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Microfoundational cyborg dream

from Lars Syll

blog_robot_overlordsAre macro-economists doomed to always “fight the last war”? Are they doomed to always be explaining the last problem we had, even as a completely different problem is building on the horizon?

Well, maybe. But I think the hope is that microfoundations might prevent this. If you can really figure out some timeless rules that describe the behavior of consumers, firms, financial markets, governments, etc., then you might be able to predict problems before they happen. So far, that dream has not been realized. But maybe the current round of “financial friction macro” will produce something more timeless. I hope so.

Noah Smith

So there we have it! This is nothing but the age-old machine dream of neoclassical economics — an epistemologically founded cyborg dream that disregards the fundamental ontological fact that economies and societies are open — not closed — systems. 

If we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we “export” them to our “target systems,” they do only hold under ceteris paribus conditions and are a fortiori of limited value for understanding, explaining or predicting real economic systems. Or as the always eminently quotable Keynes wrote in Treatise on Probability(1921):

The kind of fundamental assumption about the character of material laws, on which scientists appear commonly to act, seems to me to be [that] the system of the material universe must consist of bodies … such that each of them exercises its own separate, independent, and invariable effect, a change of the total state being compounded of a number of separate changes each of which is solely due to a separate portion of the preceding state … Yet there might well be quite different laws for wholes of different degrees of complexity, and laws of connection between complexes which could not be stated in terms of laws connecting individual parts … If different wholes were subject to different laws qua wholes and not simply on account of and in proportion to the differences of their parts, knowledge of a part could not lead, it would seem, even to presumptive or probable knowledge as to its association with other parts … These considerations do not show us a way by which we can justify induction … No one supposes that a good induction can be arrived at merely by counting cases. The business of strengthening the argument chiefly consists in determining whether the alleged association is stable, when accompanying conditions are varied … In my judgment, the practical usefulness of those modes of inference … on which the boasted knowledge of modern science depends, can only exist … if the universe of phenomena does in fact present those peculiar characteristics of atomism and limited variety which appears more and more clearly as the ultimate result to which material science is tending.

  1. Paul Schächterle
    March 6, 2015 at 3:32 pm

    Come on, neoclassical micro theory is based on ludicrous assumptions and horrible logical errors. The question whether neoclassical micro is right or wrong has nothing to do with ontology or psychology or “rationality”.

    Neoclassical micro models the individual decision making process and the object of those decisions in an absolutely absurd manner. No time, no quality, infinitesimally divisible “goods”. No dependencies, no partially interchangeable goods, no multi-purpose goods. “Insatiability”, “convexity”. It is all an absurd M.C.-Escher-like world. No person on earth would ever make decisions in the way neoclassical economists theorize.

    And what is the result? Basically nothing.

    Take the so called “law of demand”? Is it proven given neoclassical assumptions? No it is not! Even with their nonsensical assumptions neoclassical economist can only “prove” the so called “substitution effect”. But every change in price (i.e. unit price) leads to a so called “income effect”. What is its form? We can’t say.

    So the supposed “proof” of the “law of demand” is a non-sequitur!

    That is b.t.w. the reason that you can’t aggregate individual “demand curves”, as shown with the so called Sonnenschein-Mantel-Debreu-conditions.

    I’ll stop here. For the theory of the firm just read Steve Keen’s Debunking Economics or his papers on the neoclassical theory of the firm. Let’s just say that confusing infinitesimally small amounts with zero would give a fail grade in even a low level math course.

    Neoclassical theory is so bad, it is really sad that we still have to write about it.

  2. Larry Motuz
    March 6, 2015 at 5:11 pm

    What microeconomics ignores is that all consumption — whether that of the ‘firm’ or of the ‘consumer’ (an artificial distinction since both use goods and services) — is that all use of anything occurs to obtain tangible, measurable benefits. For the ‘firm’, that ‘benefit’ is generally able to be measured in monetary units. For the ‘consumer’, that is not the case, especially since, as a life form, the ‘needs’ for different kinds of benefits in minimal amounts throw out any assumptions that ‘consumers’ can be ‘indifferent’ o what they are consuming over a broad range of ‘consumables’.

    I am puzzled that most economists do not seem to understand that this is self-evident.

  3. BC
    March 6, 2015 at 7:19 pm

    Corporate revenues are growing at 2-2.5% as are the trend rates of nominal GDP since 2007 and money supply less bank cash assets/reserves. Productivity is decelerating rapidly because of the record low for labor’s share of GDP and net flows to the financial sector equaling total annual GDP growth.

    Firms are now consuming equity capital by borrowing trillions of dollars at 3-4% to buy back equity shares to reduce equity float in order to report growth of earnings to keep share prices rising so as to ensure stock option grants and other related executive compensation schemes. Were the trend of buybacks to continue (which it won’t) at the rate of buybacks to market cap and GDP, the S&P 25-100 (revenues equivalent to 40-75% of US GDP) would become private entities by the 2030s.

    In this secular context, firms will likely accelerate automation of labor without net replacement, all the while continuing to borrowing at low rates to buy back shares with revenues growing at 2% or perhaps not at all. There is no incentive to increase capacity or labor share or its deepening under these conditions.

    http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf

    Therefore, it follows that perhaps half or even more of paid employment today will be eliminated without net replacement in the next 10-20 years by the accelerating advances in intelligent systems, Big Data analytics, bioinformatics, biometrics, telepresence, robotics, etc.

    Thus, in a debt-money-based system in which the vast majority of households rely upon their subsistence purchasing power from earned income or taxes on, and transfers from, the earned income of the working class, a loss of paid employment and purchasing power by definition means the end of growth of productivity and the mass-consumer capitalist system of division of labor, income distribution, and ownership of the means of production.

    Worse, without a replacement for after-tax and -debt service purchasing power as a consequence of loss of same from earned income, the system risks collapse along with the loss of faith in, credibility, legitimacy, and viability of the social, economic, financial, and political institutions that have arisen as a consequence of, and are dependent upon, the perpetual growth per capita of population, profits, capital formation, and consumption of resources, goods, and services.

    Current uneconomic schools of thought are ill equipped to even acknowledge the foregoing conditions, let alone understand them and thus inform us and propose viable approaches to permit the society to adapt successfully to the once-in-history effects of Peak Oil, LTG, population overshoot, the end of growth and so-called capitalism, and accelerating automation and elimination of paid employment and purchasing power for the bottom 80-90% of households.

  4. March 9, 2015 at 3:24 am

    D S Wilson (biologist in SUNY Binghampton) has a new book on multilevel or group selection, which is a concept very similar to what Keynes discussed in his quote. Wilson has been writing on this since the 70’s. (I once met with up there to discuss grad school; i figured I had only a 50% chance since he had only one spot and there was a nother good candidate, so I very wisely decided to spend the money my parents had given me to cover the application fee—I had it all done—on something else). Also he wanted me to do computer simulations and I wanted a math based project. He’s a very nice person. This idea is also called the ‘superorganism’ theory—eg a bacteria, and an ecosystem, and even the earth is a superorganism. Maybe even subatomic particles are (and some theories of this exist). Even Darwin was open to some ideas of superoganisms; the prominent enemy of this theory recently has been Richard Dawkins.

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