What’s wrong with ‘Freshwater economics’? (Hint: it is absurd).

Photo of JohnIt is by no means the first time that people blinded by faith or ideology have pursued false premises to absurd conclusions – and, like their religious and political predecessors, come to believe that those who disagree are driven by ‘woeful ignorance or intentional disregard’.

Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart.

John Kay

There’s something maddening about watching people of great intelligence doing really, really, (and obviously) stupid things. Enter Freshwater economics. Quiggin’s book Zombie economics takes shots at lots of freshwater nonsense. But this essay by John Kay is very hard to beat as a kind of psychoanalysis of what’s wrong with it all. Read it and be amazed. Is there any other discipline like this – well I guess one could say that deconstruction was like that. But then I make no claims to understand deconstruction.

And note there’s a rogue paragraph in the piece which gives far too much away – as skewered by Paul Krugman.

Some of the better passages of Kay’s essay are reproduced above and below.

The distinguishing characteristic of their approach is that the list of unrealistic simplifying assumptions is extremely long. . . . They loosely resemble the world, but a world so pared down that everything about them is either known, or can be made up.  Such models are akin to Tolkien’s Middle Earth, or a computer game like Grand Theft Auto.

The knowledge that every problem has an answer, even and perhaps especially if that answer may be difficult to find, meets a deeply felt human need.  For that reason, many people become obsessive about artificial worlds, such as computer games, in which they can see the connection between actions and outcomes. Many economists who pursue these approaches are similarly asocial.  It is probably no accident that economics is by far the most male of the social sciences.

One might learn skills or acquire useful ideas through playing these games, and some users do. . . .   The nature of such self-contained systems is that successful strategies are the product of the assumptions made by the authors.  It obviously cannot be inferred that policies that work in Grand Theft Auto are appropriate policies for governments and businesses.

Yet this correspondence does seem to be what the proponents of this approach hope to achieve – and even claim they have achieved.  The debate on austerity versus stimulus, in academic circles, is in large part a debate about the validity of a property called Ricardian equivalence, which is observed in this type of model.  If government engages in fiscal stimulus by spending more or by reducing taxes, people will realise that such a policy means higher taxes or lower spending in future.  Even if they seem to be better off today, they will be poorer in future, and by a similar amount.  Anticipating this, they will cut back and government spending will crowd out private spending. Fiscal policy is therefore ineffective as a means of responding to economic dislocation. [Krugman explains why this concession is way to generous] . . .

Consistency means that any statement about the world must be made in the light of a comprehensive descriptive theory of the world.  Rigour means that the only valid claims are logical deductions from specified assumptions.  Consistency is therefore an invitation to ideology, rigour an invitation to mathematics.  This curious combination of ideology and mathematics is the hallmark of what is often called ‘freshwater economics’ – the name reflecting the proximity of Chicago, and other centres such as Minneapolis and Rochester, to the Great Lakes.

Consistency and rigour are features of a deductive approach, which draws conclusions from a group of axioms – and whose empirical relevance depends entirely on the universal validity of the axioms. The only descriptions that fully meet the requirements of consistency and rigour are complete artificial worlds, like those of Grand Theft Auto, which can ‘be put on a computer and run’. . . .

‘The first siren of beauty’, says Cochrane, ‘is logical consistency’.  It seems impossible that anyone acquainted with great human achievements – whether in the arts, the humanities or the sciences – could really believe that the first siren of beauty is consistency.  This is not how Shakespeare, Mozart or Picasso – or Newton or Darwin – approached their task. . . . Few modern economists would, for example, monitor the behaviour of Procter and Gamble, assemble data on the market for steel, or observe the behaviour of traders.  The modern economist is the clinician with no patients, the engineer with no projects.   And since these economists do not appear to engage with the issues that confront real businesses and actual households, the clients do not come.

There are, nevertheless, many well paid jobs for economists outside academia.  Not, any more, in industrial and commercial companies, which have mostly decided economists are of no use to them.  Business economists work in financial institutions, which principally use them to entertain their clients at lunch or advertise their banks in fillers on CNBC.  Economic consulting employs economists who write lobbying documents addressed to other economists in government or regulatory agencies.

The mutual disdain between economists and practical people is not a result of practical people not being interested in economic issues – they are obsessed with them.  Frustrated, they base their macroeconomic views on rudimentary inductive reasoning, as in the attempts to find elementary patterns in data –  will the recession be V-shaped, or L-shaped, or double dip? Freakonomics,[9] which applies simple analytic thinking to everyday problems, has been a best seller for years.  Elegantly labeled ideas that resonate with recent experience – the Minsky moment, the tipping point,[10] the Black Swan[11] – are enthusiastically absorbed into popular discourse.

