Neoclassical Economists are blinkered

Flamed Diving

Once again we are reduced to the magic equation:

All Economic Thought = Neo-Classical Economics

Myopic, ignorant and willful of both.

Time Magazine

Jaysis.

I'll get back to this thread in due course, but can anyone enlighten me as to when economists started claiming that complete, reflexive and transitive preferences would result in kids from Clondalkin getting into college?

Économiste Monétaire

The Economist wrote: »

Jaysis.

I'll get back to this thread in due course, but can anyone enlighten me as to when economists started claiming that complete, reflexive and transitive preferences would result in kids from Clondalkin getting into college?

About the same time that rationality was equated to GDP growth. It's also a bourgeoisie concept, duh.

synd wrote: »

It must be painful to live in denial

I'm not the one living in Egypt, my friend.

Time Magazine

Okay, I won't get to the substantive post until at least tonight, but synd I want you to answer me three questions (below) first. I'm not demanding it as a mod or anything, but it would help me clarify my post.

Rationality in microeconomic theory is defined as a preference set that is:

1. Complete. Consumers know which they'd prefer between A or B, or acknowledge that they like them equally.
2. Transitive. If A > B, and B > C, then A > C.
3. Reflexive. (This is a stupid mathematical one, where A = A, basically.)

Let's omit reflexivity because it's really just there for mathematical prettiness. So the two assumptions of rationality are completeness and transitivity. I can see how both could fail. I'm not sure whether I'd rather go to a gig or play football tonight, so perhaps completeness is too strong. And maybe transitivity isn't water-tight, either: if I prefer polo mints to white magnums, and white magnums to steak, I may not necessarily prefer polo mints to steak. So I can see how perhaps they're invalid assumptions.

But here's the bit I don't get, that leads to the questions: Given that A and B are just variables and are not specified, how can you claim that rationality implies a preference for capitalism over communism? Can you make any tweaks to the rationality criteria that would destroy the under-handed neo-liberal agenda? If I were to point you to dozens of highly-respected economists who use the neo-classical framework to promote greater socioeconomic equality, to what extent would that weaken your argument that economics is a political cult?

edanto

I'm enjoying this thread, and learning a lot from it, but haven't really had much to say yet.

Rationality, as defined above, seems to ignore advertising as influencing preferences. It seems a bit simplistic to be of any actual use, but perhaps I'm missing some useful application of it.

The point above that physicists don't speak on religion just isn't true - here is something from the hand of the most famous physicist
"I do not believe in a personal God and I have never denied this but have expressed it clearly. If something is in me which can be called religious then it is the unbounded admiration for the structure of the world so far as our science can reveal it." Gould's writings are also well known.

Much more importantly, when it comes to the position that it is not the responsibility of the economist to say what should be done politically, I refute that absolutely as being a cosy arrangement and ultimately quite cowardly.

For it is the application of neo-classical economics that appears to have worsened the state of the world (judged by global poverty) lately. And if there were economists that knew something bad was happening, yet were too timid to say anything about it, then some of the fault lies with them.

Adbusters, again wrote:

Affiliates of the school like Milton Friedman shaped Ronald Reagan’s and Margaret Thatcher’s economic agendas and helped set the tone for the era of fervent free-enterprise boosterism, market liberalization and privatization that swept the globe during the 1980s and 1990s. Their thinking has also helped shape the International Monetary Fund and World Bank directives that have only managed to widen the gap between the rich and poor.

A special point for Flamed Diving - let's just assume that most people on this thread can read and repetition isn't needed. You'll notice from the title, and my post at 12.02 on 11/6 that this thread isn't about the advanced fields of economics that seem to be looking to improve our world, but more about the neo-classical perspective that to my mind has dominated political thinking since at least the 1950s.

Flamed Diving

edanto, I can read, thanks. But unfortunately I keep coming across several posts who seem to think that:

All Economic Thought = Neo-Classical Economics

There people are, in my opinion, talking our their arse. If they want to keep the topic on neo-classical economics, then fine. No problem. But stop pretending that one school of thought in economics represents all of economics. I really don't care if it has dominated politics. It has nothing to do with the science of economics.

nesf

edanto wrote: »

Rationality, as defined above, seems to ignore advertising as influencing preferences.

It doesn't, all it states is how a person's preferences are ordered etc, it says nothing about how a person comes to have said preferences or how they can be changed. It's only a statement on how at a single given moment how someone's preferences should be.

