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Study the shocks

from Peter Radford

A system in motion stays in motion. A system at rest stays at rest.

Good so far.

But: our question is a little more interesting. We want to know how the system began to move. We want to know about those moments of change. When you think about it, or when you’re not a mainstream economist, it is precisely those changes that attract your attention.

In this context it is always hilarious to be reminded of the way in which mainstream economics sees the world. It postulates an economy chugging along merrily following a path smoothly, fully determined by a combination of where it came from and a number of internal factors, and hermetically sealed off from the hurly burly around it.

To make sure that the path is smooth, mainstream theorists get rid of all the nasty stuff that could cause things to misbehave. Like people. Real people are an inconvenience, so they’re kicked out and replaced by a single representative chosen, presumably, for his or her astonishing likeness to economists. Business firms are tossed out as well. They too are represented by a single suitably cleansed and correct representative. The single firm and the single person then interact. Well, that is they interact within the confines of mainstream theory. This means they behave according to a few very simple and specially chosen rules that preclude any cheating, conniving, cooperation, or generally demeaning activity that  would discredit an economist. They are also endowed with astonishing powers of calculation. This is probably why they were chosen. I know its why I wasn’t chosen. I don’t know enough, and I am hopeless at all those lightning fast calculations. Were I the representative person inside the mainstream model I would probably send it hurtling off track so quickly it would explode before we all moved more than one time period forward. I am just clueless at knowing my preferences and trying to keep them consistent with what they were a few years ago, or with what they will be a few years hence. And I have a hard time keeping track of my taxes so I have no clue when I should stop buying food in order to save enough to pay them in the future. I think. 

Goodness it makes my head hurt just thinking about how hard it must be to be a representative person.

I’m glad they found a volunteer.

Anyway.

Someone must have noticed that actual economies don’t plod along as smoothly as the mainstream models do. Presumably that’s because our actual people are a bit like me and don’t act like economists all the time. Sometimes they even change their minds.

This wobbly behavior of real economies doesn’t sit well with mainstream models, so in order to make the models look like the real world economists came up with a clever trick.

Shock therapy.

They zap their models now and again to make it deviate from their eternal precision. They bash them on the sides of their heads to see what happens. The source of the bashing could be anything. A common source is technology. Apparently technology changes every so often. Who knew? Economists didn’t. Not when they set their model up, and now it’s too late and too complicated to make technology integral to the model’s smooth trajectory. Whoops. Besides our representative person and firm are so knowledgeable they don’t need new technology to keep on plodding along. They have to be forced to accept it. Hence the shock.

You’d be surprised at how many shocks the poor representative person and firm have to endure. I am shocked, if you pardon the pun, that they don’t quit. It’s a testimony to their fortitude, endurance, and all round public spiritedness they they don’t send one of those shocks right back at the economist responsible for introducing it.

The headline would be fun: “Economist shocked by model” or “Model tosses economist a brick”.

Actually I am shocked by those models. They’re stupid.

They’re stupid for one simple reason: all the interesting stuff about the economy has to be pounded in as one of those afterthought shocks.

But maybe there’s a lesson here after all.

We could just study the shocks and forget about the models. After all, if the economists have to bash their models with shocks in order to make them a tad more realistic, then all the realism resides in the shock not the model.

That’s it! Study the shocks.

  1. Jon Cloke
    October 3, 2014 at 1:42 pm

    It’s definitely fun picking up on all the behavioural absurdities that pretend to manifest orthodox economic theory, but it’s wrong to call them dumb – they serve a definite purpose. As Capitalism developed into an orthodoxy, i.e. it was not longer just a phase in human development as, say feudalism had been, but became a beneficient end-state bestowed on us by an indulgent God, it became obvious that no-one really understood how this inreasingly complex, dynamic system actually worked, if indeed it was a ‘system’ that did work.

    For the beneficiary nation-states that did so well (relatively speaking) out of capitalism, particularly while the socialist bloc still existed as the threat of an alternative (however corrupt and oppressive), it was necessary to crown capitalism as the dominant deity in the pantheon of Enlightenment through reverse engineering its’ scientific rationality. In other words, if you were white male middle-class beneficiary of capitalism you needed some kind of justificatory rationale to avoid having to admit that your privilege was not earned, but was a historical accident that you were selfishly abusing. None of us likes cognitive dissonance, after all, and truth hurts.

