Fisking Philip Ball

A few days ago Mark Thoma posted an article by Philip Ball, "consultant editor of Nature", taking economists to task for, well, being economists.  Although Mark handled the rebuttal quite nicely, and there was lots and lots of fine commentary on Mark's site (a good chunk of which is summarized by Dave Iverson), I found the article so wrong-headed that I just can't help myself from commenting.  So, a-commenting I go:

Baroque fantasies of a most peculiar science, by Philip Ball, Commentary, Financial Times (free): It is easy to mock economic theory. Any fool can see that the world of neoclassical economics, which dominates the academic field today, is a gross caricature in which every trader or company acts in the same self-interested way – rational, cool, omniscient. The theory has not foreseen a single stock market crash and has evidently failed to make the world any fairer or more pleasant.

It is true that neoclassical economists tend to be the methodological children of Milton Friedman, heirs to a positivist tradition that directly connects explanation and predictability.  But predictability in this sense is conditional:  If X occurs then, all else equal, Y will follow.  As a matter of logic, large forecast errors may only prove that the arrival of X is especially uncertain, and that economists are not clairvoyant (a trait that I think is shared with physicists and other human beings).

To be fair, if Y equals a stock market crash, I cannot really tell you what X equals.  I am unaware of any serious economist who claims they can.  Even those economists who express knowledge of a "bubble" in some asset market or another shy from taking definitive stands on when and how the bubble will burst.  I do know this, however:  Economists have devoted a lot of energy to thinking about the lessons delivered by the Great Depression.  At least part of the conventional wisdom formed from that thinking is that it is a very bad idea to restrain liquidity when liquidity is most desired.  For an example of that wisdom in practice, I refer to you to the actions of the Federal Reserve in the aftermath of the 1987 market crash in the United States.  I'll stick my neck out and claim that the world was more pleasant as a result of putting that lesson into action. 

The usual defence is that you have to start somewhere. But mainstream economists no longer consider their core theory to be a “start”. The tenets are so firmly embedded that ... it is ... rigid dogma. To challenge these ideas is to invite blank stares of incomprehension – you might as well be telling a physicist that gravity does not exist.

That is disturbing because these things matter. Neoclassical idiocies persuaded many economists that market forces would create a robust post-Soviet economy in Russia (corrupt gangster economies do not exist in neoclassical theory)...

Economists accept -- insist, actually -- that institutions matter, and nobody would argue that market forces alone can create a "robust" economy absent well-defined property rights, functioning legal systems, and the like.  If you doubt that, check out the latest John Bates Clark award.

Neoclassical economics asserts two things. First, in a free market, competition establishes a price equilibrium that is perfectly efficient: demand equals supply and no resources are squandered. Second, in equilibrium no one can be made better off without making someone else worse off.

Wrong.  Mr. Ball is thinking of the concept of Pareto efficiency, which does indeed describe a situation in which "no one can be made better off without making someone else worse off."  But there is no presumption among economists that free markets and competition will deliver such an outcome. Any time an economist speaks of asymmetric information (conditions in which one person knows something another does not), externalities (things like pollution that is not paid for by the polluters), inflexible prices or wages, or taxes on any sort of economic activity, he or she is starting from the presumption that the free-market outcome is not efficient.  In fact, any time an economist speaks it is quite likely they are contemplating a world in which free-market outcomes are not efficient.  To not recognize this is demonstrate a startling ignorance of what economics is actually about.

The conclusions are a snug fit with rightwing convictions. So it is tempting to infer that the dominance of neoclassical theory has political origins. 

What?  Ever read Brad Delong?  Or Angry Bear?  Or Dean Baker?  Or Max Sawicky?  Good economists?  Yes.  Right wing?  Only by a standard so skewed as to be meaningless.

... the foundations of neoclassical theory were laid when scientists were exploring the notion of thermodynamic equilibrium. Economics borrowed wrong ideas from physics, and is now reluctant to give them up.

This error does not make neoclassical economic theory simple. Far from it. It is one of the most mathematically complicated subjects among the “sciences”, as difficult as quantum physics. That is part of the problem: it is such an elaborate contrivance that there is too much at stake to abandon it.

