Neoclassical Economists are blinkered

edanto

For a long time, I've been convinced of the shallowness and pseudosciencry of Economics, supported both by the huge increase in global poor over the past 60 years and the damage to our environment.

Here's an excerpt from an adbusters article which gets across what I think.

"
Economists are now warning us that the global economy is in danger of experiencing a lost decade, similar to the one Japan experienced after its real estate and equity bubbles burst in the ’90s. But the economists stop short of cautioning that we risk losing a century, or even a millennium, if climate change suddenly lurches out of control.

The logic freaks of neoclassical economics don’t like to talk ecology – their models don’t account for melting glaciers, dying coral reefs or the possible collapse of the entire Australian continent.

But the reality is that it takes centuries to restore codfish to the Atlantic or to reboot a coral reef and it takes a thousand years to grow a single inch of topsoil. This is the kind of bio-speak that falls outside the theoretical framework of neoclassical economists.

They’re much more comfortable talking money – the language of liquidity, stimulus packages and hedge fund regulation.

There is no discussion within their profession of the real-world impacts of their economic philosophies.
"

I'm not anti-capitalist, but I do believe that the market models are flawed by over simple, assumptions and that that we need a new way of doing business.

I just don't know what that new way is. What other realistic options are there?

Environmental economics is an underappreciated field.

Time Magazine

Good topic.

Can you explain why "the huge increase in global poor over the past 60 years and the damage to our environment" affects your opinion on the scientific status of economics? To what extent is this like blaming the spread of AIDS on the study of biology?

suckslikeafox

Important issues alright, but theres no way to quantify them. Economics is all about quantifying and inserting variables into models, this is the problem for environmental economics.

Flamed Diving

The most simple model of all is:

Neoclassical Economics = All of Economics

This is the commonly held view of the armchair economist, as is the view that Economics has not moved beyond the mathematical models of the 1950's. As is the view that Economics itself is one homogeneous blob, with no division or sub-fields.

This irritates me.

edanto

Yes, of course there are lots of sub-fields.

But which are the ones that influence government policy?

Which are the ones that influence corporate behaviour?

On a global scale, corporate behaviour is more co-ordinated and powerful than any single government. And practically unregulated.

It seems to me, from my armchair, that Economists support that type of activity. I mean the economists that appear on in the media, those that appear to advice governments. Or am I missing some way that environmental economists (for example) actually influence policy?

Here's an interesting paper that I came across which details and supports several criticisms of neoclassical economics.
http://www.neweconomicthinking.org/thinking.htm

But it doesn't provide an alternative that is any way detailed.

Flamed Diving

edanto wrote: »

Yes, of course there are lots of sub-fields.

But which are the ones that influence government policy?

Which are the ones that influence corporate behaviour?

On a global scale, corporate behaviour is more co-ordinated and powerful than any single government. And practically unregulated.

It seems to me, from my armchair, that Economists support that type of activity. I mean the economists that appear on in the media, those that appear to advice governments. Or am I missing some way that environmental economists (for example) actually influence policy?

Here's an interesting paper that I came across which details and supports several criticisms of neoclassical economics.
http://www.neweconomicthinking.org/thinking.htm

But it doesn't provide an alternative that is any way detailed.

Again, you use a mass of generalisations in your post and you have strayed from your original point, which was hazy to begin with. Firstly, you seem to see a chosen economic fields influence on government as a measure of how 'Economics' views this field. Conveniently glazing over the fact that it is politicians who choose to implement policy, and that they will always choose whatever it is that makes them popular, whether it be neoclassical, kenyesian, etc. I don't see what this has to do with economics as a science. This is politics.

Economists that appear on the media are rarely actual economists. They are journalists, bankers or company executives who studied an economics undergraduate degree and haven't a single publication to their name. Try not to get these people confused with economists and don't ever believe what they say when it comes to economics, they are in the media to further their own interest and nothing more.

If you think that 'The Economists' support unregulated markets, then you have barely been making an effort to understand the field. It seems to me that you are just looking for reasons to have a go, probably based on current events and the latest copy of the Socialist Worker.