Personally I've a lot of problems with rationality as defined above but criticism of it should at least be accurate.

edanto wrote: »

A special point for Flamed Diving - let's just assume that most people on this thread can read and repetition isn't needed. You'll notice from the title, and my post at 12.02 on 11/6 that this thread isn't about the advanced fields of economics that seem to be looking to improve our world, but more about the neo-classical perspective that to my mind has dominated political thinking since at least the 1950s.

Arguably the real domination of the neo-classical perspective in politics happened in the 70s not the 50s when the oil crises presented conditions that the traditional view of Keynesian economics thought to be impossible.

synd

y not necessarily prefer polo mints to steak. So I can see how perhaps they're invalid assumptions.

Word

But here's the bit I don't get, that leads to the questions: Given that A and B are just variables and are not specified, how can you claim that rationality implies a preference for capitalism over communism? Can you make any tweaks to the rationality criteria that would destroy the under-handed neo-liberal agenda? If I were to point you to dozens of highly-respected economists who use the neo-classical framework to promote greater socioeconomic equality, to what extent would that weaken your argument that economics is a political cult?

I had a feeling the term rationality would be immediately taken in the precious neo-liberal context - ''rational choice theory''. I was using it as a general term, check an English dictionary. Rationality has various meanings within fields of sociology, philosophy ect - weberian theory and so forth.

In retrospect the term I should have used was efficiency - ie. capitalism is not efficient in its allocation of resources so far as production for profit is both wasteful and leaves human needs untended. BTW I don't think wants are identical to needs - my considering diamond dog collars a ''want'' and assuming food for African children falls under the category of ''need'' is just one of many Marxist flaws.

As for the dozens of liberals and social dems who advocate a greater share in the re-distribution of social surplus - they do so acting to reduce the class antagonisms that arise under conditions of socio-economic polarization. Take this as an analogy (a man beats his wife, the wife threatens to leave - so he tells her he wont ''physically'' assault her anymore - a concession ''of sorts'' is made in order to preserve the exploitative relationship). Such is the function of social welfare - without it the overt polarization caused by market competition would lead to a revolutionary situation.

If your going to define rationality as something so simplistic as (people act in what they perceive to be their own best interest - their own interest is defined by however they act) then your engaging in circular reasoning. If however you can read minds and tell us about psychological variables (admitting that a dichotomy exists between acting in ones interest and against), your not engaging in circular reasoning - but I do suggest you seek mental treatment. Given that its near impossible to know why people act as they do - calculations based on assumptions, models ''quantifying'' emotion ect. don't even merit the title pseudo science, its more like quasi mystical neo-liberal bull**** with numerical equations thrown in to give a veneer of credibility. Now excuse me, I need to go and take a piss on a book of rational egoism.

Flamed Diving

Do you think that neoclassical economics makes normative statements about an individuals preferences?

Time Magazine

synd wrote: »

Now excuse me, I need to go and take a piss on a book of rational egoism.

When you're done will you address the questions I've posed?

Time Magazine

edanto wrote: »

I'm enjoying this thread, and learning a lot from it, but haven't really had much to say yet.

Glad to hear you're enjoying it. It's nice to get a good challenge from an "outsider" now and again.

Rationality, as defined above, seems to ignore advertising as influencing preferences. It seems a bit simplistic to be of any actual use, but perhaps I'm missing some useful application of it.

An awful lot of people would argue that its simplicity is its strength. The assumptions are really just the bare bones needed to make any analysis whatsoever. When designing policy to give the public what they want, they need to at least know what they want. That's basically it.

The point above that physicists don't speak on religion just isn't true - here is something from the hand of the most famous physicist
"I do not believe in a personal God and I have never denied this but have expressed it clearly. If something is in me which can be called religious then it is the unbounded admiration for the structure of the world so far as our science can reveal it." Gould's writings are also well known.

Yep but I doubt you'll find Gould getting his personal views published in a Physics journal. Similarly economists might be a member of a political party, but you won't find their politics in an economics journal.

Much more importantly, when it comes to the position that it is not the responsibility of the economist to say what should be done politically, I refute that absolutely as being a cosy arrangement and ultimately quite cowardly.