Well, OK, economics has become pretty mathematical, which does sometimes make it hard for non-economists to join the conversation. Shoot -- there are some papers that I can't figure out. But that does not equal an "error."  (And I still think quantum physics is a lot harder -- and every bit as abstract.)

It is almost impossible to talk about economics today without endorsing its myths. Take the business cycle: there is no business cycle in any meaningful sense. In every other scientific discipline, a cycle is something that repeats periodically. Yet there is no absolute evidence for periodicity in economic fluctuations. Prices sometimes rise and sometimes fall. That is not a cycle; it is noise. Yet talk of cycles has led economists to hallucinate all kinds of fictitious oscillations in economic markets.

It's true -- economists do not define business cycles as things that repeat periodically in a deterministic way, like sine and cosine waves.  Business cycles are instead defined somewhat loosely in terms of the co-movements of various aggregate variables (like GDP, employment, prices, etc., etc, etc.)  If we want to get a bit more statistically formal, we might define a business cycle in terms of co-movements of aggregate variables within particular windows of time (say two to eight years, meaning that we are ignoring very short-run and very long-run fluctuations in the economy).  And if want to define particular episodes of contraction (or recession) and expansion, we ask a committee to decide.

However we do it, the point is to identify a set of particular facts that can then be subjected to analysis, both theoretical and empirical.  Don't like calling it a cycle?  Fine.  Call it Aggregate Fluctuations.  Call it Co-Movement In Business Statistics.  Call it a Kumquat.  Just don't pretend a picky semantic point is serious criticism.

Meanwhile, the Nobel-winning neoclassical theory of the so-called business cycle “explains” it by blaming events outside the market. This salvages the precious idea of equilibrium, and thus of market efficiency. Analysts talk of market “corrections”, as though there is some ideal state that it is trying to attain. But in reality the market is intrinsically prone to leap and lurch.

I presume that Ball is referring to Real Business Cycle Theory.  Let me try a very simple description of real business cycle theory:  The business cycle -- those co-movements in macroeconomic variables that occur over certain frequencies (i.e windows of time) in the data -- result from random shocks that hit the economy combining with the intrinsic structure of the economy in such a way that those shocks are translated into ups and downs in GDP, employment, prices, etc., etc., etc.   

What is Ball's criticism of this view of the world? 

One can go through economic theory systematically demolishing all the cherished principles that students learn... [I]t is abundantly clear that herding – irrational, copycat buying and selling – provokes market fluctuations.

There are ways of dealing with the variety and irrationality of real agents in economic theory. But not in mainstream economics journals, because the models defy neoclassical assumptions.

Oh, I see.  Maybe he missed this paper. And this paper.  Or is unaware that conversations like this one, among economists who would otherwise describe their basic orientation as "neoclassical", are a part of any good macoeconomist's basic training.

Ball concludes:

There is no other “science” in such a peculiar state. A demonstrably false conceptual core is sustained by inertia alone. This core, “the Citadel”, remains impregnable while its adherents fashion an increasingly baroque fantasy. As Alan Kirman, a progressive economist, said: “No amount of attention to the walls will prevent the Citadel from being empty.”

Whatever.

Comments

[Alex Mohr]

The best part about the conclusion is how completely worthless it is. I will take his route of comparing economics to physics and point out that, at several points throughout the history of science, have people realized that everyone was just fundamentally wrong. Even if this were the case with neoclassical economics, it takes time for ideas that make up the core of our beliefs to change. It took the Church 300 years to apologize for excommunicating Galileo and submitting to house arrest for heretically suggesting that the earth revolves around the sun. More recently, people like Magueijo who suggest an alternate cosmological model, previously touched on by Dirac and even Feynmen, are generally just brushed off and scoffed at. It's completely ridiculous to suggest that because he perceives certain beliefs held by economists as wrong that it is a failing of the science as a whole.

[pgl]

But, but, but - we Angrybears are free traders. Doesn't that get us qualified as rightwingers?

