Wednesday, December 31, 2014
The emphasis on this blog, however, is mainly critical of neoclassical and mainstream economics. I have been alternating numerical counter-examples with less mathematical posts. In any case, I have been documenting demonstrations of errors in mainstream economics. My chief inspiration here is the Cambridge-Italian economist Piero Sraffa.
In general, this blog is abstract, and I think I steer clear of commenting on practical politics of the day.
I've also started posting recipes for my own purposes. When I just follow a recipe in a cookbook, I'll only post a reminder that I like the recipe.
Comments Policy: I'm quite lax on enforcing any comments policy. I prefer those who post as anonymous (that is, without logging in) to sign their posts at least with a pseudonym. This will make conversations easier to conduct.
Monday, December 02, 2013
- The Post-crash Economics Society
- Economics students aim to tear up free-market syllabus, by Phillip Inman, in the Guardian, 24 October 2013.
- Letters: Reconnecting economics and real life, in the Guardian, 25 October 2013.
- Economics students need to be taught more than neoclassical theory, by Zach Ward-Perkins and Joe Earle, in the Guardian, 28 October 2013.
- Mainstream economics is in denial: the world has changed, by Aditya Chakraborthy, in the Guardian, 28 October 2013.
- Economics lecturers accused of clinging to pre-crash fallacies, by Phillip Inman, in the Guardian, 10 November 2013.
- Teaching evidence-based economics, by Michael Joffe, in the Royal Economic Society Newsletter, October 2013.
- University economics teaching to be overhauled, by Phillip Inman, in the Guardian, 11 November 2013.
- Cambridge Society for Economic Pluralism (CSEP)
- Letter to the editor from the Post Keynesian Study Group, 18 November 2013.
- Leter to the editor from the Association for Heterodox Economics, 21 November 2013.
- Keynes's new heirs: Britain leads a global push to rethink the way economics is taught, in the Economist, 23 November 2013.
By the way, Ian Steedman, a leading Sraffian economist, was at the University of Manchester not too long ago. And, I believe, he did supervise a number of doctorate theses from students at Manchester. So the closing of the doors to form the current monoculture happened only over the last decade, I guess.
Update: Originally posted on 6 November 2013. Updated on 12 November 2013 to include more links.
Update: Updated on 2 December 2013 to include more links.
Friday, November 29, 2013
|Current Dollars For Millionaires Of Various Eras|
How much would you need to have today to live like a millionaire in 1920? Over 10 million dollars, according to the chart1. On the other hand, a millionaire in 1980 would only need a bit less than 1.2 million dollars today to live in comparable luxury.Footnote
- Obviously, any comparison of income over such a long period can be only a rough and ready guide, not an exact function yielding precise results suitable for the application of the the differential calculus. The Bureau of Labor Statistics (BLS) provides information on how the Consumer Price Index (CPI) is computed and how the components in a typical consumption basket changes over time.
Saturday, November 23, 2013
I just want to document here some usages of the phrase, "Neoclassical economics". I restrict myself to literature in which the use is in the nature of aside, including within critiques of mainstream and neoclassical economics. Such documentation can be multiplied indefinitely. I do not quote from literature (e.g., Colander, Holt, and Rosser 2004; Davis 2008; Lawson 2013; Lee and Lavoie 2012; Varoufakis 2012) which focuses on the meaning of the word and on the sociology of economics. I find it quite silly to attempt to refute a critique of mainstream economics by complaining, without any other argument, that the word 'neoclassical' appears in that critique.
"In the last dozen years what before was simply known as economics in the nonsocialist world has come to be called neo-classical economics. Sometimes, in tribute to John Maynard Keynes's design for government intervention to sustain purchasing power and employment, the reference is to Keynesian or neo-Keynesian economics. From being a general and accepted theory of economic behavior, this has become a special and debatable inter-pretation of such behavior. For a new and notably articulate generation of economists a reference to neoclassical economics has become markedly pejorative. In the world at large the reputation of economists of more mature years is in decline." -- John Kenneth Galbraith (1973).
"One further matter merits consideration before we get down to business. I often refer to neoclassical theory and I had better make clear what I do and do not mean by this designation. For present purposes I shall call a theory neoclassical if (a) an economy is fully described by the preferences and endowments of agents and by the production sets of firms; (b) all agents treat prices parametrically (perfect competition); and (c) all agents are rational and given prices will take that action (or set of actions) from amongst those available to them which is best for them given their preferences. (Firms prefer more profit to less.)" -- Frank Hahn (1984).
