The efficient market hypothesis — pseudoscientific mumbo-jumbo​

30 March, 2018 at 11:51 | Posted in Economics | 3 Comments

The efficient market hypothesis — EMH — argues there is no free lunch and prices are ‘right.’ Well, as we all know, that is not true. dogNoise does influence asset prices and the law of one price is blatantly violated again and again.

Of course, THERE ARE IDIOTS, as Larry Summers once (in)famously put it. When visiting Chicago, look around …

The price is often wrong, and sometimes very wrong … If policy-makers simply take it as a matter of faith that prices are always right, they will never see any need to take preventive action. But once we grant that bubbles are possible, and the private sector appears to be feeding the frenzy, it can make sense for policy-makers to lean against the wind in some way.

Central banks around the world have had to take extraordinary measures to help economies recover from the financial crisis. The same people​ who complain most about these extraordinary measures​ are also those who would object to relatively minor steps to reduce the likelihood of another catastrophe. That is simply irrational.

Richard Thaler

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Mathematical economics — an unmixed evil

29 March, 2018 at 18:15 | Posted in Economics | 2 Comments

Balliol Croft, Cambridge
27. ii. 06
My dear Bowley,

I have not been able to lay my hands on any notes as to Mathematico-economics that would be of any use to you: and I have very indistinct memories of what I used to think on the subject. I never read mathematics now: in fact I have forgotten even how to integrate a good many things.

marshallBut I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules — (1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often.

I believe in Newton’s Principia Methods, because they carry so much of the ordinary mind with them. Mathematics used in a Fellowship thesis by a man who is not a mathematician by nature — and I have come across a good deal of that — seems to me an unmixed evil. And I think you should do all you can to prevent people from using Mathematics in cases in which the English language is as short as the Mathematical …

Your emptyhandedly,
Alfred Marshall

Hinterm Horizont

29 March, 2018 at 18:07 | Posted in Varia | 2 Comments

 

The face of a real hero

29 March, 2018 at 10:08 | Posted in Politics & Society | Comments Off on The face of a real hero

frenchFrench policeman Arnaud Beltrame, shot to death by an Islamist gunman when he swapped himself for a hostage in a supermarket siege in the southwest town of Trèbes.

Keynes’ beauty contest

28 March, 2018 at 19:55 | Posted in Economics | 2 Comments

beautyProfessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each​ competitor has to pick not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgement are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.

J M Keynes General Theory

Still the best description of the logic of financial markets. Professional money management is at heart a guessing game where investors try to guess what other investors guess about other investors guess about the future …

Assar Lindbeck-medaljen

28 March, 2018 at 13:38 | Posted in Varia | 1 Comment

Sveriges nationalekonomer träffas i höst på Linnéuniversitet i Växjö för en numera återkommande vartannat års-konferens. Utöver forskningsseminarier arrangeras utdelning av Assar Lindbeck-medaljen …

Juloratoriet (personal)

27 March, 2018 at 16:49 | Posted in Varia | Comments Off on Juloratoriet (personal)


Filmer kan beröra oss på många olika sätt. De flesta är spännande eller roliga tidsfördriv. Men sen finns också de riktigt stora filmerna. De som tar tag i oss och tränger djupt under skinnet och skakar om oss. För alltid.

Kjell-Åke Anderssons filmatisering av Göran Tunströms Juloratoriet — med gudabenådad musik av Stefan Nilsson — är en sådan film. Det är en av de sorgligaste filmer som kan ses. Men på samma gång kanske också den allra vackraste. Den om kärlekens oändliga styrka och kraft.

Jerry Williams (1942-2018)

27 March, 2018 at 12:51 | Posted in Varia | 1 Comment

 
En legend har gått ur tiden. Och ja, det stora vemodet rullar in, när man tänker på alla dessa år denne ‘working class hero’ med allt sitt engagemang, sociala patos och musik spridit glädje och ljus i våra liv. R.I.P.

Why game theory never will be anything but a footnote​ in the history of social science

27 March, 2018 at 11:55 | Posted in Economics | 3 Comments

Half a century ago there were widespread hopes game theory would provide a unified theory of social science. Today it has become obvious those hopes did not materialize. This ought to come as no surprise. Reductionist and atomistic models of social interaction — such as the ones mainstream economics and game theory are founded on — will never deliver sustainable building blocks for a realist and relevant social science. That is also — as yours truly argues in the latest issue of real-world economics review — the reason why game theory never will be anything but a footnote in the history of social science.

