Re: People who think that "rational economic man" is sociopathic might find this a bit humorous

[Jim Devine <jdevine03@xxxxxxxxx>]

me: >> Economists play a bait and switch game.

Julio
> Totally agree.  Only Marxists stick to our definitions and
> assumptions with absolute consistency, even if needs and
> circumstances change.  ...

I take this as an ironic statement, a critique of Marxism (in an
effort to defend neoclassical economics, its competitor?) I wish that
Marxian political economy were a consistent enough field to be
criticized in this way. Instead, it's a (small) number of
mostly-isolated and marginalized individuals with different
conceptions and theories who have a hard time talking to each other.
(Thus, I can only speak for myself. I cannot represent some mythical
group of Marxists or some unified "Marxist theory".)

On the other hand, NC economics represents the (much less
heterogeneous, much more disciplined) ideology of the dominant stratum
of the economics profession. This group hands out tenure and
promotion, raises and journal publications, etc., to those who agree
with the "consensus" and play by the rules.  BTW, that consensus seems
to include the idea that, all else equal, mathematical metaphors are
superior to other kinds of imagery.

me:
>> sure, people have conscious purposes, but that's very different
>> from  the neoclassical conception, in which those purposes are
>> typically seen as individualistic and almost always seen as
>> arising somehow from  outside of society (dropping from the sky
>> or determined by genes).

Julio:
> ... there is no point in criticizing a
> theory by simply opposing a more complex premise to the
> simpler one on which the theory is based.  The assumption of
> "rational" individuals is neither necessary, nor sufficient to
> characterize their method.  Standard economic theorists are *not* > committed to a single and fixed definition of "rationality."  Why
> would they?  Their specific definition of rationality is contingent
> upon the problem they're addressing and their ability to derive
> clear (testable) conclusions from it.

my point was that no sense of rationality in neoclassical economics
actually explains _anything_ because "tastes" or "preferences" are
themselves unexplained. The exception here is where the constraints on
individual action are totally binding. It's the constraints that help
explain behavior (to the extent to which it is explained), not the
maximizing assumption. (And there's a lot of behavior inside the
constraints.)

An example: One of the conceits of standard neoclassical economics as
actually practiced is that people are in some way the same as
profit-maximizing firms. It's true for the textbook perfectly
competitive firm that profit maximization gives a very specific result
(in the short run, with diminishing returns to a fixed input).

But people are extremely complex. We are HUMAN, rather than being
calculating machines. Not only that, but the constraints we face are
not simply in the market but imposed by other, extremely complex,
humans in a sociological rather than a market setting. (Strictly
speaking, a market _is_ a sociological setting, but to say so is
_heresy_ to the vast majority of economists.)

To say that people are analogous to firms is a slander against the
human race. It also plays an ideological role. If everyone is a
greedy, calculating, bastard (as is assumed in the individualistic
metaphysics of economics), then IMF structural adjustment policies are
okay, since those bastards will adjust. Who cares about the
communities, feelings of solidarity, etc., destroyed by the policies?
It's not part of economic science!

(BTW, sorry to all the OWs. I was using the word "bastard" as it's
usually used.)

_Some_ people act like maximizers in the market, of course. Enough
people are like this that the standard demand story works in a rough
and tumble way (in cases where income effects are cooperating). But
that doesn't say that _all_ people are that way. Note: this is a much
more sophisticated and empirical way of discussing human behavior than
is acceptable among the most mainstream economists.

(By the way, there are economists such as George Akerlof, who go
beyond the standard NC ideology. But they are the exception, not the
rule.)

> Other things equal, standard economic theorists prefer to base
> their reasoning on assumptions that are more -- rather than less --
> "realistic."

you exclude the entire Chicago school of economics here, despite its
overweening influence in policy matters these days (e.g., at the IMF).
About whom are you talking?

We might want to define "standard economic theorists" in ideal terms,
as the sophisticated elite of smart guys and gals that we like. One
problem here is that others have other preferences and may choose a
different group. Some choose Gerard Debreu, others Milton Friedman.
Etc.

Alternatively, we could define this group in terms of who has the most
weight in the real world (i.e., empirically). That's what I do.

> For the most part, their choice of definition is a
> compromise that trades off "realism" for analytical tractability or
> vice versa.  If they can get away with more complex definitions of
> rationality and still get clear results, they'll tend to use them.
>
> We need to understand the role of behavioral economics in
> today's economics.  Behavioralism doesn't substitute the results
> of standard  theory.  Not for the time being.

this is sad. Supposedly, economists want to think in a scientific way
(even though economics will likely never be a science like physics or
biology). This means that hypotheses should be rejected if the
perceived facts conflict with them. The main hypothesis that dominates
NC economics concerning human behavior is that of the individualist
utility maximizer. It seems to mean that behavioral economics
contradicts that hypothesis, so that the NC hypothesis should be
rejected. But no, that doesn't happen.

> To the extent the patterns
> established in those experiments can be formalized, they will only
> modify the abstract results of the standard theory.  Or -- to put it
> in more Hegelian terms -- they will only "transfigure" or  transform" > those results.

again, the results indicate that the individualistic vision that NC
economics pushes is wrong. That says that the model should be
transformed in a way that goes beyond adding a few more epicyles.
Instead of sticking with the Ptolemaic conception, there should be a
Copernican revolution.

This would involve a straightforward admission of the limitations of
the NC view of humanity (which really isn't necessary, BTW), along
with dumping the common disdain that NC economists have for other
social sciences. Social psychology (and other social sciences) would
play a big role in helping us to understand people. Economic thinking
(individual preferences --> collective results) would be seen as
_complementary_ to sociological thinking (e.g., social structure -->
individual preferences) as part of a dynamic system, rather than being
a substitute for (a competitor with) that kind of analysis.

> We may not like the analogy, but this is not very different from
> saying: "Assume all production industries have an average capital
> composition.  Then, the production prices are equal to the direct
> prices and the gross profits are the surplus exchange values.
> However, in reality, only by chance will an industry's capital
> composition coincide with the average.  Then, production prices
> systematically deviate from the direct prices and the gross profits
> from the surplus exchange values."

Again, talking about the process of market competition is very
different from talking about people (which I thought was the topic of
this conversation). The stuff in the quotation (which, from the
terminology seems to come from Anwar Shaikh or one of his followers)
can be seen in two different ways, or in both ways:

1. merely an algebraic (deductive) statement, given assumptions.  This
fits not only with Marxian political economy but with Ricardian
economics. (This seems to be your interpretation.) Actually, it's
consistent with a critique of one part of NC economics (see below).

2. a small part of Marx's abductive (deductive/inductive merged)
system of the analysis of capitalism as a society. The assumption of
equal compositions of capital is part of Marx's volume I analysis of
capitalist society as a whole, i.e., the battle between abstract
capital and abstract labor. Dropping that assumption represents a move
to the more concrete analysis of heterogeneous  "many capitals"
(though labor is still abstract) in volume III.

Obviously, both NC economics and (this version of) Marxian poltical
economy involve abstraction. (Only hard-core empiricists/inductivists
avoid it, but that effort is just as silly as is the effort of the
hard-core rationalists/deductivists such as Debreu and the French
school criticized by the "post autistic economics" (PAE) students.)
The question, of course, concerns the role of abstraction.

To Marx, abstraction is needed to understand the totality of
capitalism, the reality hidden if one looks at it _only_ from the
individual's perspective. Getting beyond the individual's
("fetishized") perspective allows greater understanding. But if the
old guy had finished volume III so that people could actually read it,
it would have been clear that he never rejected the individual
perspective root and branch. The "truth" is the whole (as Hegel
allegedly said), but that whole includes the parts. Moreover, Marx's
theoretical project involved trying to fill out the story even more,
by becoming even more concrete, e.g., making labor concrete. (Mike
Lebowitz's BEYOND CAPITAL seems relevant here.)

On the other hand, NC economics is totally stuck at the individual
level. There are all sorts of theorems (ignored by the Chicago school
and most other economists, natch) indicating that you can't add up
individual behavior to get collective results unless all the
individuals are basically the same. One example is the
largely-forgotten capital controversy, which says that we must assume
that all sectors have the same composition of capital to allow the
existence of a Solow-Swan aggregate production function. This is the
relevance of the algebraic statement above to NC economics (and this
relevance seems totally ignored by the so-called "new" growth theory).

But for the NC school, the big picture is filled out by such religious
conceptions as the Walrasian Auctioneer (a.k.a., the Invisible Hand or
Rational Expectations). Sophisticated economists are unsatisfied, but
the metaphysics of individualism and the sociology of professional
consensus and advancement keeps them from trying to fill the gap.