"Let us attempt to identify the key characteristics of neoclassical economics; the type of economices that has dominated the twentieth century. One of its exponents, Gary Becker (1967a, p. 5) identified its essence when he described 'the combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly.' Accordingly, neoclassical economics may be conveniently defined as an approach which:
- Assumes rational, maximizing behaviour by agents with given and stable preference functions,
- Focuses on attained, or movements towards, equilibrium states, and
- Is marked by an absence of chronic information problems.
Point (3) requires some brief elaboration. In neoclassical economics, even if information is imperfect, information problems are typically overcome by using the concept of probabilistic risk. Excluded are phenomena such as severe ignorance and divergent perceptions by different individuals of a given reality. It is typically assumed that all individuals will interpret the same information in the same way, ignoring possible variations in the cognitive frameworks that are necessary to make sense of all data. Also excluded is uncertainty, of the radical type explored by Frank Knight (1921) and John Maynard Keynes (1936).Notably, these three attributes are interconnected. For instance, the attainment of a stable optimum under (1) suggests an equilibrium (2); and rationality under (1) connotes the absence of severe information problems alluded to in (3). It can be freely admitted that some recent developments in modern economic theory - such as in game theory - reach to or even lie outside the boundaries of this definitions. Their precise placement will depend on inspection and refinement of the boundary conditions in the above clauses. But that does not undermine the usefulness of this rough and ready definition.
Although neoclassical economics has dominated the twentieth century, it has changed radically in tone and presentation, as well as in content. Until the 1930s, much neoclassical analysis was in Marshallian, partial equilibrium mode. The following years saw the revival of Walrasian general equilibrium analysis, an approach originally developed in the 1870s. Another transformation during this century has been the increasing use of mathematics, as noted in the preceding chapter. Neoclassical assumptions have proved attractive because of their apparent tractability. To the mathematically inclined economist the assumption that agents are maximizing an exogeneously given and well defined preference function seems preferable to any alternative or more complex model of human behaviour. In its reductionist assumptions, neoclassical economics has contained within itself from its inception an overly formalistic potential, even if this took some time to become fully realized and dominant. Gradually, less and less reliance has been placed on the empirical or other grounding of basic assumptions, and more on the process of deduction from premises that are there simply because they are assumed.
Nevertheless, characteristics (1) to (3) above have remained prominent in mainstream economics from the 1870s to the 1980s. They define an approach that still remains ubiquitous in the economics textbooks and is taught to economics undergraduates throughout the world." -- Geoffrey M. Hodgson (1988).
"The creators of the neoclassical model, the reigning economic paradigm of the twentieth century, ignored the warnings of nineteenth-century and still earlier masters about how information concerns might alter their analyses- perhaps because they could not see how to embrace them in their seemingly precise models, perhaps because doing so would have led to uncomfortable conclusions about the efficiency of markets. For instance, Smith, in anticipating later discussions of adverse selection, wrote that as firms raise interest rates, the best borrowers drop out of the market. If lenders knew perfectly the risks associated with each borrower, this would matter little; each borrower would be charged an appropriate risk premium. It is because lenders do not know the default probabilities of borrowers perfectly that this process of adverse selection has such important consequences." -- Joseph E. Stiglitz (2002).References
- David Colander, Richard P. F. Holt, and J. Barkley Rosser, Jr. (2004). The changing face of mainstream economics, Review of Political Economy, V. 16, No. 4: pp. 485-499.
- John B. Davis (2008). The turn in recent economics and return of orthodoxy, Cambridge Journal of Economics, V. 32: pp. 349-366.
- John Kenneth Galbraith (1973). Power and the Useful Economist, American Economic Review, Presidential address at the 85th annual meeting of the American Economic Association in Toronto, Canada in December 1972.
- Frank Hahn (1982). The neo-Ricardians, Cambridge Journal of Economics, V. 6: pp. 353-374.
- Tony Lawson (2013). What is this 'school' called neoclassical economics?, Cambridge Journal of Economics, 2013.
- Fred Lee and Marc Lavoie (editors) (2012). In Defense of Post-Keynesian and Heterodox Economics: Responses to their Critics, Routledge. [I've not read the book, but have read some chapters published seperately.]
