Sunday, March 26, 2017

Economics: Part of the Rot, Part of the Treatment, or Some of Each?

Is mainstream economics, with its false certitudes and ideological biases, one of the reasons for the dismal state of policy debate in countries like the UK and the US, or are its rigorous methods an important antidote to the ruling political foggery?  That’s being debated right now, live online.

Our starting point is a post on Unlearning Economics, dated March 5, which argues that the flaws of mainstream economics contribute to lousy policy on several fronts: downplaying the role of monopoly, cheerleading for the shareholder value imperative in the corporate world, knee-jerk support for trade agreements under the banner of comparative advantage, and regressive macroeconomic policy, among others.  A particularly pointed paragraph brought up the Reinhart-Rogoff 90% affair and accused the economics profession of dereliction of duty by not taking action to rebuke the wrongdoers:
Where was the formal, institutional denunciation of such a glaring error from the economics profession, and of the politicians who used it to justify their regressive policies?
UE’s conclusion is that mainstream economics needs to be taken down several notches, which would open more space for alternative approaches to economics and, indeed, alternative approaches to policy that place more weight on human outcomes, broadly understood, than the formalistic criteria of efficiency, etc.

Simon Wren-Lewis responded by arguing that UE has it exactly backwards.  Restricting himself to UE’s critique of macroeconomics, SWL says, yes, reactionary politicians have invoked “economics” to support austerity, but “real” economists for the most part have not gone along.  True, there were a few, like Reinhart and Rogoff and those in the employ of the British financial sector (“City economists”) who took a public stand against sensible Keynesian policies in the wake of the financial crisis, but they were a minority, and, in any case, what would you want to do about them?  Economists, like professionals in any field, will disagree sometimes, and having a centralized agency to enforce a false consensus would ultimately work against progressives and dissenters, not for them.  Let’s put the blame where it really belongs, says SWL—on the politicians and pundits who have brushed aside decades of theoretical and empirical work to promulgate a reactionary, fact-free discourse on economic policy.

Yes—but, adds Brad DeLong.  He largely agrees with SWL, but delves more deeply into the Reinhart-Rogoff affair.  He shows that, even without the famed Excel glitch, a cursory look would reveal that R-R were trumpeting nonexistent results:

• The 90% debt cliff was an artifact of the way R-R set up their bins.  Replace binning with a continuous relationship between growth and debt and the cliff disappears.

• The correlation between growth and debt supported no particular causal interpretation, and R-R provided no other evidence to support their particular causal argument.

• The correlation itself was so weak that the practical implication of R-R’s claim was nil.  Fiscal stimulus that could make or break a recovery was being rejected on the basis of future economic growth effects that would be too small to measure.

So the R-R claim that fiscal consolidation was necessary and urgent was unfounded from the get-go, and these two were both respected mainstream economists, so what can we infer?  DeLong’s takeaway is that economists do need to recognize that they operate in a political environment (the sewers of Romulus) in which their work will be seized upon by interested groups, with real practical outcomes.  In this situation, the profession as a whole has a responsibility to assess high profile but dubious work.  Although he isn’t explicit, my reading is that DeLong wants some sort of professional quality control, but not institutionalized in the way UE seems to call for.

I have a few points to make in addition to those already in the public stream (or sewer).  First, I think that, apart from the specific value of particular economic theories, there is a giant problem in mainstream economics resulting from a false certainty that the overarching theory, the economy as an arena in which agents are constantly maximizing subject to constraint, with their interactions entirely mediated by markets, is correct.  Believing they are operating within a correct framework, most economists grossly narrow the scope of the questions they allow themselves to ask.  This shows up in virtually every applied area, from the economics of the family, to industrial organization, labor markets, environmental problems, etc.  Just to take one example, consider the immense labor economists have put into estimating the social cost of carbon, as their primary instrument for “optimal” climate policy.  It’s true that one needs such a magnitude if the goal is optimality, but why is that the goal?  In the end, it’s because there’s no other model of decision-making: all agents are assumed to be constrained maximizers, and the public objective is simply to correct for the non-maximizing effects of an externality like greenhouse gas accumulation.  You can’t even pose a question like, what are the risks that a climate catastrophe will destroy the foundations of human civilization?  That’s not an assumption, that climate change will do this—it’s a question, which one could investigate.  Start with the social cost of carbon framework, and you will be sure not to ask it, or dozens of other questions about the meaning of climate risk for fundamental human values.  (Where in your integrated assessment models will you find the cost of cultural memory resulting from sea level rise and coastal inundation?)

