Thursday, July 29, 2010

Economics without Equilibrium

There’s a nice post today (or yesterday, depending on what time zone your brain is in) by Rajiv Sethi on the effort to bring back non-equilibrium approaches to macroeconomics. It looks at the argument made by Tobin in the 1970s, Minsky’s oscillating financial instability model, as well as his own work.

I think the simplest way to put the question is to ask, what sciences should economics, given its subject matter, most resemble? Physics, with its immutable laws and extraordinarily precise measurement apparatuses? Not likely. How about biology, ecology and geology, with their messy, variegated objects of study, one-off cases, and path-dependence? This is where I would turn.

So how much equilibrium analysis do we find in these fields? The answer is, a little, but not much. Mostly there is a painstaking identification of discrete causal processes, each a challenge that can occupy a whole career, with little expectation that all of them will ever be fitted neatly into a single, all-explaining model. Economics would do well to follow this path.

For more detail on my take, look here.


Toby said...
This comment has been removed by the author.
Toby said...

"What makes this failure so pernicious for economics is that the entire edifice is built on prior results that are themselves at great risk of being false positives. And it is interesting that noone much cares. This point is fundamental."

Thank you for your efforts. This is the first of your work I have read and I applaud you for it, but to my mind your paper does not go deep enough. We need to look at money itself, particularly how money creation and control shapes society. Economics seems to be mostly blind (willfully it must be said) on this important topic.

I share your wish for a humbler, more circumspect economics capable of embracing whatever reality is in respect to its focus of study. One of the trends humanity needs to reverse is the excessive compartmentalization that has taken so deep a hold in recent decades. Nowhere is this more acutely so than in economics, which seems to want to shut the real world out.

I am but an autodidact trying to make sense of the discipline I see as the gatekeeper of the money system, which is one of the root causes of society's many difficulties, globally. Few though are prepared to address the money system itself, but of those who are, Bernard Lietaer is perhaps the most convincing. In case you have not looked at his work in this area, I humbly offer two links to it, one a paper, the other a talk I found on YouTube (the paper shows much the video does not):

Also very interesting, though far less well known, is Charles Eisenstein, who takes a very broad look at humanity's progress these last many thousands of years, and covers the money system quite well. His book "The Ascent of Humanity" is essential reading in my view, and also available for free online. Chapter IV covers money, though the book must be read as a whole to be properly appreciated.

Once again, thank you for your work, and good luck in all your future efforts.


Shag from Brookline said...

E. O. Wilson's "Consilience The Unity of Knowledge" published in 1998 includes (page 212) this:

"The enterprise within the social sciences best poised to bridge the gap to the natural sciences, the one that most resembles them in style and self-confidence, is economics. This discipline, fortified with mathematical models, garlanded annually by its own Nobel Memorial Prize in Economic Science, and rewarded with power in business and government, deserves the title often given it, Queen of Social Sciences. But its similarity to 'real' science is often superficial and has been purchased at a steep intellectual price." [Wilson has more to say on economics; check his index.]

I wonder what Wilson's views are since the Bush/Cheney crash of 2008.

Eleanor said...

Brad DeLong has an essay I just read at Angry Bear arguing that economics is historical: there is no basic theory; what we know is what's happened in the past. said...

Hermann Haken via synergetics, still underappreciated in economics.

Shag from Brookline said...

Today's (8/1/10) NYTimes (Week in Review) has Eric Dash's Economics essay "A Richter Scale for Markets" that talks about econophysicists in a role similar to earthquake scientists. Interesting, but earthquake faults are not man made.

TheTrucker said...

When the rulers, in their never ending quest to be _THE_ ruler, will do that which is in their best interest and not in the best interests of the common people, the economics profession and the "successful" economists are what allows them to "rationalize" it. The more opaque this "science" is, the better it serves.

But a war on equilibrium is probably not the best way to address this problem. It seems that equilibrium is what economic relationships move toward even in situations that seem to lack rationality. Is it not the fundamental definition of "good" that is irrational? "Good" is a religious opinion.

When one set of economists employ such crap as Ricardian Equivalence to thwart fiscal intervention in the economy, those of an opposing religious belief know that the "science" is a sham. But that same snake oil exists on the other "side" of the debate as well. You can't force people to consume for the sake of the GDP. If productivity has reached a state where labor is much more abundant than can ever be "consumed" by production, it is irrational (religious) to be running around creating additional work.

A rational person and a rational science would seek to share the tedium/work among the larger number of willing contributers. Only religious nutters will seek to do otherwise. Or have I selected my own religion, my own definition of "good".

I am of the opinion that the primary economics controversy that prevents any agreed upon equilibrium is a divergent definition of "good".