If much of the modern research agenda of the economics profession is thus unconnected to the everyday world of business and finance, this is also largely true of what is taught to students.  Most people finishing an undergraduate course today would not be equipped to read the Financial Times.  They could import data on GDP and consumer prices into a statistical package, and would have done so, but would have no idea how these numbers were derived.  They would be little better equipped than the person in the street to answer questions such as ‘why were nationalised industries more efficient in France than in Britain?’, ‘why is a school teacher in Switzerland paid much more than an Indian one?’, or the oldest of examination chestnuts, ‘are cinema seats in London expensive because rents in London are high, or vice versa?’. . . .

Becker’s Nobel citation rewards him for ‘having extended the domain of microeconomic analysis to a wide range of economic behavior.’ But such extension is not an end in itself: its value can lie only in new insights into that behaviour.

‘The economic approach’ as described by Becker is not, in itself, absurd.  What is absurd is the claim to exclusivity he makes for it:  a priori deduction from a particular set of unrealistic simplifying assumptions is not just a tool but ‘the heart of the economic approach’. A demand for universality is added to the requirements of consistency and rigour.  Believing that economics is like they suppose physics to be – not necessarily correctly – economists like Becker regard a valid scientific theory as a representation of the truth – a description of the world that is independent of time, place, context, or the observer.  That is what Prescott has in mind in insisting on the term ‘aggregate economics’ instead of macroeconomics – there is, he explains, only economics. . . .

This is not science, however, but its opposite.  Properly conducted science is always provisional, and open to revision in the light of new data or experience:  but much of modern macroeconomics tortures data to demonstrate consistency with an a priori world view or elaborates the definition of rationality to render it consistent with any observed behaviour.

Economic models are no more, or less, than potentially illuminating abstractions.  Another philosopher, Alfred Korzybski, puts the issue more briefly: ‘the map is not the territory’.[15]  Economics is not a technique in search of problems but a set of problems in need of solution.  Such problems are varied and the solutions will inevitably be eclectic. . . .

[P]ragmatic thinking, employing many tools, is a better means of understanding economic phenomena than ‘the combined assumptions of maximising behaviour, market equilibrium, and stable preferences, used relentlessly and consistently’ – and to the exclusion of any other ‘ad hoc’ approach. . . .

The distinguishing characteristic of Henry Ford or Steve Jobs, Warren Buffett or George Soros, is that their behaviour cannot be predicted from any prespecified model. If the behaviour of these individuals could be predicted in this way, they would not have been either innovative or rich. But the consequences are plainly not ‘too small to matter’.

The preposterous claim that deviations from market efficiency were not only irrelevant to the recent crisis but could never be relevant is the product of an environment in which deduction has driven out induction and ideology has taken over from observation.  The belief that models are not just useful tools but also are capable of yielding comprehensive and universal descriptions of the world has blinded its proponents to realities that have been staring them in the face.  That blindness was an element in our present crisis, and conditions our still ineffectual responses.  Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart.

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conrad
conrad
10 years ago

I think the statistician George Box was able to summarize this in a slightly shorter version: “essentially, all models are wrong, but some are useful”.

“Is there any other discipline like this”

Yes, lots of areas of the social sciences (e.g., some areas of neuroscience, psychology, sociology…) — although in some you can get better data because it’s easy to run experiments in constrained domains with proper control conditions that really do tell you something useful.

Patrick
Patrick
10 years ago

In fairness, both sides of the debate as to austerity v stimulus seem to be conducted somewhere far away from reality. The stimulus side, in particular, appears to regularly forget that in this world there are such phenomena as politicians, incentives and uncertainty, presumably they can’t see these things because they have their faces pressed firmly into the cold stone floors at the temple of the multiplier, who must not be looked at in case we realise she is but another false (and illusory) god.

Greece, Italy, Portugal, Ireland and Spain, for example, don’t have a choice between stimulus and austerity, whilst other parties could provide stimuli for them they themselves have only lots of austerity vs tons of austerity. Krugman has some particularly weird position that Ireland don’t need austerity because they should not have bailed out their banks, which is fine as historical judgement but a bit useless policy-wise.

America’s problem is not that it needs stimulus (although it probably does this is much less important than a lot of other things) but that it needs political change and it needs regulatory reform (they are of course linked, no-one now imagines Obama will pass a law that helps the non-union economy except by accident).

I think there is a lot to be said for stimuli. I think the ‘freshwater’ types, whilst conscious of the immediate political economy (stimulus passed by Obama will go straight to public sector unions to build useless things very expensively and be spent about 18 months too late) don’t pay enough attention to the broader political economy (i.e. role that government spending can play in boosting confidence or weathering short-term effects).

But I am not sure that they are so much more detached from reality than the alternatives.

Richard Tsukamasa Green

Parts of this verge on my own tentative hypothesis about what is wrong, at least in North America. That universities are set up to produce the GTA players, and that government agencies that need something more practical had to adapt to the PhDs they were taking in, as opposed to directing their own people into PhD programs that weren’t useless (which may be the case in Australia).

Pedro
Pedro
10 years ago

“The distinguishing characteristic of their approach is that the list of unrealistic simplifying assumptions is extremely long”

Hmm, who’s just spent plenty of column inches going in to bat for IS/LM?

