Re: Paul D. on this year's Nobel

[william_b_ryan@xxxxxxxxxx]

Davidson 10 October 2002:  "...we can hypothesize an infinite number of ad hoc behavioral 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."
------

A more general theory explains the totality of the facts with fewer inconsistencies.  The less general theory handles facts that conflict with the theory by ad hoc inclusion of assumptions not required by the more general theory.  The facts were either not predicted by the less general theory or conflict with the theory's predictions.

At some point the less general theory becomes untenable and is replaced by the more general theory, as the Copernican system supplanted the Ptolemaic system because it required fewer epicycles - which were ad hoc assumptions - and therefore was easier to comprehend and apply to emerging scientific discoveries.  In that case, the geocentric axiom was replaced by the heliocentric axiom.  The theory was generalized further when it was realized that orbits are not circular but elliptical - another change in assumptions - eliminating the need for epicycles in their entirety.

A theory is not more general because it contains fewer axioms but that it contains different axioms that better conform to reality.  There is a difference in this regard between theory and the rules of chess.

General Relativity is not more general than Special Relativity because it has fewer axioms.  General Relativity does not have fewer axioms than Special Relativity.  It is "general" because it accounts for gravity, which required the replacement of Euclid's parallel postulate with Riemann"s alternative.

--
William B. Ryan
william_b_ryan@xxxxxxxxxx - email
voicemail/fax - 1-866-678-3967 - toll free




-----Original Message-----
From:     Paul Davidson <pdavidson@xxxxxxx>
Sent:     Thu, 10 Oct 2002 16:37:19 -0500
To:       mongiovg <mongiovg@xxxxxxxxxxx>
Cc:       pkt@xxxxxxxxxxxxxxxx
Subject:  Re: Paul D. on this year's Nobel

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
503 SMC
Knoxville, Tennessee 37996-0550
work phone: (865) 974-4221
fax: (865) 974-4601/  (865) 974-1686
home phone and fax (865) 692-0802
http://econ.bus.utk.edu/davidsonextra/Davidson.html