I will say it again:

Neoclassical Economics = All of Economics

is not true. It never has been, and never will be.

eamonnm79

Flamed Diving wrote: »

Again, you use a mass of generalisations in your post and you have strayed from your original point, which was hazy to begin with. Firstly, you seem to see a chosen economic fields influence on government as a measure of how 'Economics' views this field. Conveniently glazing over the fact that it is politicians who choose to implement policy, and that they will always choose whatever it is that makes them popular, whether it be neoclassical, kenyesian, etc. I don't see what this has to do with economics as a science. This is politics.

Economists that appear on the media are rarely actual economists. They are journalists, bankers or company executives who studied an economics undergraduate degree and haven't a single publication to their name. Try not to get these people confused with economists and don't ever believe what they say when it comes to economics, they are in the media to further their own interest and nothing more.

If you think that 'The Economists' support unregulated markets, then you have barely been making an effort to understand the field. It seems to me that you are just looking for reasons to have a go, probably based on current events and the latest copy of the Socialist Worker.

I will say it again:

Neoclassical Economics = All of Economics

is not true. It never has been, and never will be.

Why do you pointr presume this guy is from the far left?
He seems much more moderate to me.
All he is doing is expressing a concern that economists in general underprice risk.
If you agree to sell your second car to me, it would be measured by a non environmental economist as a simple transation.
However what about the unintended consiquences like the carbon created or the fact one less person is using public transport making that persons bus route more likely to be closed down etc etc. All these flapping butterfly wings eventually cause a tidal wave as we saw in the credit crunch.

As I have said on this forum before, although mathmatical modeling that economics provides is very useful, I think many Economists overestimate the science bit and underestimate the social part of this social science.

Most times economists are asked moral questions they seem to not want to get involved. Well thats a cop out.

silverharp

eamonnm79 wrote: »

Most times economists are asked moral questions they seem to not want to get involved. Well thats a cop out.

To be honest its better not to ask some Economists questions about Economics let alone moral questions.:D

"We have a global glut of savings, which is why there is, in fact, no upward
pressure on interest rates."
– Paul Krugman, May 10, 2009

Yes, this whole science vs social science thing has bothered me a wee bit since the forum has been moved..Id be reluctant to call economics a science..

Flamed Diving

eamonnm79 wrote: »

Why do you pointr presume this guy is from the far left?
He seems much more moderate to me.
All he is doing is expressing a concern that economists in general underprice risk.
If you agree to sell your second car to me, it would be measured by a non environmental economist as a simple transation.
However what about the unintended consiquences like the carbon created or the fact one less person is using public transport making that persons bus route more likely to be closed down etc etc. All these flapping butterfly wings eventually cause a tidal wave as we saw in the credit crunch.

As I have said on this forum before, although mathmatical modeling that economics provides is very useful, I think many Economists overestimate the science bit and underestimate the social part of this social science.

Most times economists are asked moral questions they seem to not want to get involved. Well thats a cop out.

Change:

It seems to me that you are just looking for reasons to have a go, probably based on current events and the latest copy of the Socialist Worker.

To:

It seems to me that you are just looking for reasons to have a go, probably based on current events and/or the latest copy of the Socialist Worker.

Better?

I'm particularly impressed by the way you focused on just two words at the end of a sentence while wilfully ignoring the rest of my post, and going off on a unrelated tangent.

eamonnm79

Flamed Diving wrote: »

Change:

It seems to me that you are just looking for reasons to have a go, probably based on current events and the latest copy of the Socialist Worker.

To:

It seems to me that you are just looking for reasons to have a go, probably based on current events and/or the latest copy of the Socialist Worker.

Better?

I'm particularly impressed by the way you focused on just two words at the end of a sentence while wilfully ignoring the rest of my post, and going off on a unrelated tangent.

Someone got up on the wrong side of the bed;)

Flamed Diving

eamonnm79 wrote: »

Someone got up on the wrong side of the bed;)

I fell out of it.

Akrasia

There is a very valid point to this topic.

Human society is intergenerational, but economics is only about pricing the current market value of commodities.

There are communities who have developed culture arts and agriculture over thousands of years without ascribing ownership of these valuable assets to any individual or class, but within a hundred years of capitalism and the ownership society, we have privatised almost every aspect of culture, agriculture and art.