“Economic models are no more, or less, than potentially illuminating abstractions.”

Yep, the guy who talks about his models in all his wonkish columns.

“The distinguishing characteristic of Henry Ford or Steve Jobs, Warren Buffett or George Soros, is that their behaviour cannot be predicted from any prespecified model. If the behaviour of these individuals could be predicted in this way, they would not have been either innovative or rich. But the consequences are plainly not ‘too small to matter’.”

There is nothing about the careers of Jobs and Ford that disproves anything about market efficiency. In fact the contrary argument can be made. Ford mearly went broke and Apple nearly tanked. As for Buffett and Soros, the normal expression of the EMH is certainly not disproved by them.

As far as I can tell, most claims about the perfidity of the other team are based at least in part on misrepresentations of their positions.

desipis
10 years ago

I wonder if it’s something deeper than the models; that it’s the underlying ideology that is the seductive part. As Pedro demonstrates, convincing a believer in EMH that their faith is misplaced is as likely convincing a die-hard fundamentalist Christian that their belief in God is misplaced. The Christian believes that God is the cause of everything, therefore anything and everything they see is interpreted as simply more evidence of God. The market fundamentalist believes that the efficiency mechanism of the market is the cause of all economic outcomes, therefore any outcome at all is simply more evidence in support of the efficient market hypothesis.

To believe otherwise is scary; we might have to think for ourselves, we might need to intervene and we might make mistakes in doing so. Much better to just have faith and leave all these big problems to a mystical higher power…

Richard Tsukamasa Green

It is a mistake to think of this as a criticism of laissez faire, or anti stimulus sentiment as several commentators are doing. There are many anti stimulus schools; recalcitrant Austrian or monetarist which were once plausible but disproved by events, or newer quasi monetarists or methodologically keynesian discretionary fiscal skeptics who, although I think they are wrong, are certainly worth talking to. They are views partially shaped by free market or liberal beliefs, but they are inhabiting the same universe (they recognise that financial crises can happen for instance) and looking at the real world. They’re “the other side”, but they’re not being criticised here.

What’s being criticised here is an elaborate, complicated form of nonsense that is indefensibly stupid and absurd absolutely apart from any ideological basis or implications. They same criticism can extend to the New Keynesians that used the same tool box and were playing in the same fantasy land.

By analogy, I see a screw with a phillips head. I might think the Austrians are trying to use a hammer to knock it in, and the quasi monetarists are using a flat head screwdriver – they’re on the right track at least. The people criticised here are trying to use a replica Star Trek phaser. The problem isn’t what they believe, but that they’re only equipped for a fantasy universe.

Paul Frijters
Paul Frijters
10 years ago

There are, nevertheless, many well paid jobs for economists outside academia. Not, any more, in industrial and commercial companies, which have mostly decided economists are of no use to them.

This is complete bs. Just graduated economists are lapped up by industry, banks, insurers, financial firms, etc. From Arnold Schwarsenegger to Kofi Anan, from Treasurer to union boss, economists are employable. And, as Ross Gittins loves to point out, the ones with more I/O theory under their belt seem to do best.
Whilst there are various aspects of the story that are hence insightful, its just another straw man argument.

desipis
10 years ago

Richard, my point was that if you accept these articles of faith assumptions that an “elaborate, complicated form of nonsense” is the inevitable result. Once you’ve accepted that the economy can be explained or understood using a simple set of ideological assumptions without reference to observations of reality, the next logical step is to accept that mathematical models without reference to reality are just as useful. I agree, though, that any criticism applies whether these tools are used as a basis for laissez faire argument or to support an argument for Keynesian style intervention.

KB Keynes
KB Keynes
10 years ago

A large part of the debate is whether Ricardian equivalence occurs and if it makes fiscal policy impotent.
This paper by Baxter and King completely refutes Barro on this point.

This was written in 1993 but it appears few people have read it.

More’s the pity

Maurie Joyce
Maurie Joyce
10 years ago

Could we apply same considerations to climate change models and the IPCC?

KB Keynes
KB Keynes
10 years ago

Maurie,

There isn’t different schools.

there is one model.

The other mob have nothing.

as Kaiser Fung, a statistician said. ‘This whole debate reminds me of the climate change model controversies. I am not aware of an alternative model from those who dislike the consensus model. Until they offer such an alternative, their critique cannot be taken seriously, I’m afraid.’

Tel
Tel
10 years ago

Looks like those sneaky Canadians stole some of John Kay’s early drafts, and then went and blogged about it.

http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/09/the-lucasian-map-is-not-the-hayekian-territory.html

It obviously cannot be inferred that policies that work in Grand Theft Auto are appropriate policies for governments and businesses.

Well the Climate Scientists get away with it of a regular basis; and yeah I agree that the vehicle collision physics in GTA isn’t particularly realistic, so they let you jump out the window of a burning car as it slides sideways down the street, because that’s what makes people play the game.

