Re: Paul D. on this year's Nobel

[Paul Davidson <pdavidson@xxxxxxx>]

At 02:41 PM 10/10/02 -0400, you wrote:
> In response to Paul:
>
>
> There's another way to think about this work, as I said in my original
> post.  
> These results imply that the economist's conception of rationality
> doesn't 
> jibe with how people actually behave. Mainstream economists might take
> that to 
> mean that economic agents aren't rational. I take it to mean that the
> economist's conception of rationality is not very useful, because 
> (i) I don't 
> think people are generally irrational; and (ii) I don't see how general
> propositions about social behavior can be derived if human beings are
> presumed 
> to be irrational. 

Maybe you ought to think about why people--even patriotic Brazilians --
rush out of the Brazilian real -- in search of a better international
store of  liquidity, when the possibility of "Lula " being
elected President is suggested. Is such behavior rational or irrational
-- or as I have noted in my discussions of people's behavior under
uncertainty and the need for liquidity--, is the behavior SENSIBLE?

> It seems to me that economists
> might have to revise their 
> notion of rationality to encompass the behavior patterns exposed by Smith
> et 
> al.


Now Sven -- here is where you might jump in -- and talk about defining a
Gary M. concept of rationality when some observations are from hot water
environment and some from an ice environment.  Maybe Gary you should
suggest that whatever behavior a Nobel Prize winner emphasizes -- no
matter how much it diverges from Nobel Prize winner Robert Lucas's
concept of rational expectations and rationality -- is the
"noble" Nobel concept of rationality!

> This work moreover implies that
> propositions built on the supposition that 
> agents are rational in the economist's narrow conception of rationality
> are 
> defective.  I don't understand why Paul, a long-time critic of
> orthodoxy, 
> finds this result uninteresting or unimportant or irrelevant.

The concepts of rationality built on Lucas (where rational expectations
makes rational decisions both a short run and a long run concept)-- or
even Milton Friedman's long run "as if" rationality, are NOT
logically defective within their individual axiomatic systems!! And if
you understand Bourbaki mathematical philosophy  and the concept of
proofs and truth -- these mainstream rationality concept can be proved
and are true -- within the mainstream  axiomatic system that they
are erected in.  

Unfortunately, Gary, it is your attempt to erect a broad tent under which
anyone who provides data which positively feeds your instinct for what
you want to believe -- no matter from what axiomatic system it is derived
-- is logically defective.

and it is such honest but logically defective thinking that made the
earlier (American) neoclassical Keynesians such an easy target -- for the
logically consistent Debreu, Arrow, Lucas, Friedman, etc -- so as to kill
off Keynes in mainstream economic theory.

If we are ever going to turn the community of economists around towards a
logically consistent representation of actual physical economic
processes  as Keynes attempted in the 1930s -- we must continually
rub their noses in the fact that they are merely adding additional 
ad hoc constraints (restrictive axioms )to the classical (Arrow-Debreu
GENERAL (equilibrium) theory -- and these additional restrictive axioms
are not necessary conditions to explain financial bubbles, non-optimizing
decisions, etc. {there is a difference between necessary and sufficient
conditions, you know.)

I know that this argument of mine is not pleasant for the
orthodox -- and I have been told by many  of the Establishment (who
are good acquaintances, if I can not call them good friends) that if I
modified my "harsh" logical attitude towards their Nobel prize
winning work, I might have gotten further in the profession. But , like
an ancient sage once said "I'd rather be right 
than President[ of the AEA]"  -- or even a Nobel prize
winner.


> >And if rational choice is possible, then
> there are five dollar bills lying
> >in the street, and those who make these choice -- even if they do
> not  know
> >the choice was rational --but merely act a"as if" they knew
> -- will collect
> >all those five dollar bills!
> >
>
> This is a non sequitur. Behavioral economics suggests that the context in
> which a choice is made can influence the choice in subtle and complicated
> ways.


Ah! yes subtle and complicated ways is the coverage of all theoretical
scoundrels----
we can hypothesize an infinite number of ad hoc behaviorial ways which
will get us to one solution one time and another solution another time --
and therefore never have a general theory --as a basic -- fewer axioms--
system

>  I doubt if even the most
> anti-ergodic Post Keynesian on the planet would 
> maintain that, as a general rule, agents will decline to retrieve a
> five-dollar bill in plain view on a sidewalk.