[stefan]

Ball's rhetoric and argument structure reminds me of creationist rants about evolutionary biology. A similar mixture of mischaracterization and 'can you believe?' ad-hoc argument, and lack of interest in actual work by actual researchers.

[Dave Iverson]

Nice post.

Yes, but ... look what a great discussion Ball's reactionary commentary has produced in various blogs. Ball's article is, I believe, a reaction to what the press, some politicos, and sometimes we as underinformed or ideologically blinded economists spin up as economic theory/practice--not adequately owning up to limits, nuances, etc. of our methods.

Hence we economists are not guiltless as to some general criticism well-aired on Mark Thoma's blog. Sometimes too, we are not well-enough covered by the press as to contrasting views/theories, etc. (then again who is).

Still, as Dave A. aptly points out we economists (taken collectively) are not shy about criticising each other and learning from our criticism, our practice, etc.

[piglet]

"At least part of the conventional wisdom formed from that thinking is that it is a very bad idea to restrain liquidity when liquidity is most desired."

Wow. That sounds like a rule-of-thumb, like the common-sense kitchen-table economics of the Average Joe. You offer this as a vindication for economic "science"? Ball will surely like that.

To Ball's undeniably correct observation "The conclusions are a snug fit with rightwing convictions. So it is tempting to infer that the dominance of neoclassical theory has political origins.", you answer by pointing out that there are also one or two economists who are not right-wingers. I suggest you take a basic course on scientific reasoning to learn why this "argument" cannot succeed.

[piglet]

"I will take his route of comparing economics to physics and point out that, at several points throughout the history of science, have people realized that everyone was just fundamentally wrong. Even if this were the case with neoclassical economics, it takes time for ideas that make up the core of our beliefs to change."

Well. There are several important things to point out. While it is true that physics has been revolutionized in the 20th century to the extent that Newtonian classical mechanics has been recognized as incorrect, it is worth remembering that Newtonian mechanics, far from being "fundamentally wrong", was and is still approximately correct. It correctly accounts for a wide range of observations. Does this apply to neoclassical economics? Secondly, it is worth noting that physicists of the 1900s were quick to understand that their traditional models were not sufficient any more to account for a new range of observations. Their reaction was not to massage the data, to discuss away unwelcome evidence or to ridicule those asking hard questions. A few papers written by an unknown physics teacher by the name of Einstein revolutionized the science and within a few decades, physical science received a whole new foundation. Why could that happen? because Einstein was right, that's why. This is why physics is a science.

What do we see in economics? Theories are not confirmed by empirical observation but nobody cares. I have been over at Mark Thoma's, and now on this discussion, and I haven't seen anything that seriously refutes Ball. Most troublesome is that many economists participating in the discussion don't even grasp what this is about. You simply don't get it, that's the really sad thing.

[Dave Iverson]

Piglet …

Maybe the real problem is with Economic Fundamentalism, Fred Argy covers the main bases for effective criticism of "economic fundamentalism here: http://www.australianreview.net/digest/2003/03/argy.html

Two questions: 1. How does one distinguish between "economic fundamentalists" and other practicing economists? 2. How does one practice economics w/o being libeled as a fundamentalist?

[Dave Altig]

piglet --

We're all about constructive criticism here, but honestly you're not giving me much to work with. You assert that you haven't seen anything to refute Ball's criticisms. Perhaps you should go back and read Mark and my posts -- both of us point out that several of Ball's claims about economics are just simply wrong. You criticize my grasp of logic by pointing out that I cannot refute the rightwing nature of the discipline by pointing out a few economists who do not fit into that category. I may have been unclear on the point: "Rightwing" is a term that has absolutely no meaning or value in an informed discussion of issues. It is a cheap polemical trick, suited only to the discourse of coffee house pseudo-intellectuals. Define rightwing and maybe the conversation can progress, although I suspect that it will reveal only that your definition of rightwing is hopelessly out of the mainstream.