But, I’d like to quote an earlier John Kay (2009) explaining pretty much the same topic using different words:

There is not, and never will be, an economic theory of everything. Physics may, or may not, be different. But the knowledge we can hope to have in economics is piecemeal and provisional, and different theories will illuminate different but particular situations. We should observe empirical regularities and – as in other applied subjects such as medicine and engineering – we will often find pragmatic solutions that work even though our understanding of why they work is incomplete.

Nothing I could possibly disagree with. Nothing that doesn’t apply to Keynes, or any other branch of economics just the same (although Keynes carefully left key concepts such as “full employment” in an ill defined state, presumably to cleverly prevent future generations of computer modelers from misusing his work).

So I’m told, there was a book called “The Sensory Order” back in 1952 where it was demonstrated that the same self-referential problem at the heart of Gödel’s Incompleteness Theorem, also proves it is impossible to fully model the effect of the model itself inside the system being modeled. Mind you, mathematicians have been happy to barge onwards despite Gödel, and economists are even more difficult to deter.

Pedro
Pedro
10 years ago

“convincing a believer in EMH that their faith is misplaced is as likely convincing a die-hard fundamentalist Christian that their belief in God is misplaced”

You should start with checking what people believe about the EMH. At the risk of an argue past each other thread, the best thing I ever read about the EMH is that there are no policy implications that arise from the limits to the EMH. I don’t think anyone believes that markets are always and instantly efficient. I hope that nobody is dumb enough to believe that policy can usefully be determined on the assumption that wise people can out think the market.

Paul Frijters
Paul Frijters
10 years ago

Nick,

agreed that economists inside industry and many services too dont do much ‘neoclassical economics’. But they are employable and employed by the likes of McKinsey and BCG. How do I know? In the past I ran conferences for economics PhDs in Europe and we got big sponsorships from McKinsey because they were looking to hire more economics PhDs. BCG too are quite active in the market for economists.

My problem with the argument is hence that it fails to see how ‘evolutionary fit’ that economists with their current training actually are. The eggheads who do nothing else but live in their irrelevant imaginary world might not have too many opportunities outside of academia, but the students they educate with similar mindsets and abilities are highly employable. Playing Grand Theft Auto is a good training for the real world after all!

Mainstream economics is by any objective standard on a victory march: the mainstream books are displacing the alternative books in Indian and Chinese universities, just as they replaced the alternatives in Eastern Europe. ‘We’ are winning big time. Mainstream economists now get paid more, are more prominent in media debates, and there are more of them than 20 years ago. Its a success formula and the sniping against the mainstream is to a large part a reflection of the increased status of economists. ‘High trees capture more wind’ is a Dutch saying.

More in general hence, I find a lot of Kay’s argument to be ‘raging against the machine’. A more sober analysis would note what most economists actually do, how policies actually get set (and there is a huge difference between the reality of policy making and the model playing that surrounds it), what the competitive environment is in which economists must defend themselves against others (and the pressures to be ‘more exact’ are at least as big as the pressures to be ‘more real’: there are plenty of competitors within economics who even more assiduously pretend to have the answer to everything with their model), etc. Ideally, one must offer a worked-out alternative. Absent any of that, it is just another dog barking as the caravan moves on.

KB Keynes
KB Keynes
10 years ago

Nick,

It isn’t a person’s political view it is their consisitency of view.
Kruggers is consistent. He argued against expansionary fiscal policies by Reagan and both Bushes.He argued Obama should do it.
On a Keynesian basis this is very consistent. The major problem here is a lot of people simply do not understand basic Keynesian economics.

Also those on the ‘right’ are not consistent. Take John Taylor. He was open advocate of fiscal stimulation under Bush Jnr but says it is the apocalypse now.

Mankiw is less openly political but still inconsistent on this.

If we take Australia the only time active fiscal policy was needed alah Keynes was in 2008. In all other circumstances we simply needed automatic stabilisers and quite active monetary policy.

Two young blokes by the names of Gruen and Stevens at the RBA found for example the fiscal expansion of Keating was too late and simply exacerbated the recovery.

Paul,
Economists used in industry come in two guises.
In financial markets it is as a soothsayer cum public spokesman. Few agree with this but that is what they are paid to do.

In other companies like McKinseys or BCG etc they are used to do work similar to Access economics here.

JC
JC
10 years ago

Kruggers is consistent. He argued against expansionary fiscal policies by Reagan and both Bushes.

Interesting. So the 80/81 depression/recession never happened and the tech crash was a “fig tree” of your imagination. Those events of course don’t qualify as requiring a Keynesian stimulus because…. ummm there were Republican presidents?

Patrick
Patrick
10 years ago

the fiscal expansion of Keating…simply exacerbated the recovery.