Lars Pålsson Syll_06Heavy use of formalism and mathematics easily foster the view that a theory is scientific. But although game theory may produce ‘absolute truths’ in imaginary model worlds, in the real world the game theoretic models are nothing but — as Rubinstein (2012a) puts it — fables. Fables much reminiscent of the models used in logic, but also like them, delivering very little of value for social sciences trying to explain and understand real-life phenomena. The games that game theory portrays are model constructs, models without significant predictive capacity simply because they do not describe an always much more complex and uncertain reality …

Although some economists consider it useful to apply game theory and use game theoretical definitions, axioms, and theorems and (try to) test if real-world phenomena ‘satisfy’ the axioms and the inferences made from them, we have argued that that view is without warrant. When confronted with the real world we can (hopefully) judge if game theory really tells us if things are as postulated. The final court of appeal for models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, model building is little more than hand-waving that give us rather little warrant for making inductive inferences from the model world to the real world.

The real challenge in social science is to accept uncertainty and still try to explain why different kinds of transactions and social interactions take place. Simply conjuring problems away by assuming patently unreal things and treating uncertainty as if it was possible to reduce to stochastic risk, is like playing tennis with the net down. That is not the kind of game that scientists working on constructing a relevant and realist science want to play.

Keynes’ critique of econometrics — still valid after all these years

26 March, 2018 at 19:24 | Posted in Statistics & Econometrics | 2 Comments

To apply statistical and mathematical methods to the real-world economy, the econometrician has to make some quite strong assumptions. In a review of Tinbergen’s econometric work — published in The Economic Journal in 1939 — John Maynard Keynes gave a comprehensive critique of Tinbergen’s work, focusing on the limiting and unreal character of the assumptions that econometric analyses build on:

(1) Completeness: Where Tinbergen attempts to specify and quantify which different factors influence the business cycle, Keynes maintains there has to be a complete list of all the relevant factors to avoid misspecification and spurious causal claims. Usually, this problem is ‘solved’ by econometricians assuming that they somehow have a ‘correct’ model specification. Keynes is, to put it mildly, unconvinced:

istheseptuagintaIt will be remembered that the seventy translators of the Septuagint were shut up in seventy separate rooms with the Hebrew text and brought out with them, when they emerged, seventy identical translations. Would the same miracle be vouchsafed if seventy multiple correlators were shut up with the same statistical material? And anyhow, I suppose, if each had a different economist perched on his a priori, that would make a difference to the outcome.

J M Keynes

(2) Homogeneity: To make inductive inferences possible — and being able to apply econometrics — the system we try to analyse has to have a large degree of ‘homogeneity.’ According to Keynes most social and economic systems — especially from the perspective of real historical time — lack that ‘homogeneity.’  It is not always possible to take repeated samples from a fixed population when we were analysing real-world economies. In many cases, there simply are no reasons at all to assume the samples to be homogenous.

(3) Stability: Tinbergen assumes there is a stable spatio-temporal relationship between the variables his econometric models analyze. But Keynes argued that it was not really possible to make inductive generalisations based on correlations in one sample. As later studies of ‘regime shifts’ and ‘structural breaks’ have shown us, it is exceedingly difficult to find and establish the existence of stable econometric parameters for anything but rather short time series.

(4) Measurability: Tinbergen’s model assumes that all relevant factors are measurable. Keynes questions if it is possible to adequately quantify and measure things like expectations and political and psychological factors. And more than anything, he questioned — both on epistemological and ontological grounds — that it was always and everywhere possible to measure real-world uncertainty with the help of probabilistic risk measures. Thinking otherwise can, as Keynes wrote, “only lead to error and delusion.”

(5) Independence: Tinbergen assumes that the variables he treats are independent (still a standard assumption in econometrics). Keynes argues that in such a complex, organic and evolutionary system as an economy, independence is a deeply unrealistic assumption to make. Building econometric models from that kind of simplistic and unrealistic assumptions risk producing nothing but spurious correlations and causalities. Real-world economies are organic systems for which the statistical methods used in econometrics are ill-suited, or even, strictly seen, inapplicable. Mechanical probabilistic models have little leverage when applied to non-atomic evolving organic systems — such as economies.

Building econometric models can’t be a goal in itself. Good econometric models are means that make it possible for us to infer things about the real-world systems they ‘represent.’ If we can’t show that the mechanisms or causes that we isolate and handle in our econometric models are ‘exportable’ to the real-world, they are of limited value to our understanding, explanations or predictions of real-world economic systems.

