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Saturday, December 09, 2006

Bumbling, Impractical, Disconnected Economists

More on how clueless economists are. My comments are in brackets and bold:

The Autistic Economist, by Stanley Alcorn and Ben Solarz, Yale Economic Review:

How many economists does it take to change a lightbulb?

  • Two: One to change the bulb and one to assume the existence of a ladder.
  • Eight: One to screw in the light bulb and seven to hold everything else constant.
  • None: They are all waiting for an invisible hand.

The caricature of the economist – bumbling, impractical, disconnected from the object of his work – underpins a set of surprisingly sophisticated criticisms leveled against the discipline, particularly its realism, method, and ideology. None of these critiques is particularly new, nor is any entirely unique to economics. But over the last few years, they have been asserted against the dominant economic pedagogy in general and the neoclassical framework in particular with new force...

[I hope you'll forgive me if I don't see myself as bumbling, impractical, disconnected...]

“We wish to escape from imaginary worlds!” proclaimed a group of French economics students in 2000, petitioning for broad changes in their economics curricula. “We no longer want to have this autistic science imposed upon us.”

The use of the French term “autisme” harkens back to an older meaning – “abnormal subjectivity, acceptance of fantasy rather than reality” – but it also refers to the continuum of neurological disorders. Steve Keen ... at the University of West Sydney and the author of Debunking Economics: The Naked Emperor of the Social Sciences, sees the aptness of the term as the strongest point of the critique. “It asserts that neoclassical economics has the characteristics of an autistic child,” he said, criticizing the manner in which the discipline “hangs on to its preconceptions, when serious analysis shows that they are untenable.” ...

[... or autistic.]

It Takes Two: the Realism Critique Go back to the light bulb jokes and look at the economist who “assumes the existence of a ladder”; the analogy here is with the many simplifying assumptions made in the course of developing an economic model. But as Keen is quick to point out, “There’s a very big difference between a simplifying assumption and a counterfactual one.” By way of example, he notes the Capital Asset Pricing Model, developed by Bill Sharpe in 1964, and challenges the implicit assumption that investors agree on the future prospects of shares with correct expectations. This is equivalent, he argues, to assuming consumers could predict the future. For Keen and other leaders of the movement, however, this is not an isolated example of confusing simplifying assumptions for counterfactual ones: “Neoclassical economics makes many of the latter and then defends them as if they’re the former.” ...

[I'd like to object, mildly, to using a model built in 1964 that is used more in finance than in economics as the basis for this discussion. There are better choices.]

[A] variety of recent work suggests that application of this broad outline may often have the character of Sharpe’s assumptions; the neoclassical paradigm may not be a simplification of the real world, but rather a contradiction of it.

A powerful example of this is the critique written by economist Joseph Stiglitz ... of the assertion in the First Fundamental Theorem of Welfare Economics that every competitive equilibrium is efficient. Based on the work in information economics for which he won the Nobel Prize, Stiglitz finds that this most basic claim is not robust to the removal of the assumption that information is perfect. Removing even a few of the counterfactual assumptions of the competitive equilibrium means that markets will always be incomplete and non-competitive in a way that renders the First Theorem essentially false. As he concluded in Whither Socialism? ..., “Quite contrary to that theorem, competitive economies are almost never efficient.”

Consider, for example, the market for insurance: the notion that this market could be “complete” in any meaningful sense is mind-boggling, since it would require perfect information about an infinite set of unknown, possible worlds. The state space cannot be enumerated, much less insured against. The incompleteness of such markets is not an exception, but a basic fact...

A separate, but related criticism of the neoclassical paradigm attacks the idea of the individual as a “rational maximizer.” Although models have attempted to integrate the insights of psychology and behavioral finance, the basic insight is one of non-rationality. The neoclassical theory, however, hinges on a contradiction: immaculate rationality, such as Sharpe’s assumption that individuals have a stochastic form of perfect foresight...

The insurance company’s quandary carries over to every individual decision-maker... The individual is no more capable of making decisions about infinite sets of unknowns than the insurance companies. Yet, supposedly, economic man makes such decisions in the course of daily life.

