Economics — a science with wacky views of human behaviour​

21 February, 2018 at 17:08 | Posted in Economics | 4 Comments

There is something about the way economists construct their models nowadays that obviously doesn’t sit right.

The one-sided, almost religious, insistence on axiomatic-deductivist modelling as the only scientific activity worthy of pursuing in economics still has not given way to methodological pluralism based on ontological considerations (rather than formalistic tractability). In their search for model-based rigour and certainty, ‘modern’ economics has turned out to be a totally hopeless project in terms of real-world relevance.

grumpy-economics-catIf macroeconomic models — no matter of what ilk — build on microfoundational assumptions of representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that model-based conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged to real-world target systems, are obviously non-justifiable. Incompatibility between actual behaviour and the behaviour in macroeconomic models building on representative actors and rational expectations microfoundations shows the futility of trying to represent real-world target systems with models flagrantly at odds with reality. As Robert Gordon once had it:

Rigor competes with relevance in macroeconomic and monetary theory, and in some lines of development macro and monetary theorists, like many of their colleagues in micro theory, seem to consider relevance to be more or less irrelevant.

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4 Comments

  1. I would not concede that rigor is much achieved. The pretension is that economics is a body of doctrine built up by rigorously vetting arguments for logical consistency thru systematic analysis, an analysis carried out by making axioms explicit and deductive arguments formal proofs of theses laid out as theorems: in other words by the same method as analytic geometry. And, indeed, the archetypal argument of Econ 101 is presented in much the same manner: graphs of curves outlining supply and demand.
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    I do not share Professor Syll’s expressed hostility to axiomatic-deductive analysis. I think an economics that had carefully thought thru the logic of social cooperation in trade and production could aid our shared understanding of the problems of public policy that arise.
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    The problem of “relevance” arises because economists routinely refuse to acknowledge the inherent epistemic limitations of analysis. They routinely and uncritically assert the relevance of fundamental analysis by waving their hands out the window of the classroom, without acknowledging the need to go and confront the world as it is with systematic observation and measurements. The simple analytic model of “perfect competition” is made relevant by the classroom assertion that a “market” with “many” buyers and sellers is somehow “like” the analytic model of perfect competition, which is then treated as an ideal: students are told that public policy should strive to make the institutions of the real world “resemble” more closely the ideal analysis of perfect competition. This is sheer confused nonsense.
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    The simple analytic model of perfect competition is constructed by assuming away all strategic behavior. Such an assumption makes perfect sense within the ambit of analysis, which is the painstaking conceptual examination of logical necessity. With that simplifying assumption, the concepts of efficient cooperation can be examined, logically — a potentially useful and intellectually powerful activity. What it is not is realistic — something that ought to be obvious from simply stating the assumption. There is no justification for that gesture out the classroom window, no justification for waving a hand in the direction of the actual economy and vaguely asserting “relevance” by suggesting that perfect competition is effectively an ideal map or design for living.
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    I do not reject the analysis, per se. I am not inclined to complain that Euclid’s Geometry is a priori and fails to make maps. The fault in Samuelson’s Economics, laid out like Euclid’s tract in a system of theorems, is that Samuelson thinks he has written a Geography, not a Geometry. He thinks his geometry can be applied without any further work, without what is labelled “synthesis” in the classic dichotomy with “analysis”. Economists prattle on mindlessly about a market economy and market equilibrium, without ever noticing that there are very few actual markets observable and prices that can be observed are mostly managed administratively, perhaps because cost structures commonly preclude even the possibility of a “market-clearing” equilibrium in price. Logical rigor is recognizing that a cost structure that dictates declining marginal cost precludes a market-clearing market equilibrium; logical rigor recognizes allocational efficiency stands beside managerial or technical efficiency in organizing production. Such rigor need not apply in economics as commonly practiced in mainstream economics.
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    Proliferation of analytic models has become an idle habit of economists, who refuse to recognize the necessity of testing not their models, but the world. That is not because analysis is inherently wrong-headed on its own terms, but because its epistemic power is being misconstrued. A map-maker could make no maps without a Geometry, but mapping a pure geometry is idle and ill-conceived speculation, not the work of systematic observation and measurements that developing a knowledge of the world requires.