(6) Linearity: To make his models tractable, Tinbergen assumes the relationships between the variables he study to be linear. This is still standard procedure today, but as Keynes writes:

It is a very drastic and usually improbable postulate to suppose that all economic forces are of this character, producing independent changes in the phenomenon under investigation which are directly proportional to the changes in themselves; indeed, it is ridiculous.

To Keynes, it was a ‘fallacy of reification’ to assume that all quantities are additive (an assumption closely linked to independence and linearity).

2014+22keynes%20illo2The unpopularity of the principle of organic unities shows very clearly how great is the danger of the assumption of unproved additive formulas. The fallacy, of which ignorance of organic unity is a particular instance, may perhaps be mathematically represented thus: suppose f(x) is the goodness of x and f(y) is the goodness of y. It is then assumed that the goodness of x and y together is f(x) + f(y) when it is clearly f(x + y) and only in special cases will it be true that f(x + y) = f(x) + f(y). It is plain that it is never legitimate to assume this property in the case of any given function without proof.

J. M. Keynes “Ethics in Relation to Conduct” (1903)

Real-world social systems are usually not governed by stable causal mechanisms or capacities. The kinds of ‘laws’ and relations that econometrics has established, are laws and relations about entities in models that presuppose causal mechanisms and variables — and the relationship between them — being linear, additive, homogenous, stable, invariant and atomistic. But — when causal mechanisms operate in the real world they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. Since statisticians and econometricians have not been able to convincingly warrant their assumptions of homogeneity, stability, invariance, independence, additivity as being ontologically isomorphic to real-world economic systems, Keynes’ critique is still valid.

In his critique of Tinbergen, Keynes points us to the fundamental logical, epistemological and ontological problems of applying statistical methods to a basically unpredictable, uncertain, complex, unstable, interdependent, and ever-changing social reality. Methods designed to analyse repeated sampling in controlled experiments under fixed conditions are not easily extended to an organic and non-atomistic world where time and history play decisive roles.

Econometric modelling should never be a substitute for thinking. From that perspective, it is really depressing to see how much of Keynes’ critique of the pioneering econometrics in the 1930s-1940s is still relevant today.

The general line you take is interesting and useful. It is, of course, not exactly comparable with mine. I was raising the logical difficulties. You say in effect that, if one was to take these seriously, one would give up the ghost in the first lap, but that the method, used judiciously as an aid to more theoretical enquiries and as a means of suggesting possibilities and probabilities rather than anything else, taken with enough grains of salt and applied with superlative common sense, won’t do much harm. I should quite agree with that. That is how the method ought to be used.

Keynes, letter to E.J. Broster, December 19, 1939

McCloskeyian rhetoric

25 March, 2018 at 18:36 | Posted in Economics | 1 Comment

This is not new to most of you of course. You are already steeped in McCloskey’s Rhetoric. Or you ought to be. After all economists are simply telling stories about the economy. Sometimes we are taken in. Sometimes we are not.

spin-meme-generator-dont-say-capitalism-replace-it-with-either-economic-freedom-or-free-market-3ba401Unfortunately McCloskey herself gets a little too caught up in her stories. As in her explanation as to how she can be both a feminist and a free market economist:

“The market is the great liberator of women; it has not been the state, which is after all an instrument of patriarchy … The market is the way out of enslavement from your dad, your husband, or your sons. … The enrichment that has come through allowing markets to operate has been a tremendous part of the learned freedom of the modern women.” — Quoted in “The Changing Face of Economics – Conversations With Cutting Edge Economists” by Colander, Holt, and Rosser

Notice the binary nature of the world in this story. There are only the market (yea!) and the state (boo!). There are no other institutions. Whole swathes of society vanish or are flattened into insignificance. The state is viewed as a villain that the market heroically battles against to advance us all.

It is a ripping tale.

It is shallow and utterly misleading.

Peter Radford

Programmet som gör det värt att betala varenda krona i radio- och tv-avgiften

25 March, 2018 at 17:18 | Posted in Varia | 3 Comments

radioI dessa tider, när ljudrummet dränks i den kommersiella radions tyckmyckentrutade ordbajseri och fullständigt intetsägande pubertalflamsande tjafs, har man nästan gett upp.

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 dagens program kunde man bland annat höra detta oändligt vackra stycke musik

Tack Eric för ett fantastiskt program som bara det är värt varenda krona som läggs på radio- och tv-avgiften!