The issue here is that the accusation of economics is that it's a politically-motivated pseudo-science etc etc. I'm refuting that. I'm arguing strongly that it should remain in the realm of "what's true" rather than "what's right", because then it's really moving away from being a science.

An economist will say that if you take a dollar from a rich westerner and give it to a poor sub-Saharan African, it will probably make the world a happier place. The economist will also point out that there are serious problems with this (disincentive effects, emergence of dependency, administrative costs, Dutch disease...) but will generally fall short of saying "this should be done" because it's not his call whether that dollar should be taken or not. That's a political question. The world would be a happier place were we to quietly kill the world's richest 100 men and redistribute their wealth, but that's not for economists to say either.

The problem with you saying economists have a responsibility to say what should be done politically opens you right up to economics becoming a neo-liberal pseudo-science which further harms the billion people most at risk in the world. And you can't say you didn't ask for it. If it remains analytical/scientific, then the risk of its bias declines considerably.

For it is the application of neo-classical economics that appears to have worsened the state of the world (judged by global poverty) lately.

Could you back that up? I'm of the opinion that global poverty has fallen hugely over the past century or so. Inequality has risen, but that's a different thing altogether: the poor aren't poor because the rich are rich.

the neo-classical perspective that to my mind has dominated political thinking since at least the 1950s.

You're mixing up neo-classicalism with politics. I'm broadly a neo-classicalist insofar as I appreciate the importance and power of markets and there are further complicated mathematical reasons that I won't get into unless asked. I also do a lot of work on things like "imperfect" markets, market failures and behavioural economics. I also think that the Irish ODA budget should be removed from the reach of standard fiscal policy and put in the pile with judges' pay to ensure it cannot be cut; that carbon and property should be taxed; and that a much stronger focus needs to be put on early educational intervention as social policy. I would disagree with Milton Friedman on how money should be spent, but not what happens when it is spent, if you catch my drift. There's no definite disconnect between social democracy and (the vast majority of) neo-classical economics.

andrew

synd wrote: »

Word



In retrospect the term I should have used was efficiency - ie. capitalism is not efficient in its allocation of resources so far as production for profit is both wasteful and leaves human needs untended.

Reminds me of the Churchill quote regarding democracy and how it's the worst political system except for all the others which have been tried. Capitalism, so far, is the system which best allows people to satisfy their wants/needs (I don't think there's a difference between the two) because it allows people to satisfy their wants/needs on an individual basis; to choose what to buy. The alternative is that resources are allocated by some other means. Correct me if i'm wrong, but Marxism advocates a means of resource allocation according to what a person 'needs.' If so, how is someone else (a government, communist collective of some sort) better suited to determining my needs/wants? How is that more efficiant than a market? How are markets more wasteful than other methods, especially a method based on a there being such thing as objective definitions of what 'wants' and 'needs' are? Also, how can you say needs are different to wants when all needs are predicated on a value judgement - that African child 'needs' food, but only because he/she 'wants' to live.

If your going to define rationality as something so simplistic as (people act in what they perceive to be their own best interest - their own interest is defined by however they act) then your engaging in circular reasoning. If however you can read minds and tell us about psychological variables (admitting that a dichotomy exists between acting in ones interest and against), your not engaging in circular reasoning - but I do suggest you seek mental treatment. Given that its near impossible to know why people act as they do - calculations based on assumptions, models ''quantifying'' emotion ect. don't even merit the title pseudo science, its more like quasi mystical neo-liberal bull**** with numerical equations thrown in to give a veneer of credibility. Now excuse me, I need to go and take a piss on a book of rational egoism.

Sure models based on assumptions aren't perfect. However, they have been and continue to be used to describe real world situations with some accuracy, as The Economist pointed out. And so a lot of data begs to differ with your assertion that "its near impossible to know why people act as they do."

asdasd

For it is the application of neo-classical economics that appears to have worsened the state of the world (judged by global poverty) lately

If lately is the last year, yes. However even big global recessions take a few percentage points off GDP, if that, equal to one years growth in GDP. In fact he global economy was humming along at 4% a year prior to the recent recession, and I am not sure it is negative yet. Sales of Cars were up 48% this year in China, so far, although they may have monetary eased a bit too much. The claim that capitalism is creating more poverty is at odds with the ( more realistic) claim that classical economics ignores environment externalities. It is also at odds with what is happening in India and China. Where the Free Market is very popular indeed. ( 80% approval rating - higher than the US).

