O ponto de equilíbrio da HPE.

O conceito de equilíbrio permeia a história do pensamento econômico desde Adam Smith. Raros são os economistas que se aventuraram em pensar a ciência partindo de outra base, entre eles alguns nomes mais conhecidos são Marx, Schumpeter, Minsky, Veblen, Myrdal, Young e Kaldor. Além desses autores, que recebem pouca atenção da profissão, há outros que recebem ainda menos atenção como Patinkin, Clower e Leijonhufvud que nas décadas de 60 e 70 lançaram uma agenda de pesquisas desequilibrista, virtualmente esquecida pelos economistas contemporâneos.

Esse movimento desequilibrista surgiu como uma resposta à síntese neoclássica de meados do século XX em que o arcabouço Walrasiano foi conciliado com o Keynesiano, inaugurando a era do equilíbrio geral enquanto modus operandi da ciência.

A síntese não se deu sem custos, tanto Walras quanto Keynes foram caricaturizados e não por acaso a agenda de Patinkin, Clower e Leijonhufvud é conhecida como Keynesianismo Desequilibrista. O ceticismo em relação à síntese neoclássica originou um período de intenso debate entre economistas; os desequilibristas ficaram em segundo plano enquanto a atenção da ciência se voltou ao debate entre os Neo-Keynesianos e os teóricos dos Ciclos Reais de Negócios a partir da década de 70.

A ciência econômica tornou-se um campo de guerra até a década de 90, que veria a emergência de um novo paradigma. O consenso entre os Fresh Water e os Salt Water na virada do século, ou a nova síntese neoclássica, lançou a teoria do equilíbrio geral em novas bases: os modelos DSGE.

Assim, nota-se a resiliência do conceito de equilíbrio na ciência econômica.

A conclusão elementar dessa estória?

O ponto de equilíbrio da história do pensamento econômico é o conceito de equilíbrio.

Behavioral Economics, back to the future?

Behavioral Economics is not a new science, it is rather a new method applied to an old concern.

Jevons and Edgeworth were practitioners of Behavioral Economics, as long as we understand this branch of Economics in a broader sense. Marshall, likewise, opens his "Principles" stating that Economics "is on the one side a study of wealth; and on the other, and more important side, a part of the study of man". 

But then there was the Paretian turn. Fiat homo economicus! 

Most people would blame Walras, but that is not quite true. 

What has come to be known as Walrasian Economics does not resemble Walras' original thought. One should blame Allen, Hicks and Samuelson for the façon de parler imposed upon the french, poor little León!

Little by little Economics became an "as if" science, the process of decision is something that should concern Psychologists, not real practitioners of science. For there are those worried about stupid little things, e.g., the human mind, and there are real scientists, capable of taking the derivative of a trigonometric function in a blink of an eye.

Let me get back to the point, me and my friend Alysson Lorenzon Portella are writing a paper about this subject (it will be less ironic and more interesting than this post, I hope).
Our argument is that Walrasian economics can be interpreted as an interregnum in the History of Economic Thought. 

We address the plurality that once populated economics, particularly Armstrong, Bernardelli and Georgescu-Rogen and how they relate to Behavioral Economics, the awkward interpretation of Walras' tâtonnement and how it became the modus operandi of our science, and, finally, the possibility of modern economics divorcing from its Lausanne School monotheism. 

I'm happy to be married with my lovely wife, but please let me have intercourse with different areas of science. Marrying once is great, but twice is just stupid! 

Are we headed to a new cycle of plurality in Economics or is nowadays call for change just a consequence of the crisis?

Economists are full of crap with their crystal balls and their pseudo-science-santeria,
so I don't dare answer to such question.

All I have to say in that regards is:

Keep your eyes wide open, don't marry the status quo and do what you believe, 

don't believe in what you do. 

Rationality for Mortals: How People Cope with Uncertainty

"The agent's behavior is like a bird that drops down instantaneously to the optimal bundle, rather than like a worm that actually moves through the choice space in real time to arrive at the optimal choice. Of course, if the behavior was worm-like, the particular path taken might matter to the final choice" (Georgescu-Roegen).