?

derrida derider
derrida derider
10 years ago

Microeconomists are used very widely by a very wide range of companies, macro not so much. For good reason – macro is, as an applied science, in a simply dreadful state and has been ever since the implications of the Lucas critique began to be drawn out. As I’ve said earlier, macro that ignores Lucas’ point is seriously incomplete as a guide to action, while macro that takes it on board is useless as it inherently can never properly satisfy the canons of Popperian science. Its unfalsifiability allows people to justify almost any position on the questions of the day – as they have.

And yes, market horse-race commenters are the least valued, least prestigious and least influential members of the profession – for good reason. Yet they are, because of commercial pressures, the public face of the profession.

JC as usual displays his ignorance. Reagan took office in January 1981, which makes it unlikely that even Krugman would blame the 1980 recession on him.

KB Keynes
KB Keynes
10 years ago

JC,
Volker had put up interest rates very high.

The was NO liquidity trap. monetary policy easing plus automatic stabilisers was appropriate not the largest deficit in the midst of a boom.

Tech crash should have been handled the same way.

JC’s contribution is a very good example of a person being ignorant of simple Keynesian economics.

Krugman didn’t blame Reagan for the recession. It was a deliberate policy action of Volcker.

KB Keynes
KB Keynes
10 years ago

sorry I should have added.

Patrick,

you ONLY use active fiscal policy when monetary policy either doesn’t work because of a liquidity trap or has become impotent as in the GFC when credit markets froze.

Keating used fiscal policy when the recovery had already started.

Pedro
Pedro
10 years ago

Is Krugman a freshwater fool?

“So a helicopter drop is just like a temporary lump-sum tax cut. And we would expect people to save much or most of such a tax cut — all of it, if you believe in full Ricardian equivalence.”
http://krugman.blogs.nytimes.com/2010/07/14/nobody-understands-the-liquidity-trap-wonkish/

Patrick, that’s Homer you’re querying.

KB Keynes
KB Keynes
10 years ago

Yes Krugman is very good at pointing out fallacies which those who do not understand get confused about as Pedro shows here.

desipis
10 years ago

I don’t think anyone believes that markets are always and instantly efficient. I hope that nobody is dumb enough to believe that policy can usefully be determined on the assumption that wise people can out think the market.

I believe that it’s possible to use policy to identify and counter some of the undesirable or inefficient trends within the market. I probably wouldn’t describe this as ‘out thinking’ the market though.

David Walker
10 years ago

Nick, I’m sorry to say I was disappointed by the John Kay essay. Its core technique seems to be to build straw men and then light them on fire. It depicts all of its subjects in the worst possible way. Just to take one example: reading Kay, you’d think that the philosopher of science Nancy Cartwright was a stern critic of Lucas, when a brief reading of her comments suggests she admires his self-awareness about the limits of his methods.

I am not that much of an enthusiast for applying rational expectations thinking in all circumstances, but there are circumstances where it is clearly relevant.

And when you go and read the comments by Lucas and Sargent that Kay mentions at the top of his essay, you find people grappling with tough questions, not blindly applying some simplistic formula. Lucas in particular has generally seemed to me fairly aware of how modest economics’ current achievements are. Hence his question at the end of his Nobel lecture: “Who can say how the macroeconomic theory of the future will develop?”. And in the Economist article cited by Kay, Lucas is making a point that springs not just from Eugene Fama’s work, but from Hyman Minsky’s.

If John Kay’s essay is the closest thing anyone can find to a killer blow against freshwater economics, then freshwater economics is more powerful than I thought.

Tel
Tel
10 years ago

The Sensory Order is an intriguing excursion into psychology by Hayek. I’m not sure you could say he proves it.

Well I haven’t read it, so I’m just going by the cheat sheet, but I’m not sure that either John Kay or Nick Rowe actually rigorously prove the point either, they just advance a decently compelling argument in that direction. I’m only pointing out that the same argument has been surfacing repeatedly for quite some time (both inside and outside the Keynesian circles, probably going back before Hayek if anyone cares to search hard enough). I don’t see great value in studying exactly who presented the idea slightly better than all the others.

The problem is that if you accept the argument, then you stop making models, and that would logically include computer models, and mental models, and back of the envelope scribbling too. In fact, the thing that humans basically do with their lives is make models of stuff, and that is the basis of our reality. To draw any meaningful conclusion in an economic context you need a model of some sort, because you simply cannot rerun the experiment. A computer is nothing more than a very large and fancy back of the envelope. Before you ask, yes I have heard of Occam’s Razor, and simply adding more CPU grunt to an idea does not make the idea any better, but it does give that idea a lot of play space to develop into something.

JC as usual displays his ignorance. Reagan took office in January 1981, which makes it unlikely that even Krugman would blame the 1980 recession on him.

Unfortunately, even the omniscient denizens of government seem to find it difficult to apply Keynesian stimulus before the recession… so it largely comes down to how quickly they can react afterwards and Reagan’s “Economic Recovery Tax Act” was 1981 which was reasonably prompt given the circumstances. Not a small number of Keynesians claim Reagan as one of their own.