    • I enjoyed your comment Bruce. Have you read Lars’ book “On the use and misuse of theories and models in economics”? My reading is that his critique is not that different than yours above. Perhaps his short sweat blog posts don’t reveal that as they are mostly snapshots of the absurdity of economic theory. Fullbrook, Marques, and others on the WEA site round out the story I think. Where does manipulation and deception and fraud fit into your analysis above? I am thinking of Akerlof et. al. Phishing for Phools, as I have actual cas examples of this from my own experience in the technology industry of major lead firms manipulating the global supply chains as Akerlof notes can be done.

      • Prof Syll and I agree that Uncertainty is, technically speaking, the Big Enchilada in all this.
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        Uncertainty presents serious challenges to analysis. There is not available any singular axiom of pervasive uncertainty and those who would work to understand the implications of uncertainty must be clever, even to nibble around the edges. I do not expect analysis to produce a complete nomological machine isomorphic with the actual economy, but I think some necessary logical implications of uncertainty could be usefully admitted into the general worldview of economists. I think, for example, that management of production processes is logically necessary under uncertainty (as is waste and pollution), and that sunk-cost investments as an element in organizing production follow and marginal cost declining over the usually relevant range of output also follows of necessity. Declining marginal cost makes a system of markets tending toward equilibrium in market price a logical impossibility. Admit this, and the rhetorical frame of mainstream economics concerning “the market economy” is rendered an absurd lie.
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        If one was of an observant nature, one might have noticed that the actual economy is organized primarily by large bureaucracies, not markets. Most of the prices an individual confronts are administered — this is simply common fact, denied by economists routinely. To talk of employment as a “labor market” is to talk nonsense. And, yet, since the Marginal Revolution, economics has studiously ignored the emergence of business enterprise governed by corporate bureaucracy.
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        Where there are actual institutionalized “markets” — as is the case of financial markets — economics has not done a whole lot better. The hypothesis of efficient markets has become a qualitative assertion and now, for some, a dogma. Science would be interested in analyzing the efficiency of a particular financial market as a mechanical engineer might analyze the efficiency of a heat engine of particular design: quantitatively and in relation to features of mechanism design.
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        Serious economists would not be satisfied to prattle on exclusively about allocational efficiency of a purely theoretical and qualitative character. They would be concerned with the efficiency losses due to disputes and fraud; they would not be treating pollution rhetorically as an exceptional market failure, an “externality”, but as a necessary concomitant to production under uncertainty.
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        But, I digress. I do think it is useful to think seriously about how we know and discover and “explain” things about the world. That is the essence of uncertainty — not that “nobody knows anything”, but that we learn without being entirely sure of the boundaries of knowledge or ignorance and it is in uncertainty that the economy functions, for better or worse.

  2. “the warrants for supposing that model-based conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged to real-world target systems, are obviously non-justifiable.”
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    And yet, again, Wren-Lewis on his blog baldly states that every UK citizen will be 8% poorer because of the gravity equations of trade, citing another blog http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2018/01/picking-your-own-facts.html that claims the theory that trade volumes depend on geographical distance is “one of the most empirically successful in economics”.
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    My first problem is the idea that GDP growth measures wealth in any useful way. We should abandon GDP maximization as a societal goal, because GDP mostly prioritizes the selling of vast oversupply to unwitting marks.
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    Secondly, the gravity model does not predict that China and the EU are bigger trade partners of the US than Canada or Mexico. The gravity model does not predict that that Japan exports more to the US than to China, or that the UK trades more with the US and China than with France, the Netherlands, etc. (There is a possibility they can fudge this by taking the so-called “mass” or size of the country into account, but I think their model must require a lot of such fudge factors to force data to fit it.)
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    Third, the model does not seem to touch financial trade at all. What are the central banks doing? How much currency is being swapped? What securitization instruments are returning globally-derived profits to local investors? GDP measures none of this yet it contributes to the wealth of investors.
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    Yet Wren-Lewis baldly states that Brexit will make him 8% poorer, which is proved by the gravity model of trade.
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    Ultimately, I think, it is a matter of personalities, who gets more attention. Mainstream economics still gets the benefit of the doubt by public consensus … So too was divine right of rule agreed upon by consensus …


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