4% a year is much higher than Europe's growth rate from 1850-1950, and by the magic of compund interest it is enough to increase world growth by 5,000% in a century, which is admittedly not sustainable. Most of that is going to the developing world.

Marxists are always out of tune with reality. When I first started reading Marxism in the 90's the vogue was the deskilling of labour. In the actual real world I lived in the sons of Farmers and factory workers were gaining IT experience, and 50% of people were about to go to university.

Now that the developing world is racing ahead in growth, the chant is the increasing poverty in the developing world.

without it[social welfare] the overt polarization caused by market competition would lead to a revolutionary situation.

In a world without social welfare what would happen is a working class revolution ( and probably a democratic one) which would create a welfare state. And leave capitalism intact, otherwise. We've had that. But because the workers voted to not become serfs of the state, Marxists ignore the vote.

The Marxist idea that we want to work for the State ( lets ignore the embarrassing "science" of how the State is going to disappear later, however mysteriously) is merely an unfalsifiable construct. If we dont agree we are controlled by the Lizard Men false consciousness.

In fact, it is falsifiable. When the people of Europe left for America they left - generally - Serf or tenant farms. When they got to America they did not set up communes*, they did not organise States to own all the land. Yet, these people were not land-owners historically, so where did this bourgeois "consciousness" come from?

Only Marxist academics have convinced themselves, but no-one else, that we want the State to own everything.


* with the exception of some religious communities.

Ostrom

asdasd wrote: »

Only Marxist academics have convinced themselves, but no-one else, that we want the State to own everything

Academia is not immune to idiots - not all Marxists share this opinion.

asdasd wrote: »

Marxists are always out of tune with reality. When I first started reading Marxism in the 90's the vogue was the deskilling of labour. In the actual real world I lived in the sons of Farmers and factory workers were gaining IT experience, and 50% of people were about to go to university

Bravermans' Labour and Monopoloy Capital was published in the 1970's, and explained workers experience in industrial Britain. Extensively criticised throughout the 80's and revised, it wasn't the vogue by the 90's, not even in the late 80's.



This may be of interest, some of you may be followers?

DeLong's response to David Harvey's criticism of the US stimulus package (Harvey's first post, the critique is in the text of DeLongs' response). Harvey titled his response 'The Arrogance of Neoclassical Economists'. Whatever your position, it is interesting reading.

Delong

Harvey

Hasschu

After reading this I remember that a well respected economist once said "The main reason to become an economist is to protect yourself from other economists."
An early change of gov't would be good. We are so tied up with trying to get a few sods of turf dry for the winter here in Kerry that we do not have time to storm the Dail. It is all up to you Dubliners' now. Even Chomsky and Marx combined would be incapable of saving the Irish from ourselves.

Hasschu

The following is a cut from:

http://delong.typepad.com/sdj/2009/02/department-of-huh-in-praise-of-neoclassical-economics-department.html

And it is at this point that we draw on neoclassical economics to save us--specifically, John Hicks (1937), "Mr. Keynes and the Classics," the fons et origo of the neoclassical synthesis. Hicks's IS curve gives us a menu of combinations of levels of production and interest rates at which private investment spending and public deficit spending are financed out of the flow of savings. When the level of production is higher, private savings are higher--and thus the combination of private investent and deficit that can be financed is bigger. When the level of production is lower, private savings are lower--and thus the combination of private investment and deficit that can be financed is lower. Any level of deficit can be financed if the interest rate is such that the deficit plus the private investment spending equals the savings that come out of the incomes generated by the corresponding level of output.

Will neoclassical economics save us?

gerry87

Nobody can claim economics has all the answers, but it has some of them, and an educated guess at the rest. It's best not to get attached to any particular theory, since it is just that - a theory. Talking about any theory as if it's known to be right is stupid, a theory can't be known to be right.

It's all a work in progress, there are new areas coming into vogue trying to question things - Econophysics, Behavioural Economics, Neuroeconomics all trying to build on the theories, and the only way to do that is to attack old theories, it's the way it should be. Universal acceptance of a theory stagnates the discipline.

The thing about economic models is that they are tested and accepted to be a good fit - based on assumptions. Nobody says they're right in the real world, just in the assumed world. The next step is to relax assumptions and update the model, and keep repeating until it graduates from a theory to 'the way it is.' For a lot of things we're not there yet, and who knows if we ever will be.