I'm quite glad that you think the lessons we have learned about the problems with moneatary policy in the Great Depression are so obvious. I was not giving a particularly deep rendering of that discussion in my post, but I do suggest that you read the relevant chapters in Friedman and Sschwartz's monetary history to gain some understanding of how existing orthodoxy of the time helped to turn a problem into a disaster. And you also might recall that there were views of the world -- still are, I suppose -- holding that the overaccumulation of capital followed by deep and prolonged slumps was the inevitable state of free market capitalism. I think the neoclassical economists carried the day on that one.

You suggest what we see in economics is theories not confirmed by enpirical evidence. I'm not sure what you mean by this. That our theories are untestable because they are not subject to controlled experimentation? Neither you nor Ball have offered anything that helps in understanding what are your real objections. Instead you set up straw men, knock them down, and dance gleefully around a vanquished pile of nothing.

I am guessing that Ball's objections -- maybe yours as well -- is that economists have the temerity to call their discipline "science". If that is what you object to, I say fine. On that there is precisely zero at stake. If you want, call economics an attempt to construct coherent stories about social phenomenon. I'm proud enough of that.

[Robert]

As far as I can see, David Altig's claim is that since David doesn't know what Philip Ball is talking about (e.g., the contrast between the response of linear systems to random shocks and nonlinear dynamics, Alan Kirman's work), Philip Ball has not made his case.

[Steve Conover]

FYI, Eric Beinhocker addresses all this and more in his book "The Origins of Wealth." Here's an entry I posted at my blog:
http://www.optimist123.com/optimist/2006/09/read_this_book.html

If you only have time for two chapters, make it chapters 3 and 4.

[radek]

Uh, Robert, where does Ball mention Kirman in this particular context? And honestly I don't know what Ball is talking about either. Maybe because he's making sh*t up.
(And I gotta say this again. Alan Kirman has made many important contributions to economics some of which have since been seized on by ideological hacks completely out of context and totally misunderstood)

[Dave Altig]

Robert -- I an aware, although I admit only in passing with evolutionary models. (I will make an effort to take a look at the Beinhocker book that Steve Conover notes.) But I'm with radek -- if Ball wants to make the case that these sorts of models are useful in ways that neoclassical models are not, then he should make that case. What he should not do is say a bunch of things about the conventional framework that simply aren't true. And maybe you can point me to the part of Kirman's work that suggests his complex dynamical systems are superior to models relying on individual maximization because they are not rightwing.

[philcball]

The key criticism here – and in most other critiques of my article – is that economists seem to be reading “neoclassical economics” as “all of economics”. Interesting, that, and perhaps revealing, but come on guys, read the print. Once you do that, the remark about institutions collapses. So does the remark about market efficiency.

So let me say this clearly. Lots of economics goes beyond assumptions about perfectly rational agents, fixed preferences, perfectly efficient markets and so forth. That’s great. But lots doesn’t, and there are journals where you won’t get a look in if you challenge that dogma. My point is that it is time to ditch those notions altogether. Stop teaching them to undergraduates. Not only do they not work, but they are (mostly) demonstrably wrong in behavioural terms, and even if you accept them, the models derived from those assumptions are internally inconsistent. Won’t you at least admit that?

“It is tempting to infer that…” This is a rhetorical structure. It implies that “Yes, it’s tempting, but we should resist that simplistic idea.” I didn’t think this was so hard so understand, but sorry if I was wrong to assume that. In any event, clearly I shouldn’t have mentioned the dread words ‘right-wing’, because you’ve really got hung up on that. I’m interested in why it provoked such a response.

“This error” – is not that economics is highly mathematical, but that economics got stuck on ideas of equilibrium and a balancing of forces. Again, that’s what my article says quite clearly.

“Business cycle” – words matter. Cyclicity has been a persistent myth in economics, whence Kitchin cycles, Juglar cycles, Kuznets cycles, Kondratieff cycles, ad nauseam. Ditch the word – it is not helping. In fact, if this really is ‘fine’ with you, then do call them ‘aggregate fluctuations’. ‘Cycle’ sounds like something well behaved and well understood. ‘Fluctuations’ sounds a bit more disconcerting, but why not face up to that?

