Why should economics demand what harder sciences do not?

3 November, 2016 at 19:31 | Posted in Economics | 7 Comments

Although economics main concern is with aggregates, there has predominated in the discipline an atomistic approach. If you want to know what consumers do, you model the individual consumer behavior and assume it represents the behavior of the typical consumer. The same applies to producers: the theory of the firm is the basis for the aggregate supply function. Moreover, it has been proposed that the actual economy can be read as if it were acting out the maximization of the utility function of a single, immortal representative agent. This excludes per se any possibility of coordination failure. But many problems in the economy arise precisely from coordination failures and heterogeneous behavior by economic agents.

colEconomics deals with the study of the economic system. Why not starting by studying the economy as a system? …

Change the departing point in economics. It should be not the individual but the economic aggregates. These aggregates are the result of the behavior of many agents, all interacting with one another at once. So, collective behavior and not individual behavior should be the departing point of economic analysis.

Orthodox economics demands for microfoundations as a necessary condition in macroeconomics. But, for instance, thermodynamics and chemistry do not claim for a micro theory. All biological creatures are made up of particles. This does not mean that the natural place to start in building biology is to start with particle physics. Botanists study certain characteristics of the behavior of plants without knowing the exact biochemical mechanism behind them. Zoologists study anthills without having to resort to the individual behavior of ants. It is well known that relativity theory (macrophysics) and quantum mechanics (micro-physics) are mutually inconsistent. Why should economics demand what harder sciences do not?

Victor Beker

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  1. “This excludes per se any possibility of coordination failure.”

    No it does not! How many times do I have to write this? The prisoner’s dilemma is a good case in point. It’s a representative agent model, and it’s the key example to illustrate the very idea of coordination failures.
    .
    If there were indeed only one agent in the economic, coordination failures cannot arise. But if there are many — and even if they are all alike — coordination failures arise all the time.
    .
    I’m somewhat sympathetic to your approach to the “philosophy” of economics: Complain without suggesting an alternative. Criticism is important. But when it builds on such an obvious lack of knowledge it doesn’t do anyone any good. You simply cannot criticise what you don’t understand. And Lars, you do not understand economics.

  2. Victor Beker — not yours truly — writes “Moreover, it has been proposed that the actual economy can be read as if it were acting out the maximization of the utility function of a single, immortal representative agent.” And you admit “If there were indeed only one agent in the economy, coordination failures cannot arise.” So, what’s the problem?

    .
    Re game theory, let’s listen to (I think even you can admit this guy does “understand” it) Ariel Rubinstein:
    .

    “I believe that game theory is very interesting. I’ve spent a lot of my life thinking about it, but I don’t respect the claims that it has direct applications.

    The analogy I sometimes give is from logic. Logic is a very interesting field in philosophy, or in mathematics. But I don’t think anybody has the illusion that logic helps people to be better performers in life. A good judge does not need to know logic. It may turn out to be useful – logic was useful in the development of the computer sciences, for example – but it’s not directly practical in the sense of helping you figure out how best to behave tomorrow, say in a debate with friends, or when analysing data that you get as a judge or a citizen or as a scientist …

    In general, I would say there were too many claims made by game theoreticians about its relevance. Every book of game theory starts with “Game theory is very relevant to everything that you can imagine, and probably many things that you can’t imagine.” In my opinion that’s just a marketing device …”

    • Well if you reblog it you must endorse it.
      .
      The problem is that a “single, representative, agent” does not mean a “single agent”. It means that there are many agents but they are all alike, so understanding the actions of one agent (the representative) makes us understand the actions of all agents. But this does not preclude coordination failures.
      .
      An example. Agent i faces the problem max Ui(xi,X) with respect to xi. Here xi may be consumption, and X income. However income is given by the average of all the xi choices in the economy. Let’s assume that agent i is sufficiently small that her choice of xi has a negligible effect on X which can be ignored.
      .
      The first order condition for this problem is Uix(xi,X)=0, where Uix represents the derivative of U with respect to xi. If every agent is alike, we now know each agents choice of x, and we know X=x. Thus the equilibrium is fully given by
      .
      Ux(X,X)=0.
      .
      Here there is a clear coordination failure. Each agent does not take into account that she affects average income, and how that benefits the other agents in the economy. A social planner that would maximize average welfare in the economy, would instead set X such that
      .
      Ux(X,X)+UX(X,X)=0
      .
      where UX represents the derivative of U with respect to the second argument.
      .
      The outcome in these two settings can vary tremendously, and it all boils down to coordination.
      .
      Lastly, the Keynesian cross – your favorite model – is a representative agent model.

      • Yes, when I reblog something I usually endorse it. In this case, definitely.
        .
        Comparing the true, immense, coordination problems we find among real world heterogeneous actors, to the watered-down game theoretical version of “coordination” problems of identical representative clones do not — sorry to say, but, still — sound as especially relevant. Jon Elster rightly complains that mainstream economists generally have ‘excessive’ ambitions,’ but when it comes to questions of relevance and realism the ambition level is rather set too low!

      • So perhaps we can agree that the sentence “This excludes per se any possibility of coordination failure.” is wrong?
        .
        Perhaps it should read “This excludes per se any possibility of true, immense, coordination failures”, with the heterodox community defining what is “true” and “immense”?

      • And, before I forget. What is it in the Keynesian cross that makes the coordination failure “true” and “immense”? After all, it is a “watered-down game theoretical version of “coordination” problems of identical representative clones”.

  3. Because the harder sciences have already gained in what their explorers set out to do whilst the vaguer sciences including economics have not achieved this. Its simple logic to answer your question. When people, including myself present economics in a harder form, there seems to be no interest and all the “softer” economists look the other way. How about a division into hard and soft with both sides going their separate ways?


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