Debunking Economics – Don’t shoot the piano!

I have argued elsewhere that it is meaningless to criticize mathematics per se. As Steve Keen puts it, “while it is undeniable that an inordinate love of mathematical formalism has contributed to some of the intellectual excesses in economics, generally this reaction is as erroneous as blaming the piano for the discordant notes of a bad piano player. If anything should be shot, it is the pianist, not the piano”. His book combines sound theory (Marx – Schumpeter – Minsky – Keynes) and chaos theory (non-linear differential equations) to analyze the inherent instability of a monetary economy.

He argues that poor scholarship leads to bad theory, both regarding the lack of knowledge in the history of economic thought as well as the lack of proper mathematical training. It is interesting to note that neoclassical economists are so vain about their unlimited mathematical skills and reject their critics on the basis that they do not understand math and therefore aren’t in a position to criticize their work. This can be traced back to Walras:

“As for those economists who do not know any mathematics […] let them go their way repeating that ‘human liberty will never allow itself to be cast into equations’ or that ‘mathematics ignores frictions which are everything in social sciences’ and other equally forceful and flowery phrases”

Ironically, Kalecki who was a great mathematician (see Libânio) was left at the backwaters of economics, which leads to the conclusion that the neoclassical claim to be scientific does not hold up to scrutiny. Since he had a Marxist background where classes were the basic unit of analysis and did not use the conventional tools – equilibrium, utility and production functions, optimization – he was ignored, as anyone who doesn’t follow the dogmas will. To put it short, mathematics on itself won’t take you to the ivory tower of neoclassical economics.

Tony Lawson, trained as a mathematician, supports Keen’s point that you don’t need to be a bad mathematician to be critical of economics. Eric Weinstein, in the same vein, proposes Gauge Theory to deal with economic issues. Evolutionary economics and complexity theory, as well, provide alternatives based on evolutionary game theory and computer simulation that are far from nonmathematical and take the social and historical much more seriously than standard economics.

For every flaw of standard theory there are ancillary assumptions to save the day, however, as Lakatos argues, this is a sign of a degenerative scientific research program, one in which the hard core is constantly being incapable of explaining new phenomena and most effort is applied at adjusting the ancillary assumptions.

Hence, whether you are enthusiastic of Keen, Kalecki, Weinstein, Evolutionary Economics, Complexity Theory (or what have you) you are entitled to say: “don’t shoot me, I’m only the piano”. However, be aware you won’t be invited to play in the lousy gigs where most of the audience goes. But, who said the best parties are the most crowded?

We are all Keynesians now. Really?

Economists are often caricaturized, as if a single photo could describe a film. I have talked about Adam Smith and someday I’ll talk about Walras and Phillips “Dundee” (believe it or not, he was a crocodile hunter in his youth). 
Today, though, I’d like to make a few comments about Keynes.

We are not all Keynesians now. Keynes has influenced economics deeply, but not through his original contribution. The travesty version of Keynes (IS-LM) was a benchmark for quite a while and still lives on undergraduate textbooks, although “cutting-edge” economics has long ago dismissed this flawed interpretation of the General Theory.

I’m not sure why, but as I was an early undergrad learning IS-LM I read Hicks’s paper admitting he was wrong about it (published at the Journal of Post-Keynesian Economics in 1980). I like to think I always struggled with IS-LM because I knew it was wrong from the outset, although it was probably just because I’m not the brightest bulb in the chandelier. Be it as it may, I got Hicks's point that Walras’ Law wouldn’t apply in his analyses and, therefore, it was not correct to use the traditional argument that n markets in equilibrium imply n+1 markets in equilibrium. In that sense, the Labor Market which was such an important feature on the General Theory was erroneously assumed to be constantly in equilibrium. Nevertheless, that could only be true for the intersection point of IS and LM curves, and since equilibrium theory never worried about the time element and dynamics plays no role (don’t be misguided about the D in DSGE, it’s subject to the same criticism although I won’t address this issue now) there was no actual investigation about what happens in disequilibrium and it was just assumed that in the long run we are all dead, pardon me, we are all in equilibrium. Further, uncertainty and psychological features that were paramount to Keynes’s analysis vanished in Hicks’s IS-LM model, which he later on admitted was “a product of my Walrasianism”.

What really amazes me and my motivation to write this post is that most of the profession seems not to be aware of Hicks’s rendition, perhaps because it was written in a non-orthodox journal. As Keen puts it, it “was generally ignored by economists who – if they were aware of it at all – would have been more inclined to put his views down to approaching senility to any blinding logical revelation”. The almighty Lucas, for instance, in 2003 (over 20 years after Hicks plead guilty) said:

“My credentials? Was I a Keynesian myself? Absolutely […] I remember when Leijonhufvud’s book came out and I asked my colleague Gary Becker if he thought Hicks had got the General Theory right with his IS-LM diagram. Gary said, ‘Well, I don’t know, but I hope he did, because if it wasn’t for Hicks I never would have made any sense out of that damn book’. That’s kind of the way I feel, too, so I’m hoping Hicks got it right”.

I don’t have a problem with mathematics being at the center of economics, my concern is that it seems as though it is the sole foundation of our science. My problem is the building of an intellectual edifice in such a fragile soil, the lack of dialogue among economists from different schools and the overall decline of interest in the history of economic thought. My stance towards economics is to get in touch with as many different approaches as I manage, although as Carlos Suprinyak once told me: “if there is one thing we should give credit for neoclassical economists is that time is scarce”. Therefore it seems almost impossible to become a great mathematician and a great historian. On the other hand, Suprinyak also said it is admirable that I am trying to combine historical analyses with an understanding of DSGE models and the like. 

I’m not sure how one divides optimally his time among studying different areas, and equating marginal benefit with marginal cost seems useless to answer such question. But there should be some effort among economists to understand one another, relying on each other’s expertise to create synergy.

If mainstream economists read or even talked to Post-Keynesians, for instance, they wouldn’t claim to be Keynesians. So, to the question are we all Keynesians now I answer:

No, we are all ultra specialized economists now.

We make a film out of a picture, and, even worse, claim to be one of the actors.

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: