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Simple model mania

from Peter Radford

Economics, as we all know, is a bit of a shambles. There’s plenty of good stuff sitting about, and there’s plenty of bad stuff. On any given day we can witness two Nobel prize winners disagree and put forward totally contradictory theories to support radically different sets of policy advice. One example at the moment is the continual warnings we gat about the imminence of high inflation. One side says we are doomed because all the money the Fed has been tolerating in the economy will cause prices to rise – this is a variant of the old “too much money chasing too few goods” argument. The other side says this won’t happen because the money is all idle in bank reserves and will stay there as long as the economy sputters and interest rates stay stuck at or near zero – no one wants to do anything with all that money, so it is irrelevant and certainly won’t end up chasing too few goods. So far the evidence supports the latter, but the former don’t stop, and they don’t revise their ideas either. The two sides just shout at each other. The public has a right to be bewildered. 

Milton Friedman has always been associated with the “too much money chasing too few goods” idea. He is well known for saying that inflation is always and everywhere a monetary phenomenon. But that’s because he wanted it to be. It fitted his view of the world.

One of the reasons economics is a shambles is that economists have an obsession with simple models. This is not new. It goes all the way back to the subjects roots. Quesnay’s obsession was a model that showed the flows of activity through three sectors of the economy. As if everything could be reduced to just three such sectors, and as if each sector was predictable, stable, and no one went off the script prescribed by Quesnay. This was in the mid 1700′s just before Adam Smith inadvertently shoved economics lurching off into deep unreality by mentioning – just once mind you – something about the effects of an invisible hand.

This is s brilliant metaphor. It is an awful basis for a model. Ever since he wrote about it economist have been obsessing over it. They see order everywhere on the surface and disorder everywhere beneath. They ask: how come? And, as they say the rest is history. What’s worse is that Smith made this remark right as the real sciences – let’s not dignify economics with that moniker – were careening off into a deterministic, mechanical, and ultra certain cul-de-sac. Well not really a true cul-de-sac. Newtonian physics remains very useful for some explanations and predictions. It just isn’t complete and it needed gentle correction, which is what Einstein did.

The problem is that economics never had its Einstein. It has stayed stuck in the past. It works relentlessly on adding ever more epicycles to its rational, reductionist, and ultra-certain view in order to accommodate the inconvenience of empirical contradiction. It stays simple. Very simple. This is so it can break things apart and study the pieces. Then it hopes that the bits just modeled behave nicely when they are thrown back into the pool.

Which they rarely do. The world is vastly complex and not amenable to simple modeling. Things may mimic the model for a while, but sooner or later the relationship changes and a new simple model is called for. There aren’t many, if any, truly lasting phenomena that economics explains well. And it can’t predict for toffee. Not that prediction is the be all and end all. It would nice, however, to get things right more consistently.

Let’s get back to Milton Friedman.

He has an undeserved reputation. He was very good at self promotion, and managed to have the good fortune to possess a simple model to present as an alternative to the Keynesian view losing its gloss in the late 1970′s. He was in the right place at the right time.

One of his ideas, the one for which he won the Nobel prize, is the Permanent Income Hypothesis. In a nutshell the PIH says that consumers make decisions about how much to spend or save based upon their estimate of their lifetime income, and not their current income. This is because people generally earn more later in life, and, knowing this, are willing to overspend – i.e. borrow – when they are young, and underspend – i.e. save or pay down debt – when they are older. This is important because it helps explain why consumption patterns are less volatile than incomes. People keep spending despite a drop in temporary income.

An alternative idea to explain consumer habits is the Relative Income Hypothesis first put forward by James Dusenberry back in the late 1940′s. It has a distinctly Veblen like flavor. It says that consumers are influenced, not by their lifetime incomes, but by what others are spending. People, it argues, want to keep up with the Jones’s.

Now. Friedman had to reject RIH. That’s why he invented PIH.

Why did he have to?

Because one implication of RIH is that consumers are influenced by social and institutional factors. This is the Veblen flavor coming through. It implies that consumers are not behaving purely along rational lines, and, worse, that economics has to take into account social and institutional stuff Friedman and his followers want to chuck out. This is so offensive to the simple world view Friedman built all his thinking up from that it had to be rejected and replaced with a hypothesis in line with that simple world view.

