Category: Gathering Thoughts

Goal-seeking Economics

We are on the verge of a revolution in economics, in fact, it might have already started. Many have pointed out that the current climate within the discipline is such that it cannot continue. I have linked to these discussions in previous posts, although, I have neglected to include other heterodox forms of the field such as feminist economics, humanistic economics, etc, but mostly because I don’t feel as if I know enough about them to give them proper representation. Though, even in the mainstream, economists have begun to seek new ways of their craft things outside the status quo rate of the field’s continual evolution.

Something that must be warned against is the potential for economists to use economic theory as a means to their own ends, instead of merely a means to discover truths about the nature of humanity and economies. I would argue that economics has value in and of itself, without the addition of value placed on it by those who are consulting or use the prescriptions to further their own interests. An economy is not something that can be engineered. More so, an economy is not something that can be altered from the outside. None of us can take a metaphorical wrench and adjust the economy in seemingly knowable/predictable ways that will guarantee specific outcomes. However, many economists attempt to do just that.

While I think there is a mix of good intentions and hubris involved in the decisions of those who wish to alter the state of the economy using tools and policies, there is something to be said about what a fully engineered economic system would look like. What if we could model the economy down to the very basis points of interest rates and cash flows? One could imagine that a computer capable of doing such things might not be too far in our future, especially since quantum computing is closer than ever before. We could know exactly what is going to happen and how to change the dials and the knobs to secure specific outcomes. For many, that would be a Utopian dream. Imagine eradicating all poverty just by changing some set of parameters to complement a given set of initial conditions.

This has been considered before, over 200 years ago, but it was through the eyes of classical mechanics and not economics. Pierre Simon Laplace realized some 150 years after the invention of Newtonian Mechanics that if there was some being that could know the exact specifications of everything, the entire universe could be modeled. He stated in A Philosophical Essay on Probabilities,

“We may regard the present state of the universe as the effect of its past and the cause of its future. An intellect which at a certain moment would know all forces that set nature in motion, and all positions of all items of which nature is composed, if this intellect were also vast enough to submit these data to analysis, it would embrace in a single formula the movements of the greatest bodies of the universe and those of the tiniest atom; for such an intellect nothing would be uncertain and the future just like the past would be present before its eyes.”

This supreme intellect became known as Laplace’s Demon. The reason being the point at which everything becomes predictable then the universe becomes entirely deterministic — free will ceases to exist, we become cogs in the machine. Because this machine could crank time forwards and backwards and we would be no more than actors playing a predefined script. Quite quickly, this Utopian vision turns into an existential nightmare. Fortunately, this kind of machine or intellect was proven to impossible with the discovery of quantum mechanics ca. 1900, but there has been some talk of a “computer” that could model the universe via quantum wave functions. However, the size of the computer is probably the same size as our universe.

I have argued against the fatalist view of economics (essay to be posted later), I think there are marginal changes that can be made through the work of policy and individuals allowing us a better world. Nothing is entirely set in stone, complexity allows us to appreciate the myriad number of potential outcomes and how all of the interactions of individuals make for beautiful, interesting world. Using economics as a tool to mess with the supposed “cogs” might end up doing more harm than good, but we are able to learn from the works of others. Economics isn’t merely decision theory, it is the theory of explaining how people interact to achieve their goals at both the micro and macro scale (as far as those actually exist). So while I think economists working in the public and private spheres provide a necessary service, what is unnecessary is for economists to create versions of economics that have vested interests. If one is to remake a better version of DSGE, it shouldn’t be a means to the greater positioning of oneself, but for a greater understanding of behavior that will in turn help humanity.

 

The Tale of Two Disciplines

Economics, as it is taught today, is split into two different disciplines. The first being economic theory, which is real science in that it attempts to explain the world as we know it. According to Einstein, theory should be a systematic description of the essential interrelations of reality. While the second being decision theory, uses mathematical or logical modes of operation to explain the end actions of individuals. In this mode of operation, the thing being studied can be via the usage of consistent axioms.

My Austrian friends have told me that the difference I am attempting to explain is that of praxeology and catallactics. The former being that study of purposeful human action and the latter being a study at how the market orders itself, how exchange happens. Robert Whately defined catallactics as the science of exchanges, which is something I am partial to. However, while these larger themes fit my prior complaints, much of the profession, including the material taught to students, does not use the heterodox methodology or terminology of Austrian economics. While I think heterodoxy is important, this leads to a different set of questions and not ones I will try to answer in this essay.

The broader point that I want to make is that the profession is split into two camps, and has been for a long time. The economic theorists have been left behind by the choice theorists. The science has lost its way in assuming that the logical nature of decision theory, which always ends in a binary variable of the choice is taken (1) or not taken (0). This is neither truly descriptive nor informative, minus what is the supposed outcome. Mind you, the outcome is only fictional until it happens in actuality. At that point, the supposed outcome and the actual may be different since each person, though they are subject to the law of demand, has a different set of constraints.

