Home > New vs. Old Paradigm > Some Issues

Some Issues

from Peter Radford

First:

I have finally arrived at the point where I can give orthodox simple economics its due. It is a triumph. A system of thought well conceived, brilliantly executed, coherent, consistent, and pretty much complete. Bravo. I love it.

As long as we are trying to examine economies consisting of one or two prescient households, a couple of firms of exquisite accounting excellence, one or two products that are easily substituted for one another, as long as there is no uncertainty, no relevant time, and as long as these various actors can calculate everything at warp speed, we know everything we need to know about economics. The game is over.

As I say: well done everyone.

These unbelievably simple little economies, I assume, must exist somewhere. And wherever they do we can explain them easily.

Where they don’t is another matter.

Orthodox economics is simple economics. Simple.

Second:

Unfortunately the overwhelming number of possible economies are more complex. Orthodoxy simple theory tells us little in these cases. What it does is to try to simplify life back downwards and crunch it into the simple space it explains well. It acts as a kind of perennial first guess. It is a stab at understanding, nothing more. In the absence of a fully worked through complex economics it is all we have.

Complex economics is the future and is made possible by the development of technologies and ideas – some decades old – that allow us to get beyond simple economics. It will allow us to substitute more well thought through ideas for those rough guesses we have inherited from the simple work thus far accomplished.

Third:

No. Slathering scads of formalism all over the place does not constitute complex economics. It quite often simply hides the lack of a complicated narrative underneath.

Fourth:

I am also trying to get beyond – although clearly I haven’t yet succeeded – using the words orthodox and heterodox. What was orthodox is now heterodox and vice versa. Thus the words have little enduring relevance. Which is why I now prefer simple and complex.

Yes, I realize that those two new words can be muddled up too. But they aren’t yet. So they will have to do.

Fifth:

Structure matters. So do institutions. So does time.  Any economics that takes for granted its context isn’t worth much. It remains too simple for the real world.

Sixth:

Information is all. All is information. Economies translate matter, energy, and information into stuff we need or want. The great cycle of creativity that sits squarely at the center of an economy is the constant shuffling about of information. We infuse matter with order courtesy of the information we have at hand and the input of energy. This process is the most important aspect of an economy. We then consume, which is the disordering aspect of the cycle. Disordered matter doesn’t disappear. It loses its use value. We call it depreciation, dissipation, dissolution, and so on. It doesn’t matter what we call it. Humans order and disorder their surroundings. They create and consume.

Labor is energy and information. Capital is matter and information. Land is energy and matter. A simple production function thus creates confusion. A complex production function would not.

This sounds kind of thermodynamic. That’s better than simple because simple ignores energy, matter, and information. It ignores the cycle. It contains no process and sits outside of time. It has no direction. It has no purpose.

Seventh:

Simple sits on top of, and presumes, the cycle of creativity. Hence its inability to relate well to the environment, to real world production, to innovation, and to a host of other activities embedded in the structures, institutions, cultures, and networks that provide the basis of an economy.

Simple takes the world for granted, which is why it gets flummoxed so often by growth, change, or other phenomena that exist in time.

Complex will be an improvement on this determined ignorance.

Eighth:

Economies appear to accrete information through time. They get more complex. This appears related to the division of labor. Whether they are the same phenomenon is another matter. Simple economics cannot account for the accretion of information. Complex economics can. Which is why complex economics helps us understand growth and possible alternatives to growth.

Ninth:

Complex economies are in a constant state of becoming. They never arrive. They contain within them both the consequences of the past and the construction of the future. They have paths constrained by history. They are always in flux. Complex economics will interpret and embrace this flux. Simple economics cannot.

Tenth:

So we move on.

  1. C-R D
    August 8, 2015 at 7:03 pm

    Peter, you should take a look at “How Market Economies Come to Live and Grow on the Edge of Chaos” http://mpra.ub.uni-muenchen.de/65945/

  2. August 8, 2015 at 7:18 pm

    Peter, what an excellent succinct summation! thank you. I am currently reading Cesar Hidalgo’s wonderful new book, Why Information Grows, the Evolution of Order from atoms to economies, who elaborates upon many of thepoints you make. He explains the primary points in a superb RSA presentation 22-minute video: https://www.youtube.com/watch?v=9cXe8w62_ow

  3. James Akpan
    August 8, 2015 at 7:38 pm

    Peter, what alternative method apart from orthodoxy do you think can lead to more rapid development with minimal shocks in developing countries like Nigeria,

  4. macroambiente
    August 9, 2015 at 2:07 pm

    Great work as ever, but it seems to me that those who know that the prevailing mainstream economics is not economic science do not need more critical appreciations of its shortcomings. Those who do not know that are irrelevant. What is needed is a real world economic theory. Perhaps you and other bright minds could create a kind of a “WEA Commission on Real World New Economic Theory Ideas” without the bias of INET. Such a commission could appreciate many existing contributions searching for good ideas that, alone or combined, may potentially be developed into a new theory able to replace the mainstream economics at least in some open-minded graduation courses. This could be the beginning of a paradigm change. No person is strong enough to do this job alone.
    WEA publications is plenty of such contributions and much more has been published somewhere else, all of them waiting for such appreciation. It is not sufficient to publish a new idea somewhere; some institution must be engaged in prospecting, identifying and collecting good ideas aiming at developing them into a coherent theory that actually adheres to reality.
    I think that the contributions above deserve an appreciation like that and suggest two others: “Supply and Demand is Not a Neoclassical Concern” (http://mpra.ub.uni-muenchen.de/63135/) and “Public Debt is Economic Nonsense” (http://itnifa2015.weaconferences.net/papers/public-debt-is-economic-nonsense/).
    Gerson P. Lima

  5. August 9, 2015 at 4:11 pm

    Real economics starts with understanding MONEY and BANKING.

    moneyasdebt.net

    • August 10, 2015 at 9:38 am

      Real understanding of today’s “wolf-in-sheep’s clothing” pseudo-economics starts with understanding MONEY and BANKING.