‘Rational choice’ history — a case of models not fitting the facts

24 March, 2018 at 17:01 | Posted in Economics | 6 Comments

Rational choice history is in a worse situation than that of either mechanistic biology in the seventeenth century or of sociobiology today. The analogy would be appropriate if it were mainly a question of refining the theories and of gathering more evidence. One could refine theory by incorporating bounded rationality and quasi-rational choice, so as to match more closely the way in which actual decisions are made. One could gather more evidence by paying careful attention to sources that illuminate the beliefs and goals of the actors …

an narrThe need for modesty appears in two ways. First, as I have been at some pain to emphasize, one should avoid the postulate of hyperrationality. Collective action, iterated games, and credibility are simple ideas that can be and have been refined to yield rococo (or baroque?) constructions that no longer bear any relation to observable behavior. To be useful, they have to be constrained by what we know about the limitations of the human mind. Second, because formal analysis has nothing to say about the motivation of the agents, it cannot by itself yield robust predictions. Although it is extremely useful to know that the structure of material interests in a given case is that of a one-shot Prisoner’s Dilemma, that fact does not by itself imply anything about what the agents will do. If they have nonmaterial or even nonrational motivations, they might behave very differently from the noncooperative behavior we would expect if they were exclusively swayed by material interests. If they are in fact observed to cooperate, then we will have to search for nonmaterial or nonrational motivations. Rational choice theory tells us what to look for, not what we will find.

 Jon Elster

Parce mihi domine

24 March, 2018 at 09:55 | Posted in Varia | Comments Off on Parce mihi domine

 

National security adviser John Bolton — a bullying madman

24 March, 2018 at 09:19 | Posted in Politics & Society | Comments Off on National security adviser John Bolton — a bullying madman

John R. Bolton, chosen by President Trump to be his new national security adviser, does not need the Senate’s endorsement to succeed H. R. McMaster in the job. But in 2005, the extraordinary refusal to confirm his nomination to be President George W. Bush’s ambassador to the United Nations by a Republican-controlled committee is worth revisiting for what it revealed about Mr. Bolton and what it may portend for our national security.

Bolton-1200x723One moment singularly derailed his nomination. Testifying before the usually staid Senate Foreign Relations Committee in April 2005, Carl W. Ford Jr. — the former assistant secretary of state for intelligence and research — called Mr. Bolton a “kiss-up, kick-down sort of guy” and a “serial abuser” of people beneath him in the chain of command. Mr. Ford — a self-described conservative Republican and Bush supporter — made vivid an emerging portrait of Mr. Bolton as a bully who repeatedly sought retribution against career intelligence analysts with the temerity to contradict him …

Other witnesses came forward to allege abusive behavior by Mr. Bolton during his time as a lawyer in the private sector — screaming, threatening, throwing documents and, in the words of one woman, “genuinely behaving like a madman.”

Antony Blinken/New York Times

How to interpret and use regression analysis

23 March, 2018 at 19:06 | Posted in Statistics & Econometrics | Comments Off on How to interpret and use regression analysis

achenAfter having mastered all the technicalities of regression analysis and econometrics, students often feel as though they are the masters of the universe. I usually cool them down with a required reading of Christopher Achen’s modern classic — Interpreting and Using Regression.

It usually gets them back on track again, and they understand that

“no increase in methodological sophistication … alter the fundamental nature of the subject. It remains a wondrous mixture of rigorous theory, experienced judgment, and inspired guesswork. And that, finally, is its charm.”

And in case they get too excited about having learned to master the intricacies of proper significance tests and p-values, I ask them to also ponder on Achen’s warning:

Significance testing as a search for specification errors substitutes calculations for substantive thinking. Worse, it channels energy toward the hopeless search for functionally correct specifications and diverts​ attention from the real tasks, which are to formulate a manageable description of the data and to exclude competing ones.

What do ​economic models explain?

22 March, 2018 at 19:55 | Posted in Economics | 5 Comments

Truth ConceptIn my view, scientific theories are not to be considered ‘true’ or ‘false.’ In constructing such a theory, we are not trying to get at the truth, or even to approximate to it: rather, we are trying to organize our thoughts and observations in a useful manner.

