LARS P. SYLL

Pure game theory — an irrelevant tautology

Applied game theory is a theory of real-world facts, where we use game theoretical definitions, axioms, theorems and (try to) test if real-world phenomena ‘satisfy’ the axioms and the inferences made from them. When confronted with the real world we can (hopefully) judge if game theory really tells us if things are as postulated by theory.

But there is also an influential group of game theoreticians that think that game theory is nothing but pure theory, an axiomatic-mathematical scientific theory that presents a set of axioms that people have to ‘satisfy’ by definition to count as ‘rational.’ Instead of confronting the theory with real-world phenomena it becomes a simple matter of definition if real-world phenomena are to count as signs of ‘rationality.’

This makes for ‘rigorous’ and ‘precise’ conclusions — but never about the real world. Pure game theory does not give us any information at all about the real world. It gives us absolutely irrefutable knowledge — but only since the knowledge is purely definitional.

Mathematical theorems are tautologies. They cannot be false because they do not say anything substantive. They merely spell out the implications of how things have been​ defined. The basic propositions of game theory have precisely the same character.

Ken Binmore

Pure game theorists, like Ken Binmore, give us analytical truths — truths by definition. That is great — from a mathematical and formal logical point of view. In science, however, it is rather uninteresting and totally uninformative! Even if pure game theory gives us ‘logical’ truths, that is not what we are looking for as scientists. We are interested in finding truths that give us new information and knowledge of the world in which we live.

Scientific theories are theories that ‘refer’ to the real-world, where axioms and definitions do not take us very far. To be of interest for an economist or social scientist that wants to understand, explain, or predict real-world phenomena, the pure theory has to be ‘interpreted’ — it has to be ‘applied’ theory. A ‘pure’ game theory that does not go beyond proving theorems and conditional ‘if-then’ statements — and do not make assertions and put forward hypotheses about real-world individuals and institutions — is of little consequence for anyone wanting to use theories to better understand, explain or predict real-world phenomena.

Pure game theory has no empirical content whatsoever. And it certainly has no relevance whatsoever to a scientific endeavour of expanding real-world knowledge.

Admati on ‘the banker’s new clothes​’

Chicago economists — people who have their heads fuddled with nonsense

Mainstream macroeconomics has always had problems with the notion of involuntary unemployment. According to New Classical übereconomist Robert Lucas, an unemployed worker can always instantaneously find some job. No matter how miserable the work options are, “one can always choose to accept them,” according to Lucas:

KLAMER: My taxi driver here is driving a taxi, even though he is an accountant, because he can’t find a job …

LUCAS: I would describe him as a taxi driver [laughing], if what he is doing is driving a taxi.

KLAMER: But a frustrated taxi driver.

LUCAS: Well, we draw these things out of urns, and sometimes we get good draws, sometimes we get bad draws.

Arjo Klamer

In New Classical Economics unemployment is seen as a kind of leisure that workers optimally select. In the basic DSGE models used by these economists, the labour market is always cleared – responding to a changing interest rate, expected lifetime incomes, or real wages, the representative agent maximizes the utility function by varying her labour supply, money holding and consumption over time. Most importantly – if the real wage somehow deviates from its “equilibrium value,” the representative agent adjust her labour supply, so that when the real wage is higher than its “equilibrium value,” labour supply is increased, and when the real wage is below its “equilibrium value,” labour supply is decreased.

In this model world, unemployment is always an optimal choice to changes in the labour market conditions. Hence, unemployment is totally voluntary. To be unemployed is something one optimally chooses to be.

Yours truly has to admit of being totally unimpressed by this kind of New Classical macroeconomic quackery. I guess Keynes would have felt the same:

The Conservative belief that there is some law of nature which prevents men from being employed, that it is “rash” to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years … Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense. We shall try to show him that the conclusion, that if new forms of employment are offered more men will be employed, is as obvious as it sounds and contains no hidden snags; that to set unemployed men to work on useful tasks does what it appears to do, namely, increases the national wealth; and that the notion, that we shall, for intricate reasons, ruin ourselves financially if we use this means to increase our well-being, is what it looks like – a bogy.

John Maynard Keynes (1929)

Text och musik

I en tid när ljudrummet dränks i den kommersiella radions tyckmyckentrutade ordbajseri och fullständigt intetsägande pubertalflamsande tjafs har många av oss mer eller mindre gett upp. Radion, som en gång i tiden var en källa till både vederkvickelse och reflexion har degenererat till en postmodern ytlighetsavgud.

Men det finns ljus i mörkret!

I programmet Text och musik med Eric Schüldt — som sänds på söndagsförmiddagarna i P2 mellan klockan 11 och 12 — kan man lyssna på seriös musik och en programledare som har något att säga och inte bara låter foderluckan glappa.

En lisa för själen.

