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The Counterintuitive Problem

from Edward Fullbrook

Keynes argued that markets often create inaccurate expectations of economic reality which they then act upon thereby changing reality. This reflexivity that Keynes identified as central to capitalist markets is the opposite of the basic process described by traditional economic theory, both in Keynes’ day and in our own, whereby it is assumed that market expectations are determined by reality rather than one of reality’s determinants.

For most people Keynes’ theory of market expectations, like his theory of aggregate demand, is counterintuitive, and therefore difficult to elucidate and popularize sufficiently to become part of public discussion.   That is why George Soros’s role as a populariser of Keynes’ theory of expectations is potentially significant.  It is my view that in democratic societies the ultimate obstacle to implementing and maintaining laws and policies that will make their economies function reasonably well and fairly is the challenge of intellectually enabling their populations, especially their pundits and politicians, to comprehend the counterintuitive dimensions of economic reality.  Without that comprehension democratic societies will always be highly vulnerable to accepting the advice that follows from economic reasoning that excludes counterintuitive propositions and that serves the interests of tiny minorities.

  1. Nancy Sutton
    October 19, 2015 at 5:59 am

    Yes, yes, yes!! The deliberate obfuscation propagated by the mainstream economics profession is very real… and serves it’s purpose well! I’m waiting for someone to step up and boil the main points down to effective, story-creating, sound bites. They can be crude, simplistic, etc… but they have to be basically accurate and create the picture. As in, ‘1% vs 99%’, Hixon’s ‘for the government to give banks the power to create money, then borrow from and pay interest to them, is insane!” (or words to that effect), the ‘Paris Hilton Tax’ (re: the ‘death tax’)… we need a super duper ‘marketer’ for economic reality… can we hire an ad agency? :) (I do have faith in people, but when they can’t tell dark from light… !?)

  2. Min
    October 19, 2015 at 6:43 am

    First, let us not be unduly pessimistic. It is intuitive that objects fall straight down. If you have a small child run by a box and try to drop a pebble into it, the child will not drop the pebble until his hand is directly over the box. It is counterintuitive to drop the pebble before reaching the box, but with a little experience the child will learn to do so.

    One reason that it is not so easy to unlearn intuitive economic misconceptions is that they are taught to us over and over again, and to a greater or lesser extent propagandized. Notoriously, President Obama, a smart guy, said on CSPAN that we (the gov’t) had run out of money! In his 2010 State of the Union Address –I think I remember the year correctly– he said that we (the people) were tightening our belts, and that the gov’t should, too!

    Now, when I was a child I learned from a Sunday TV show that the US gov’t was the source of the American Dollar. So how could it run out of money?! Later, in high school I learned about how we financed the Civil War in part with greenbacks. Also as a child I learned the Biblical story of the Seven Fat Years and the Seven Lean Years. So countercyclical gov’t policy was not counterintuitive to me, quite the opposite. So by and large I think that the problem is not poor intuition, it is propaganda.

    • October 19, 2015 at 1:02 pm

      Yes, why don’t we all stop working and just live off government money which can never run out?

      • October 19, 2015 at 5:23 pm

        Which comment is not counter-intuitive, it’s merely counter-common sense. (See “neural pathways” below). Reminds me of a queen of France (since decapitated) who, when told the people had no bread to eat, replied “so let them eat cake”. (Ask a silly question, get a silly answer)!

        Semi-seriously, have you not yet learned (or been taught the truth) that one does not eat money? That it is merely a counter-cyclical convenience (its banks being symbolic of barns) when eating bread from this year’s harvest while we sow, nurture and gather next year’s harvest in order to continue to be able to have bread to eat?

      • Min
        October 19, 2015 at 7:59 pm

        Ah! A real question, not just bullshit about not being able to afford what we can produce.

  3. October 19, 2015 at 7:07 am

    Keynes is of course correct. So what is the issue with economists, of all varieties recognizing Keynes’ insight? Social scientists who study economists and economies have recognized that the economic theories which are often the basis for market organization change the reality which these same theories assume are the basis for the markets. In other words it’s often economists and their theories, rather than reality that are the origins of markets, in full or in part. And the theories in turn work to remake reality in their image. Social scientists followed the actors, the data for this knowledge. I assume Keynes did the same. Makes me wonder what economists who miss this insight are following.

  4. October 19, 2015 at 11:03 am

    Yes, yes,yes, Edward! Following Nancy’s lead, should we not be talking about the Gestalt experience and the etymological formation as against the intuitive usage of words: both being examples of the brain automatically forming neural pathways to automatically tune in our senses to in-formation we have repeatedly experienced and/or been taught to in-tuit.

    The Gestalt experience gives the lie to Thatcher’s “there is no alternative”, but needs to be part of primary education so it can become taken for granted in economic tuition.

  5. October 19, 2015 at 10:17 pm

    Misled by ordinary intuition and common sense
    Comment on Edward Fullbrook on ‘The Counterintuitive Problem’

    The decisive strength of Aristotle’s physics had been that it was intuitively convincing and, lo and behold, not too much has changed since the old days: “[The] stunning finding was that 87 percent of the students who had had no training in physics gave answers considered incorrect according to modern physics, but consonant with Aristotelian notions of motion and impetus. A further result, which gave even greater pause, was that 27 percent of those who had studied physics gave Aristotelian answers.” (Mirowski, 1995, p. 104)

    So much for the power of intuition and common sense which have turned out in the meantime to be the most persistent impediment to scientific advancement “… that the new physics of the seventeenth century, which replaced the older concepts of motion, rest, and change, involved a radical reorientation of the view of the cosmos and the possibilities of an infinite void space, thus yielding an almost entirely new philosophy of nature and a wholly different physics that contradicted ordinary intuition and common sense.” (Cohen, 1977, p. 318-319)

    In short, science begins exactly beyond ordinary intuition and common sense as already J. S. Mill told his fellow economists: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, … , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.” (2006, p. 783)

    This crucial insight was lost on the Cambridge School, first on Marshall “Economics for Marshall was the perfection of common sense.” (Hoover, 1998, p. 243), then on Keynes “L’intuition de Keynes lui a fait sentir où se trouvaient les difficultés, mais son insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir.” (Allais, 1993, p. 70) [Keynes intuition led him to the real difficulties but his logical inability thwarted the solution (see also 2011)]. As Moggridge confirmed “For, if anything, Keynes was the most intuitive of men.” (1976, p. 33)

    To reject Keynes’s ordinary intuition is not to reject scientific intuition “… we cannot over-emphasize the fundamental role played in this research by a special intuition, which is not the popular sense-intuition, but rather a kind of direct divination (ahead of all reasoning) …” (Bourbaki, 2005, p. 1272)

    The most misleading intuition is that economics is a science of behavior (2011). It should be clear by now that second guessing human behavior, animal spirits or reflexive expectations cannot lead to much more than folk psychology, sociologism, storytelling or gossip.

    The crucial methodological error/mistake can be traced back to Jevons: “The science of Economics, however, is in some degree peculiar, owing to the fact … that its ultimate laws are known to us immediately by intuition, or, at any rate, they are furnished to us ready made by other mental or physical sciences.” (Jevons, 1911, p. 18)

    This turned out to be the representative economist’s fatal illusion “It is possibly very encouraging for the economist to hear that compared with the natural scientist the psychological method saves him “ages of laborious research” but it is curious and a pity that this huge start has not enabled him to formulate any considerable body of reliable prognoses such as the natural sciences have managed to achieve.” (Hutchison, 1960, p. 132)

    What the representative economist has not realized until this very day is that ordinary intuition and common sense are the very hallmark of proto-science. All depends on taking the decisive methodological step: “Economics inevitably goes beyond common sense and intuition.” (Dow, 2006, p. 15)