In my view neither PIH nor RIH is correct in and of itself. There are decisions, home buying for instance, where PIH looks pretty good. There are other’s, fashion and iPods, where RIH seems to come into play. The point being that the obsession to reduce everything to simple ideas that can be put into simple models, condemns economics to misunderstand, and therefore not explain, reality. People are far too nuanced and unpredictable to be shoved completely into either PIH or RIH. They bounce about. The truth is that there are likely plenty more explanations as well. Perhaps there are twenty hypotheses each explaining a little bit. But, since that makes modeling complicated, economists stay well away from reality.

So scared are economists of abandoning their simple views and simple model mania that they would, apparently, prefer to become irrelevant rather than change.

One last example, one that might shock. Growth.

We live at the latter end of an extraordinary event. Humanity has just gone through an unprecedented period of growth. Over two hundred years and counting. In the context of our entire history this is so abnormal as to scream for an explanation. Average incomes and wealth did not change much for centuries. Thousands of years of near subsistence for the vast majority of our ancestors, and a not much better life even for the kings, queens and sundry elites. At least by our standards. Then a sudden rush to wealth. Why?

Given this outrageous anomaly you would think economics would have a water tight explanation for growth. It doesn’t. It really doesn’t. Textbook economics cannot explain, from within its set of ideas, how that rush to wealth came about. It cannot explain the Industrial Revolution. It cannot explain why it began in England. It cannot explain its consequences. And it is hopeless at explaining whether growth is the new normal. Robert Solow had a shot at it in 1957. He wrote a paper that is regarded as ‘seminal’ by economists. It is relatively straightforward in its thinking, but better at its math. So of course it is famous. The problem with Solow’s theory is that it fails to explain well over half of all growth. About two thirds of growth seems to be caused by something that falls outside of the basic parameters of economics. It just sits there as a residual. Solow’s Residual. Yes, this is the economy we are talking about.

Let’s not be too harsh. Solow didn’t think he would get an explanation, he wanted to highlight to extent of the impact of technology and other stuff that sat outside economic theory at the time. Plus people like Romer and Lucas have embellished and expanded on Solow. Romer, for instance, had the temerity to make technological innovation an economic factor inside the economy and not something that dropped from the skies onto it. Clever that. Whoever would have thought that businesses innovate to try to make a buck? Certainly not economists. Well, not all anyway. And not the sort that write the basic textbooks.

Keeping technology outside and not inside the economy is another example of what happens when you allow your simple view and your desire to keep your models simple, drive your thinking.

By the way, that 50% to 60% of all growth that Solow couldn’t explain is still a bit of a mystery. But now it has a clever sounding name: Total Factor Productivity.

Here’s what I think: until we drop the obsession with simplicity, and until we embrace the complexity of reality we won’t resolve this conundrum. By that I mean that the causes of Total Factor Productivity are just as much social, institutional, cultural, and political as they are economic. That is to say that economics needs to change to incorporate those things alongside complex ideas, or it needs to admit it cannot explain the economy.

Then again much of economic theory has little to do with the economy and a lot to do with itself. So, maybe, we are stuck with simple model mania.

That’s embarrassing. We have to ask sociologists, political theorists, and historians what’s going on in the economy?

What are economists for? Wall Street model building?

Simple

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  1. July 26, 2013 at 8:02 pm

    The growth of energy output (i.e. work, not energy input) fits the Solow residual well over the 20th century in the USA, and has been observed in Germany as well. So modern economic growth may be a fossil fuel bubble.
    See Robert U. Ayres, Benjamin Warr, The Economic Growth Engine : How Energy and Work Drive Material Prosperity,(Cheltenham: Edward Elgar, 2009). Also
    The Need to Reintegrate the Natural Sciences with Economics
    Author(s): CHARLES HALL, DIETMAR LINDENBERGER, REINER KÜMMEL, TIMM KROEGER,WOLFGANG EICHHORNReviewed work(s):Source: BioScience, Vol. 51, No. 8 (August 2001), pp. 663-673Published

  2. BFWR
    July 26, 2013 at 9:01 pm

    Any model that computes the costs of production, but that fails to accurately assess what individuals end up with to purchase production because it ignores or abstracts out any of the actual costs reducing such, and then fails to include the means of equating the two….does not solve the most basic economic problem: enabling individuals to liquidate production (prices).