“RBC theory” – yes, that’s what I’m referring to. And as I clearly said, what I object to is the way it places the cause of fluctuations outside the system, in the form of random, external shocks. Why not entertain the idea that the fluctuations may be intrinsic to the dynamics of this complex system?

“Conversations like this one” – that ‘conversation’ begins “The rational expectations hypothesis swept through macroeconomics during the 1970s and permanently altered the landscape. It remains the prevailing paradigm in macroeconomics, and rational expectations is routinely used as the standard solution concept in both theoretical and applied macroeconomic modelling.” Look, I’m glad that hypothesis is now being debated, but are you seriously saying that this disproves my point?

“Whatever” – i.e. shut up. Well, OK, it’s your blog. But I thought these comments were meant to be pointing out my errors.

‘Mohr’ – seems to be saying ‘well, you could be right, but if so, change could take 300 years.’ Well, you said it. I’m more optimistic.

‘Robert’ – couldn’t have put it better myself.

‘radek: I don’t know what he’s talking about either’ – what did I say in the article about blank stares?

I’ve no objection to economics calling itself a science. I believe that is just what it should be. And it’s a really, really hard science, which other scientists don’t sufficiently appreciate. What puzzles me is why it is finding it so hard to discard wrong ideas. All sciences struggle with that, but this one seems to have more problems than most. At least one economist agrees: see the FT on 6 November, http://www.ft.com/cms/s/d0cd9ee2-6d3b-11db-9a4d-0000779e2340.html.

But look, I’m sure all of this sounds more aggressive than I want it to, because I get irritated when I think my words haven’t been read properly. I’m not interested, however, in saying that I’m right and you’re wrong. There’s a lot I can learn from this exchange. And I recognize that I could have done more to indicate that there are many branches of economics, by no means all of which suffer from the defects I mentioned. If I’ve provoked discussion, the article has served its purpose. Let’s try to keep it as discussion, and not turn it into a battle.

[radek]

""The key criticism here – and in most other critiques of my article – is that economists seem to be reading “neoclassical economics” as “all of economics”""

Unless you're confusing "neoclassical economics" (which is a fuzzy way of just saying "most economics") with "new classical economics" then this critique is correct.

""there are journals where you won’t get a look in if you challenge that dogma.""

And which would these be? Have you looked through the articles in AER, JPE, QJE, JEP or JEL in the past ten years? Like I said, you're making sh*t up.

""Not only do they not work, but they are (mostly) demonstrably wrong in behavioural terms""

Actually as a first pass at looking at a particular phenomenon they often work surprisingly well. The extent to which they are "demonstratrably wrong" is smaller then you think - consider for example Vernon Smith's work. Or, like Kahnemann himself said "the standard economic paradigm of rationality is applicable 90% of the time. I'm just focusing on the 10% when it isn't".

""and even if you accept them, the models derived from those assumptions are internally inconsistent. Won’t you at least admit that?""

No, I won't admit it because it's false. If nothing else, economic models ARE logically consistent - anything that isn't, like say the concept of 'conjectural variation' that Keen is so enamored with, gets picked apart by the profession very quickly. In the same vain, rational expectations, for all its strong assumptions, largely came out of an effort to model expectations about the future consistently. You might think the assumptions are crazy, the parameters not estimatable, some concepts too abstract to have real world relevance. Fine. But logical consistency is one thing we do well.
Looking at your various responses it seems like you've just brought your ideological prejudices to the table (and like Paul Krugman says, it's not the job of economic theory to agree with folks' pet theories), combined it with a superficial view of economics as gleaned from hacks like Keen who have no understanding of what they're talking about and proceeded to make some arrogant pronouncments and generally insulted people.
This is why you're getting flak. Which you deserve.

[bailey]

"If you want, call economics an attempt to construct coherent stories about social phenomenon. I'm proud enough of that."

I like that.