That said, oil prices also went down after 1981, making the chain of cause and effect difficult to untangle (as it always is, especially without a model)… but hey, if oil prices can drive a recession, that would imply that the economy is supply driven, rather than demand driven (there I go making models again).

KB Keynes
KB Keynes
10 years ago

Tel,

No Keynesian would claim Reagan as he didn’t have to increase fiscal policy.
afterall Paul Volker raised the Federal funds rate to 20%! Active fiscal policy is not the same as Keynesian policy.

I think one of the problems is disagreement on basic economics.
most people agree that The economy’s growth — the rate of change in GDP — depends on the rate of change in spending, not its level — to quote Paul Krugman.

It is something we learnt at Uni and applied whilst working yet Sinclair Davidson for one says this is bullsh.t. despite the overwhelming evidence supporting this.
now I do not know whether this is merely an Austrian thing or simply another part of Opposition shilling.

How do you have a conversation when people disagree on the basics and when they keep their prejudices even when they are shown to be continually wrong?

This appears to me happening in the US courtesy of Krugman’s exasperations and also here.

Fyodor
10 years ago

How do you have a conversation when people disagree on the basics and when they keep their prejudices even when they are shown to be continually wrong?

It’s called “stoushing”.

As you were.

Mike Pepperday
Mike Pepperday
10 years ago

“Consistency and rigour are features of a deductive approach, which draws conclusions from a group of axioms…”

Spot on.

“‘The first siren of beauty’, says Cochrane, ‘is logical consistency’… … This is not how Shakespeare, Mozart or Picasso – or Newton or Darwin – approached their task.”

Shakespeare, Mozart and Picasso are irrelevant. Consistency is exactly how Newton and Darwin approached their task: logical deduction from axioms. It’s how you find out if your axioms are wrong – by checking the deduced consequences against reality.

Paul at 17: “Mainstream economics is by any objective standard on a victory march: the mainstream books are displacing the alternative books in Indian and Chinese universities, just as they replaced the alternatives in Eastern Europe. ‘We’ are winning big time.”

This is science. Successful paradigms displace the unsuccessful. They take over as more and more of those in the game agree. This accords with Kuhn’s analysis and in its implied rejection of old theories, it also fits Popper.

It’s not a lot of use to whinge that the successful paradigm is imperfect. Sure it is: all theories are provisional. But the faults are not with the approach. AFAIK deduction from axioms is the only approach that leads to understanding. Useful is to come up with a better theory and whoever does will use the same scientific approach: deduction from axioms. They’ll have new axioms but the approach will remain. For saltwater to replace fresh this approach is mandatory.

Conrad at 1. You say lots of areas in social science do this. I would have said that none do. That is, none deduce from axioms. So on that point I agree with Kay. Moreover, it seems to me that exactly this difference explains the relative success of economics. In other social sciences you don’t see the agreement Paul points out; no one is winning big time. I would be interested to know what specific axioms (in neuroscience, psychology, sociology…) you are thinking of.

Mike Pepperday
Mike Pepperday
10 years ago

“Consistency and rigour are features of a deductive approach, which draws conclusions from a group of axioms…”

Spot on.

“‘The first siren of beauty’, says Cochrane, ‘is logical consistency’… … This is not how Shakespeare, Mozart or Picasso – or Newton or Darwin – approached their task.”

Shakespeare, Mozart and Picasso are irrelevant. Consistency is exactly how Newton and Darwin approached their task: logical deduction from axioms. It’s how you find out if your axioms are wrong – by checking the deduced consequences against reality.

Paul at 17: “Mainstream economics is by any objective standard on a victory march: the mainstream books are displacing the alternative books in Indian and Chinese universities, just as they replaced the alternatives in Eastern Europe. ‘We’ are winning big time.”

And this is science. Successful paradigms displace the unsuccessful. They take over as more and more of those in the game agree. This accords with Kuhn’s analysis and in its implied rejection of old theories, it also fits Popper.

It’s not a lot of use to whinge that the successful paradigm is imperfect. Sure it is: all theories are provisional. But the faults are not with the approach. AFAIK deduction from axioms is the only approach that leads to understanding. Useful is to come up with a better theory and whoever does will use the same scientific approach: deduction from axioms. They’ll have new axioms but the approach will remain. For saltwater to replace fresh this approach is mandatory.

Conrad at 1. You say lots of areas in social science do this. I would have said that none do. That is, none deduce from axioms. So on that point I agree with Kay. Moreover, it seems to me that exactly this difference explains the relative success of economics. In other social sciences you don’t see the agreement Paul points out; no one is winning big time. I would be interested to know what specific axioms (in neuroscience, psychology, sociology…) you are thinking of.

conrad
conrad
10 years ago

Mike, the whole behaviorist movement in psychology is/was in essentially the same boat as this take on economics — people invented what are essentially axioms about the way people learn things (learning rules), tried to apply them to everything, and the rules got more and more complicated until people realized that they didn’t actually explain much that was useful (or at least not the questions people wanted answered — for some things they did and still do work really well). More recently this approach has been revived and it’s now called connectionism.