The false certainty about core theory has in turn given rise to a pernicious tendency in econometrics to calibrate rather than actually test models.  This is true almost by definition in most structural econometrics: a set of equations is derived from theory, and their parameters are estimated from an available dataset.  This procedure makes sense if you know the structure is right, since you aren’t actually testing it.  Incredibly, the bar is lowered still further, since many theories remain in circulation even when their structural estimations fail out of sample or are inconsistent with one another.  There doesn’t exist in mainstream economics a culture of radical self-testing, since there is no professional cost to having one’s results disconfirmed by a subsequent study.  Hey, we’re all just playing with our models, which is OK since they follow the proper rules, with maximizing agents and everything.  The world of DSGE modeling is rife with this, but you’ll see the same thing in the micro world; it just hasn’t been called out as vociferously up to now.

So where do these biases come from?  What would need to be changed in order for mainstream economics to be a reasonably reliable, self-correcting body of knowledge?  I don’t have all the answers, but here’s a hypothesis: the simplistic, formulaic introductory economics course—the infamous Econ 101—has brainwashed not only generations of students for whom this is their only exposure to the field, but also generations of professional economists themselves.  The so-called “economic way of thinking” dished out to neophytes serves equally as the way sophisticates understand their own field of study.  The empirical basis for this claim is my own anecdotal experience working with economist colleagues in a number of educational and research institutions over the years.  I might have this wrong, but hear me out.

The first causal mechanism is selection.  After all, Econ 101 is where the light begins to glimmer in a few heads: hmmmm, maybe I should think about becoming an economist.  A professor (or grad student) is going on and on about rational this and optimal that, illustrated with simple geometry, and the beauty of it seizes upon some small proportion of the students scribbling notes.  Someone in this multitude is thinking, yeah, this is the real deal.  And that someone goes on to become an economist.

The second is the power of discourse.  Econ 101 introduces the framework and language economists use to think through the problems they’ll face further down the road.  Yes, they will complexify and qualify it as their knowledge deepens, but the fundamental terms are set in place.  Many of the framing effects are subtle: thinking of economic relationships solely as encapsulated in their moments of exchange, adopting a particular conception of rationality, etc.  This is not to say that there exists some mentally liberated existence beyond discourse and framing—hardly.  But mainstream economics is a discourse, and it has no self-awareness of it.  This is a problem because, for many of the practical areas economists get involved in, there are other, competing discourses (management, political theory, psychology, cultural and historical theories) that economists can barely perceive, much less understand.  These leads to the hermetic quality of economic practice that many have noted.

The third is the role of default assumptions.  Economics is a giant, multifarious discipline with lots of detailed, arcane specialties.  Some people spend their lives studying health care markets.  Others the economic impacts of immigration.  Or petroleum markets.  Or the effects of cash transfer programs in low income countries.  And so on.  In their own fields of specialization economists often develop complex understandings of the forces at play, and cross-disciplinary applied work with colleagues from other backgrounds is becoming more common.  (This contradicts what I just said about hermetic economics; it’s an evolving contradiction.)  One of the stock arguments of those who deny the existence of any mainstream at all is that if you look at these subfields you will see well-recognized scholars wielding all sorts of hybrid models, and there is truth to this.  But the process that gives us intensive specialization also gives us widespread ignorance of the specialization of others.  The economist who burrows deeply into markets for health services has to rely on a hazy sense of the rest of the discipline and how her work connects with it.  Where does that hazy sense come from?  To some extent (yeah, this is quite a hedge) it comes from Econ 101 or at most the field surveys undergraduates take in addition to their core requirements.  Consider a world in which there is a discipline like economics and four equally populated subdisciplines A, B, C and D.  All economists take Econ 101, after which they specialize in their own subdiscipline.  In 101 they learn that markets mostly work, agents are mostly rational, and economic policy is mainly about marginal tweaks to keep the machine humming.  Then they dive into their subdisciplines.  In A they learn that behavior is complicated, institutions matter, and markets are embedded, with contradictory impacts.  It’s all messy and fascinating, and it keeps them busy.  But the denizens of A believe, due to their initial training in Econ 101, that B, C and D, together the bulk of the discipline, are all basically variations on 101-ness, so they see their specific problems as exceptions to the general account of how the economy works.  And the same is true of the B, C and D tribes.  Each of them comes to understand how different their subdiscipline is from the norm laid forth in Econ 101, but also how these differences should be seen as exceptional.  Thus, taken together, the economics profession would simultaneously be creative and heterodox in its day-to-day work and rigid and orthodox in its general view of the entire field and the principles that ought to govern it.