[philcball]

Well, I'd hoped to turn mudslinging into debate (and actually there has been some interesting debate both here and on Mark Thomas site). But it seems that economics (or at least, the economics blogosphere) has a different and far more aggressive mentality from the one I'm used to in the natural sciences. If the attitude is like Radek's, to say I'm right, youre an idiot, and the folks who disagree with me are by definition ideological hacks [I'm not thinking just or even primarily of Keen] and are talking out of their backsides, then frankly I'm not interested. It doesnt strike me as an attitude born of intellectual security (or a great deal of maturity, for that matter). Still, thanks to some of you for the considered comments, pro and con.

[Dave Altig]

Dr. Ball --

Thank you for the measured and thoughtful response. And let me start my own by apologizing for the "whatever" that ended my post. I really didn't mean it say "just shut up", although I admit its hard to interpret it any other way. You are correct in surmising I was trying to make considered comments and that offhand remark had no place. My bad.

I'm not quite so sure why you react quite so negatively to radek's latest comments. I think he (or she)is articulating what many of us think is problematic with your critique -- your examples of things that we economists are presumably doing wrong just doesn't jibe with what we know to be going on in the profession. If the dominant paradigm remains rational expectations, for example, it is not because we are unaware of the many behavioral puzzles that exist or have no interest in phenomena like learning dynamics. Nor is it the case that there is no research into these issues or that researcher can't publish in the major journals if someone has something constructive to say about these issues. The problem is that we have not yet figured out how these types of expectational elements can be used to sufficiently discipline model predictions. That search for that sort of discipline was exactly what motivated rational expectations in the first place, and I think most of us would gladly throw it overboard if we thought it would help us better answer questions we are interested in.

To your comment: "what I object to is the way it places the cause of fluctuations outside the system, in the form of random, external shocks. Why not entertain the idea that the fluctuations may be intrinsic to the dynamics of this complex system?" I confess I still don't quite understand. Almost all of modern macroeconomics is about discovering the internal mechanisms that generate economic fluctuations. It is true that the impulses are stochastic shocks -- we try to interpret them, but they do largely arrive out of black boxes. But am I mistaken in thinking that physics, for example, still relies on models that are essentially systems of stochastic differential equations? Economics did have its moment of interest in chaos, or purely deterministic but highly nonlinear dynamic systems. Not much progress was made that I know of -- maybe we gave up too soon. But has the paradigm of chaotic systems carried the day in other sciences? Or am I (again?) simply not understanding the point.

As for the right-winger designation, I think I do not protest too much (as your comment suggests). I simply have no idea what it means, and as a critique it is unhelpful. I gather you agree, so we can leave it at that.

Here's the rub: As I read through your response, it occurs to me that what you really object to is the assumptions that economists make, something that economists generally argue cannot form the foundation of a considered critique. Maybe I am wrong about that, but I have yet to hear examples of what predictions and explanations our standard models get wrong that other models (not already embraced by economists) get right. If you have a battery of such examples, I would love to see them.

To close, though I disagree with you, I really am sincere in saying thanks for the prodding.

[radek]

Phil, your original article didn't shy away from mudslinging, whether you understood the subject matter or not. In fact, it was one big mud loogie. So I'm surprised (well, no not really, since this is a standard rhetorical trick) that you're surprised by my "attitude". I made specific references to what you said, and made specific counter arguments to yours. But YOU chose the tone of the discussion, so please drop the false innocence and hypocrisy.

In truth I have a lot of respect for many people who make criticisms of economics, even from an outsiders perspective, as long as these people actually bother to familiarize themselves with the field. At the same time there is a lot of "hacks" out there who contriute nothing but noise to the discussion. And yes, it gets old trying over and over to explain to people who don't know and who don't want to know how economics actually works. And this tiredness and frustration does sometimes show up as terse and curt replies.

[radek]

To wit:

"It is easy to mock economic theory. Any fool can see that... "

and that's just the start.

[philcball]

Dave,
I’m very grateful for your thoughtful and gracious comments. They make me realise that in fact I need to climb down from my high horse too and make sure that I am listening rather than just defending.

‘Right-wing”: First, let me reiterate that this could all be something of a red herring, since, as I said, I wasn’t saying that the conventional economic theory stems from right-wing beliefs, but almost entirely the opposite: that it would be tempting to suspect that, but that we should resist that temptation, because the current shortcomings, as I see them, have a quite different source.