The Ultra Liberals believe that everything ought to be privately owned because then someone will have an interest in preserving it and putting it to an 'efficient' use (whatever it may be), but they ignore the fact that an individual operates in a human timescale of weeks, months and years, but our society and ecology needs to last for much much longer, and what's good for the individual in the short term could be very very bad for the collective in the medium and long term.

Time Magazine

To be fair Akrasia, environmental economics (for example) makes none of the assumptions you just did about timescales you just did.

Typically the complaint about discounting theory in economics is the opposite you claim. Most rational expectations economics (which, I think, is the sort of economics you'd hate) assumes an infinite time-span. Milton Friedman is well known for his permanent income hypothesis, that people care about what's going to happen to their world in an infinite amount of time, albeit discounted heavily. The discount rate is usually the prevailing interest rate. So I don't accept this idea that neo-classical economic theory only assumes that in the long-run we're all dead. I associate that line of thought with someone else altogether.

eamonnm79

Found it!
Ok, this guy for my money is the smartest man alive. And since he has an opinion on this its probobly worth reading.
http://www.stwr.org/global-financial-crisis/the-financial-crisis-of-2008-interview-with-noam-chomsky.html

silverharp

eamonnm79 wrote: »

Found it!
Ok, this guy for my money is the smartest man alive. And since he has an opinion on this its probobly worth reading.
http://www.stwr.org/global-financial-crisis/the-financial-crisis-of-2008-interview-with-noam-chomsky.html

I didnt read it yet but Chomsky has some very wolly ideas , its easy to know what he is against but never quite figured out what he wants

silverharp

silverharp wrote: »

I didnt read it yet but Chomsky has some very wolly ideas , its easy to know what he is against but never quite figured out what he wants

You never will - I get a little frustrated by people who will critique but never offer alternatives.

Ronando

To the original poster, it's probably worth reading "The Undercover Economist" by Tim Harford.

It's readable and gives a good overview of what economics is and isn't. The one that really gets my goat is how business and government have hopped on the idea of GDP as the be-all-and-end-all, whereas economists will be the first to tell you that at best this should one in a three or five indicator strong measurement of welfare.

The book also outlines some of the issues the OP mentioned, such as market failures, imperfect information and how government can use economics to understand issues such as pollution, congestion, etc. Market mechanisms are excellent ways for people to reveal their preferences and for society to allocate its resources. Provided those market mechanisms include social costs that aren't always reflected in the price (such as pollution, potential costs of climate change, wasted time due to congestion, etc.), they will be far superior to any other policy intervention.

Just look at carbon trading, smart utility networks, road pricing, etc., as exciting new ways of using technology to bring the full range of costs inside the market mechanism.

book smarts

Whatever model is used, it will always be incomplete. There are just too many variables. The variables are almost infinite, effectively. The more complex the model the greater the illusion of completeness. Humanity and the world just cannot be summed up in a few equations. Sorry if this deflates your self-importance and self-congratulatory know-it-alledness bubble.

Flamed Diving

book smarts wrote: »

Whatever model is used, it will always be incomplete. There are just too many variables. The variables are almost infinite, effectively. The more complex the model the greater the illusion of completeness. Humanity and the world just cannot be summed up in a few equations. Sorry if this deflates your self-importance and self-congratulatory know-it-alledness bubble.

Wow, I wish I was like you.

Time Magazine

Flamed Diving wrote: »

Wow, I wish I was like you.

And I wish I'd never heard of empirically testing models so that I could simply assume life is reducible to a set of four equations and retain my sense of self-importance

Flamed Diving

The Economist wrote: »

And I wish I'd never heard of empirically testing models so that I could simply assume life is reducible to a set of four equations and retain my sense of self-importance

It's a heavy burden we carry, Econy. A heavy burden.

Ronando

book smarts wrote: »

Whatever model is used, it will always be incomplete. There are just too many variables. The variables are almost infinite, effectively. The more complex the model the greater the illusion of completeness. Humanity and the world just cannot be summed up in a few equations. Sorry if this deflates your self-importance and self-congratulatory know-it-alledness bubble.