> In behavioral finance, this is clear.  The argument (say, Shiller's)
> is that the results derived from nonarbitrage or equilibrium
> arguments  are not consistent with observable patterns.  *Still*
> the benchmark continues to be general equilibria!

that benchmark is an ideological bias. Those who reject GE are
rejected by the econ. hierarchy. Unless of course they have something
equally cool (i.e., employed the newest and hottest math metaphors) to
replace it. Shiller isn't really saying anything that the old
conventional wisdom -- e.g., that of John Maynard Keynes, whom you may
have heard of, but Shiller doesn't cite, as far as I know -- said.
Rather, he has impact in the sociological context of the economics
profession because he takes old ideas and says them in the official
language. (Kindleberger, on the other hand, is shunned.) Even so, his
ideas have faced a lot of resistance from the Chicago school.

BTW, I should mention two main problems with the GE benchmark. It
lacks two concepts that may seem old-fashioned and unsophisticated but
are still used by economists, i.e., production and (historical) time.
The concept of money has also never been successfully introduced into
the GE framework except by using Patinkin-type unrealistic
assumptions.

BTW2, I thought game theory had supplanted GE as the "core" of NC
theory. But I may be wrong.

> All behavioral finance does is
> show that there are a host of "heuristics" (anchoring, affect, etc.)
> "biases" (overconfidence, excessive optimism, etc.), and "framing
> effects" (loss aversion, aversion to sure loss, etc.) that account for
> systematic deviations from market efficiency, mean-variance
> optimal portfolio, Modigliani-Miller's equity-debt irrelevance,
> Coase's  irrelevance of ownership rights allocation, etc. -- in a
> phrase: general equilibria!

so the unreality of GE persists despite the move toward a more
realistic (Keynesian) perspective. That's sad. Actually, however, it
really isn't GE. It's more like Smith's view of compensating
differences (for an individual, risk-taking is on average rewarded by
higher-than-average return).

GE plays the role of the Garden of Eden in some theology. Behavioral
economics suggests that there are lots of snakes in that grass. Since
there is no Garden of Eden (and never will be), the snakes should be
given almost all of the attention.

Again, the religious nature of GE theory doesn't say that it's totally
wrong. Rather, its empirical content comes from such
empirically-oriented thinkers as Smith, Marshall, and Keynes. It
doesn't add anything, as far as I can tell, except self-critiques such
as the theory of the second best (T2B).

(Standard theology, as far as I know, doesn't involve deriving
disproofs of God's existence based on theistic axioms (in analogy to
the T2B). I think the difference may be that theology doesn't try to
start with the parts in order to derive the whole, something that
seems impossible to me. But then again, I don't know theology outside
of that practiced by economists.)

The main benefit of the GE theory, it seems, is that intelligent
economists knock it down. Starting with the silly notion of "perfect
information" (central to GE), people like Akerlof examine the role of
asymmetric information. By stating the theory of adverse selection in
terms that economists understand, it has an impact (on economists who
are willing to listen).  But it should be remembered that adverse
selection is a concept that preceded Akerlof's work. Bankers and
insurance people knew about it, while Adam Smith knew of its effects
back in 1776.

> The behavioral finance argument is not that -- say -- maximization
> of the expected NPV is useless, but that there are systematic
> reasons why the observed behavior of individuals deviates from
> NPV maximization. The normative part of the story is that people
> *should* use certain  tricks to correct as much as possible the
> distortions introduced by their emotions, genetic predisposition,
> etc. and get closer to maximizing the NPV of their assets.  Were
> not for these distortions  (and others, such as agency costs,
> taxation, informational  asymmetries, etc.), general equilibrium
> would be an apt description of reality.

There is also the normative part (of the Chicago school and the IMF,
among others) which says that the world should be forced into the
strait-jacket of GE theory: if the world doesn't fit the model, it
should be forced to do so.

> There are precedents in the history of economics.  Just as an
> example,  Vernon Smith's famous market experiment, reported in
> his 1962 JPE  paper, showed that with private and imperfect
> information regular  folks could generate prices leading to Pareto
> efficiency and all that.  In a sense, Smith's experiment seemed to
> provide an argument in favor of free markets stronger than Arrow
> and Debreu's.  Yet nobody thought  of discarding general
> equilibrium.  GE remained as the gold standard  in theory.

There's a metaphor that should be junked. We should remember that
adherence to the gold standard helped produce the Great Depression of
the 1930s.