Robert Aumann

What ‘Nobel prize’-winning economist Robert Aumann and other mainstream economics defenders of scientific storytelling ‘forget’ is that potential explanatory power achieved in thought experimental models is not enough for attaining real explanations. Model explanations are at best conjectures, and whether they do or do not explain things in the real world is something we have to test. To just believe that you understand or explain things better with thought experiments is not enough. Without a warranted export certificate to the real world, model explanations are pretty worthless. Proving things in models is not enough. Especially not since we all know that almost all models massively misrepresent their real-world targets in many ways and have lots of outcomes that never occur in real life. Although the models usually incorporate familiar-sounding entities — like ‘rational actors’ and ‘firms’ — these entities are nothing but idealized entities with tractability characteristics with the sole goal of making mathematical-logical deductions possible.

Finding vague similarities or establishing flimsy analogies between the model world and the real world is not much of an explanation. Especially not when the never-questioned core model assumptions are not even remotely reasonably realistic. Analyzing real-world cooperation with game theoretical models built on, e.g., assumptions of ‘common knowledge’ and ‘belief alignment,’ does not explain anything at all since we know these restrictive assumptions are blatantly false of the cooperation phenomenon and that the result of the analysis depends heavily on these assumptions. And what is perhaps even worse — those outer-worldly assumptions cannot be relaxed without vastly changing the results the models bring about, and so underlining the exceedingly weak real-world applicability of this kind of ‘rational choice’ models. Using models building on that kind of assumptions is not credible. It is useless from both an epistemic and ontological point of view.

Mainstream economists often defend their ‘as if’ modelling practice with the argument that truth is not an essential element in economics. But that is not a tenable attitude if one at the same time argue that these models have anything to say about causality. To be able to give a causal account of something, the account has to be true. You have to really show that effect e was brought about by cause c. An increase in wages could be a cause of higher consumption, but unless it really is increased it does not explain higher consumption.

nancyMy newly planted lemon tree is sick, the leaves yellow and dropping off. I finally explain this by saying that water has accumulated in the base of the planter: the water is the cause of the disease. I drill a hole in the base of the oak barrel where the lemon tree lives, and foul water flows out. That was the cause. Before I had drilled the hole, I could still give the explanation and to give that explanation was to present the supposed cause, the water. There must be such water for the explanation to be correct. An explanation of an effect by a cause has an existential component, not just an optional extra ingredient.

Describing credible ‘as-if’ worlds in thought-experimental models is not equivalent to giving genuine explanations. To think that is actually to ignore the real problem. Even though most mainstream economists think that their models are credible, that in no way constitutes a warrant or reason for considering them explanatory in any substantive way. Why? Simply because — as argued more extensively in my On the use and misuse of theories and models in mainstream economics — genuine explanation requires ‘truth.’ Models building on non-existent things like ‘common knowledge’ and ‘belief alignment’ have no explanatory warrant whatsoever.

So, if you are seeking genuine explanations of what happens in real-world economies, you can take your books on general equilibrium, growth theory, game theory, ‘rational choice’ theory, Mankiw textbooks, New-Classical-Keynesian macroeconomics models, and put them all in the dustbin. If you are going for genuine explanations you simply have to look elsewhere.

Transitivity — a questionable ‘rational choice’ assumption

21 March, 2018 at 19:23 | Posted in Economics | 3 Comments

My doctor once recommended I take niacin for the sake of my heart. Yours probably has too, unless you’re a teenager or a marathon runner or a member of some other metabolically privileged caste. Here’s the argument: Consumption of niacin is correlated with higher levels of HDL, or “good cholesterol,” and high HDL is correlated with lower risk of “cardiovascular events.” If you’re not a native speaker of medicalese, that means people with plenty of good cholesterol are less likely on average to clutch their hearts and keel over dead.

But a large-scale trial carried out by the National Heart, Lung, and Blood Institute was halted in 2011, a year and a half before the scheduled finish, because the results were so weak it didn’t seem worth it to continue. Patients who got niacin did indeed have higher HDL levels, but they had just as many heart attacks and strokes as everybody else.

rockPaperScisssor How can this be? Because correlation isn’t transitive. That is: Just because niacin is correlated with HDL, and high HDL is correlated with low risk of heart disease, you can’t conclude that niacin is correlated with low risk of heart disease.

Transitive relations are ones like “weighs more than.” If I weigh more than my son and my son weighs more than my daughter, it’s an absolute certainty that I weigh more than my daughter. “Lives in the same city as” is transitive, too—if I live in the same city as Bill, who lives in the same city as Bob, then I live in the same city as Bob.