Homo economicus, the fictional actor envisioned by the neoclassicals, ... could be diagnosed as “autistic” more easily than the economists who created him. More advanced and evolved than the average homo sapien consumer, this idealized construct is capable of analyzing an infinite string of data in an infinitesimally small period of time – all with seamless prescience and precision. Take as an example a trip to the supermarket, where actors are charged with calculating which basket of goods will maximize utility and minimize cost. With the number of combinations increasing exponentially with the number of options, the actor faces 100 combinations given 2 options when told to choose 0-10 units of each. But given just 30 goods, told once again to choose 0-10 units of each, the consumer faces 1030 combinations. Even if the consumer could rule out 99.9% of the combinations and calculate each remaining combination in one-billionth of a second, he would be faced with a task lasting 32 billion years, or a period longer than the age of the universe. Homo economicus does not even bat an eye.

[I am not sold by this. Calculating the trajectory of a thrown baseball, for example, is a somewhat complicated mathematical problem to model, it would certainly take more time to solve than is available with a ball coming toward you, yet most people would have no trouble catching the ball as it arrives. Simple rules of thumb involving incremental adjustment are likely used to catch the ball and there is lots of research in economics to see if similar rules of thumb or other approximations will converge, given enough time, to the rational solution. Using simple rules that people can certainly solve, learning models ask if they converge to the optimal, rational expectations solution. They do in a surprising number of cases. This also contradicts the assertion that economics simply accepts rationality without question, they don't. The next paragraph hints that economists investigate these issues, but is dismissive of these efforts in the full article.]

That the actual psychology of decision-making differs significantly from this picture should be no surprise, and the insights of decision theory confirm this. ... Economists have attempted to integrate these insights without sacrificing the basic paradigm. ...

It Takes Eight: the Method Critique The central post-autistic criticism of economics’ lack of realism is inherently linked to that of method in general. To turn again to the light bulb jokes, the first and second punch lines are closely related; the attempt at holding all things constant is as contrary to reality as the assumption of the existence of a ladder. ...

It is this connection between method and realism that makes economics so remote for the non-economist... Edward Fullbrook, research fellow at the University of the West of England and the coordinator of the online Post-Autistic Economics Network (www.paecon.net), captures this criticism... He states, “Economics must engage with ‘real economic problems’ and make its analysis intelligible to an educated general public if real democracy is to function intelligently.” Holding things constant, instead of engaging with the inconstancy of real economic problems is one of the central criticisms of the economic method.

“Holding things constant” could be a metaphor for the neoclassical focus on static equilibrium rather than dynamics – a focus which post-autistics often identify as the central problem of the ruling economic method. “My major objection to neoclassical theory is its obsession with equilibrium,” says Keen, “as if economic processes occur only in equilibrium. That’s nonsense: economic processes, like those of all other dynamic and evolutionary systems, occur in time and far from equilibrium.”

[This seems to confuse the art of constructing useful models - abstracting from the unimportant to isolate the important - with the concept of a partial derivative which assesses the effect on one variable on another, all else held constant. But even in this case, it's possible to consider more than one change at a time, e.g. the effect of a simultaneous change in government spending, taxes, and money on a variety of macro variables such as output, prices, employment, and wages. As for the lack of dynamics and adherence to equilibrium outcomes, more on this below].

This is a criticism which cuts to the core of the neoclassical paradigm. In contesting not the properties of equilibrium but its very existence, the post-autistic approach points toward an economics that would differ radically from that going on in today’s college classrooms, as well as in most economists’ offices. It points toward an economics built up from reality, rather than built down from theory. ...

[I'm not sure what an approach "built up from reality" means, it isn't explained, but a problem with many of these approaches, e.g. those of the econophysicists, is that they are based upon empirical regularities attained through sophisticated data processing techniques. Setting aside the warnings from the Lucas critique from adopting such atheoretical approaches, my problem with this method is that we do not learn how the economy works. There is a confusion running through much of this literature between the use of models for understanding how the world works, and the use of models to predict the future. While academics are largely focused on the former, many of the users of the theory and people outside the profession are more interested in the ability of the models to predict the world accurately. The point is not that our theoretical models are separate from prediction, they should explain and predict the world, nor is the point that we can boast about the success of these models in predicting economic outcomes generally, we can't. The point is that we cannot abandon theoretical models for the bottom-up approaches many advocate unless we are ready to abandon using theory understanding how the economy works. Of course, these approaches can be used to formulate theory and have usefulness for that purpose, but theory is still the goal.]