So this has gone on rather long, hasn’t it?  My point is that, while SWL is right that there is a lot of work in economics that can be used as a resource for thinking clearly about making the world a better place, UE is right that mainstream economics is also a big part of the problem.  I agree with DeLong that the profession needs to take more seriously the problem that there are few if any professional incentives that lead economists to scrutinize their own work lest it be subsequently disconfirmed.  A false sense of having the correct overarching model, hammered out in Econ 101, pervades the entire field and undermines what ought to be the effects of the ongoing turn toward empiricism.  From the header: mostly rot, some treatment, could be more.


Bruce Wilder said...

"A false sense of having the correct overarching model, hammered out in Econ 101, pervades the entire field and undermines what ought to be the effects of the ongoing turn toward empiricism."

Well, yes. But, doesn't that just beg the question of why neoclassical economics aka Econ 101 is so hostile to critical reason? It cannot be simply that everyone is being bribed, even if we were to concede, say, that Rogoff and Reinhart are hacks realizing big rewards for being hacks.

It seems to me, to be persuasive, that you need to start with a more elaborate account of how neoclassical economics aka Econ 101 is hostile to critical reason. I doubt that SWL sees himself as hostile to critical reason, per se. You need an account of neoclassical economics' immunities to reason that someone like SWL would recognize himself as participating in. Or, maybe that Brad DeLong, bless his black neoliberal heart, would recognize himself as participating in.

Botany and zoology manage to send Ph.D. students off to study specific species in specific ecologies without losing the capacity for the center to make sense of their discoveries. The specialist in ants can make sense of the discoveries of the specialist in mussels, at least insofar as those discoveries explicate the aspects of, say, the general theory of natural selection. So, you have A, B, C, D busy in the empirical periphery without sclerosis in the core. Why is that? How is that?

How does neoclassical economics make itself so disinterested in critical inquiry into the actual, institutionalized mechanisms of exchange?

Peter Dorman said...

Yes, this is the question. Here are two speculations, not mutually exclusive. (They may be mutually supportive.) First, mainstream economics has evolved to be a doctrine-centered enterprise. People enter biology because they are fascinated by mussels or bacteria or because they want to work on some pressing issue related to the environment, health, etc. They don't go into it, in general, because they fell in love with the drawings in their intro bio textbooks of carbon rings. In econ, while some people dive into it because of a fascination with a particular institution or economic problem, many or most are attracted by the "elegance" of the doctrinal core itself. That has to be a big problem. (Aside: it was a problem in first-generation evolutionary explanations for human behavior, where many practitioners were drawn by the logic of natural selection and had only a smattering of applied knowledge. They come up with all kinds of silly hypotheses for real and imagined behavioral patterns. Over time, though, the field was taken over by serious researchers well grounded in their particular specializations. At long last, can this happen in econ too?)

Second, there's the role of ideology. Is it accidental that Econ 101 doctrine is generally favorable to supporters of the status quo? Of course, it isn't enough to do some handwaving about ideology; you should also say something about the mechanisms. How exactly does the political usefulness of the Econ 101 version of economics get translated into hegemony? I don't think the answer is simply bribery. I'll break off here because I think the mechanisms are often subtle.

Bruce Wilder said...

It might be helpful to make a sharp conceptual distinction between mainstream economics (a sociological phenomenon as a set of institutions) and neoclassical economics (an intellectual tradition and doctrine).

It is almost inevitable that mainstream economics, like the legal profession -- and no matter what its intellectual content -- would supply props for the existing order, as one of its roles must be to train citizens and technocrats. This is a feature, not a bug, as the works would say. Explaining how and why institutionalized "mainstream" economics is conservative is both superfluous (it could scarcely be anything else -- that must be its function in society) and beside the important point Unlearning Economics was making: to wit, neoclassical economics is causing mainstream economics to function poorly for the society.

Your post title reflects awareness of this point: it is not a question of whether economics supports the existing order, but rather of whether economics is a pathological instrument of the corruption --"rot" -- afflicting the existing order.

Your two speculations divert attention from the issue of "rot" to focus attention on aspects of why mainstream economics will tend to be conservative, something not exactly a mystery.

