the thread, saw that pdf which is rather good – and similar to a remark, about three yards from the top of my comment, about how the RC experiments seem to work admirably – when they are set up so as to leave little alternative. Also noted more comments which suggest a parallel with issues in the ‘utopia’ thread, though that’s now drifted off into something about Islam I think. This comment is now is too long and ranty – but a bit of scrolling never hurt anyone, and no-one else seems to be pussyfooting around so’s you’d notice.

Oh yeah, someone’s mentioned Arrow – whose ‘impossibility’ theorem always seemed misnamed to me – it’s more of a ‘barely possible incompatibility of plausible sounding assumptions’ finding. A bit like taking the Liar paradoxes as disproving the possibility of language. Actually, worse.

I wrote –

“RCT did contribute significantly to the move to deregulation that is partly responsible for the current shambles. ”

Mr Econotarian asked –

“Exactly which deregulation was this?”

Um, the abolition of fixed fees in the US financial markets in the seventies, the abolition of the broker/jobber division in Big Bang in London, the removal of restrictions in the activities in the Savings and Loans sector in the US … To that we can add the moves to liberalise capital markets around the world. Oh, and the gradual hollowing out and final abolition of Glass-Steagall, a particularly resonant example.

Capital markets were much, much freer by 2007 than they had been in, say, 1970 – government regulation had been removed or had been remodeled on ‘light touch’ lines amenable to powerful market players. The explosion in derivatives trading and in structured debt products took place against this background.

Market actors should be allowed to decide how much regulation there was. After all, as Alan Greenspan put it: “There is nothing involved in federal regulation which makes it superior to market regulation”.

Greenspan later noted that he “made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.” RCT theory underpinned his fantastical beliefs and gave them some aura of intellectual solidity and sobriety.

I would say that RCT needs all the ridicule it can get right now.

Dan Hind, where to start?

Well, for a start, you don’t even acknowledge my point that RCT implies that public goods will be undersupplied by the market. However, your error there has apparently not caused you to be more careful in your assertions about RCT in the future.

RCT does not assert that “only free individuals making free decisions in free markets could be considered to be acting freely.”. To repeat my earlier quote: “Although models of rational choice are diverse, all assume individuals choose the best action according to stable preference functions and constraints facing them.” Nothing in there about freedom.

Game theorists apply this theory to the Prisoners Dilemma. In the prisoners dilemma both prisoners are assumed to have a stable preference of minimising their jail time, and the question is how each prisoner should best achieve this, given the constraints of the prison. Now, the whole point of the prisoner’s dilemma is that the prisoners are not free. You can criticse the game theorists’ analysis on the basis that it implies that for repeated games with a fixed ending point both prisoners are worse off if they behave according to rational choice theory, which isn’t very rational. But that’s an entirely separate criticism to your bizarre claim about RCT’s relationship to freedom.

Your claim about disinterestedness is unclear. What do you mean by disinterestedness?
I looked it up in a dictionary and found two relevant meanings – 1, Free of bias and self-interest, impartial. – 2. Not interested, indifferent.
I don’t see anything in rational choice theory that denies that people can act without bias, or impartially. Say a commercial mediator wants a reputation as a “honest broker”. So she acts impartially (and we assume a simple rational choice model in which we ignore all the cognitive biases humans are subject to, and a social setting in which she can get away with this, and isn’t say killed by the local king as a potential threat to his powerbase). So she gets lots of business as both parties to a contract can agree to use her as an honest judge. What’s the conflict with rational choice theory there? She’s chosen a rational means of getting to her goal.
As for not-interested, indifferent, if you’re indifferent to something then why would you act? I am indifferent to the sex life of plants, while I recognise on an abstract level that they are necessary to my survival, the topic bores me entirely, and I do nothing to even learn more about their sex life. My indifference prevents me from acting on that topic.

So, we have two possible meanings of your claim that people sometimes act disinterestedly. In one, rational choice theory can handle it. In the other meaning, people don’t act, because they aren’t interested, so we don’t need a theory, rational or otherwise, to explain their actions.

Rational choice theory can justify attempts to regulate markets – just add in limited information, or rational bubble theory. The arguments for leaving issues to markets rather than to governments is different – once you start accepting the idea that people are at least only boundedly rational, and once you apply this argument to the people in government as well as the people in markets, the case for regulating markets become weaker. People in markets make mistakes, but so do people in government (for a start, every war between nations must have invovled a mistake by at least one side in that war – the side that lost – and often arguably was a bad mistake by both sides). Any theory of choice, rational or irrational, that aims to resemble reality, is going to have to apply to governments as well as markets.