- Geoffrey M. Hodgson (1999). False Antagonisms and Doomed Reconcilations, Chapter 2 in Evolution and Institutions: On Evolutionary Economics and the Evolution of Economics, Edward Elgar.
- Joseph E. Stiglitz (2002). Information and the Change in the Paradigm in Economics, American Economic Review, V. 92, N. 3 (June): pp. 460-501.
- Yanis Varoufakis (2012). A Most Peculiar Failure: On the dynamic mechanism by which the inescapable theoretical failures of neoclassical economics reinforce its dominance.
Tuesday, November 19, 2013
I have previously gone on about multiple selves, also known as Faustian agents. I had not considered how an individual manages these selves in making plans and decisions. My point was to apply Arrow's impossibility theorem at the level of the single agent, thereby demonstrating the necessity of some argument for characterizing an individual by a utility function.
Consider many individuals interacting in a market, each being composed of multiple selves. What, in the analysis, groups together sets of these multiple selves to identify individuals? This problem, and similar problems with many other decision theory analyses, is the theme of John D. Davis' 2011 book, Individuals and Identity in Economics.
By the way, an interesting issue arises with multiple selves interacting through time. One might justify hyperbolic discounting by thinking of an individual as composed of a different self at each moment in time. Why should these selves make consistent plans? Might one self start an action based on a plan for future actions, only to have a future self revise or reject that plan? This is the third or fourth time I have started reading Davis' book. Anyways, on pages 41 and 42, Davis writes:
"...[Herbert] Simon's recommendation to abandon the standard utility function framework was not influential in economics, but Lichtenstein and Slovic's demonstration of preference reversals was. Most economists initially dismissed it on a priori grounds, but David Grether and Charles Plott believed that they could go farther and demonstrate that preference reversals could not possibly exist. They identified thirteen potential errors in psychologists' preference reversal experimental methodology and accordingly set out to show that preference reversals were only an artifact of experimental design. Nonetheless, they ended up confirming their existence as well as Simon's judgement of utility functions:'Taken at face value the data are simply inconsistent with preference theory and have broad implications about research priorities in economics. The inconsistency is deeper than mere lack of transitivity or even stochastic transitivity. It suggests that no optimization principles of any sort lie behind the simplest of human choices and that uniformities in human choice behavior which lie behind market behavior may result from principles which are of a completely different sort from those generally accepted.'(Grether and Plott 1979, 623; emphasis added)
Published in the American Economic Review, this was a momentous admission for economists. However, for many psychologists the debate was already long over, and research had moved on to which theories best explained preference construction. James Bettman published what is regarded as the first theory of preference construction in the same year Grether and Plott's paper appeared (Bettman 1979), a major review of preference construction theories appeared in 1992 (Payne and Bettman 1992), and Lichtenstein and Slovic's retrospective volume appeared in 2006 (Lichtenstein and Slovic 2006). As Slovic put it in 1995, 'It is now generally recognized among psychologists that utility maximization provides only limited insight into the processes by which decisions are made' (Slovic 1995, 365). Grether and Plott, interestingly, extended their own critique of standard rationality to Kahneman and Tverky's proposed prospect theory replacement, implicitly highlighting the difference between the two currents in Edwards' B[ehavioral] D[ecision] R[esearch] program.'We need to emphasize that the phenomenon causes problems for preference theory in general, and not for just the expected utility theory. Prospect theory as a special type of preference theory cannot account for the results.' (Grether and Plott 1982; 575)
So, given the data and what economists have said years ago about it in the most prominent and most prestigious economics journal in America, one can expect mainstream economists today to have rejected utility theory, revealed preference theory, prospect theory, and the usual old textbook derivation of market demand curves and factor supply curves. Right?
Saturday, November 09, 2013
Mainstream and non-mainstream economics can be read as sociological categories, defined by what conferences economists attend, in which journals they publish, and through patterns of referencing. One might expect the intellectual content of the theories put forth by mainstream and non-mainstream economists to cluster, too. In some sense, non-mainstream economists are also automatically heterodox, where heterodoxy refers to the content of theories. For example, heterodox economists tend to prefer theories in which agents are socially embedded and constituted, in some sense, by society (instead of being pre-existing, asocial monads).