Why mainstream economics remains stuck in a more than hundred year old neoclassical doctrine that ignores much of modern world and lacks such reasonably expected fundamentals as a theory of production is a mystery.

Your original post seemed right on target in identifying the suspension of critical reason as a fundamental albeit unexplained problem.

Peter Dorman said...

Hmmm.... I thought my speculation #1 was speaking directly to this point. Just to be clear, the officially sanctioned definition of economics is doctrinal, not content- or inquiry-based. As for your take on ideology, it's too functionalist for me. I want to know the mechanisms; I don't take the existence, form or intensity of ideological influence as given.

Seriously -- this is a real question -- is any other academic discipline defined doctrinally and not by its object of study?

Anonymous said...

Is there any other discipline where the concentration of published research in its top journals is so concentrated among the faculty and former students of one or two institutions? And is becoming more so?

chrismealy said...

My experience majoring in econ at flagship state U supports your third point. For years, when people attacked econ, I would defend it by saying that they're just talking about econ 101, because every upper division class is really about why the econ 101 view is incomplete or wrong. But I stopped doing that, because economists (presently company excluded) by default accept the free market / general equilibrium view or whatever as the default baseline. I remember this from my classes. The enviro econ prof wonders what minimum wage laws are for, the public finance prof saying restaurants don't need health inspectors because firms have reputations, etc. There was always tremendous unsupported deference to the free market. Had I been paying better attention I may have noticed sooner that the econ 101 view didn't make a lot of sense if no economists believed it applied in their own specialities. I don't think I really got it until I read Bowles' "Microeconomics," which treats the automatic free market successes as edge cases (for example, he talks about "the invisible hand game" and "utopian capitalism").

"The economic way of thinking" is not hard to learn (a lot easier than Bowles) and makes its user feel smart by giving them easy answers to economic problems (did for me, anyway). I think that largely accounts for its popularity in the economics curriculum. Otherwise you're just sociology, with no easy answers for real-world problems.

Sandwichman said...

chrismealy's point about "making the user feel smart" is apt. It seems to me it is a two-step process that involves first making the user feel dumb with a wrong answer and then making him/her feel smart when the "not intuitively obvious" (but still intuitive) truth is revealed. The trick is to replace simple-minded common sense assumptions with no less simple-minded but occult assumptions.

In place of post hoc ergo propter hoc "fallacy" the economist substitutes an equilibrium model sorting individuals into occupational cells based on education and experience. The fact that the latter assumptions may be even more fallacious than the former is beside the point. The point is mathematics has been done and thus the result is more sophisticated and not obvious.

May I make a plug for Geoff Mann's "In The Long Run We Are All Dead"? Mann argues that political economy is post-revolutionary, in the sense of having been developed and come into use largely after and in response to the French Revolution and the Terror. Thus there is the inherent tension of economists seeking to predict the future in order to prevent a catastrophe. There is also a tension of economists persuading themselves that they have already succeeded in solving the economic problem and that it is just a matter of not being sufficiently listened to.

Peter T said...

Economics is, in the west, the central organising myth of our time (not the only one, but the one with greatest command of institutions, mainstream narrative, political force..). This is quite recent - from c 1750 to c 1945 it was "the nation" - another set of simple concepts laid over a complex reality. From 1550 to 1750 it was the true religion. To put it another way, in 1900 the point of economic progress was to strengthen the nation; in 1600 prosperity was both a sign of godliness and a tool in the hands of the righteous. From 1945 it became an end in itself.

This makes simplicity of general doctrine essential. It also ties economics closely to politics. Note that economics as a discipline rarely investigates the world for its own sake (in the way biology or geology do), but is almost always looking for current relevance. Its inquiries are always tinged with a political perspective, even where not driven by immediate application. In this way it's like a great deal of C19 history.

The easiest way for this to change is for economics to lose its central place. If it mattered less, it would not be fought over. I have a feeling this may already be happening. said...


I think it is environmental economists, not labor economists, who are trying to estimate the social cost of carbon. The real problem on the risk side is that we do not know the underlying probability distribution for serious catastrophe. Thus, as Marty Weitzman has pointed out, if climate is Gaussian-distributed, the probability of a truly shattering 12 degree increase in average global temperature is infinitesimal But if, as looks more likely given all the positive nonlinear feedbacks in the system, it is more like Pareto-distributed, that probability is nearly 1 percent.