Your claim about Kenneth Arrow is false. Kenneth Arrow showed mathematically that all voting systems fail to achieve all of a set of plausible-sounding criteria. See the Wikipedia article for more details. According to this proof, a group can collectively agree on a course of action on the basis of shared values, just if they do so by voting, and there’s some hetrogenity in their values or preferences, then they’re at risk of getting some weird results.

You have now made two contradictory claims about markets:
In the real world markets require governments.
Furthermore, rational choice equated human motivation with self-interest in a way that undermined any and all practical attempts to subordinate markets to anything at all

I don’t know how you can simultaneously believe both of this arguments. Either markets require governments, and are thus necessarily subordinate to them, or there’s a risk that markets can’t be controlled. Perhaps you are trying to disprove rational choice theory in your own person. I do agree, and I think nearly all economists do, that rational choice theory doesn’t explain every person’s behaviour. However, when we abandon rationality, where do we go next? How can we make policy on a belief like yours that simultaneously markets require governments and also that markets don’t?

I agree that emissions trading schemes are an attempt to use a market to control another market. I don’t see however how you can reconcile this belief here with your assertion that rational choice theory undermined any attempts to subordinate markets to anything at all.

I agree with you that market actors can seek out and try to lock-in subsidy from the tax-payer, but I note that this is an observable fact about the world, not a theoretical result of RCT. Consider for example the massive Renassiance palaces built by the Papacy, or the Palace of Versailles, or Stuart II’s of England’s art collection, or Elizabeth I of England’s habit of rewarding her favourites with monopolies, these occurred long before Adam Smith, let alone any game theorist. Or, to take a more modern view, the European Union’s Common Agricultural Policy, or subsidies to well-connected arts like opera and ballet. Any economic theory of choices,rational or otherwise, that attempts to explain all the behaviours of government, is going to have explain those facts.

You also criticise RCT on the basis that the powerful use economic theory when it helps them and ignore it when they don’t, if this is a basis for criticisng RCT then we are going to have to throw out all of the social sciences because the powerful can all use them that way.

You provide no reference for your claims about Arrow, I am starting to formulate an Internet Law that when a poster in an Internet debate attributes something stupid to someone else, but provides no cite, it’s safe to assume that the poster is at best sadly confused.

but we are talking about the relationship between an academic tradition and the creation of a wider intellectual hegemony.

And apparently you feel free to do this without knowing anything about this academic tradition.

Tim Wilkinson – I am going to launch a defence of rational choice theory as a rule of thumb on the basis that other theories of decision-making risk encouraging excessive arrogance in the theorist.

RCT is the idea that individuals choose the best action available to them given stable preferences and their constraints. RCT encourages respect of other individual’s decision-making processes. When a rational choice theorist sees another individual making a decision that seems irrational, RCT implies that the theorist should be asking “what are the constraints that that individual is under”? And this question often leads to deeper understanding, take for example “Sect, Subsidy and Sacrifice: An Economist’s View of Ultra-Orthodox Jews”, Berman, August 2000. In this article the author investigates why Israeli Ultra-Orthodox men study full time in yeshiva until age 40 on average, while similar religious groups in the USA only study to their early twenties. The explanation he comes up with is that the men are signalling their commitment to their religious group by making a costly signal of commitment. But Israeli law exempts religious students from the draft, so to prove their commitment to the group, and not merely to draft-dodging, the Israeli men have to study for considerably longer than the period for which they are exempt from the draft. If Berman had just said “well what do you expect, people aren’t rational”, he would have missed out on this possibility to gain a deeper understanding. The guidance is not perfect of course, but there is some pressure to be internally consistent, and this has some value.

There is a certain arrogance I find in many advocates of irrational models of decision-making, to take a really gregarious example, Freudian psychoanalysis assumes that the psychologist knows far more about other people’s motivations than those people do. Freudian pyschologists were notorious for interpreting all arguments against their theories as simply evidence of psychological flaws in their critics. No humbleness there. See for example http://www.human-nature.com/freud/tallis.html for an outline of what I am talking about. Once we start assuming that other people are irrational, and particularly the more easily we make that assumption, what can cause us to stop?

Tracy w,
If your descriptions (and defences) of RCT are correct (and they seem to be spot on) the problem I have is that all RCT seems to offer is that we should acknowledge that all decisions are rational. But is that really as far as it goes?

What I mean is if RCT can help us know that most decisions are ‘rational’ but are nonetheless constrained by ‘stuff’ isn’t that robbing RCT of any normative or analytical value? What in RCT allows us to know which ‘constraints’ are the ones we should look to? And also how does RCT allow us to understand whether a decision was a good or bad one?