The point of this post, though, is to illustrate that the boundary between mainstream and non-mainstream economists is not hard and fast, at least as far as ideas go. I point out two-and-a-half areas where both categories of economists are developing similar ideas.2.0 Complex Economic Dynamics
Economic models are available which exhibit complex, non-linear dynamics, including chaos. Richard Goodwin, Steve Keen, and Paul Ormerod are some self-consciously non-mainstream heterodox economists who have developed such models. Jess Benhabib and John Geanakoplos are some authoritative mainstream economists on certain models of this type. I also want to mention some researchers who I do not feel comfortable putting in either category. As I understand it, J. Barkley Rosser, Jr. makes an effort to talk to both mainstream and non-mainstream economists. I do not know enough about, for example, Anna Agliari to say what she would say about these categories. And Donald G. Saari is a mathematician interested in social science; so I am not sure how these categories would apply to him, if at all.3.0 Multiple Selves
I have previously commented on theories of multiple selves, also known as Faustian agents. I particularly like the conclusion, from the Arrow impossibility theorem, that an agent's preferences cannot necessarily be characterized by a utility function, given a theory of modular minds.
I do not think I know enough about these theories to talk authoritatively on this subject. Specifically, I have some dim awareness that a large literature exists here about time (in)consistency of decisions. But I am aware that this is a topic of research among both non-mainstream and mainstream economists. I cite John B. Davis, Ian Steedman, and Ulrich Krause as non-mainstream, heterodox economists with literature in this area. And I cite E. Glen Weyl as a mainstream economist also with literature here.4.0 Choice Under Uncertainty
Keynes distinguished between risk and uncertainty. Post Keynesian economists have famously developed this theme. Works seen as part of mainstream economics in their time also distinguish between risk and uncertainty, for example:
"...Let us suppose that a choice must be made between two actions. We shall say that we are in the realm of decision making under:
- Certainty if each action is known to lead invariably to a specific outcome...
- Risk if each action leads to one of a set of possible outcomes, each outcome occurring with a known probability. The probabilities are assumed known to the decision maker...
- Uncertainty if either action or both has as its consequences a set of possible specific outcomes, but where the probabilities of these outcomes are completely unknown or are not even meaningful."
-- R. Duncan Luce and Howard Raiffa, Games and Decisions, Harvard University (1957): p. 13.
I only feel entitled to count this as half an example. I find that other literature on the foundations of decision theory is also clear on assumptions about known outcomes and probabilities necessary to characterize a situation of risk. But I do not know of contemporary mainstream economists researching choice under uncertainty (as opposed to risk). I think elements of Chapter 13 of Luce and Raiffa, on decision making under uncertainty, has entered the teaching of business schools targeted towards, for example, corporate managers.5.0 Reflections
I do not think that this post has demonstrated an openness in mainstream economics. Further work would need to show an awareness among mainstream researchers of parallel work by non-mainstream economists, a willingness to critically engage that work, and a willingness to cite it in mainstream literature. Furthermore, one would like to show that the implications of such work is transitioning into the teaching of economists at all levels. I have seen some economists verbally affirm that economies are complex dynamic systems and then ignore the implications of such a claim. Some economists - for example, Yanis Varoufakis - have expressed skepticism that cutting edge mainstream economics research, in which unique deterministic outcomes do not obtain, can be successfully transitioned. Nevertheless, I find the parallel research noted above to be intriguing.
Tuesday, October 29, 2013
One intellectually bankrupt technique to rationalize non-engagement with an argument is to complain that the ones putting forth the argument compare themselves to Nicolaus Copernicus or Galileo:
"So the central laws of the movements of the heavenly bodies established the truth of that which Copernicus, first, assumed only as a hypothesis, and, at the same time, brought to light that invisible force (Newtonian attraction) which holds the universe together. The latter would have remained forever undiscovered, if Copernicus had not ventured on the experiment-contrary to the senses but still just-of looking for the observed movements not in the heavenly bodies, but in the spectator. In this Preface I treat the new metaphysical method as a hypothesis with the view of rendering apparent the first attempts at such a change of method, which are always hypothetical...
This attempt to introduce a complete revolution in the procedure of metaphysics, after the example of the geometricians and natural philosophers, constitutes the aim of the Critique of Pure Speculative Reason." -- Immanuel Kant, Critique of Pure Reason, Preface to Second Edition.
As I understand it, Kant's revolution was not to look for what must humans be to understand an external, given, phenomenal reality. Rather, he asked, what must the phenomena be such that we could observe it, given the properties of our understanding. But I have never read far in this particular book. Nor, given non-Euclidean geometry and other readings in philosophy, do I expect to agree with it.