You got us alright!
"How do numbers make you feel? What does a plus sign smell like? Is the number 7 odd, or just different?"

Time Magazine

The point we're making, book smarts, is that economists don't write out a set of four equations and presume they've cracked life. Almost every model that has been created in the past two decades has been then tested empirically, with real data. The results provide an indication of how good your model is.

So economists want to know what explains the differences in pay rates. So they throw in a few variables they think might be important: education, gender, health, experience, etc. Then they think the relationship between experience and wages may be nonlinear, so they add a nonlinear term. Then they try and account for unobserved heterogeneity between education and wages (maybe harder-working people get more education and wages) so they instrument for education and sub the equations in. These models might explain 80% of the variation in wages. By no means is that explaining everything, but it does give a very good idea of how you might make society richer. Say it's found that experience is twice as important as education, then even if you model only explains 80% of the variation then it would be foolish to think that pouring money into education will make people richer.

Now of course there are completely other arguments for education and why it should be funded, things like people's happiness, propensity to commit crime, likelihood of voting and so on. Completely agree there. But that's a completely different topic to what causes differences in wages, which is what the economist set out to find out in the first place. And (fao: edanto) he did so without any underhanded political bias, he just crunched the numbers. The political questions of what to do with the results of such analyses typically only get a sentence or two in any paper. Why? It's not our job. Economics isn't a science by most definitions of the word, but the parallel between physicists trying to find out how the universe was formed but refusing to tell governments whether to consequently legislate against blasphemy is something most economists would associate with. Economists have their political views, and disagree on them, but there is strong consensus on what's factually true or not. Associating economic theory with actions of governments is, at best, missing part of the story.

synd

The point we're making, book smarts, is that economists don't write out a set of four equations and presume they've cracked life. Almost every model that has been created in the past two decades has been then tested empirically, with real data. The results provide an indication of how good your model is.

Oh please - your attempts to quantify emotive incentives illustrate your complete ignorance of empiricism and reality in general.

So economists want to know what explains the differences in pay rates. So they throw in a few variables they think might be important: education, gender, health, experience, etc. Then they think the relationship between experience and wages may be nonlinear, so they add a nonlinear term. Then they try and account for unobserved heterogeneity between education and wages (maybe harder-working people get more education and wages) so they instrument for education and sub the equations in. These models might explain 80% of the variation in wages. By no means is that explaining everything, but it does give a very good idea of how you might make society richer. Say it's found that experience is twice as important as education, then even if you model only explains 80% of the variation then it would be foolish to think that pouring money into education will make people richer.

We see clear class re-production within capitalist society. 1997 admission to third level education 4.5% for students from clondalkin, 57% for students from rathgar. Studies consistently show that the offspring of those from unskilled manual backgrounds rank lowest with regards educational attainment while those from the upper professional category rank highest. Differences in pay can be explained in class terms, the upper class's with more access to resources both material and intellectual benefit. Methodological individualism utilized by economists is neo-liberal nonsense designed to obscure the reality of class structure by engaging in atomization.

The separation of individual effort and social condition amounts to false dichotomy (purposefully upheld within liberal ideology in order to justify the given mode of social stratification) - individual effort is determined by and predicated upon social externalities.

Now of course there are completely other arguments for education and why it should be funded, things like people's happiness, propensity to commit crime, likelihood of voting and so on. Completely agree there. But that's a completely different topic to what causes differences in wages, which is what the economist set out to find out in the first place. And (fao: edanto) he did so without any underhanded political bias, he just crunched the numbers. The political questions of what to do with the results of such analyses typically only get a sentence or two in any paper. Why? It's not our job. Economics isn't a science by most definitions of the word, but the parallel between physicists trying to find out how the universe was formed but refusing to tell governments whether to consequently legislate against blasphemy is something most economists would associate with. Economists have their political views, and disagree on them, but there is strong consensus on what's factually true or not. Associating economic theory with actions of governments is, at best, missing part of the story.

Stop trying to imply that neo-classical economics is non-politically motivated or somehow objective - its incredibly deceptive. The fact that economics makes claim to objectivity is evidence of just how subjective it really is. Clues of the inherent subjectivity include the idiosyncratic redefinition of terms - ie rationality. Only an economist could hold a straight face and proclaim the market to be rational in its allocation of resources.