Peter T.,

I would put the dates for when "true religion" ran everything as being more like 450 (consolidation of Christian control of Roman Empire) to 1650 (just after Treaty of Westphalia) rather than your weird 155-1750.

BTW, while I agree with the general critique of rationality (and edit the Review of Behavioral Economics), I do think there may be a personal usefulness for teaching students about economic rationality. It does not hurt for them to realize that when they procrastinate on studying or writing papers rather than partying, they are often suffering from time inconsistent hyperbolic discounting, which is in some sense irrational, and which may well bring them personal misery and regrets. Economic rationality in the end is mostly a matter of being internally consistent so that one does not end up making oneself unnecessarily unhappy.

Wallfly said...

It has seemed fairly clear to me that economics is not a science in the sense of an open ended, empirically driven enterprise (to some extent, I would have to guess the reliance on mathematical modeling helps maintain the illusion of science). There is just not enough empirical data, particularly in macro, to allow real scientific inquiry. This is actually a condition that infects various bona fide scientific disciplines dealing with a paucity of evidence, so a social science dealing with the same problem is going to be even more "pathological" given the well-known difficulties of its problem domain.
So what is economics? A fairly un-self critical branch of philosophy would be my attempt at a characterization. said...

Actually, Wallfly, there is quite a lot of good data in economics, especially micro data, and especially coming out of experiments, both lab and natural. You are overstating things, although clearly certain of (but not all) of the hard sciences have better data and a better ability to carry out seriously controlled experiments.

As for macro data, no disagreement. Data pretty weak, and the ideologically driven pseudo-models pretty intense. Un-self critical philosophy indeed.

Peter Dorman said...

Lots I could respond to, but just this:

Barkley, regarding rationality as expected utility maximization and real world behavior as "departures", see the critique of Gigerenzer. I haven't seen much in the way of economist engagement with him, but my guess is that it would take the form of "Gigerenzer offers an alternative to rationality."

Wallfly said...

Actually Barkley, I agree that there are pockets of empiricism and experimental work in the discipline (and have admiration for various stripes of the heterodox). My remarks were made in the spirit of Peter's observations about the degree to which over-arching paradigms which richly deserve dissection don't get that treatment. I fear the corrupting effect of macro (and micro, if P is to be believed) could extend well beyond those sub-disciplines.

I've been looking at pathological science a lot in recent years, and many disciplines facing evidence paucity tend, either as cause or effect, toward an authoritarian culture. (I've been putting off diving into the history/philo. of science literature on this.)

Maybe the critical distinction is not the culture so much as how/how much the main institutions enforce the orthodoxy (which seems to be Max S's perspective). From an outsider's perspective, the situation in econ seems dire. Though if Noah Smith is to be believed you can still find work with a Phd without drinking the koolaid, and that is encouraging if true.

(UE, I think, did a post on being pessimistic on the issue of econ as science, I will have to look it up).

AXEC / E.K-H said...

The non-existence of economics
Comment on Simon Wren-Lewis on ‘On criticising the existence of mainstream economics’

There is no such thing as economics, there are FOUR economixes and they are constantly played against each other. First, there is theoretical and political economics. The crucial distinction within theoretical economics is true/false, the crucial distinction within political economics good/bad. Economics exhausts itself since 200+ years in crossover discussion, that is, by NOT keeping science and politics properly apart. As a result, it got neither science nor politics right.

Heterodox economists say that orthodox economics is false and in this very general sense they are right. Heterodox economists have debunked much of Orthodoxy but this has not enabled them to work out a superior alternative. The proper task of Heterodoxy is not the repetitive critique of Orthodoxy but to fully replace it, that is, to perform a paradigm shift: “The problem is not just to say that something might be wrong, but to replace it by something ― and that is not so easy.” (Feynman)

Because Heterodoxy has never developed a valid alternative it advocates pluralism, more precisely, the pluralism of false theories. The argument boils down to: if Orthodoxy is allowed to sell their rubbish in the curriculum, Heterodoxy must also be allowed to sell their rubbish. Economics is not so much a heroic struggle about scientific truth but about a better place at the academic trough.

The fact of the matter is that neither Orthodoxy nor Heterodoxy has the true theory and that, by consequence, the political arguments of BOTH sides have NO sound scientific foundation.