I come at this from the angle of being a Political Scientist or Historian (so, no doubt lacking in the scientific rigour required to comment about these things). But, whilst I’d agree that LBJ’s decision to escalate the Vietnam War was completely rational and I’d be inclined to think George W. Bush’s decision to Invade Iraq was also rational (given allowable and understood constraints), I’d nonetheless also argue they were both terrible decisions. The irrationality or rationality of the decisions doesn’t change my judgement, or effect my explanations for why the events happened. Whether they can be called rational or irrational seems to miss the point.

Anyway back to the original discussion, what I think that perhaps what you are missing is more often than not the words ‘rational’ and ‘irrational’ are synonyms, especially in politics and policy making, for ‘good’ and ‘bad’. So when politicians find a hint that RCT means people DO act rationally, they don’t read that as meaning we should try and understand the internal ‘rationality’ of an action, they read that as meaning all decisions are made for the common good of the community that makes them. So, bankers make ‘rational’ decisions (as a basic reading of RCT tells us) and to policy makers this means the decisions will be guaranteed to be ‘good’, in this case make lots of money (which RCT does not conclude – it can’t). So, this isn’t the fault of RCT then, just the fault of whoever exposed RCT to policymakers and didn’t explain that it doesn’t mean what they think it did. As a Brit I’d therefore smugly suggest American academics are to blame for too easily wanting to be heard by policy-makers. This is clearly not something British academics do. Anthony Giddens being a prime example of how we keep well out of things!

Hang on isn’t Giddens a ‘Sociologist’? I’ll get my coat…

Tracy W @56
That bottom drawer still opens then…

Well yes, rational choice in the minimal sense you describe is a default heuristic for interpreting behaviour that everyone uses – historians and sociologists included. Even those wedded to abstruse theories and vocab about various kinds of social forces can’t help using the standard categories of the intentional stance when their guard drops (or their quoting fingers get tired). Even the egregious Freud can be seen as describing subconscious rational choice (in the minimal sense of means-end rationality) on the part of multiple sub-selves acting under jejune (not irrational by RCT standards) beliefs and desires.

But this has nothing to do with RCT as a pervasive economic model stuff about Israeli students is, topically enough, not even economics as we know it. A sociologist, historian, psychologist might provide the same analysis. The point is, it’s explanation. In explaining an event or fairly discrete phenomenon we can happily start from a presumption of practical rationality and modify, complicate extend or qualify that account in the light of how well the explanation fits the observed facts (including facts established after we start explaining and testing hypotheses).

Economics is not primarily about explanations, and especially not about historical (singular) explanations (leave those to speculative evolutionary theorists who do such a good job of replacing Kipling’s efforts with a close substitute.)

Predictions are the thing, and while it’s true that many defects of RCT (in its specifically economic sense) are well-documented and widely acknowledged by economists, it’s mostly lip-service as far as I can see – the underlying conception still holds sway over the maths, and all the caveats and fine talk about not assuming a simplistic and deeply unattractive kind of material self-interest are largely ignored when it’s time to produce some figures. Humility then goes out the window and instead airy assurances abound – the model is inaccurate, but it’s probably good enough. In fact, it’s not even necessary to say the second part. Presenting the results implies it. I’m reminded of TV or radio shows where they say ‘well let’s have a show of hands. Well, according to our unscientific straw poll…’

It would be better to admit that you don’t know, or that you are never likely to know, but instead it seems to be assumed that findings must be produced (that’s what economists do, you see), and however divorced from reality, some results are better than none.

Tracy –

1.

You asked for a reference for my claims about Kenneth Arrow –

“At its most basic, Arrow’s work demonstrated in formal terms – that is, in mathematical expression – that collective rational group decisions are logically impossible. Arrow’s paradox, or Arrow’s impossibility theorem, as it came to be called, presented an unshakeable mathematical argument that destroyed the academic validity of most kinds of social contract.”

Alex Abella, Soldier of Reason: The RAND Corporation and the Rise of the American Empire (New York: Harcourt), 2008, p.51. I spent some time in the British Library looking at the subject a couple of months back and didn’t find anything to contradict Abella’s description. We don’t rank our preferences in the manner that RCT claims, which makes RCT moonshine from the ground up.

2.

I am not sure what point you are making about public goods – I argued that it “followed from rational choice theory that only markets can discover and deliver public goods justly”. If collective decision-making is irrational by definition – as RCT claims – then only the market is left to deliver anything at all in a just way.

3.

To repeat – I said that RCT undermined efforts to regulate. To undermine something is not necessarily to destroy it – an undermined wall doesn’t always fall down.