  3. July 26, 2013 at 11:05 pm

    Peter I think you confuse simple models with simple mindedness. As someone who knew Milton Friedman personally and who engaged in a published debate in the 1970s in the JPE with Milton, I know Milton had a very clever mind and what appears to be simple is really a complicated taxonomy to make things look clearer than they are in the model. My debate with Milton was later published by the University of Chicago press as a book MILTON FRIEDMAN’S MONETARY THEORY: A DEBATE WITH HIS CRITICS

    Let me give you one example using Milton’s Permanent Income model [if this example intrigues you, you can look in my textbook POST KEYNESIAN MACROECONOMIC THEORY for further elaboration..

    In Friedman's Permanent Income book, Milton defines words different than what they seem.

    Permanent Income is the stream of utility over tie that a household expects to get from his/her purchases. Consumption is defined as that utility that is obtained in an accounting period. Thus consumption today s equal to the utility obtained today. The purchase of a durable such as a flat screen TV, a mink coat, a yacht is primarily SAVINGS since the purchase yields very little of its utility in the day of purchase. Thus if you purchase a new sports car today unless you crash it totally as you drive out of the showroom, the purchase price is, in Milton's world, accounted for as SAVINGS.
    Friedman prides himself on not defining consumption as the current purchase of currently produced durables. In his PI book he boasts[p.28] that his taxonomy is superior to others (including Keynes) because “much that one classified as consumption is reclassified as savings.”

    thus it is obvious if you were to win the Lottery (windfall income) almost 100% of the windfall will be defined as savings in Friedman’s world. After all if you win how much can you spend on the proverbial nondurables such as “wine, women and song” all of which will yield their total utility in the day of purchase. Most of what you spend your lottery winnings on will be durables — and hence Friedman can “prove” that SAVINGS create jobs just as much as consumption (contrary to what Keynes says savings does).

    Secondly Milton presumes , the neutrality of money axiom, at least in the long run, in his model. Accordingly in such a model can anyone doubt that inflation is due to, in the long run, too much money chasing too few goods?

  4. July 27, 2013 at 8:39 am

    Economics has never had its Einstein but the subject seems to have followed a rational line of development through the Physiocrats, Smith, Ricardo, Mill and Henry George. The last named revealed issues which exposed the role of the rich and powerful – primarily the landowning class – in perpetuating economic injustice and poverty. Since this knowledge had to be buried, the subject then had to detach itself from reality, which is roughly where it has been for the past 120 years

    • Newtownian
      July 30, 2013 at 7:55 am

      As with this I’m a little hurt by this cul-de-sac quip.

      ” What’s worse is that Smith made this remark right as the real sciences – let’s not dignify economics with that moniker – were careening off into a deterministic, mechanical, and ultra certain cul-de-sac. Well not really a true cul-de-sac. Newtonian physics remains very useful for some explanations and predictions. It just isn’t complete and it needed gentle correction, which is what Einstein did.”

      To be sure Einstein was remarkable – his annual mirabilis produced 4 very different papers anyone of which deserved a Nobel.

      But singling out this couple misses the other co-giants like Galileo, Young, Maxwell and Bohr – and the insightful pioneers in dozens of other semi-derivative sciences (based on a cause effect world but which tap into something undreamed of by say Newton) such as Pasteur/Koch in microbiology, Darwin/Mendel/Watson/Crick with evolution and genetics – just to show my own biology bias.

      The thing all these giants have in common is that rather than being at odds and presenting the last word in their particular sciences and then being worshipped as semi-deities, they spawned new sciences and new combinations which took knowledge way beyond where they had got to. Today the sciences feed on one another learning new techniques and ways of thinking.

      Has economics spawned new sciences itself or is it the one that deserves the cul-de-sac label?

      • davetaylor1
        July 30, 2013 at 8:06 pm

        Great comment and question, Newtownian. It goes well with my Whitehead quote at http://rwer.wordpress.com/2013/07/28/whats-the-use-of-economics/#comment-36719.
        on seeking “the few general ideas which illuminate the whole”. But I don’t think I am just showing my own bias when I suggest science as a whole has ended up in a cul-de-sac by looking at what humans can see, not at what it is to be human: not at the nature and implications of symbolic language, art, technology and the instrumentation which has allowed us as scientists to see further and more deeply and communicate and learn from each other more widely than did our mere animal endowment.