  6. August 10, 2015 at 2:31 pm

    Important decisions ahead
    Comment on ‘Some Issues’

    1st issue
    Peter Radford sees the main problem of current economics in ‘these unbelievably simple little economies’. There is, of course, a huge problem with orthodox modeling but it is not exactly simplicity. Given the serial processing of human thinking, theory must start with the simplest case and then proceed to ever more complexity.

    “There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, “more realistic” assumptions are being made.” (Morgenstern, 1941, p. 373)

    The lethal crux of orthodoxy lies in unacceptable premises. What are these premises?

    “… I have argued that the program is organized around the following propositions: HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 147)

    The economics of the future has to be built on an entirely different set of premises — not because orthodox premises are too simple but because they are methodologically unacceptable.

    2nd issue
    “… economics is a big omnibus which contains many passengers of incommensurable interests and abilities.” (Schumpeter, 1994, p. 827)

    Current economics is a melange of political and theoretical economics with a predominance of the first ingredient. The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. One problem of economics is that many economists are not scientists but agenda pushers. The crucial difference between the two is as follows.

    “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. … A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent. (Haack, 1997, p. 1)

    Economists are expected to deliver the true economic theory and not to serve any extraneous purpose of whatever sort. Up to the present, they have not accomplished their primary task. Economics is a failed science.

    In order to become a science, economics has to get agenda pushers off the omnibus. Political economics may become a sub-discipline of political science. The topic of political economics is how to instrumentalize the economy for political purposes. Economics proper is concerned with the working of the economic system. The goal of the theoretical economist is to achieve a paradigm shift. In Keynes’s words: “The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight — as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (1973, p. 16)

    3rd issue
    “… there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell, 1980, p. 1)

    All of microeconomics is false because the set of hard core propositions HC1 to HC5 is the false point to start with. For the reconstruction of economics the following concepts are definitively ruled out: utility, expected utility, rationality/bounded rationality, equilibrium, constrained optimization, well-behaved production functions, supply/demand functions, simultaneous adaptation, rational expectation, ergodicity.

    As a positive heuristic we have: time, matter, energy, information, entropy, randomness and uncertainty should be part of the theoretical reconstruction of the monetary economic system.

    As main formal tool the usual system of equations has to be replaced by the stochastic simulation. A simulation as defined by structural axioms, probability distributions, and behavioral propensities is a well-defined mathematical object just like a system of equations. A simulation yields a bundle of intertwined paths of real and nominal variables including the stocks of money and debt. This bundle has a counterpart in reality.

    In any case, Heterodoxy has to define itself with a set of hard core propositions that fully replace HC1 to HC5 above.

    4th issue
    Paraphrasing J. S. Mill: The most effectual mode of showing how Heterodox economics may be constructed, would be to construct it.*

    5th issue
    Heterodoxy has to decide whether it stands for a political movement or a new economic paradigm.

    Egmont Kakarot-Handtke

    References
    Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism.
    Skeptical Inquirer, 21(6): 1–7. URL http://www.csicop.org/si/show/science_
    scientism_and_anti-science_in_the_age_of_preposterism.
    Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
    Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political
    Economy, 49(3): 361–393. URL http://www.jstor.org/stable/1824735.
    Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical
    Mirror: On the Break-Up of a Vision, pages 1–16. Cambridge, New York, NY,
    Melbourne: Cambridge University Press.
    Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.
    Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
    http://www.jstor.org/stable/1805586.

    * See cross-references
    http://axecorg.blogspot.com/2015/04/new-curriculum-cross-references.html

  7. Paul Schächterle
    August 10, 2015 at 7:45 pm

    I have a hard time understanding why intelligent people would say that neoclassical economics is a coherent or even true description of a “simple” economic situation.

    Neoclassical assumptions are totally absurd and have IMHO no field of application whatsoever.

    Do people have “convex” preferences? No.

    Do people prefer more units of each class of goods over less units? No.

    Can you discern “income effect” and “substitution effect” in real life? No.

    Neoclassical theory does not even allow for the most basic economic decisions people do every day.

    For example people often exchange one good for a similar good if their budget allows for it. So you might exchange cheap simple bread for better, more expensive bread.

    Or people change their consumption plans according to pricing and possible combination. For example people might decide to fly in their holidays if flights get cheaper and at the same time reduce the consumption of some other good to finance the flight.

    So neoclassical theory, particularly “microeconomics” is complete and utter nonsense! It does not describe any real life economic decision but is a phantasy that is used for ideological purposes or out of complacency, conformism and ignorance.

    “Well done”? I don’t think so.

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