Gerd Gigerenzer’s book presents a richer interpretation of human beings' cognitive processes when compared to economists’ workhorse. Following Herbert Simon’s concept of bounded rationality, the author argues that humans use fast and frugal heuristics to cope with uncertainty. In many decisions time and information are limited and we use simple rules of thumb to guide our choices. Imagine a baseball player trying to catch a flying ball; according to the economics modus operandi the homo economicus solves a system of differential equations and calculates where the ball will land, whereas, in the real world, players use the gaze heuristic keeping a straight angle between their eyes and the ball and adjusting their speed accordingly.

Herbert Simon’s bounded rationality has led to two different approaches; in game theory many authors have examined its implications for equilibrium while behavioral economics has set numerous experiments that illuminate agents’ deviations from rational behavior. Gigerenzer is critical of both interpretations of bounded rationality, he stresses that human beings are neither rational individuals facing constraints, as in game theory, nor irrational individuals as proposed by behavioral economists. Rather humans are ecologically rational in the sense that they have developed several heuristics which are evoked depending on the environment surrounding them. This is a much brighter picture of the actual decision making process than utility maximization, for institutions, social contracts and the environment play an important role.

The economics reformulation agenda must focus on transforming the one way road that leads from micro to macro into a system with feedback effects, recognizing that decisions taken by individuals reshape the environment, which, in turn, implies reevaluation of their choices.

I end this post with a timeline I have created based on the paper “Deviations From Homoeconomicus and its Impacts on Economy” (Billur Şeniğnea and Hale Kirerb). They discuss how the concepts constructivist rationality and bounded rationality have divided some of the greatest minds through the last centuries. In addition to the theorists cited on this paper (in black) I add a few more (in orange). 

Capital in the 21st Century - Introduction

Notes on Piketty’s Book – Introduction

The first chapter of Piketty’s book stresses the importance of bringing inequality back to the heart of economics. Taking a quick trip through the history of capitalism, inequality is shown to be a central feature since its dawn. Economics was born at the same time as capitalism (or from the same mother). In its early days, the Classical Political Economy saga, distribution was one of the key questions. Malthus, in 1798, predicted there would be overpopulation; “it is impossible to understand Malthus’s exaggeratedly somber predictions without recognizing the way fear gripped much of the European elite in the 1790s”. Ricardo, in the early nineteenth century, based on the idea that the scarcity of land would inevitably on the long run cause landowners to increase steadily their share of output and income, shared with Malthus the view of an apocalyptic future for capitalism. For Marx, the third prophet of doom, not landowners, but industrial capitalists would accumulate steadily capital and capitalism eventually would succumb to its illness.

One important lesson from these three examples is that regardless of the failure of their predictions, they were asking the right questions. Economists are often worried about errors type I and type II, but seem unaware of error type III, i.e., providing the correct answer for the wrong question. Piketty is quite critical about the state of affairs of economics, which “should never have sought to divorce itself from the other social sciences and can advance only in conjunction with them”.

I shall argue, the prevalence of method over substance inevitably leads to error type III. When “how” comes first and “what” is secondary, we’re necessarily building an edifice of mathematics over a swamp.

“To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences”.

In other words, if you are making error type III it doesn't matter how elegant is your mathematical apparatus or how well data fits your model. 

I end this first post on Piketty’s book with two graphs that speak louder than words, if and only if you are convinced the shit hasn’t even begun to hit the fan:

     

A crítica de Lucas Marley

Só mesmo o café

Permite entender

A maldita algebrera

De onde brotou esse c.

Equação compreendida,

Simplificação embutida,

E o reggae de Lucas

Racionalizando as expectativas da vida.

Eu, o café, o livro, a música e a gata,

Internalizando a crítica ao sabor do vento:

Você pode enganar algumas pessoas algumas vezes,

Mas não todas todo o tempo.