The trouble is that theories get thrown into the real world before they're ready to be released from the incubation of academia.

The normal distribution in finance is a fine example, it seemed to fit so it got pulled out of academia coupled with a compelling theory (EMH) and then was used infallibly (Black-scholes), it got into the hands of people who didn't understand it and thats when the problem started.

emm so yea, in conclusion... all economics doing is trying to turn the unknown unknowns into known unknowns.

Anyway, i'm rambling... but sure thats not stopping anyone else :P

(oh and flamed divings right, arguing about specific theories/models is useful, arguing about generalisations 'Neoclassical Economicsts' is just jibber jabber)

Flamed Diving

Econophysics?

gerry87

Flamed Diving wrote: »

Econophysics?

Yup, it's like economics.... and physics!

Flamed Diving

gerry87 wrote: »

Yup, it's like economics.... and physics!

Any examples or overviews, I'm just curious.

Other than what comes up with a quick google, just wondering if u have something interesting that is hidden.

gerry87

Flamed Diving wrote: »

Any examples or overviews, I'm just curious.

Other than what comes up with a quick google, just wondering if u have something interesting that is hidden.

I'm just finishing my masters thesis on an econophysics topic, it's basically using the tools of physics to study economic data. True economics is supposed to form a theory, then test the theory. Physics takes a different approach, analyse the data then come up with a theory to fit what actually happens.

The only topic i can talk about in it really is the one i've done, which was basically power law distributions in finance and analysing financial markets as fractals. Which basically says the way markets act is linked to how individuals within the market act, so it's enough to analyse the market data as in isolation to form theories about the individuals. The kind of example to explain it is, think of the veins of a leaf they look similar to branches of a tree, branches of the tree themselves look similar to little trees. Stones look like rocks which look like mountains. Stones don't look like branches... There's also some more ways fractals relate to markets. (think individual -> company's stock ->industry index -> market index -> 'the market', you can measure the relationship between them and so study one to infer things about the others)

I'm pretty sure it all sounds horrendously boring, but i liked it

Flamed Diving

gerry87 wrote: »

I'm just finishing my masters thesis on an econophysics topic, it's basically using the tools of physics to study economic data. True economics is supposed to form a theory, then test the theory. Physics takes a different approach, analyse the data then come up with a theory to fit what actually happens.

The only topic i can talk about in it really is the one i've done, which was basically power law distributions in finance and analysing financial markets as fractals. Which basically says the way markets act is linked to how individuals within the market act, so it's enough to analyse the market data as in isolation to form theories about the individuals. The kind of example to explain it is, think of the veins of a leaf they look similar to branches of a tree, branches of the tree themselves look similar to little trees. Stones look like rocks which look like mountains. Stones don't look like branches... There's also some more ways fractals relate to markets. (think individual -> company's stock ->industry index -> market index -> 'the market', you can measure the relationship between them and so study one to infer things about the others)

I'm pretty sure it all sounds horrendously boring, but i liked it

No, it's interesting. From what I know, the reason economics worked in that way was the complete lack of data available, so all academics could do is build models and test them, if possible. Since the mid-80's that began to change, so it is both interesting and encouraging to see methods changing, as a consequence. Keep me posted!

gerry87

Flamed Diving wrote: »

No, it's interesting. From what I know, the reason economics worked in that way was the complete lack of data available, so all academics could do is build models and test them, if possible. Since the mid-80's that began to change, so it is both interesting and encouraging to see methods changing, as a consequence. Keep me posted!

Thats definitely one of the main reasons it's taking off, the huge amounts of data thats being recorded every day. My topic was analysing 1 minute, 10 years of data in economics can sometimes mean 10 data points, in econophysics it can mean millions.

At the moment markets can fill orders in 5 milliseconds, down from 350 milliseconds a few years ago, this has huge effects on the way a market acts, and it's going to get faster so that has to be understood too.

Ya can read me thesis when it's done!

Économiste Monétaire

PM it to me too . I'm pretty sure that most people here are unapologetic nerds, so anything that feeds the nerdity is good :pac:.

gerry87

No doubt, tho i prefer the term academic jocks... :pac:

Time Magazine

Économiste Monétaire wrote: »

PM it to me too . I'm pretty sure that most people here are unapologetic nerds, so anything that feeds the nerdity is good :pac:.

I'd like to read it too, plz.