Traditional Heterodoxy knows quite well that it has nothing to offer in the way of progressive science and therefore argues for dumping scientific standards altogether and to focus on politics pure and simple: “The case against austerity does not depend on whether it is ‘good economics’, but on its human impact. Nor does the case for combating climate change depend on the present discounted value of future costs to GDP. Reclaiming political debate from the grip of economics will make the human side of politics more central, and so can only serve a progressive purpose.”

This is a good idea, economists should no longer pretend to do science but openly push their respective political agendas, after all, this is what they have actually done the past 200+ years. Neither Orthodoxy nor traditional Heterodoxy satisfies the scientific criteria of material and formal consistency. So, both, orthodox and heterodox economists have to get out of science because of incurable incompetence.

It was John Stuart Mill who told economists that they must decide themselves between science and politics: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.”

Both, orthodox and heterodox economists violate the principle of the separation of science and politics on a daily basis. Economics is what Feynman famously called cargo cult science and neither right wing nor left wing economic policy guidance has a sound scientific foundation since Adam Smith/Karl Marx. It is high time that economics frees itself from the corrupting grip of politics.

Egmont Kakarot-Handtke

Bruce Wilder said...

With regard to the French Revolution, liberal/libertarian economics emerged well before the French Revolution and was a significant factor in bringing on both the bankruptcy of the state and the conditions of famine that helped to create the Terror. Voltaire's Dr Pangloss appeared in Candide in 1759. Turgot and Necker pre-figured right and left neoliberalism, with Turgot arguing for virtuous austerity and Necker for pseudo-technocratic competence. That "enlightened" public opinion was dogmatically committed to laissez faire in grain markets at a time of impending famine was a factor that led the Paris mob to resort to physical intimidation of the National Assembly. The inability to manage a currency or a national debt contributed in several ways at different times to the rise of Napoleon.

Economics as an organizing ideology has evolved with the emergence of modern nation-states and development of complex finance and industrial organization. True religion went out the door with the English Civil War if not the Peace of Westphalia, no? There were a lot of economic ideas around building the nation-state and its mass democratic constituency swirling around from the 17th century until well into the 1950s. What's strange to me is that neoclassical economics got stuck in the Marginal Revolution, more than a hundred years ago. And, what happened in the 1940s was Paul Samuelson, which poured math over the Chicago model, like amber over an insect, creating a fossil.

Peter T said...

Side note. While religious issues were a large part of life from 350 CE (and especially 400-500), there were a lot of other things in the mix. Religion is simply over-represented in the sources. But it's hard to see Gundobald or Chlodovech - or their contemporary popes - thinking much about religious doctrine.

Europe 850-1100 is too various and unorganised to have a common theme (it did not have the institutions to embody or develop a common idea). The imperial idea is prominent from 1100, and the church was one carrier of that idea. But that was essentially a political theme, not a religious one (the emperor, sovereign kings and the pope did not argue religious doctrine, they argued political doctrine in religio-legal terms).

By c 1400 religious doctrine was too settled to be controversial (roughly, everyone who mattered was western catholic). The Reformation changed this. And when the Reformation captured state power, then correct doctrine became a central issue. Hence my 1550 date (Dutch Revolt, English conversion...).

Bruce is right that economic ideas became prominent well before 1750. My point is that politics up to the mid C20 saw economic growth as a tool to be used in pursuit of other ends. Guns before butter (or orthodoxy before butter) were both perfectly respectable slogans up to then. said...

Peter D.,

It will probably not surprise you that I have published a paper by Gigerenzer in the journal I edit, Review of Behavioral Economics (ROBE). He was closely associated with the late Reinhard Selten, who got the Nobel for a hyper rational game theory result (sub-game perfect equilibrium) but who later turned strongly against such hyper rationality in economics. In fact, he never thought people were that rational, even when he was doing his pure theory work that assumed such rationality. His view then was that this was unrealistic theory, but still interesting in terms of thinking about how rational people would behave.

Oh, and I published a paper by Reinhard also before he died.


Well, while there are openings, it remains the case that there is a lot of discrimination against heterodox in hiring and publishing and so on. There has been increasing acceptance among conventional economists of elements of behavioral econ, which allows for non-rationality, but Peter is right that for many economists they are more open to this in their narrow specialties where they know better what is really going on and often fall back on an Econ 101 view of rationality for the rest of economics.