Implicit in this criticism is a caution against the overemphasis of any single approach. If there is a central post-autistic methodological critique, it is a demand for pluralism. This is not a unique criticism; in fact it can be brought to bear in all of the social sciences as well as the physical sciences. It is, however, a recognition of the fact that economics has been uniquely limited as of late in its menu of approaches.

As Nobel Prize-winning economist Ronald Coase pointed out ... five years ago, that one could (and many still do) teach economics today using Samuelson’s 1948 textbook is an indictment of the discipline’s stagnancy. While physics and chemistry have been fertile ground for innovation, economics continues to rely on the same basic tools. Fullbrook and the post-autistics take issue not only with the neoclassical approach of Samuelson, but with the stagnant reliance on any single economic approach. ... The acceptance that there are multiple conceptual perspectives would allow each model to be applied where it is most valid, rather than applied by force even where they are not.

[Nobody I know uses Samuelson. Not a one.]

This pluralism is thus also a shift from an approach driven by methods, looking for markets everywhere because it believes it can model their equilibria, to an approach driven by problems, looking for solutions to economic realities. “I don’t only think [economics] will change. I think it ought to change,” Coase said in his speech. “We do need empirical work, but we need something additional: empirical work which actually changes the way we look at the problem.” Once again, this is not a criticism unique to economics, but the fact that it is being raised ... by its own Nobel Prize-winning practitioners, shows economics is uniquely in need of such a critique. The most common defense of economists against these critiques is that they are aware of them and have already taken them into account. Yet, if the post-autistics are right, the concessions that have been made are superficial, and orthodox economics remains fundamentally autistic.

[Perhaps because I do macroeconomics, much of this criticism seems empty. Our models are not static, they're dynamic (that's what the D is in DSGE, i.e. DSGE model = dynamic stochastic general equilibrium model). We understand transition paths between equilibrium points and their importance, that we are never at equilibrium but instead constantly in flux (see S plus propagation mechanisms) with forces pulling in various directions (see E). In addition, there has been substantial evolution of both models and methods in macroeconomics - what we do now is far, far from what I learned in graduate school. On pluralism, there are competing paradigms, and each has advantages in explaining particular phenomena. But plurality is not an end point. Like physics, this should in no way deter us from seeking unified models (see G).]

It Takes None: the Ideology Critique The third and final light bulb joke punch line – the economists waiting for the invisible hand to screw it in – touches on the possible reason for economics’ resistance to change. Blind faith in market forces is a problem both of realism – assuming perfect, complete markets exist which in fact do not – and of method – searching for a specific mathematical construct called a “market” rather than searching for a model adequate to a specific economic reality – but it is also something more. It is an ideology, associated in the popular consciousness with the “Chicago school” economics of George Stigler and Milton Friedman, and more accurately, with the policies of neo-liberalism – the laissez faire endorsement of the “free market.” It is the fear of an encroaching ideology that has motivated most non-economist critiques of economics – a fear that economics is not a social science, but actually a tool of the free market enthusiasts for their own self-congratulation. In the minds of these critics, the First Fundamental Welfare Theorem of Economics is not simply inapplicable, but is actually capitalist propaganda. ...

[Isn't there this whole school of thought called New Keynesian economics where wage and price sluggishness is the fundamental feature, where blind faith in the market as a self-regulating mechanism is questioned? In these models there are departures from the long-run equilibrium path due to the wage and price rigidities, and there is no guarantee that the economy will maximize welfare without government intervention in many versions. There is no blind faith that markets always clear instantaneously, some sort of friction, such as wage and price sluggishness, information confusion, etc. is present in these models and plays a fundamental role in the dynamics as the economy moves between equilibrium points. And for those in this school, which is no small number of economists, it's hard to sell the "propaganda" as described above since it is at odds with their research.]