Houvesse três pequenos pássaros

À janela da minha alma,

Fosse o sol mais quente e eu mais frio,

A matéria estaria na palma.

Seria a vida mais calma?

Exercício contrafactual de pouca valia.

Penso no velho barbudo.

Se vivesse, hoje, de que lado estaria?

Pudesse escrever por mais tempo,

Faria um poema melhor,

Mas esse mestrado mecanizado

Implica saber tudo de cor.

A day with Amitava Krishna Dutt

Actually, last week we had two days of Dutt, the best academic experience I’ve ever had.

Talking to Dutt was a confirmation of an old dream: to go abroad for my Ph.D.

Not that we don’t have excellent professors in Brazil, we do! Gilberto de Assis Libânio, Dutt’s host during his journey through UFMG, is a brilliant professor as well, and I’m quite glad to study Macroeconomics with him. However, he also took his Ph. D. abroad, at Notre Dame, which partially explains his broad vision of economics.

Back to Dutt, the most remarkable feature of his personality is that he is definitely not radical. In economics we are very much used to extreme reasoning, there are several schools of thought fighting over semantics. Had we learned “The tower of Babel” moral, much of the disasters we see in our society could have been avoided. Rather than working together, however, economists preferred fighting for hegemony within the profession. Take mathematical models, for instance. Instead of debating which models work under specific contexts, we engaged in a hopeless competition, as if some particular model could answer everything everywhere. I wish I could say economics is playing a zero sum game, but I think it’s a negative one.

Dutt’s open minded vision of our science reminded me the most important lesson my father has taught me, Aristotle’s Golden Mean. My dad behaves like a Greek philosopher in many ways, even though his Ph. D. was in a different field within philosophy. If economists took Aristotle seriously, the current debate about pluralism in economics would be redundant. Unfortunately, nevertheless, we focus so much in mathematics we can barely dialogue with other fields of science. The trade-off of being a brilliant mathematician is the lack of a critical view. An obsessed mathematician might not even notice the homeless family living nearby his house due to the fact that every time he walks by them he is trying to solve one of the millennium prize problems.

I have no problem with mathematics; it has always been my favorite subject, actually. However, thanks to my father and the great professors I had during my undergrad at UFMG such as Hugo da Gama Cerqueira , João Antônio de Paula, Eduardo da Motta Albuquerque and Marcelo Magalhães Godoy, it has become clear that sticking to a particular interpretation of the world isn’t going to change our dismal science, not to say our society, which should be our goal.

Some students choose economics to earn a fat check working at the stock market or the like. But I still believe (you can call me naive) that most students engage in economics in order to grasp a better understanding of our society, and, in the limit, change the world (or at least to help the homeless family living nearby you).

Dutt’s lesson, put it short, is that optimization might be helpful to understand specific issues and we shouldn’t doom mainstream economics. The blind belief of standard economics as a method that can solve any problem, on the other hand, is jeopardizing to the future of economics, and, more importantly, of our society. 

Me plus you over two

You say I’m not consistent,

I don’t converge in time,

I am a random walk.

You’re not. I wonder why.

You distribute your time

in such a normal fashion,

while I get stuck with mine,

most likely in recession.

The product of us two

is simply our summation.

No stupid logarithm law,

just love / formalization.

What I do is conditional on you,

for we’re not independent,

but it’s not a matter of who guides who

we’re not each other’s pendant.

If I were a function of you

how different would it be

then, take the reciprocate,

if you were a function of me?

Fixed Quota System x Tradable Procreation Permit

Comparing the fixed quota system with a tradable procreation permit, I would argue that the latter is more questionable than the former. Even though a tradable procreation permit would be efficient whereas a fixed quota system would not, its impact in terms of eroding people’s perception of how fair their community is offsets efficiency gains. People’s expectations about one another affect their behavior towards the group, a position underpinned by a large body of recent academic evidence that rejects the idea of the utility maximizer representative agent. It is rather the case that emotion and moral codes play a major role in human decisions. In this vein, one’s attitude toward his or her group, including whether  one cooperates or not and to what degree, depends fundamentally on the person's expectations about the rest of the group. Hence, the fairness of public policy fosters cooperation among agents. The design of public policy and institutions must account for this behavioral effect, taking the discussion beyond efficiency concerns.