People have also wondered about what the best way to determine whether you have an “axiom” is or indeed what an axiom is in psychology. In cognitive land people call these representations — i.e., what the lowest level is you need to go to before you can say you have something in your mind that is modular, or essententially self contained — i.e., something you can construct other systems from once your have a number of these modules). Neuroscience modellers have this problem too (i.e., do you have a set of equations for neurons, populations of neurons etc.). In cognitive neuroscience/neuropsychology, traditionally people used something that you can look up called “ultra-cognitive neurospsycholgy” to determine this (in fact, traditionally people have really used abduction, but everyone likes to think they have used a scientific approach). This approach seems to work pretty well for some things, but you run into the problem that some problems don’t allow a modular explanation (i.e., you can’t just look at the bits and stick them together to predict behavior, because there are not bits to look at), and so you need a different paradigm to investigate these (of which there are many).

Incidentally, I don’t agree with this statement:”Moreover, it seems to me that exactly this difference explains the relative success of economics. In other social sciences you don’t see the agreement Paul points out; no one is winning big time.”.

The reason for this is that I don’t think economics is more successful than other areas. It’s exceptionally good at some things, but poor at others. For example, if you want to answer questions like:”why do people take drugs”, “why is there racism in the world”, “what is altruism”, “what makes good schools”, all questions which economists have tried to answer, you often end up with fairly awful explanations, and that’s because the “economists tool-box” simply doesn’t allow those questions to be meaningfully answered, whereas psychology, which has historically allowed essentially any theories (including whacky ones) to prosper have come up with far better answers. A good example of this is all the racism stuff which economists seem to find interesting these days — as far as I can tell, they’ve basically taken stuff social psychologists were doing three decades ago and repeating it badly, because the way to examine these questions isn’t in their tool-box, and so they’re blindy using tools that no-one thinks are good anymore.

Mike Pepperday
Mike Pepperday
10 years ago

Thanks for the effort, Conrad, but it is just claims. “people invented what are essentially axioms…” Did they? Like what, for instance?

Can you give me a few of these axioms and what was deduced? I’d have thought that if anything was a candidate for a scientific approach it would indeed be behaviourism. But I’m damned if I can think of any axioms and looking at Wikipedia hasn’t helped me. Really, are there any?

Pavlovian stimulus and response would be more basic and thus an even better prospect. It even seems to work (on children and animals). Can you suggest an axiom or two? I have been sitting here trying to think of some and not really getting anywhere. If you know some, can you then deduce from them that the less often the stimulus is given, the stronger the association becomes? I can’t imagine that that will be possible. I can only conclude that what is known about stimulus-response merely amounts to observation of correlations of simple behaviours. Correlations are not deductions from axioms.

“People have also wondered about what the best way to determine whether you have an “axiom” is or indeed what an axiom is in psychology.” If people are wondering, then is it there at all? No one is wondering what occurs with “market clearing” or what “homo economicus” does. No one is in doubt about the meaning of “if price increases, demand falls”. That para, also, is full of assertions but no examples of axioms or deductions.

By relative success of economics I mean (and Paul meant) its acceptance. If you like: the salaries paid and the pontificators interviewed. The other social sciences are not in same league.

The efficacy or otherwise of theories is not here the point but those matters you mention in your last para aren’t economics and have nothing to do with what Kay is talking about. Probably, the reason economists are meddling in them is (a) economists think the other social sciences have failed and, (b) they have milked their own dismal subject dry.

Dan
Dan
10 years ago

Mike: you don’t think the salaries have anything to do with economics’ proximity to money as a subject matter?

Also no-one in psychology really takes behaviourism seriously any more – that kind of deductive, mechanistic, positivistic thinking ultimately turned out to be a barren field when applied in the real world to complex systems such as, well, dogs and children. Perhaps freshwater will be seen the same way one day.

conrad
conrad
10 years ago

“Like what, for instance?”

Like, for example, that there are separable things called short-term memory, long-term memory, and attention (and that these separate down a bit further so you are left a bunch of modules that you can then use to construct bigger systems with if you want).

If you want mathematical axioms that have stood test of time in conditioning that are still useful today, then the Rescorla-Wagner model is a good example (with identified failures). There are also laws in computational neuroscience that have faired fairly well also although their application to anything obvious is not surprisingly further away.

“By relative success of economics I mean (and Paul meant) its acceptance”

People are quite happy to accept a lot of the conditioning laws — that’s because they work really well in some situations. Things like the distinction between long term vs. short term memory, and cognitive vs. affective processes, are also well accepted — so well we don’t even think that once upon a time these things were really just conjectures. If you just mean pay, then I’ll just point to the debate we had between men and women a while ago and the industry that drives it.

KB Keynes
KB Keynes
10 years ago

David Glasner has a god take on using rational expectations as does Noahopinion.

Dan
Dan
10 years ago

Glad you enjoyed, Nicholas – here’s another that is germane:

http://www.theonion.com/articles/historians-politely-remind-nation-to-check-whats-h,26183/

Mike Pepperday
Mike Pepperday
10 years ago

Dan – Yes, it is said that if you deal in money, some of it will stick to your fingers. It’s a bit glib, though, and here’s a caution: land is the basis of wealth; the people who measure land are called surveyors. Surveyors die with their boots on and virtually never get rich. Real estate dealers, you might counter, often get rich, however that is because they are salespersons – like car dealers. So there may be something in the proximity thesis but I don’t think it’s the essential explanation for the success of economics.

Surveying, by the way, is pervaded with axioms and deductions. Surveyors are in no doubt that it’s the way to understand things. Surveying would be that form of applied maths which is nearest to pure maths so surveyors have a rare confidence in their knowledge yet (like behaviourists) now and again surveyors are shown to be in error. How will this error be exposed? By the same axioms-deduction technique.

“…no-one in psychology really takes behaviourism seriously any more – that kind of deductive, mechanistic, positivistic thinking ultimately turned out to be a barren field…” Bless me, where is this mechanistic thinking? Show me the axioms and the deductions. They DIDN’T do any such thinking!

We shouldn’t blame an approach that was not used for the failure. If you deduce from axioms you might well fail. (All theories are provisional!!!) But that’s evidently not the problem here. On the contrary, I am asserting that the cause of the failure was precisely that the standard deduction from axioms was NOT used.

conrad
conrad
10 years ago

Mike, the reason behaviorism failed, or at least got superseded in your sort of reasoning wasn’t because of what you are asserting. The reason it failed was basically because the protagonists wern’t willing to hypothesize that there are modular parts of the mind (which are basically equivalent to axioms in psychology) that interact. For example, if you told someone to do a task that involved both memory and attention, which are both just hypotheses about modular parts of the mind, then the type of explanatatory model and predictions you would get from a model which accepts these exist is going to be much better than one that doesn’t and just tries to impute predicted behavior via some learning rule that approximates both at once. Of course, if you want to say there are discrete modular parts of the mind, this of course leads to its own phrenology-like problems as to how one identifies these parts. A good example of a current debate where this is important is whether people have specific algorithms or processes that deal with aspects of social situations. If they do, then those could be considered psychological axioms, and so if I wanted a model to explain the type of behavior that occurs in social situations, I would have to incorporate them. If we don’t have these, then my model would need to explain the behavior via other mechanism that people agree on more (e.g., general memory systems etc.).

conrad
conrad
10 years ago

oops, obviously explanatatory should be explanatory

conrad
conrad
10 years ago

“What tools has economics uncovered in the last fifty years that have improved either our ability to forecast economic developments or to improve economic performance?”

I can suggest where a tool developed in part by economists has helped other areas, which I guess indirectly helps economics performance — a lot of the development in Structural Equation Modelling (SEM) was done in the second half of the 20th century, some of it by economists (it’s really an interdisclinary development), and it has been really useful in psychometrics. You’ll have to ask an economist if it has been useful in economics.

Paul Frijters
Paul Frijters
10 years ago

Nick et al,

ye of little faith! Let’s list some of the successes of the last 50 years:

– HECS, a good old Aussie invention that is quite spectacularly taking over educational financing in the rest of the world. The real ‘trick’ is that you leave the collection of education debt to the Tax Office. Call it an ‘institutional innovation’ if you like, but its a clear winner in terms of cost reduction.

– Conditional welfare, another area where Australia is leading innovation. The jury is out whether it works or is just dressed up to work, but it is actively pushed and experimented with.

– That golden oldie: the Black-Scholes formula which has helped option markets to develop as it provides a direct means for coming up with a reasonable price that reflects predictions about the future. Of course you might want to argue this is a counter-example.

– Political and economics futures market that directly predict future events. Want to know how likely it is that President Assad of Syria will remain in power till the end of this year? Just look it up on Intrade. Similarly for many economic events.

– Organising health financing by detailed assesment of the expected costs of an incoming patient. This has revolutionaised health systems, generally seen as making it cheaper.

– Organising job search via assessing the likely costs of getting someone a job. Again an Aussie-led innovation that is generally seen as a successful model for improving the efficiency of the job market.

– Various innovations in operations research that have improved processes within companies. Dunno if you want to call it economics, but there is a large overlap in personel here.

– inflation targetting via interest rates, now a standard in monetary policy. We have become better at hitting the inflation rate we want via this heuristic. You can argue though as to whether that in turn has been such a good thing…

– pre-testing of auction designs, both by government and private companies, with lab tests. Big successes in Germany, and now a standard tool.

Need I go on? There is no shortage of innovations in economic techniques used by companies and governments. I might add that virtually none of the above has anything to do with axioms but more with fairly blind experimentation with simple micro-economic and macro-economic ideas, now and then striking gold, leading to mimicking by followers.