I förra söndagens program spelades bland annat denna vackra georgiska sång:

A memorable evening with Joan Robinson

After dinner – by now I had had a couple of glasses – I decided I had to make something of this once-in-a-lifetime opportunity to engage with one of my heroes.  Joan … was in the armchair again, and I sat down on the floor facing her at her feet.  I began by asking her what it was like being a student at Cambridge back in the Twenties.  After recalling the lectures of the literary critic I. A. Richards, she moved on to Wittgenstein and Sraffa and their weekly one-on-one discussions over tea … Soon the whole room of economists was debating the meaning of Tractatus Logico-Philosophicus. And, bizarrely, something was about to happen that would change the course of my life.

As the debate continued it occurred to me that perhaps no one in the room had really read the Tractatus.  Joan Robinson stayed out of the debate and, although I was still sitting at her feet, I now had my back to her. Then suddenly from behind me her loud raspy voice broke into the conversation. Here are her exact words.

“The world is all that is the case.  The world is the totality of facts, not of things.  The world is determined by the facts, and by their being all the facts.  For the totality of facts determines what is the case, and also whatever is not the case.  Those are the first four propositions of the Tractatus.  I’ve never been able to understand them.”

It was a magic moment for me – the relaxed integrity of her intellect was so plain to see.  And such a contrast to the outcome of my conversation sixteen years before.  I wasn’t yet in a position where I could change my life’s course, but in time I was, and if it hadn’t been for that evening with Joan Robinson and the Tractatus I would never have become an economist.

Edward Fullbrook

Economists are missing the big picture

INET conferencing​ beyond disappointment

I’m sitting in a coffee shop opposite Haymarket Station in Edinburgh. Just up the road, the Institute for New Economic Thinking (INET) is holding its conference. I’m supposed to be there, as I was yesterday and the day before. But I am not at all sure I want to go. The last two days have left a very bitter taste.

This conference, grandly entitled “Reawakening”, is supposed to be a showcase for the “new economic thinking” of INET’s name. I hoped to hear new voices and exciting ideas …

Not a bit of it. In the last two days we have had panel after panel of old white men discussing economic theories developed by old white men, many of them dead. Economic beliefs that I thought had been comprehensively debunked have reappeared, dressed up as “new thinking” …

I returned for a panel on debt traps, public and private – and I despaired again … Oh dear. It went from bad to worse.

Pontus Rendahl … claimed that “banks don’t create money” and explained that Barclays creates its own currency “pegged at par to the central bank currency”, which apparently only works if the central bank “is complicit”. The Bank of England debunked this nonsense back in 2014. Why is it still being presented now? …

This is not “new thinking”, it is the same old elite economists’ voodoo in different clothes.

Frances Coppola

It is indeed difficult not to agree. A lot of the stuff presented at INET conferences are just regurgitations of the same old mainstream dogma. And to even for a second think that a visionless neoclassical economist like Rendahl should have anything to do with new thinking in economics is of course totally gobsmacking!

‘Laws of economics’ — a fictional cage

Increasingly, our debates about — and our solutions to — pressing issues such as immigration, budgets and debt are framed in the context of all-powerful economic laws that dictate what is and is not possible. There’s just one slight problem: There are no laws of economics.

Referencing “the laws of economics” as a way to refute arguments or criticize ideas has the patina of clarity and certainty. The reality is that referencing such laws is simply another way to justify beliefs and inclinations …

Liberating ourselves from the fictional cage of these laws will not suddenly reveal hidden answers. But it will allow for more pragmatic examination of what is working and what is failing and why. Economic theories are guides, ones that have substantial utility. But once elevated to the realm of laws, they fall short and do us no good.

Zachary Karabell

Mainstream economics is usually considered to be very ‘rigorous’ and ‘precise.’ And yes, indeed, it’s certainly full of ‘rigorous’ and ‘precise’ statements like “the state of the economy will remain the same as long as it doesn’t change.” Although true, that is, however — as most other analytical statements — neither particularly interesting nor informative.

As noticed by Karabell there’s still a lot of talk about ‘economic laws.’ The crux of these laws that allegedly do exist in economics, is that they only hold ceteris paribus. That fundamentally means that they only hold when the right conditions are at hand for giving rise to them. Unfortunately, from an empirical point of view, those conditions are only at hand in artificially closed nomological models purposely designed to give rise to the kind of regular associations that economists want to explain. But, really, since these laws do not exist outside these ‘socio-economic machines,’ what’s the point in constructing thought experimental models showing these non-existent laws? When the almost endless list of narrow and specific assumptions necessary to allow the ‘rigorous’ deductions are known to be at odds with reality, what good do these models do?

Deducing laws in theoretical models is of no avail. Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science, it ought to be considered of little or no value to simply make claims about models and lose sight of reality.

Do unrealistic economic models explain real-world phenomena?