Specifically as regards the options at hand, a fixed quota system is problematic in a highly unequal world. Imposing a significant fine on the poor for an extra child limits their freedom regarding family decisions, whereas for the rich the cost of having more than one child dissipates in their mammoth budget. A fixed quota system, however, can be socially acceptable by letting the fine on extra child be proportional to income. On the other hand, when there is a market for the right to have a child, such as a tradable procreation permit, the nature of having children changes drastically. When kids are goods, having a child implies an opportunity cost absent under a fixed quota system. Kids would most likely become luxury goods under such conditions; rich families would be notable for having five kids. For the average guy, having a child would imply not earning a lot of money, as the right to have kids would presumably be quite expensive. A young couple would thus be faced with the awkward decision of having a kid or selling the right to do so and travelling around the world, buying a car or an apartment and so forth. Who knows what the price of life would be? For poor people, having a child would be a burden; selling their fundamental right to have a family would be a matter of making ends meet. A market for children introduces an opportunity cost, its corollary is to create a fallacious equivalence between money and life, as if they were interchangeable.

Most economists would argue it’s a paradox that one system can be more efficient yet less preferable than other. Mainstream economics isolates moral concerns from its analyses claiming everything can be understood as goods. Economic models and its restrictive hypothesis, however useful, must operate within its boundaries. Most relevant economic questions lie beyond orthodox framework, and, in such cases, dialoguing with other fields of science is paramount.

PS: I'd like to thank the old salt Pedro Mendes Loureiro for very helpful comments on a draft of this post, thank ye matey! 

Robot Economicus

Adam Smith economics can’t be seen as value-neutral driven. Modern Economists misread the father of economics by either not reading The Theory of Moral Sentiments or by considering it independent from his other book, slightly more famous. Oddly enough, the so-called father of economics gave birth to a child that didn’t share the Scottish Enlightenment’s DNA, for Smith’s reasoning was embedded on Scottish Tradition under which moral concerns played a major role.

Born out of Smith’s wedlock with the Illuminati, not exactly nine months after the author’s major academic intercourse in 1776, the Homo Economicus, put it short, is a misinterpretation of Smith’s self-interest concept.

Little by little the politique was taken away from the économique and economics became mathematics. In order for economics to be a science such as physics men were reduced to atoms. Quoting Murray Gell-Mann, “Think how hard physics would be if particles could think”, now, think how hard economics would be if men had feelings...
Modern economics, under the streetlight effect, asks not this question. A drunken mainstream economist is looking for his car keys under a lamppost, a younger economist asks whether he has lost his keys there, the prominent economist replies: “No, I lost the keys somewhere across the street, but the light here is better”. The youngster follows his master with all his heart, ironically, for heart matters belong not to the modus operandi of his science. He gets thrilled when his paper proving that emotions play no role in economics wins the Clark Medal. In the following years he gets completely obsessed with the possibility of winning the Nobel. Unfortunately this fairy tale doesn’t have a happy ending; during his lifetime another economist was actually able to prove that humans are robots, hence winning the Nobel prize for his major contributions in fostering the scientific inherent aspects of life.

Passionate economists argue that Robot Economicus inhabits our world, they twist-and-shout and scream-and-cry to defend their deep beliefs. Just don’t blame Adam Smith for our blindness, the man he portrayed wasn’t ruled by algorithms:

“Though every man may, according to the proverb, be the whole world to himself (...) Though his own happiness may be of more importance to him than that of all the world besides (...) In the race for wealth, and honours, and preferments, he may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit (…) They readily, therefore, sympathize with the natural resentment of the injured, and the offender becomes the object of their hatred and indignation”.