As usual, you are just full of it and repeating yourself. Here is a counter-example to your false claim: Vernon Smith and his experiments, first reported in Econometrica in 1988, on speculative bubbles. Vernon won the Nobel Prize and is viewed as "the father of experimental economics." A socialist in his youth (Vernon recently turned 90 and is still going strong), his most famous experiments were ones in the early 1960s that showed that double auction markets will generally move very rapidly to conventional micro supply-demand equilibria. This fit with Vernon's view that properly structured markets tend to work well, and he has long had a pretty pro-laissez faire view, including a very positive attitude towards Hayek,, as well as of Adam Smith.

But he also founded the Economic Science Association (ESA) and he has never denied scientific data that does not correspond with his ideology. So while he generally thinks free markets work pretty well and we should keep government to a minimum, he has not at all repudiated or denied his findings, since found by others to be robust, that in many markets there are strong tendencies for people to engage in speculative bubble trading, even when it is clearly irrational. Sorry, Egnmost, but I think in this case you simply do not know what you are talking about at all.

Peter T.,

I grant that during the period of Viking invasions in Europe, about 850-1050 or so, religion and a lot else came not to matter much. But your claim about a dominance of the imperial idea after 1100 is misguided. That idea was in conflict with the idea of papal rule and there were many wars over this, with the long-running Guelphs versus Ghibellines in Italy a part of this, one with a lot of attention paid to it, partly because northern Italy was the leading economic power in Europe, if not the world from about 1200 on for several hundred years along with Flanders.

Anyway, I shall change my dates to 350-1650 for the period of religious domination, and throughout all this period there were conflicts within dominant Christianity, between Catholic and Orthodox, whose final split came in 1054, and throughout even within the Catholic zone between different orders and theological views, a constant struggle for power. Most of this is little studied or known now, outside of Catholic circles. This stuff was going on even during the period of the Viking disruptions, probably the low economic point for Europe since the Neolithic Revolution.

Peter Dorman said...

Barkley, I think there is something important in your comment about Gigerenzer and Selten. Yes, you've promoted GG's work, and for that you deserve a lot of thanks, not only from me but also everyone who cares about behavioral econ. Nevertheless, in your comment you use the word rationality to be synonymous with expected utility maximization. Thus homo economicus is "hyper rational", which should be critiqued for being "unrealistic". But Gigerenzer's point is deeper, isn't it? Mainstream economics gives us a conception of rationality that is procedural: follow this algorithm and you are being rational. This is not a minor detail; it's actually the linchpin of the entire model. All the math follows. Gigerenzer's conception is consequential: rational behavior is that which is most likely to achieve the purposes of agents. That turns out to be an entirely different standard in a complex, uncertain world populated by agents who know they are fallible. I know you and I largely agree about such things, but the language we use matters too. Econ 101 works its magic to a large extent through language slippage around terms like rational, efficient, preferred, etc.

AXEC / E.K-H said...

Barkley Rosser

Economics is a cargo cult science. Feynman defined it thus: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

What is missing among economists is a proper understanding of what science is all about.

You write: “… his [Vernon Smith’s] most famous experiments were ones in the early 1960s that showed that double auction markets will generally move very rapidly to conventional micro supply-demand equilibria. This fit with Vernon’s view that properly structured markets tend to work well, and he has long had a pretty pro-laissez faire view, including a very positive attitude towards Hayek as well as of Adam Smith.”

Vernon Smith’s blunder consist in concluding from the satisfactory functioning of one market that the market system as a whole functions well, i.e. is stable. This is the fallacy of composition which is the defining blunder of scientifically incompetent economists. The fact of the matter is that the grand claim of Adam Smith, Hayek, Arrow-Debreu et al. about the functioning of the market system has NEVER been proven. In fact, just the opposite can be demonstrated.

With regard to the labor market as a whole follows from the fallacy of composition: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed.” (Tobin)

From the correct employment theory follows that an INCREASING average wage rate leads to INCREASING employment. This testable proposition asserts just the OPPOSITE of microfounded cargo cult economics.

The fallacy of composition follows ultimately from Walrasian microfoundations: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

Methodologically, this behavioral axiom set is forever unacceptable. The Iron Law of Economic Methodology says: NO way leads from the understanding of human behavior to the understanding of how the monetary economy works. And this explains why the microfoundations approach has been doomed to failure from the very beginning.

It holds: (i) economic theory cannot be based on assumptions about human nature/behavior/action, (ii) economics is NOT a social science but a system science, (iii) if it isn’t macro-axiomatized, it isn’t economics.