        The few ideas which have most illuminated and enabled the transformation of our own whole have been about electrical circulation, its variation and its magnetic side-effects, which have spawned the largely unrecognised science of Faraday and Shannon embedded in the now ubiquitous human technology of the communication of power, information, computation of memory, to say nothing of its contributions to quantum mechanics, DNA genetics and investigations of the physical structure of the brain. To my mind economics is about human communication, and its key challenge is the symbolic nature of money

  5. Robert Locke
    July 27, 2013 at 11:14 am

    I don’t disagree with you, but why do you leave out all the economists in Europe in your rational line of development. Someone like Friedrich List, who died in 1846, objected to classical economics on the ground that it just justified the hegemony of the British empire. That was a rational reaction to the British tradition.

  6. anmayhew
    July 27, 2013 at 5:58 pm

    Peter. an excellent essay.

    I don’t think that Peter is confusing simple models and simple-mindedness, as Paul suggests. Indeed it was very clever of Friedman to define spending from windfalls as “saving.” Friedman was very clever in blurring once reasonably clearly differentiated categories of behavior (consumption and saving) in a way that accommodated both the classical and the neo-classical/Marshallian/Keynesi-based models. A simple equilibrium model is preserved but the confusion that results continues to plague public dialogue, for “saving” becomes simultaneously a virtue and a vice and we do not have good textbook-level discussions of the real decisions that households make.

    • July 28, 2013 at 12:59 am

      Ann, my textbook POST KEYNESIAN MACROECONOMIC THEORY does just what you ask — making it clear what the effect of decisions made by households — whether called consumption or savings or investment in financial assets make on the economy

  7. Peter Meier
    July 28, 2013 at 8:51 am

    Very interesting essay. However, I believe the economics profession simply may have been going down a deductive and assumption-driven path. If you took an inductive approach, it would become quite clear that it is indeed possible to construct rather simple/elegant models, e.g. by plotting the creation of credit/money for productive (GDP) purposes against nominal GDP. This has been shown in numerous examples by Werner, especially for the Japan case, but also the Great Recession, and holds up excellently. Besides the Austrian School, even members of the Chicago School have argued for such a view (among those early Fisher and indeed Friedman).

  8. sergio
    July 29, 2013 at 1:20 pm

    It is not “simple model mania”. It is primitive vision of reality.

  9. Hawkeye
    July 30, 2013 at 8:08 am

    Peter

    A post in two halves. Your second point that critiques the Solow growth model almost deserves a full post on it’s own. The sheer paucity of a plausible growth model was covered at length in this article a few months back:

    http://www.golemxiv.co.uk/2013/03/the-slippery-grip-of-growth-guest-post-by-hawkeye/

    Section 4 “Deaf, dumb and blind kids” covers this subject, and references the under publicised work of Ayres and Warr:

    “Since 2007, Ayres and Warr have provided perhaps the best set of nails to drive into the coffin of the Solow-Swann model. They demonstrate that energy available for useful work by society provides a remarkably more satisfactory explanation and statistical fit, without having to resort to intangible and mystical concepts such as human knowledge and technology. This forms the basis of their Useful Work growth theory (http://www.insead.edu/facultyresearch/research/doc.cfm?did=1244).”

  10. Robert Locke
    July 30, 2013 at 9:08 am

    As long as you try to turn economics into some sort of science, patterned on physics, or what ever, you will ignore the political nature of the subject, the power politics of elite groups and nation states, knowledge of which is essential to understanding the subject — and condemn this blog to an endless repetition of phony science while driving potential bloggers interested in the political dynamic away.

    • Hawkeye
      July 30, 2013 at 10:52 am

      Robert

      I suspect that you are half right and half wrong. Economics confuses and conflates what are in fact two different constructs; wealth and debt.

      Frederick Soddy fully appreciated this back in 1926 and wrote about the confusion:

      “Real wealth rots and rusts, whilst debts multiply by the laws of compound interest”.

      The physical “science” part of economics should concern itself with defining and understanding how wealth itself is created. The political nature of the subject should concern itself with money and debt dynamics as these are indeed purely social conventions and subject to power politics.

      To Soddy, wealth was real, and money a purely human construct. Whereas paradoxically, neoclassical economics seems to have got itself into the topsy turvy way of seeing it that wealth could be created at will (e.g. through ingenuity), yet money and debts were the tangible reality!