But many of the most interesting relations we find in the world of data aren’t transitive. Correlation, for instance, is more like “blood relation.” I’m related to my son, who’s related to my wife, but my wife and I aren’t blood relatives. In fact, it’s not a terrible idea to think of correlated variables as “sharing part of their DNA.” Suppose I run a boutique money management firm with just three investors, Laura, Sara, and Tim. Their stock positions are pretty simple: Laura’s fund is split 50–50 between Facebook and Google, Tim’s is one-half General Motors and one-half Honda, and Sara, poised between old economy and new, goes one-half Honda, one-half Facebook. It’s pretty obvious that Laura’s returns will be positively correlated with Sara’s; they have half their portfolio in common. And the correlation between Sara’s returns and Tim’s will be equally strong. But there’s no reason (except insofar as the whole stock market tends to move in concert) to think Tim’s performance has to be correlated with Laura’s. Those two funds are like the parents, each contributing one-half of their “genetic material” to form Sara’s hybrid fund.

Jordan Ellenberg

Stoppa järnvägsnedläggningarna!

20 March, 2018 at 11:58 | Posted in Politics & Society | 2 Comments

Yours truly debatterar i dagens Göteborgs-Posten den sanslösa järnvägsnedläggnig som staten i det tysta är i full gång med:

tågInfrastrukturen tycks löpa amok med klimat, demokrati och skattemiljarder. Trafikverket fortsätter att vansköta den svenska järnvägen och bluffar nu även igenom nedläggning av elbanor i Västra Götaland. Landets järnvägar är också mest 1800-talskrokiga enkelspår, en otänkbar standard för moderna vägar. Samtidigt storsatsar regeringen och trafikverket på Arlanda och flyget. Detta trots Parisavtalet och vårt klimatpolitiska ramverk för att minska CO2-utsläppen, vilket kräver åtgärder nu.

Vi har följt trafikpolitiken och järnvägen i många decennier och kan konstatera att läget i dag är sämre än någonsin med ständiga tågförseningar och tågstopp på grund av problem med växlar, signaler, spårarbeten, snöfall med mera. Resenärer och näringslivets godstransporter drabbas och media skriver ständigt om problemen. Men det är inte lika välkänt att staten med Trafikverket i spetsen arbetar intensivt för att lägga ned en massa järnvägar runt om i landet. En ny stor nedläggningsomgång har just börjat.

Game theory — a severe case of ‘as if’ Model Platonism

19 March, 2018 at 15:12 | Posted in Economics | Comments Off on Game theory — a severe case of ‘as if’ Model Platonism

peanutsplatonismThe critic may respond that the game theorist’s victory in the debate is at best Pyrrhic, since it is bought at the cost of reducing the propositions of game theory to the status of ‘mere’ tautologies. But such an accusation disturbs the game theorist not in the least. There is nothing a game theorist would like better than for his propositions to be entitled to the status of tautologies, just like proper mathematical theorems.

Ken Binmore

When applying deductivist thinking to economics, game theorists like Ken Binmore 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 real-world relevant, we also have to argue that their precision and rigour still holds when they are applied to real-world situations. They often do not. When addressing real-world systems, the idealizations and abstractions necessary for the deductivist machinery to work simply do not 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.

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 …

200px-Hans_Albert_2005-2A 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.

Hans Albert

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 game theorists 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 does not 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 game theoretical models assuming ‘common knowledge’ and ‘rational expectations,’ says nothing of situations where knowledge is ‘non-common’ and  expectations are ‘non-rational.’

Building theories and models that are ‘true’ in their own very limited ‘idealized’ domain is of limited value if we cannot supply bridges to the real world. ‘Laws’ that only apply in specific ‘idealized’ circumstances —  in ‘nomological machines’ — are not the stuff that real science is built of.

When confronted with the massive empirical refutations of almost all models they have set up, many game theorists react by saying that these refutations only hit A (the Lakatosian ‘protective belt’), and that by ‘successive approximations’ it is possible to make the models more readily testable and predictably accurate. Even if T & A1 do not 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.

Hans Albert’s ‘Model Platonism’ critique shows 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 game theorists should all be held non-defeasibly corroborated, seems, however — to say the least — rather unwarranted.

Retreating — as Ken Binmore and other game theorists —  into looking upon their models and theories as some kind of ‘conceptual exploration,’ and give up any hopes whatsoever of relating theories and models to the real world is pure defeatism. Instead of trying to bridge the gap between models and the world, they simply decide to look the other way.

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

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