It is pretty obvious that Barkley Rosser has never grasped this and never will and this applies to the contributors, referees and readers of the Review of Behavioral Economics, the followers of Hayek, and all other scientifically retarded supply-demand-equilibrium economists.*

Egmont Kakarot-Handtke

* See also ‘Austerity and the idiocy of political economists’ said...

Peter D.,

I see GG's view as being related to that of Herbert Simon's view.


You could not be more wrong. Vernon Smith did not make the "blunder" you claim he did. He never made any statement about the general stability or instability of the market system as a whole, even though he is largely pro-laissez faire. He showed stability for a very particular type of market form, double auctions, and many auctions have since been set up following his work, and his findings have held up. Those types of auctions generally do go to equilibrium quickly. However, you seem to have missed the point that he also showed that speculative bubbles are ubiquitous in many markets. That is not stability. You just cannot read, can you, so obsessed with repeated your endless drivel you are.

Peter T said...

Peter Dorman's point about rationaility being what achieves one's purposes is a good one. It then shifts attention to what those purposes are and how they are formed, things on which, AFAIK, economics has little to say.

You miss my point about dominating ideas. I'm not claiming that people did not talk about religion, nor dispute about it. I'm saying that the major pan-European cultural networks had some very strong central themes at different periods, themes that spilled over into all the cultural domains. And these themes were important because they were contested (or vice versa, or both), so the partisans were caught up in a frame where neutral investigation was difficult if not impossible. All utterances around the theme were ammunition in a contest.

So the imperial idea - the idea that, as heir to the Roman Empire, there is/should be one single point of sovereignty, one final earthly arbiter, was central to the period 1100-1300. The Pope and Emperor disagreed about who that should be and what prerogatives the position should carry. They did not disagree on a theological point, although they used, in part, theology to buttress their argument (as they did canon law, classical authors and whatever else they could). It ended when the assertion that "the king is sovereign in his own domain" - a position first articulated in France - became generally accepted. In other words, there would be no final arbiter across all domains.

Likewise, if you look at the period when nationalism was the dominant these, you see nationalist history, nationalist music (Smetana, Tchaikovsky, Kodaly, Sibelius), nationalist monuments (Brandenburg gate, Marble Arch, Arc de Triomphe), paintings, novels..and a public debate framed in terms of who and what constituted the nation and what would advance the national interest. BTW, this frame is still prominent but, I would argue, less dominant than pre 45 (that could change).

Economics is in such a frame at this point. As a discipline, it will be less obstinate in error once it becomes less central - once getting richer every year is not an expectation.

AXEC / E.K-H said...

Barkley Rosser

You said: “This fit with Vernon’s view that properly structured markets tend to work well, and he has long had a pretty pro-laissez faire view, including a very positive attitude towards Hayek as well as of Adam Smith.”

You said also: “He never made any statement about the general stability or instability of the market system as a whole, even though he is largely pro-laissez faire.”

Wikipedia says: “Being a system of thought, laissez-faire rests on the following axioms:
1. The individual is the basic unit in society.
2. The individual has a natural right to freedom.
3. The physical order of nature is a harmonious and self-regulating system.”

So laissez-faire = “harmonious and self-regulating system” = overall stability. This property has been put into the axioms of the laissez-faire doctrine. This methodological blunder is known since antiquity as petitio principii. Overall stability, which is compatible with partial and temporary instability, has to be PROVEN and NOT put into the premises.

By subscribing to laissez-faire Vernon Smith indeed made a statement about the general stability of the market system. This statement has always been false.*

Egmont Kakarot-Handtke

* See ‘Could we, please, all focus on the key question of economics?’ said...

Look, Egmont. I reported on Vernon Smith doing experiments that show that some kinds of markets are unstable. He has not hesitated to publicize those results. That he may still be generally pro-laissez faire can simply be due to his fearing that efforts by government to stabilize those markets will lead to more problems than they solve.

Quoting a Wikipedia definition of laissez faire here is totally irrelevant. You have simply fallen on your face. You said that there are no scientific economists, that they are all just political ideologues, blah blah blah. But here is Vernon Smith who has been fully scientific, who has carried experiments that provide results that raise doubts about what is his political philosophy, and he has accepted and publicized those findings.

Deal with it, Egmont. You are just wrong about this. Period.

Oh, of course I have published papers by good old Vernon in my journal, :-).

AXEC / E.K-H said...


The market economy is inherently unstable and economists never grasped it

Egmont Kakarot-Handtke