      • Robert Locke
        July 30, 2013 at 4:06 pm

        Hawkeye, #12

        “The physical “science” part of economics should concern itself with defining and understanding how wealth itself is created.”

        Neoclassical economics has not been about wealth creation but equilibrium — a static analysis. People like Schumpeter were concerned with the entrepreneurial dynamic, that is the creative, unpredictable individual, and then the creative research entrepreneurial corporation, and then recently, the dynamic economic cluster, like Silicon Valley, how they promoted a new wealth creating industrial, (the IT) revolution. People in management studies look at this stuff, but not people trying to make economics a physical science. Management people studying the wealth creating dynamics do not find economics to be of much explanatory use. Not people on this blog.

  11. Robert Locke
    July 31, 2013 at 6:26 am

    Follow up on Thread #12

    Gunnar Eliasson who, at the end of the 20th century was trying to square the study of economics with “growth” was not able to do so with the neoclassical model. Here is what he wrote ”

    “The single most important postulate in economics is what you assume about the totality of all possible states that the economy can be in (the state space). The assumption you make determines the costs of information and learning when exploring that state space, the nature of the equilibrating forces of the markets of the economy, towards what kind of equilibrium the economic system is heading and what that means for the modes of behavior of individuals and firms, in short the dynamics of the economy. The mainstream model of economics assumes a very narrow and, for all practical purposes, fully transparent state space and thus excludes all interesting dynamics from the analysis by assumption. I argue for the alternative assumption of a very large and non-transparent state space, or investment opportunities space that takes us into the unpredictable world of an Experimentally Organized Economy that is more compatible with economic reality. In that brave new world of economics new answers to old questions appear. Above all, using the tools of analysis developed from, and for the mainstream neoclassical model to study the realities of an EOE will place the analyst in a misinformation situation. I illustrate that through simulation on the Swedish micro to macro (MM) model and with one Swedish business case” This is abstract of his paper in the Journal of Evolutionary Economics (April 2010).

    I don’t think Eliasson succeeded, despite determined efforts, to square the two (economics with his dynamic conception of the Experimentally Organized Economy). The physical science part of economics has not dealt at all successfully with wealth creation.

    R R Locke and K. Schoene, (2004) The Entrepreneurial Shift: Americanization in European High Technology Education. (Cambridge UP). We note Eliasson’s earlier efforts pp. 2-3.

  12. Hawkeye
    July 31, 2013 at 8:27 am

    Robert

    You assert that “The physical science part of economics has not dealt at all successfully with wealth creation.”

    However, the Ayres and Warr link that I referenced does tackle this and provides a basis for economic growth that is dependent upon energy inputs.

    Have you reviewed the A&W piece, and if so do you dispute their findings?

    • Robert Locke
      July 31, 2013 at 9:15 am

      No and doubt if I shall. But I spent quite a few years listening to Gunnar Eliasson’s complaints about economics. If you don’t know Eliasson you should? He has worked hard on the question of economics and economic growth. Do you think he is wrong, or don’t you read economists outside anglo-saxonia? Goggle him “Gunnar Eliasson” and “Experimentally Organized Economics.” It might be enlightening.

    • Robert Locke
      July 31, 2013 at 9:39 am

      I have serious doubts if anything I write you take seriously, but in the hope that you can open up your mind to others, please click on the following.

      Modeling the Experimentally Organized Economy – Complex …
      http://www.ifn.se/eng/publications/wp/1976-1990_1/~/BinaryLo
      The theory of the experimentally organized economy and … – Springer
      http://link.springer.com/article/10.1007/s00191-009-0149-5
      1 Apr 2010 … This article presents the theory of the experimentally organized economy and
      competence blocs. The theory assumes that information is …
      The theory of the experimentally organized economy and …
      http://ideas.repec.org/a/spr/joevec/v20y2010i2p185-201.html
      Article provided by Springer in its journal Journal of Evolutionary Economics. …
      Keywords: Experimentally organized economy; Competence blocs; Evolutionary

    • Robert Locke
      July 31, 2013 at 10:05 am

      Could not call up the first reference I gave, but if you type in the following you’ll get Eliasson’s 1989 article: Modeling the Experimentally Organized Economy – Complex …

      • Hawkeye
        July 31, 2013 at 11:51 am

        Hi Robert

        I have downloaded the Eliasson article you mention, as well as another titled “THE NATURE OF ECONOMIC CHANGE AND MANAGEMENT IN THE KNOWLEDGE-BASED INFORMATION ECONOMY”.