Similarly, constant accusations of mental infirmity and ignorance might undermine my self-confidence but they won’t necessarily cause me lose faith in myself altogether.

4.

“You have now made two contradictory claims about markets:
In the real world markets require governments.
Furthermore, rational choice equated human motivation with self-interest in a way that undermined any and all practical attempts to subordinate markets to anything at all”

My claims are not contradictory – I was making a claim about the world and another claim about RCT – RCT doesn’t describe the real world, which is the point I am trying to make.

5.

Here are two claims –

1. RCT provided useful intellectual weight to attempts to deregulate or to fend off new regulation, contributing directly to the current financial crisis.

2. Its governing assumptions about human agency are indefensible.

Do you disagree with both claims?

1.

Alex Abella again:

“Arrow’s theorem proved that whenever two or more people are asked to rank their pick of three choices, unless there is a dictator among them who forces his view to prevail, there is no free choice for no one will agree on the same results.”
http://www.huffingtonpost.com/alex-abella/rand-and-the-bush-tax-reb_b_101391.html

2.

Rational choice theory ‘proved’ that collective decisions were by definition dictatorial – it follows that they are unjust. No?

3.

The claim that RCT undermined attempts to regulate is an empirical one. I will go away and research the relationship between RCT and deregulation – to see where and how it was used to promote deregulation of financial markets in particular. It would be interesting if you could find some real world examples of it being used to promote regulation, whether in conjunction with assumptions about ignorance and externalities or on its own.

4.

“So your claim that RCT undermined any practical attempt to subordinate markets to anything at all wasn’t a claim about the real world.”

I don’t know why you think this follows from what I wrote.

RCT undermined attempts to subordinate markets to anything at all (a claim about the implications of RCT and their impact on policy-making – a claim about RCT’s inadequacies and their consequences for policy-making).

Markets need governments, and market actors love subsidies. Again, a claim about the real world.

Why do these two claims contradict one another?

Now you can prove me wrong if you can find any examples of RCT being used to assert the sovereignty of anything at all over markets. (being used to formulate arguments in favour of regulation, for example).

I believe that RCT was only used in support of moves to deregulate, and that it was used only to undermine regulation as a legitimate function of government. These are very strong claims and I will qualify them if you can show me an example of RCT being used to support regulation in particular instances, or of RCT being used to promote the legitimacy of regulation as a state function.

5.

RCT begins from the assumption that individuals order their preferences and seek outcomes that maximise their utility by satisfying as many of their preferences as possible. Now this starting assumption is wrong and wrong in highly consequential ways. As a device for analysing market behaviour it might well have some uses, but as a description of human agency it is terrible – it rules out the possibility that humans can freely and rationally decide on a common course of action in the light of collectively agreed principles when individuals have conflicting preferences.

The rules of chess are useful when you are predicting what move your opponent will make, they are less good at predicting what humans will do in other circumstances.

“I also want to know what evidence, if any, could convince you that RCT didn’t provide useful weight to attempts to deregulate or to fend off regulation.”

If you could show RCT being used to promote regulate and fend off deregulation, then I would certainly revise my views.

Tracy W microfoundations of macroeconomics are, well, shaky at best

No doubt micro analysis can be turned to particular applications in which some element of a utility function is not a widget, but instead some other external good. I suppose I tend to think that anything that’s both of widespread importance and distinctively economic is going to be macro, and that RCT when used as (at least notional) microfoundation tends to jettison the compexities of the added realism that some of the micro literature deals with. On a vague-ish note, I’m thinking of how GDP is calculated, for example- though that’s more to do with materialism than with non-tuism.

But it may be that we don’t disagree that much after all – I’m probably guilty of a bit of overstatement, and you’re right that I’m not well-versed in the macro literature. But at least my criticisms of economics are a cause (I abandoned study of the subject in favour of straight philosophy) rather than just an effect of my comparative ignorance.

And I’m sympathetic to the point about needing to try even if imperfectly. It’s just that taken too far (and I think that it probably often is somewhat, as you suggest), that route eventually leads to pure superstition.

Ian D-B, here’s a non-exhaustive list:

Industrial Organization.
International Trade
Development
Labor economics
Health economics
Sports economics
Economic history

Non macro. Non finance. All economics.
Though I do share your distaste for a lot of “Applied Micro”, it’s really more because of method (let’s do some data mining then slap together some sloppy half baked theory that has the word “demand” in it somewhere, that wouldn’t last ten seconds if it had to be spelled out rigorously) rather than the subject matter – anything that involves choice or accounting is fair game for economics.