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Some Issues Re-visited

from Peter Radford

Hmmm.

It seems that some people misunderstood my comments regarding neoclassical economics.

Allow me to reiterate and, perhaps, clarify.

I want to say that I regard neoclassical economics as a triumph. A wonderful achievement. Brilliant.

Please read the fine print: that brilliance has nothing to do with relevance, reality, or any other such yardstick.

All I am saying is that within its own confines, with regard to its own rules, and with respect to the limits placed upon it by its multitude of excellent practitioners, neoclassical economics has been an extraordinary success.

Further, and more to the point, I am saying that the number of instances of economies we find within the space of all possible economies described by neoclassical economics is tiny. So tiny we are unlikely ever to experience one.

So tiny that neoclassical economics, triumph or not, can be regarded as insignificant as having valid application to the vast majority of instances within that space.

It is thus a triumph, but a useless triumph.

At its very best – and this is an enormous stretch – it acts a very rough and dull caricature of the kind of economy we actually experience. Like all caricatures it has a vague resemblance to what we find around us, but on closer inspection it totally lacks the necessary detail for us to use as a portrayal of reality. It is useful, therefore, as a tentative first step, but we must discard it immediately if we want to delve far into any economy we are likely to encounter.

There may be economies, somewhere, that resemble those of neoclassical economics. People in those economies may actually be the oddballs that neoclassical analysts have theorized about. The firms may act along neoclassical lines. All the bizarre and twisted assumptions that the neoclassical system requires to possess the internal coherence that it demonstrates may actually exist in that far off place.

That they don’t here on planet earth is my point.

That actual economies require a different economics, a better understanding of human behavior, and a less weird description of business, does not detract from the intellectual achievement of the people who built the neoclassical system. It simply means that their effort is irrelevant. It means we all need to stop picking holes in something that, by its own measures, is a great success, and that we ought, instead, build something else. Something that stands up to a more rigorous set of standards.

Something that, in other words, requires rigor not to mask irrelevance and insufficiency, but, rather, to reflect the instances of economic activity we are likely to encounter. Rigor as elucidation not rigor as obfuscation ought guide us.

It is time for us to stop taking the easy route of simply picking at the strange world posited by the neoclassical thinkers, and to start replacing it.

And, as I tried to say before, I think that means ditching simplicity and replacing it with an embrace of complexity.

We ought leave those infinitely small instances of supremely simple economies that must lurk in the distant corners of the space of all economies somewhere to the neoclassical folk. Well done them! Our job is greater and more difficult. It is also more important and relevant.

We need to build theories that match the complexity of reality. Where we understand reality as being the majority of instances of economies we are likely to encounter in real life.

Does that clear things up?

 


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  1. Finance as warfare
  2. Piketty vs. the classical economic reformers
  3. Incorporating the rentier sectors into a financial model
  4. From the bubble economy to debt deflation and privatization
  5. How economic theory came to ignore the role of debt
  6. The use and abuse of mathematical economics
  7. U.S. “quantitative easing” is fracturing the global economy
  1. macroambiente
    August 14, 2015 at 4:03 pm

    “We need to build theories that match the complexity of reality” actually clears things up. But my suggestion holds: the “we” must be defined and really work together.
    Gerson P. Lima

  2. Blissex
    August 14, 2015 at 8:03 pm

    «Please read the fine print: that brilliance has nothing to do with relevance, reality, or any other such yardstick. All I am saying is that within its own confines, with regard to its own rules, and with respect to the limits placed upon it by its multitude of excellent practitioners, neoclassical economics has been an extraordinary success.»

    As Steve Keen has tirelessly documented, that’s propaganda: neoclassical Economics is riddled with several gross mathematical and semantic mistakes, not just with irrelevance or unreality.

    It is not a beautiful, consistent, elegant system, even if irrelevant and unreal: it is a mess of sophistry and tricks and non-sequiturs wrapped in trivial yet faulty mathematical formulas because it has evolved by having retrofitted into it whatever it took to pretend it can be used to “prove” the central truthiness of neoclassical Economics, that the distribution of income is optimal absent any distorting government intervention.

    It does not even qualify as a theory of the political economy: it is missing any theory of capital, land, uncertainty, profit, …

    A “very likable young middle-aged academic tenured at an elite British university” referred to it as “pure shit”, “old theories that nearly everyone knows are false”, as reported on this blog it is

    rwer.wordpress.com/2013/06/30/doctor-x-pure-shit-and-the-royal-societys-motto/

  3. August 14, 2015 at 10:34 pm

    But Peter, do we not have Finance as War and economics as propaganda? Do we not need to replace the bewildering variety of too-simple models with a theory that does not “match” the diversity of reality but is complex and interactive enough to be able to account for it and “regenerate” any parts of interest?

    “Ah, love, could thou and I with Fate conspire
    To grasp this sorry scheme of things entire –
    Would we not shatter it to bits, and then
    Remould it nearer to the heart’s desire?”

    [Nevil Shute on Hitler’s war, recalling the Rubaiyat of Omar Khayyam].

  4. August 15, 2015 at 9:10 am

    I pretty much agree with this post, except i think people havee been revising neoclassical economics since its inception in many ways—though one could say any of those revisions could be said to result in theories/explanations which are no longer neoclassical economics. I view that as just a matter of words. I tend to prefer using the term economics, though one could equally use terms like political economy, socioeconomics, etc. I think the situation is analogous to Boltzmann’s ideal gas model of the 1860’s. Its elegant, relativiely simple, and is really applicable to only a tiny fraction of physical phenomena. Since that time people have been revising it—condensed matter physics, etc. –but formally these often can be viewed as modifications of the original model—boltzmann type distributions are used through the modern literature— eg ‘the boltzmann machine’ of computer science. Also to this day people find new proofs/explanations of boltzmann’s original argument—these are math excercizes, and some quite interesting (eg geometrical rather than statistical arguments). Its also true that for a long time, and to this people, people do use boltzmann’s argument in ways similar to alot of economics—they decide that since describing a real cow or economy is too difficult or requires too much effort, they just write articles and make a career describing spherical cows and economies.

    Somewhat like alot of foreign policy—peace is complex, and besides we already have a tried andf true solution to all problems—war. (Since some scientists have solved alot of complex problems, war is fairly easy—you get a degree in international relations, get a job in the white house, call up a company and make an order for some weapons, and you are good to go .

    • August 18, 2015 at 8:28 am

      As always, Ishi, you are a breath of fresh air after the likes of Blissex. Your ‘Boltzmann’s machine’ was something quite new to me, and surprisingly relevant, though Jevons surely had Maxwell’s broadcast radiation as his model? My model being more like transmitting multichannel digital information down wave guides such as optical fibres, I don’t think you would find it “formally a modification of the original model”. With separation of the degrees of freedom it is formally more complex but in practice much simpler. Would we could discuss it at length.

      • August 18, 2015 at 8:55 am

        My apologies to Blissex for a somewhat bilious reference to him. Following Paul to glance again at it, I seem to have reacted to the talk of “shit” and not the good sense of what he was saying here.

  5. August 19, 2015 at 2:58 am

    i notice wikipedia has an article on boltzmamn machines —i recommend it. to a large extent i agree with hinton and co-authors. (i do have a conflict of interest–my dad went to CMU)

  6. August 19, 2015 at 2:10 pm

    Neoclassical economics are as unfinished economics theory as classical one was. Because they do not integratre human psychology as Keynes did. Many answers to many questions about economics are in “Money, how to flip the table off” Edited by Amazon. That means that money is the first thing to be studed to understand economics.

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