The Post-Autistic World Where, then, will the change called for by voices as diverse as Joseph Stiglitz, Ronald Coase, Steve Keen, and Edward Fullbrook occur? The suggestion by all has been to look to college campuses. As Keen says, post-autistic economics “is more of an appeal to the students of economics, rather than an attempt to convince existing economists to ‘change camps.’” Those targeting the next generation believe practicing economists are too set in their ways and that all of the problems of economics are reinforced by the way it is taught. “I blame our textbooks and the sausage-factory approach to education that comes out of the false scientism in economics,” said Keen. On this subject, the more mainstream Stiglitz might agree: “[Economics as taught] in America’s graduate schools... bears testimony to a triumph of ideology over science.” ...

Changing the way economics is taught, then, would seem to be the central action to change the way economics is practiced. The question is what, exactly, must be changed. ... The bedrock of economics as it is taught is not the subject matter – the economy – or even the approach – the neoclassical school of thought – but ideology, as Stiglitz said. The repetition of simplified and vulgarized economic conclusions is the main task of introductory, intermediate, and even some advanced economics courses, and little else sticks with the students.

Despite what a typical college curriculum might suggest, though, a post-autistic curriculum is not an inconceivable vision. In fact, the shift from ideology to problem-solving, from method-driven to problem-driven, from statics to dynamics, and from monism to pluralism is easier to imagine in course content than it is in individual research. ...

More specifically, Keen sees the need for various technical changes in mathematical and theoretical constructs. “Technical training would start with differential equations rather than simultaneous ones, and models would necessarily include time, rather than ignoring it via equilibrium constructs. Its history of economic thought would eulogize Schumpeter rather than Walras, and praise parts of Keynes rather than Friedman. Economic models would bear resemblance to those of meteorologists, though with the added difficulties of the absence of conservation laws, evolutionary change, and decisions being influenced by uncertain perceptions of the future.”

[I find this to be ill-informed. Any graduate student needs both differential equations and simultaneous equations, they are not even mutually exclusive since a system of differential equations defines, for example, the out of equilibrium behavior of models and is the basis for assessing a model's stability in some classes of models. I know what the author is trying to get at here, dynamics versus statics, but it's poorly expressed. Also, as noted above, we already use time, we even know what a dot, two dots, etc. over a variable means, and how xt and x(t) differ, all sorts of math stuff! I do time-series econometrics. As to the history of thought, it shouldn't praise anyone's normative views, it should present what they added to the body of knowledge. In any case, does the author really believe Keynes is never praised over Friedman?]

The meteorology analogy is apt. Indeed, the shift could be thought of as a movement from treating the economy as subject to unchanging, iron laws analogous to those of Newtonian physics. Instead, post-autistic economics would find its scientific analogy in the deeper but more tentative understandings of complex systems...

[Uhm, I think this is what we already do.]

Perhaps this would also give economists more humility about the power of their work. As Keen recalls, “A student of mine once commented that the mechanical analogy encourages economists to tinker with the economy as if it were a car; but if the analogy were that of a rainforest, would economists blithely recommend that the forest would work better if we removed some species from it?” The hope is that in changing curricula, there may be a corresponding change in the individual students themselves; to reeducate the Economist and cure his so-called autism.

[The rainforest example doesn't make sense to me. And what does "work better" mean here? What if it was an invasive species killing off other species in large numbers, and isn't endangered itself in its natural habitat? In any case, if welfare falls, as is implied, an economist would say that we would be worse off.]

The economist as humble ecologist is a great stretch from the aloof technician stumbling to change a light bulb, but it is not inconceivable. The goal is nothing less than a total transformation of the discipline. But the first step is nothing more than a simple change in perspective.

Please don't confuse being annoyed with the way the message is delivered with a refusal to consider alternative viewpoints. I'm more than willing to listen, but it would be easier if the criticism showed more comprehension of our models and methods and how they've evolved through time, and a little more respect for those who do their very best to approach economic problems in the most scientific way possible. Their intent is to add to our knowledge, not push an agenda. I'll leave it at that for now.

    Posted by on Saturday, December 9, 2006 at 12:24 AM in Economics, Methodology, Science | Permalink  TrackBack (2)  Comments (21)


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