Similarly, the economics profession's gold standard produced such
phenomena as the PAE movement. Of course, the GE theorists still
control the commanding heights of the profession, so it's their might
that makes right and the PAE folks are ignored. IMHO, it will take
another Great Depression -- or 1960s-type popular movement -- to shake
the profession out of his idealistic slumber.

Maybe, in this sense the rigidity of the GE "gold standard" is a good
thing. Someday they'll add an epicycle that will break the camel's
back. (sorry about the mixed metaphor, but sometimes you have to
change metaphors in mid-stream.)

Vernon Smith's experiment (the optimal results of which ignore the
existence of technical and pecuniary externalities, BTW) like the
various evolutionary or more empirical economics perspectives (Alchian
& Demsetz, Nelson & Winter, Clower & Leijonhufvud, etc.) that have
sprung up over time, in empirico-critical response to the ideological
hegemony of GE.  They get absorbed into GE ("that's what we were
talking about all along!")  the way IS-LM deracinated Keynes' General
Theory.

BTW, as I understand it, Smith's effort was ideologically motivated.
Edward Chamberlin -- who, with Joan Robinson, had developed a much
more useful image of the market than that acceptable to GE theorists
-- had done experiments that showed that markets didn't work as
advertised. Smith, a pro-marketeer, aimed to combat this. Since then,
people like Cal Tech's Charles Plott have done experiments showing,
among other things, that very specific rules are needed to produce
Smith-type results. That means the need for some sort of
macro-foundations for micro, getting beyond GE.

_Of course_ "nobody [in the economics establishment] thought of
discarding general equilibrium." To do so would be like being against
"free trade," i.e., professional suicide.

>  Why?
>  Forget the fact that experiments with small groups  may not be
> relevant to the behavior of entire societies.  The fact is
> that social and economic experiments, no matter how "controlled"
> they may seem, always leave us uneasy about *causes*.  We
> never know where  chance or measurement problems may sneak
> in, because the precise  causal mechanism is in a black box.
> Abstract deduction has its drawbacks, but in deductive structures
>  conclusions can be established  mathematically or logically.
> And math (which nowadays effectively contains logic as a subset)
> -- as E. Wigner put it -- is "unreasonably  effective in science," not
> to mention industry.

this is more of a statement of faith than anything else. Sure, math is
useful sometimes. But it's not the whole story. If it doesn't tell us
anything about the real world, it's not relevant to me. When I was in
grad school, they told me that math was just a tool. Of course, they
didn't seem to believe that statement. They reified math. Or maybe
it's a tool for professional advancement. In that case, it makes total
sense.

To me, both the costs and benefits of using math should be heeded.
It's interesting that the econ. profession doesn't apply economic
rationality in this way, tending instead to look just at the benefits.

> The reason why behavioral economics is rising as of late is not
> only because it is demonstrating that, carefully looked at, the
> predictions  of the theory deviate from observable facts, but
> *mainly* because it  has been able to show that those deviations
> are systematic -- hence,  amenable to theoretical formalization...

maybe, but I don't see why "theoretical formalization" is that important.

alas, since brevity is the soul of wit, there's an appendix after
Julio's signature line:

me:
>> The basic idea concerning human choice _is_ tautological:
>> people do  what they want to do. (How can you tell what
>> someone's preferences  are? simple, revealed preference, i.e.,
>> what they do.)

Julio writes:
> Two things are mixed up here:  In theory, the preferences are
> simply assumed.  They're axiomatic.

that's funny! what are axioms but assumption? The fact that it's an
axiomatic _system_ is no excuse, since the system itself is nothing
but a religion.

> On the other hand, the point of revealed
> preferences is to *integrate* -- i.e., to infer from given shocks,
> say, a demand curve or consumer surplus or whatever.

that's exactly as I said: revealed prefrence is how "you tell what 
someone's preferences are."

> And
> *that* is an *empirical* exercise. The problem with revealed
> preferences is *the inductive leap*, but that problem is common
> to all inductive  reasoning, which is to say, to all empirical work!!

In terms of theorizing, I see no reason to privilege inductive
reasoning over deductive reasoning -- or vice-versa. But in the end,
it's empirical reality -- the facts, practice  -- that matter, not the
theory.
--
Jim Devine
"The price one pays for pursuing any profession or calling is an
intimate knowledge of its ugly side." -- James Baldwin