But I fully accept that terms like ‘right-wing’ are not helpful, or even meaningful, in an academic discussion about economics. Indeed, I think we have had a recent illustration of that here in the UK, where the appearance of Adam Smith on the new £20 bank note has sparked a dispute in which both the political left and right have been trying to claim Smith for themselves. This, of course, misses the point that Smith was merely calling things as he saw them, regardless of the congruence with any particular political persuasion. In that regard I fully agree with the quote from Krugman, and I am perfectly happy to believe that economists take the same objective, politically neutral approach to trying to understand the economy. One of the things I said in my book Critical Mass is that, once we adopt such an approach to understand society, we need to be prepared to have our political preconceptions challenged.

Yet I do think that the term has some currency in a newspaper article, which is necessarily discoursing in a more colloquial vein. I think, for example, that few (certainly in the UK) would have any difficulty in understanding why a theoretical stance that argues for unfettered free markets fits with what the political right has been attempting to do (and often succeeding in doing) for the past several decades. I’m somewhat agnostic on that – I am sure that market competition has improved efficiencies in some areas, but it is very clear that it has been disastrous in others. I realise also that economists don’t generally argue for such a simplistic interpretation of neoclassical economics, and that the idea of market inefficiencies is completely mainstream. But the problem is that mentioned by a professor at LSE in one of the follow-up letters to my FT article (see http://www.ft.com/cms/s/8ddd349e-6d3b-11db-9a4d-0000779e2340.html): in the real world, the subtleties of economic theory are often stripped away to produce a dangerously simplistic message. That’s a problem for all of us (and for which real economists are usually not to blame – I think Krugman gave a nice account of how that process happened, in the US at least, in ‘Peddling Prosperity’).

What are the ‘better’ ideas? I accept that there isn’t a ‘better’ economics applicable to all situations, but that different tools will work for different circumstances. But it has been said to me just too often to attribute it to a few lone grudges that there is a strong opposition in some quarters to new ideas that deviate from the notion of an equilibrium market created by rational, or boundedly rational, and generally homogeneous agents. For example, I understand from one of the editors of the new Journal of Economic Interaction and Coordination that it was started because it was almost impossible to get work on interacting-agent models into most of the standard economics journals. The fact that these models don’t have an explicit equilibrium built into them, for example, was considered to be one strike against them from the outset.

I was criticized for alluding to the notion of Pareto optimality. Yet Kirman has said “The fact that the market equilibrium with its associated allocation of resources is Pareto optimal, is what is given as the principal justification for the market economy… the situation in which we find ourselves today [is as] victims in a certain sense of a very peculiar vision of equilibrium which has little empirical content.” In fact, Morishima pointed out in 1964 that “If economists successfully devise a correct general equilibrium model, even if it can be proved to possess an equilibrium solution, should it lack the institutional backing to realise an equilibrium solution, then the equilibrium solution will amount to no more than a utopian state of affairs which bear no relation whatsoever to the real economy.”

My contention is that interacting-agents models, which demand no a priori assumptions about agent behaviour, nor about its homogeneity, nor its capacity to evolve, and which do not impose an equilibrium perspective but models the system as a dynamic one, seem much more likely to do a good job of capturing many aspects of the economy. I don’t advocate them as a panacea. But the shame is that these approaches, while to some extent tolerated, seem to be marginalized, seemingly because of entrenched beliefs about how the economy works. I have heard that complaint too often, and from too many sources, to think it is just the whining of a lunatic fringe.

Criticisms of RBC theory: you’re quite right that many models of physical phenomena incorporate a stochastic noise. But – and I’m open to correction if I have this wrong – my understanding is that in RCB theory, if there are no exogenous shocks, then there is no ‘business cycle’. In other words, the imposed fluctuations might be modified by the behaviour of the economic system but are not intrinsic to it. A non-equilibrium theory, meanwhile, would allow the possibility that the system is intrinsically unstable and nonlinear (rather than just being a bit noisy).