When applying deductivist thinking to economics, neoclassical economists usually set up ‘as if’ models based on a set of tight axiomatic assumptions from which consistent and precise inferences are made. The beauty of this procedure is, of course, that if the axiomatic premises are true, the conclusions necessarily follow. The snag is that if the models are to be relevant, we also have to argue that their precision and rigour still holds when they are applied to real-world situations. They often don’t. When addressing real economies, the idealizations and abstractions necessary for the deductivist machinery to work simply don’t hold.

If the real world is fuzzy, vague and indeterminate, then why should our models build upon a desire to describe it as precise and predictable? The logic of idealization is a marvellous tool in mathematics and axiomatic-deductivist systems, but a poor guide for action in real-world systems, in which concepts and entities are without clear boundaries and continually interact and overlap.

As Hans Albert has it:

Clearly, it is possible to interpret the ‘presuppositions’ of a theoretical system … not as hypotheses, but simply as limitations to the area of application of the system in question. Since a relationship to reality is usually ensured by the language used in economic statements, in this case the impression is generated that a content-laden statement about reality is being made, although the system is fully immunized and thus without content. In my view that is often a source of self-deception in pure economic thought …

A further possibility for immunizing theories consists in simply leaving open the area of application of the constructed model so that it is impossible to refute it with counter examples. This of course is usually done without a complete knowledge of the fatal consequences of such methodological strategies for the usefulness of the theoretical conception in question, but with the view that this is a characteristic of especially highly developed economic procedures: the thinking in models, which, however, among those theoreticians who cultivate neoclassical thought, in essence amounts to a new form of Platonism.

Seen from a deductive-nomological perspective, typical economic models (M) usually consist of a theory (T) – a set of more or less general (typically universal) law-like hypotheses (H) – and a set of (typically spatio-temporal) auxiliary assumptions (A). The auxiliary assumptions give ‘boundary’ descriptions such that it is possible to deduce logically (meeting the standard of validity) a conclusion (explanandum) from the premises T & A. Using this kind of model economists are (portrayed as) trying to explain (predict) facts by subsuming them under T, given A.

An obvious problem with the formal-logical requirements of what counts as H is the often severely restricted reach of the ‘law.’ In the worst case, it may not be applicable to any real, empirical, relevant situation at all. And if A is not true, then M doesn’t really explain (although it may predict) at all. Deductive arguments should be sound – valid and with true premises – so that we are assured of having true conclusions. Constructing, e.g., models assuming ‘rational’ expectations, says nothing of situations where expectations are ‘non-rational.’

Economic theories and models have to be compared to the situations they are supposed to represent/explain/predict. There is no way of getting around questions of realism and real-world relevance. Building theories and models that are ‘true’ in their own very limited ‘idealized’ domain is of limited value if we can’t supply bridges to the real world. Economic ‘laws’ that only apply in specific ‘idealized’ circumstances —  in ‘nomological machines’ — are not the stuff that real science is built of. Results derived in mainstream economic models

Results deduced in a ‘closed world’ mainstream economic model is obtained only because the model (machine) was built for that purpose. Outside the machine — in the real world — we know that most of the assumptions, including the typical ceteris paribus condition, do not apply.

Most mainstream economic models are abstract, unrealistic and presenting mostly non-testable hypotheses. How then are they supposed to tell us anything about the world we live in?

When confronted with the massive empirical refutations of almost every theory and model they have set up, mainstream economists usually react by saying that these refutations only hit A (the Lakatosian ‘protective belt’), and that by ‘successive approximations’ it is possible to make the theories and models less abstract and more realistic, and – eventually — more readily testable and predictably accurate. Even if T & A1 doesn’t have much of empirical content, if by successive approximation we reach, say, T & A25, we are to believe that we can finally reach robust and true predictions and explanations.

There are grave problems with this modelling view. What Hans Albert most forcefully is arguing with his ‘Model Platonism’ critique of mainstream economics, is that there is a strong tendency for modellers to use the method of successive approximations as a kind of ‘immunization,’ taking for granted that there can never be any faults with the theory. Explanatory and predictive failures hinge solely on the auxiliary assumptions. That the kind of theories and models used by mainstream economics should all be held non-defeasibly corroborated, seems, however — to say the least — rather unwarranted.

Confronted with the massive empirical failures of their models and theories, mainstream economists often retreat into looking upon their models and theories as some kind of ‘conceptual exploration,’ and give up any hopes/pretences whatsoever of relating their theories and models to the real world. Instead of trying to bridge the gap between models and the world, one decides to look the other way.

To me, this kind of scientific defeatism is equivalent to surrendering our search for understanding the world we live in. It can’t be enough to prove or deduce things in a model world. If theories and models do not directly or indirectly tell us anything of the world we live in – then why should we waste any of our precious time on them?