        I will read these in due course, as I have no prejudice in who I read. It is somewhat disappointing that you appear not to return the courtesy.

        At first glance, the Eliasson premise is that “experimentation” is the source of economic growth. This appears similar to the approach put forward by Eric Beinhocker in “Origin of Wealth” 2006:

        http://www.neweconomicthinking.org/downloads/HEEDnet%20Seminars_Eric_Beinhocker.pdf

        However, the works of Soddy, Georguscu-Roegen, Daly, Ayres & Warr etc. assert that energy is the motive force:

        “The very process of economic production involves a transformation against the natural tendency of things to break down or degrade. Production creates order from disorder and so must obey the second law of thermodynamics. Therefore it must draw on energy inputs to fight against entropy. An external energy source is the only way in which such a constructive transformation can take place without breaking the laws of physics.”

        Experimentation may be the spark that enables us to exploit new energy sources, but we mustn’t delude ourselves that the spark IS the fuel for production.

  13. Robert Locke
    July 31, 2013 at 1:06 pm

    Hawkeye, # 20.

    I did look at Ayres & Warr, and at Beinhocker’s pdf. I find it curious that they are associated with business schools (INSEAD) and business consultancies (McKinsey), which fits my view that people who take an interest in the dynamics of growth are in management studies, not economics. Eliasson is in a Technical University, which helps explain why he is interested in the New Experimental Economy that grew out of the IT revolution (e.g., the entrepreneurial cluster there). His views were formulated to a great extent through interviews of people in Silicon Valley.
    I find that the stuff I read here on the blog written by neoclassical economist is mostly insensitive to the issue of separating uncertainty from risk, which Eliasson characterizes as the difference between the Experimentally Organized Economy and the one that preceded it, up to 1975, characterized by planning and mathematically modeling.

  14. davetaylor1
    July 31, 2013 at 7:40 pm

    My reaction to Newtownian ‘s splendid question at #4 not having been followed up, let me respond to Peter Radford directly. My #5 having become slightly garbled by domestic disturbance, however, let me recall again how the accidental discovery of electrical circulation “spawned the largely unrecognized science of Faraday, Heaviside and Shannon embedded in the now ubiquitous human technology of the communication of power, information, logical computation and activation of memory”.

    Peter is objecting to obsession with simple models, beginning with Quesnay’s showing “the flows of activity through three sectors of the economy” and Adam Smith’s metaphor of “the invisible hand”. He saw Einstein as having gently corrected Newton (not as having introduced a new paradigm, a more fundamental set of coordinates than Descartes’, with which to measure the universe). He describes very pithily how economists “break things apart and study the pieces”, expecting these bits to “behave nicely when thrown back into the pool”. Then, without explaining what he means by ‘complex’, he concludes “the world is vastly complex and not amenable to simple modelling”.

    The word ‘complex’ is itself etymologically complex, meaning “with parts”, as against ‘atomic’, meaning “without cut”. Quesnay’s model is thus complex (it has three sectors), but not VASTLY complex; it can be mapped as a Euclidian triangle located in two-dimensional Cartesian space by complex numbers: ‘di-mensions’ since flows may be measurable in either direction.

    Quesnay’s model is also DYNAMICALLY SIMPLE, as it has only one path. To account for change it needs a fourth change point linked to the other three, creating three further triangles which (relative to the first) may be considered as feedback paths via which the original flow may be changed. In a model, one or all of these feedback paths may not exist. It seems Quesnay’s model of the economy lacks all the feedbacks, but Smith’s “invisible hand” suggests one is making changes, Keynes’s model added another and the fact that investors change the particular things they invest in can be accounted for by the third. The point about this model, though, is that it applies to ANYTHING which can evolve or change or differ (or not), from the dimensionality of coordinate systems (point, linear, Cartesian or Einsteinian), through sub-atomic particles with quarks which combine to form different types of atom, up to humans who can change their minds and build economies which operate in different ways. It can be expanded to whatever depth is necessary because any part of an on-going journey or flow can be mapped using the same navigational techniques, and on-going errors traced to failure to use them.