But if you understood the results of these two Nobel prize winners-- that
is the implication -- namely their is an optimal (rational) solution that
would have vaccumned up all those five dollar bills implicit in all the
problems they have discussed-- but the individuals they observed
substituted a no-rational decision making process for this optimality
possibility.


> >And if the system was not
> ergodic, then there can not exist any possible
> >choice (that required the outcome to be at a future moment of time
> then the
> >point where the decision is made) to be described as rational. 
> In that
> >case, then all the investigators must argue is they do not know what
> a
> >rational choice decision is, under the [nonergodic]
> circumstances.
> >
>
> Behavioral economics gives insight into how agents make choices in
> certain 
> contexts and circumstances.  Whether we call those choices rational
> or not 
> depends on how we define "rationality" but is irrelevant to the
> soundness of 
> the BE results.


Nonsense -- either rationality means something specificor  your
suggested defibition is ambiguous.  You can not have it both way. Or
do you intend to define rationality -- as whatever people do is
rational?  So if someone is shooting people at random in the
Washington, DC area , then under his conditions and circumstances, the
sniper is rational!

>  Maybe they're not sound in
> nonergodic circumstances; that's an 
> empirical question. 


No it is NOT an empirical question.  It is a logical question of
building the fewest axiomatic system  to rigorously be able to
describe behavior!!



> I don't think we can just
> presume, as Paul does, that the 
> BE propositions about choices must be wrong in those circumstances.


It is not wrong -- all I said is that BE is logically consistent with the
axiomatic system that has as its fundamentals (1) the ergodic axiom (or
the ordering axiom -- if one assumes a nonstochastic system), (2)
neutrality of money axiom, etc.

>>   To the extent
> >>that behavioral economists share an
> essentially neoclssical understanding of
> >>market processes, their work no doubt contains trace elements of
> the kind of
> >>reasoning to which Paul objects.  But those elements seem to
> me to be
> >>incidental to, and distinct from, the behavioral insights, which
> stand alone
> >>(and which may or may not be sound in themselves).
> >


They are not trace elements -- they are fundamental axioms-- nowhere do
they reject implicitly or explicitly that an immutable objective
probabilistic distribution function
exists.  That is fundamental to their heuristic
approach.


> >God help us from this type of reasoning--
> all it does is perpetuate the
> >basic Arrow-Debreu general equilibrium model -- and then permit
> "special
> >cases" by adding ad hoc assumptions. It never will get us to the
> General
> >Theory discovered by Keynes -- where money contracts for
> organizing
> >production and liquidity is the essence of the entrepreneurial
> system.
>
>
> There are lots of things wrong with neoclassical orthodoxy.  Nothing
> I said 
> gives aid & comfort to Arrow-Debreu GE
> theory.

Sorry Gary -- but logically everything you said gives aid and
comfort!!


>  My point was that Smith's
> empirical work gives us another reason to distrust orthodox propositions.


No Smith's work shows that "in special cases" of the Debreu
general theory, his results may hold.  The policy implications is
get rid of the ad hoc constraint -- usually that means giving people
better information about the future (as if that was possible) implied
through the soundbite -- of open and free markets , a level playing
field, and transparency. And if you believe this Washington consensus , I
got a bridge that connects Brooklyn and Manhattan that I would like to
sell you Gary!

>  I 
> don't think there's anything ad hoc about their assumptions or their
> results. 
> Though of course you are right to point out that we need to be careful
> about 
> extending experimental results to other contexts.  I did not say
> otherwise; 
> nor has anyone else on this list.

Aha! So you admit that their results are special cases--- that were set
up in the context of a classroom -- but not necessarily applicable to the
real world environment. Well now that's interesting---.


> >Do you not notice that in all
> the Kahenmann and Vernon Smith experiments
> >about markets -- there are no costs of production (as Mat Forstater
> pointed
> >out) and there is never a liquidity problem in their simulation
> of
> >financial markets!!!
> >
>
> That's part of what's interesting: despite all that, they get results
> that 
> call conventional economic reasoning into question.  If I may turn
> your 
> question back at you: "Don't you see that?"

No I see real world markets that either have costs of production  or
financial markets that provide (or destroy ) liquidity.  They are
calling into question whether costs of production are relevant in
producible goods markets, or liquidity is relevant in financial
markets.  and if you can't see that, it is because you don't want
to.

Paul

Paul Davidson

Editor, JOURNAL OF POST KEYNESIAN ECONOMICS

Economics Department - University of Tennessee

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