    So firstly classical orthodoxy and then more recently neoclassical/neoliberal orthodoxy were developed with some basic functions; 1) to assert that there was a scientific rationality to capitalism that was akin to the laws of physics, an exogenous compulsive component that meant doing anything else was harmful and dangerous; 2) to posit modern capitalism as an end-state of modernity abiove which there could be no higher aspiration; and 3) to assert that the essential and universally egalitarian, benign character of capitalism would always be realized – in the long run.

    All kinds of infantile sillinesses have been invented to support this long term intellectual tour-de-force, from pareto optimality through homo economicus to efficient markets, but every single one works to exactly the same central premise; the need to underpin capitalism with unquestionable but empirically unproven and unprovable ideological tenets. So since these are the underpinnings on which the entirety of 20th century economic thought has been based and through which large amounts of money have been made, we ought at least to pay them the same respect we pay their fellow ideologies…

    • Nell
      October 8, 2014 at 10:22 am

      ” it was necessary to crown capitalism as the dominant deity in the pantheon of Enlightenment through reverse engineering its’ scientific rationality. In other words, if you were white male middle-class beneficiary of capitalism you needed some kind of justificatory rationale to avoid having to admit that your privilege was not earned, but was a historical accident that you were selfishly abusing.”
      Excellent point.

  2. Macrocompassion
    October 3, 2014 at 2:10 pm

    If it were only as simple as throwing out the idealized model. But the alternative is even worse and has so many diverse and differently acting people in it and one must take into account of ALL OF THEM — an impossible task. How would you manage it except by introducing another aggregating effect? namely econometrics, which claims (wrongly) to be able to cover human behavious, when all it can do is to mirror past ways of what occurred

    So it is ONLY by making these assumptions about aggregate behavious from idealized role-playing entities, that one can have a chance in understanding how the whole shebang actually works. The clever part is in choosing the right combination of entities and their smallish number of activities to truely cover the actual behavious of the entire system and to do it without repetition, because then it is hard to know which part does how much.

  3. October 4, 2014 at 4:51 pm

    Shocking: Methodology is a tricky business
    Comment on Peter Radford’s ‘Study the shocks’

    What is the core problem of economics? Bagehot made it clear back in 1885:

    “It [Political Economy] is an abstract science which labours under a special hardship. Those who are conversant with its abstractions are usually without a true contact with its facts; those who are in contact with its facts have usually little sympathy with and little cognisance of its abstractions. Literary men who write about it are constantly using what a great teacher calls ‘unreal words,’ — that is, they are using expressions with which they have no complete vivid picture to correspond. They are like physiologists who have never dissected; like astronomers who have never seen the stars; and, is consequence, just when they seem to be reasoning at their best, their knowledge of the facts falls short. Their primitive picture fails them, and their deduction altogether misses the mark — sometimes, indeed, goes astray so far, that those who live and move among the facts boldly say that they cannot comprehend ‘how any one can talk such nonsense.’ Yet, on the other hand, these people who live and move among the facts often, or mostly, cannot of themselves put together any precise reasonings about them.” (Bagehot, 1885, PE.13)

    Take-home message: There are two types of economists but neither has a clue.

    This, indeed, was not news then because J. S. Mill reported already in 1874 about the two classes of inquirers.

    “It has been again and again demonstrated, that those who are accused of despising facts and disregarding experience build and profess to build wholly upon facts and experience; while those who disavow theory cannot make one step without theorizing. But, although both classes of inquirers do nothing but theorize, and both of them consult no other guide than experience, there is this difference between them, and a most important difference it is: that those who are called practical men require specific experience, and argue wholly upwards from particular facts to a general conclusion; while those who are called theorists aim at embracing a wider field of experience, and, having argued upwards from particular facts to a general principle including a much wider range than that of the question under discussion, then argue downwards from that general principle to a variety of specific conclusions.” (Mill, 1874, V. 43)

    Take-home message: There are two types of economists, the upwarders and downwarders, but neither is particularly successful.

    Mill was confronted with a quite unsatisfactory situation. He was well aware of the “backward state” of the social sciences in general and of economics in particular. Being one of the finest methodologists of his time — and far beyond — he took sides.

    “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of “abstract speculation”.” (Mill, 1874, V.55)

    Mill had the great triumph of the downwarders before his eyes and he certainly concurred with Galileo.

    “I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [heliocentric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them …” (quoted in Popper, 1994, p. 84)

    In contrast, the defeat of the upwarders was evident and their good advice rung hollow.