    Peter, then, hearing about ‘complexity’ via the chaos-oriented Santa Fe group, is barking up the wrong tree. The problem is not that economics never had its Einstein; HIS problem (like that of many other economists) is that he hasn’t recognised an Einsteinian (i.e. me) when he encountered one. I’d like to explain the significance of Einstein here, but first it would be better for economists to ask questions, likening Quesnay’s model to an electric circuit in order to inquire how seemingly chaotic signal flows through complicated flow circuits have been made readily intelligible to electricians.

    • Robert Locke
      August 1, 2013 at 7:30 am

      Dave,
      I’m addressing this comment to you as our new Einsteinian. When I read the people the bloggers cite, I see, what Claude Rains, in Casablanca, referred to as “rounding up the usual suspects.” Smith, Ricardo, The Physicrats, Jevons, Walras, Marshall, Keynes, Hayek, Friedman, and the others. But we live in a world that has been and is being totally transformed by the information revolution. The usual suspects had nothing to do with that. And I look in vain in this blog for economists who do (you are not an economist).

      I found disinterest in the rank of economists some years ago when I became preoccupied with the Information Revolution that spawned and in turn was spawned by the high tech industrial clusters. When I asked why they came about, I found answers in the work of business school professors and graduate students (Porter, Miller, Saxenian, etc.) working in business schools (Stanford, MIT, UC Berkeley, Harvard). In none of this ferment over the information revolution, which is arguably the most significant economic event of the past century, do we find economists leading the pack of explainers.

      On the contrary, when K. Schoene and I did a comparative study about the creation of entrepreneurial studies in the US and Europe in business schools, we found the economists frequently opposing the establishment of chairs in entrepreneurial studies because they were not sufficiently “scientific.” RR Locke & K Schoene, The Entrepreneurial Shift, CUP, 2004, pp 76-77, 121-27.

      But there were exceptions. One was the group of Swedish economist, and in particular Gunnar Eliasson who developed the dynamic model of the “Experimentally Organized Economy.” (Locke & Schoene, pp 3-5. I give particulars in this blog in my interchange with Hawkeye, Threads 13-18.).

      Eliasson’s view of the shortcomings of economics is as follows:

      “The single most important postulate in economics is what you assume about the totality of all possible states that the economy can be in (the state space). The assumption you make determines the costs of information and learning when exploring that state space, the nature of the equilibrating forces of the markets of the economy, towards what kind of equilibrium the economic system is heading and what that means for the modes of behavior of individuals and firms, in short the dynamics of the economy. The mainstream model of economics assumes a very narrow and, for all practical purposes, fully transparent state space and thus excludes all interesting dynamics from the analysis by assumption. I argue for the alternative assumption of a very large and non-transparent state space, or investment opportunities space that takes us into the unpredictable world of an Experimentally Organized Economy that is more compatible with economic reality. In that brave new world of economics new answers to old questions appear.

      Above all, using the tools of analysis developed from, and for the mainstream neoclassical model to study the realities of an EOE will place the analyst in a misinformation situation. I illustrate that through simulation on the Swedish micro to macro (MM) model and with one Swedish business case” This is abstract of his paper in the Journal of Evolutionary Economics (April 2010).

      Eliasson felt so keenly about the failure of economists to provide a dynamic model with which to understand the current economy that he organized a well-funded 3 day conference in Stockholm (May 1998) that brought together economists from all over the world to bring economic thinking to the problem of the real-economy. Lots of American economists were there, who generally took a cynical view of their hosts, by acknowledging that economics could not as it stands deal with the issue, but showing little interest in changing economics for it to become relevant.

      I find it, as a non-economist, a bit surprising that we do not, as a blog, pay any attention to Eliasson and his band of Swedish brothers. Or to any others I mention, except for the “usual suspects.” I think this work in Sweden should be of interest to you because of your great concern with the information revolution, and with the pedagogy that we are trying to reform.

      Lee, C-M, W. Miller, et al (2000) The Silicon Valley Edge. Stanford UP.
      Porter, M. (1998). “Clusters of the New Economics of Competition.” Harvard Business Review, 6 77-90.
      Saxenian, A. (1994) Regional Advantage, Culture and Competition in Silicon Valley and Route 128 (Havard University Press)

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