This touches on the general truth, that very little is objective - rationality as the economist has been trained to understand it = profit maximization, high GDP ect. Indeed these things are rational for the capitalist class. One groups pursuit of the rational objective is often to the detriment of the opposing groups objective. Economics pre-supposes the centrality of one rationality - namely that which facilitates the process of bourgeoisie accumulation. This understood, we see the neo-classical orthodoxy for what it is, a component of upper class ideology.

No consideration is made of human needs - a rational form of economic organization would allocate resources based on need, something the capitalist market doesn't do, rendering it highly inefficient, wasteful and irrational. Of course economists may see these as problems, problems however only solved within the realm of the capitalism ie. to be solved as peripheral objectives subordinated to the ''eternal'' process of capitalist accumulation.

Bourgeoisie economics is just that, nothing more and nothing less - confined to the limits of its own presuppositions. Price need not be determined by supply and demand - it can be calculated via labor time. Money need not be the medium of exchange. Capital need not be private. The economy can largely be planned via IT - despite what jumped up econ grads think they know from reading the Austrian calculation argument - complexity theorems ect - outdated and refuted beyond doubt.

Flamed Diving

Once again we are reduced to the magic equation:

All Economic Thought = Neo-Classical Economics

Myopic, ignorant and willful of both.

Économiste Monétaire

Don't forget the great attack on 'rationality'. Complete, reflexive and transitive preferences. Yep, clearly a bourgeoisie concept.

synd

Économiste Monétaire wrote: »

Don't forget the great attack on 'rationality'. Complete, reflexive and transitive preferences. Yep, clearly a bourgeoisie concept.

Attack on rationality ? I suppose a system defined by asymmetric info, monopoly and exploitation can facilitate the rational action described in that book of mythology your reading ?

In fact would it not be rational for the appropriating class to maintain competitive monopoly via the preservation of asymmetric info ect ?

Btw - explain how people are rational utility maximizers - Oh wait Iv just figured it out ...........

Économiste Monétaire

synd wrote: »

Btw - explain how people are rational utility maximizers - Oh wait Iv just figured it out ...........

I wasn't aware this was a thread on first year microeconomics. Judging by your posts, I guess that's the direction you intend to go. Allow me to link some relevant literature for you: Hi.

synd

Économiste Monétaire wrote: »

I wasn't aware this was a thread on first year microeconomics. Judging by your posts, I guess that's the direction you intend to go. Allow me to link some relevant literature for you: Hi.

It must be painful to live in denial

"Economics has increasing become an intellectual games played for its own sake and not for its practical consequences. Economists have gradually converted the subject into a sort of social mathematics in which analytical rigor as understood in math departments is everything and empirical relevance (as understood in physics departments) is nothing general equilibrium theory using economic terms like 'prices', 'quantities', 'factors of production,' and so on, but that nevertheless is clearly and even scandalously unrepresentative of any recognizable economic system.

"Perfect competition never did exist and never could exist because, even when firms are small, they do not just take the price but strive to make the price. All the current textbooks say as much, but then immediately go on to say that the 'cloud-cuckoo' fantasyland of perfect competition is the benchmark against which we may say something significant about real-world competition . But how can an idealised state of perfection be a benchmark when we are never told how to measure the gap between it and real-world competition? It is implied that all real-world competition is 'approximately' like perfect competition, but the degree of the approximation is never specified, even vaguely


"Think of the following typical assumptions: perfectly infallible, utterly omniscient, infinitely long-lived identical consumers; zero transaction costs; complete markets for all time-stated claims for all conceivable events, no trading of any kind at disequilibrium prices; infinitely rapid velocities of prices and quantities; no radical, incalculable uncertainty in real time but only probabilistically calculable risk in logical time; only linearly homogeneous production functions; no technical progress requiring embodied capital investment, and so on, and so on -- all these are not just unrealistic but also unrobust assumptions. And yet they figure critically in leading economic theories." ["Disturbing Currents in Modern Economics", Challenge!, Vol. 41, No. 3, May-June, 1998]