    “Bacon, the philosopher of science, was, quite consistently, an enemy of the Copernican hypothesis. Don’t theorize, he said, but open your eyes and observe without prejudice, and you cannot doubt that the Sun moves and that the Earth is at rest.” (Popper, 1994, p. 84)

    Take-home message: Common sense and open eyes can be very misleading in scientific matters.

    Or, as Marx put it: “That in their appearances things are often presented in an inverted way is something fairly familiar in every science, apart from political economy.” (Marx, 1990, p. 677)

    Mill knew quite well that methodology can point out errors, mistakes, nonentities, fallacies, and green cheese assumptionism but that it is beyond the means of the methodologist to tell researchers how to solve their scientific problems. And if any methodologist should ever think he knows how to do better there is a straightforward way to demonstrate it.

    “Doubtless, the most effectual mode of showing how the sciences of Ethics and Politics may be constructed, would be to construct them …” (Mill, 2006, p. 834)

    The downwarders of Orthodoxy have failed to explain how the actual economy works. This, however, does not prove that the methodology of the upwarders is superior. Heterodoxy cannot claim that it has performed better.

    My good advice to Peter Radford could be: Never give good advice in methodological matters, but this would be much like one of these logically shocking ancient Greek paradoxes.

    Egmont Kakarot-Handtke

    References
    Bagehot, W. (1885). The Postulates of English Political Economy. Library of
    Economics and Liberty. URL http://www.econlib.org/library/Bagehot/bagPE1.html.

    Marx, K. (1990). Capital, volume I. London: Penguin Classics. (1876).

    Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On
    the Definition of Political Economy; and on the Method of Investigation Proper
    To It. Library of Economics and Liberty. URL http://www.econlib.org/library/
    Mill/mlUQP5.html#EssayV.OntheDefinitionofPoliticalEconomy.

    Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected
    View of the Principles of Evidence and the Methods of Scientific Investigation,
    volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
    (1843).

    Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and
    Rationality., chapter Science: Problems, Aims, Responsibilities, pages 82–111.
    London, New York, NY: Routledge.

  4. robert r locke
    October 6, 2014 at 9:32 am

    In 1919, Eugen Schmalenbach in his Dynamic Balance Sheet. wrote: “To know to what extent a firm is efficient is important; more important, however, is to know how efficiency changes. Namely, it is important to recognize for sure the first turn in the opposite direction in a climbing or falling efficiency curve.” In other words, study the shocks if you want to survive.

    • October 6, 2014 at 3:02 pm

      Schmalenbach clearly said: Look for the upper and lower turning points.

      It is indeed a shock to learn that robert r locke cannot tell the difference between an turning point and a shock.

      • robert r locke
        October 7, 2014 at 7:16 am

        Egmont, pull yourself together and stop trying to sell economics as a science; it doesn’t do you credit to engage in insult. Remember that Schmalenbach called business economics a Kunstlehre.

      • Macrocompassion
        October 7, 2014 at 12:22 pm

        In robert r locke comment below, the claim that that economics is not a science is absurd. My analysis of which I have mentioned several times on this site, shows not only that it is a science but an almost exact one!
        Please see the models I use for this such as DiagFuncMacroSyst.pdf it may be found in Wikimedia, commons, macroeconomics and elsewhere too.

  5. davetaylor1
    October 6, 2014 at 10:57 am

    Egmont quotes Popper (a pot anxious to call the kettle black) saying “Bacon, the philosopher of science, was, quite consistently, an enemy of the Copernican hypothesis.” Bacon, of course, was writing before Galileo acquired a telescope and revealed the magnitude of the Universe; even longer before Newton showed the reasonableness of forces acting at a distance, and far before Hume concocted the misrepresentation of Bacon’s method of induction which Popper had learned and criticised. Actually, Bacon had anticipated (though of course using different words) not only Popper’s “conjectures and refutations” but also Egmont’s “take-home message: Common sense and open eyes can be very misleading in scientific matters”. Which is why Bacon’s induction abstracts from constructed facts rather than hypothetical conjectures

    It seems that since 1990 scholars have been re-reading what Bacon actually wrote: see “Klein, Jürgen, “Francis Bacon”, The Stanford Encyclopedia of Philosophy (Winter 2012 Edition), Edward N. Zalta (ed.), URL = .

    On parabolic efficiency curves (as in the law of diminishing returns – as against rate of return – and in electrical theory the maximum power transfer theorem), well said, Robert.