Radek – you’ve misunderstood my meaning at the start of my FT article. ‘Any fool can see’ is not saying ‘So economists are worse than fools’, it is saying ‘Of course economists realise that this is a gross simplification of human behaviour’. My complaint was not that those models are stupid, but that alternative ideas get a hard time. But maybe I did not choose my words carefully enough.

Anyhow, I very much appreciate that, even if we don’t agree, it seems we can disagree calmly.

[radek]

Fair enough Phil.

[Dave Altig]

Philip --

Boy, I think we are almost in agreement. As the conversation has progressed, it does strike me that there may be a bit of a semantic difficulty. I gather that when you use the term "equilibrium" you mean are using for the shorthand "unique and stable equilibrium"? The formal mathematics in our models do generally allow for solutions that are unstable and underidentified. In fact, several important narratives of the "great inflation" of the 1970s and its conquest rely on indeterminancies that allow "sunspot" fluctuations, escape dynamics in which a large enough shock can push the economy off of a locally stable equilibrium onto an unstable path, and so on.

That said, it is true that the dominant strategy is still to find ways around indeterminancies, instabilities, and nonlinearities. This is changing as our formal techniques improve, but we are not immune to the "looking under the lamp post" charge. On the other hand, there is an argument that such things as sunspots are more due to the necessarily incomplete nature of models, and that getting carried away with the wierd places the math might take you risks missing the point. I consider the case open on that one.

I also concede that adopting a modeling strategy that deviates from the conventional approach makes it harder to publish in mainstream journals, and hence to be taken seriously. That is an old problem in intellectual discourse -- and, of course, not unambiguously bad, as such conservatism promotes a common language upon which informed discussion can proceed. It does, on the other hand, certainly risk reactionary attitudes. I guess what I was arguing is that I think we economists are trying to be pretty good about keeping an open mind. I will, however, repeat one of my earlier comments: We are a positivist bunch, so it is unlikely that an approach relying on the notion that bounded (at least) rationality is a bad place to start is unlikely to gain much traction absent clear cut examples where assuming otherwise takes to a better understanding of the questions that economics has carved out for itself. I hope that falls more in the category of good scientific conservatism than reactionary conservatism.

As for the Pareto optimality issue: I think you are right that this is an idea that contributes to neoclassical economists' affection for "the market." It is certainly true in my case. However, we should be clear that the Pareto concept only says that a market can replicate the choices that would be made by a benevolent social planner -- where benevolence is defined only by the Pareto criterion of making nobody worse off whle improving the lot of another. In that sense, Pareto efficiency has nothing to say about the dominance of free market economic arrangements per se. In fact, I gather that those who would put themselves in the tradition of, say, Von Mises would object that neoclassical reliance on the Pareto idea misses the point about the virutes of the market entirely. Furthermore, Pareto efficiency is silent on issues related to the distribution of income. I think most economists would not concede that such issues are unimportant (though I am one of those who think economists should more readily admit how little we have to say about the normative aspects of that issue.)

Thanks again for all your input. you put up with some grief here -- and even more at Mark's blog -- but it really has been a good thing. I hope it continues.

[philcball]

Dave,
I have a sense that you may be as surprised as I am, given how this started out, that we can now see this degree of convergence. But I'm very glad that you feel that way. I'm deeply appreciative of your thoughtful comments, which I can see have been based on constructive and valuable criticism. I feel that I've learned a lot from the exchange. There's much in your last set of remarks that I should and will ponder carefully. Thanks again.

[TCO]

I read the Ball article and found it very naive. For instance, one does not have to believe that every actor is rational to get an efficient market's assumptions price. Just as individual animals do not need to change in response to changed environment...rather selection among them will drive evolution. I really don't think the guy is that bright. Not a surprise...lots of scientists...and science magazine editorial writers are not.

[Ray Tomes]

I make some comments in my blog regarding wikipedia article on Edward R. Dewey and purported criticism of this by Philip Ball. So I found your discussion here and in the preceding article interesting. You and your readers might also find this material of interest.
regards, Ray Tomes
http://ray.tomes.biz/b2/index.php/a/2007/02/02/edward_r_dewey_and_philip_ball