Our need for preference negation following the landmark paper, De gustibus non est disputandum, removes the source of variations via preferences from the field.  Stigler and Becker “show” that preferences do not matter. This has been a source of contention for many since, because surely any two given people will not act similarly in similar situations. If you remove what makes humanity, well, human, then what are we studying? Even more so, the current replication crisis in many fields shows that many studies are woefully underpowered or cannot be replicated. Why? What actions undertaken by a few people at a given time and place may not be the same actions undertaken by others in a similar experiment, albeit a different time and place. Economics is more complicated than choice theory.

Even when choice theory scales up into the macroeconomy, it cannot capture the complexity and vast amount of information necessary to be processed. The greatest tragedy of choice theory is that aggregates all of the actions taken by the individuals within the model. If you’ve ever seen the summation of utility curves, then you’re well aware of what I am talking about. Choice theorists don’t know how these utility measures came into being, they’ve assumed them into the model, nor can choice theorists tell you the magnitude of the utility. Not only that, but they assume that the summation works simply because preferences will cancel out. In a zero-sum world, there may be truth to that statement, but the world isn’t zero-sum, especially with the advent of zero-marginal cost technologies.

Janos Kornai said, “The ‘transplantation’ of the models of decision theory cannot, however, serve as a substitute for a scientific theory describing reality.” Choice theory won’t save the field, but it may keep us above water for a time. There is so much more to be explored, both the whys and the hows, but especially the patterns of entanglement.

Thus we are left with a void in economics, one that if filled would describe the reality of our world without reducing its inhabitants to a homo economicus.

Gathering my thoughts 6/4/19

Early this morning, I had a chance to sit down with my (unofficial) dissertation advisor to talk about research going into my final six credits of coursework. I hope to propose next spring, having written the first two-thirds of my dissertation between now and the end of the fall semester. High hopes? Maybe, but I’ve found that I do well with deadlines and short-term goals.

In this discussion, we brought about a number of books I am intent on reading this fall and why they made it into my reading list. They are separated into two groups and are listed as follows:

Socio-Ecological Economics:

Evolutionary Economics:

Each of these revolves around specific interests within my thoughts on social systems. Ideas evolve much like genes do; though, ideas find iterations through time and interactions, unlike genes which require propagation through technology. I have written before on the necessity of trans-disciplinary work on social systems; it’s become more of a buzzword, but in practice much can be accomplished. At some point, I will share my notes with you on each of these books; not in their complete form but an abridged version.

Many interesting ideas abounded throughout our conversation; so many that I wish I could have recorded it, but observations are equivalent to interactions and that may have changed the course of our conversation. The first of which is that we should read works not to duplicate them, but as to alter or inform our way of thinking; another acceptable outlet is to apply what and how someone else tackled a problem and using that method, go about solving other problems in a similar light. After reading a new work, one has to ask themselves, “Has this work rearranged the furniture in my head, removed some furniture while replacing it with new items, or a mixture of both?” In my life, there have been a few books that have severely altered my train of thought and how I perceived the world, while many others have given me only a nuanced view of something very specific. In economics, Karl Menger’s Principles was a building block of my thoughts thereafter.

In some ways, new knowledge is frightening, it threatens our previously held world views and in place of those is something unknown. One can find examples of this throughout time, it’s not limited to the actions of the church during the Middle Ages and Renaissance. Modern societies are often faced with new information that threatens their identities. Even the movements that cause societies to tremble face new information that they want to dismiss or refuse to pursue. Revisions of history are often rejected for a variety of reasons; confirmation bias is a powerful thing.

The next things to came up were about agent-based modeling and social sciences. Many of those in the social sciences aim for the creation of a better society, but this is in some ways anathema to doing pure science. It is most likely impossible to separate the subjective person from the objective analysis in social sciences. We have to perceive our data through the lens of theories and our understandings. In almost all cases, data even in its raw form must have gone through at least one filter before a researcher looks at it. The first of which is what data is seen as valuable enough to collect.

This lens of social science is one that causes many researchers to see themselves outside the system they are observing and many theses are built on the want to solve certain problems or issues. First of all, every person is already inside the system; we cannot take ourselves out. It is wishful thinking to assume away our place inside the very systems which we observe. ABM scientists are perhaps the worst at trying to step outside since much of the time they are outside of their models looking in. What would the modeler do if she were in one of the systems she has created? Second, many problems in social systems are unsolvable. What is possible is the observation of both phenomena and patterns; there exists no one solution since every iteration of a system produces a multitude of them. I am not a fan of formal equilibrium theory outside the classroom. (I am picking up Janos Kornai’s Anti-Equilibrium from the library today; his intuition on economic systems is fascinating.)

The final thing is that I have to narrow down my topics for my dissertation. There are far too many things to learn and not enough time learn them all. This is going to be quite an adventure.