  6. October 8, 2014 at 4:52 pm

    Scrap the lot and start again. (Joan Robinson)
    Second comment on Peter Radford’s ‘Study the shocks’

    Real theoretical progress neither comes from the lengthy elaboration of flaws nor from methodological prescriptions, but consists in developing a superior alternative. This is the point of my argument which goes back to Mill.

    What does a promising strategy look like? If the conventional approach is unacceptable it has to be replaced and this is practically done by replacing the obsolete set of axioms by a new set.

    As Keynes put it: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (Keynes, 1973, p. xxi)

    It is the specific weakness of Heterodoxy that it is habitually distracted by the superstructure.

    “A method of obtaining accurate premises is needed because science can only be true if its premises are true.” (Redman, 1997, p. 328)

    In order to make serious progress I would like to substitute Peter Radford’s appeal by: Replace the axioms!

    Egmont Kakarot-Handtke

    References
    Keynes, J. M. (1973). The General Theory of Employment Interest and Money.
    The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke:
    Macmillan. (1936).
    Redman, D. A. (1997). The Rise of Political Economy as Science. Methodology and
    the Classical Economists. Cambridge, MA, London: MIT Press.

  7. davetaylor1
    October 9, 2014 at 12:30 pm

    So I’ve agreed with you, Egmont: “scrap the lot and start again”. I agree with you, “It is the specific weakness of Heterodoxy that it is habitually distracted by the superstructure”; but that is a weakness, not necessarily a universal failing. You say, “Real theoretical progress neither comes … from methodological prescriptions, but consists in developing a superior alternative”, while Redman says “A method of obtaining accurate premises is needed, because science can only be true if its premises are true”. So how do YOU propose to develop a superior alternative without a different method of going about theorising? If you simply “replace the axioms”, how are we to know the new axioms are true, and what the connection is between axioms in your form of a group of algebraic equations, what we ought to have and the reality we’ve got?

    I have myself “scrapped the lot” and started again – using Bacon’s rather than Hume’s method. In modern language I’ve started, as many generations of natural scientists have done before me, with all that we have now; and over a long time, by dint of many people not merely observing but experimenting with it and our learning from each other, we have gradually been able to distinguish and mentally abstract the simpler types of active subsystems from which more complex systems like ourselves are constructed, as well as generalising from often inhomogeous samples of static measurements. The method of intellectual abstraction leaves the whole intact; the method of intellectual construction from generalised axioms does not regenerate the whole, only dubious pictures of it.

    Our reverse engineering has currently left us with three possible cosmologies: an infinite and (over all) homogeneous Newtonian universe in which matter has always existed; Brian Cox’s more dynamic picture in which black holes continually swallow up and regenerate universes; and the Einsteinian one of a Big Bang generating finite time and expanding space (consistent with though more detailed than the ancient accounts of the order of creation and the modern ones of evolution) in which indestructible energy is locally captured and circulates within things initially as simple as sub-atomic particles; these coming together to generate three-dimensional atoms, more or less stable forms of molecule, cells continuously reacting to their environment, life-forms adapting to it and symbol-using intellect-forms controlling it using information systems such as our monetised economy. Abstracting what is controlled from that leaves not the structural axioms of a specific structure but a PID system of information channels distinguishing only energy (directed motion) and the present, past and the not-yet-existent future. My philosophical reasons for choosing this Einsteinian picture were admirably put by N R Hanson in respect of both novel axioms (re mathematics) and the real law (c.f. controller) of gravity:

    “If you accept the law of gravitation, the laws of Galileo and Kepler, the lunar motions and the tides will, as a matter of course, be systematically explained and cast into a universal mechanics.

    “But why should I? The empirical truth of the law is not directly obvious, nor can what it asserts be easily grasped.

    “Because if you accept it all these things will, as a matter of course, be systematically explained and cast into a universal mechanics. What could be a better reason”?

    In order to make serious progress I would like to add to Egmont’s appeal: “Replace the axioms” with a historical Big Bang requiring four terms and three degrees of freedom to represent it all.

    [The minimal four terms represent the reality of processes and things (energy free to generate space in three dimensions) and the reality of the tangible symbols necessary to distinguish them. The entities, processes, histories and audit trails of the SSADM methodology echo these].

    Dave Taylor

    Reference
    Hanson, N.R. (1958). Patterns of Discovery: An Inquiry into the Conceptual Foundations of Science; p.108. Cambridge University Press, U.K.

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