    Egmont Kakarot-Handtke

    Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
    Bourbaki, N. (2005). The Architecture of Mathematics. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, volume II, pages 1265–1276. Oxford, New York, NY: Oxford University Press. (1948).
    Cohen, I. B. (1977). History and the Philosopher of Science. In F. Suppe (Ed.), The Structure of Scientific Theories, pages 308–349. Urbana, IL, Chicago, IL: University of Illinois Press.
    Dow, S. C. (2006). Economic Methodology: An Inquiry. Oxford: Oxford University Press.
    Hoover, K. D. (1998). Comment: Keynes, Marshall and Involuntary Unemployment. In R. E. Backhouse, D. M. Hausman, U. Mäki, and A. Salanti (Eds.), Economics and Methodology. Crossing Boundaries, pages 236–247. Houndmills, Basingstoke, London: Palgrave.
    Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
    Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
    Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. URL http://www.econlib.org/library/YPDBooks/Jevons/jvnPE.html.
    Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL http://ssrn.com/abstract=1966438.
    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.
    Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
    Moggridge, D. E. (1976). Keynes. London, Basingstoke: Macmillan.

  6. paul davidson
    October 19, 2015 at 10:33 pm

    let me note that in a letter to the editor of THE ECONOMIST magazine, George Soros insisted that his concept of reflexivity required the rejection of the mainstream’s ERGODIC axiom. Anyone interested in seeing a copy of Soros’s letter to the economist can contact me at pdavidon@utk.edu and I will send a copy as an attachment to an email to you.
    Paul Davidson

    • October 20, 2015 at 12:14 pm

      i googled the Soros letter and it is posted on lars syll’s blogs 2014 august 3 .

      also what soros calls reflexivity i think Veblen more or less had the same concept before keynes (ie ‘keeping up with the jones’ concept, status seeking, positional utility—which also has been written about by a well known economist —fred hirsch).

      I thought Soros’ book was pretty good and accessible to a popular audience, though in many ways it was just rewriting a set of fairly well known ideas in his own language or jargon (reflexitvity is a good term but it just means nonlinear iteractions). His jargon however is more suggestive than other jargons. (This is why people invent new jargons, alphabets,
      or formalisms—eg both wave and particle mechanics).

      Samuelson’s discussion of the neccesity of equilibrium and ergodicity for modeling i think lacks nuance (samuleson was not a physicist though familiar with it—one can just look at some of his old papers where he is writing outside his field basically).

      in physics one is often dealing with semi-independent individuals or particles, but they may be in an open system and also evolve (eg mutate, learn) (like the earth—which has power from the sun, minerals from comets etc.). One can often still adapt a ‘quasi-equilibrium’ (or moving equilibrium, or maximum entropy equilibrium) and quasi-ergodic axioms (basically approximations) and the theories are formally very similar.

      This also became the biggest field in statistical mechanics starting in 50’s or so and really big in the 70’s (due to Prigogine). Concepts of self-organization replaced alot of the old terminology. Schelling’s segregation is one the most simple conceptual ones of self-organization—it is a representative agent model but also shows (despite Arrow’s view that ‘social categories’ other than methodogical individualism arent useful) one really can’t ignore collective effects. (Or one can—but that might be looking at a film at the pixel level—just a bunch of dots, with no forms, features, or plots). One would also have to mention chaos. Nash’s game theory stuff also had similar conclusions though again its a different notation (though now also studied using ergodic theory of a generalized form).
      (just my 2 cents—my view is ergodicity is a bit like entropy, complexity, etc—you may have many different definitions or opinions)

  7. October 20, 2015 at 4:28 am

    The challenge of intellectually enabling their populations, especially their pundits and politicians, to comprehend the counterintuitive dimensions of economic reality.

    To meet that intellectual challenge, intellectuals might try to intellect more.

    As Hegel said somewhere “The word “Intuition” usually just means misremembered philosophy.” One of his less known sayings that only become more apt. Things only appear counterintuitive because of bad theories that make people apply inappropriate intuitions, thinking that “adverbs” are counterintuitive because it is very hard to understand them as a type of “waterfowl”.

    The problem with money & economics is that people intuitively understand them exceedingly, exceedingly well. But following a more famous saying of the same philosopher, what is familiar is not really understood, precisely because it is familiar. So bad theories can live a long time, not only because they serve the tiny minorities interests, but because everyone can automatically, unconsciously “apply” such bad theories very easily by automatically, unconsciously ignoring them entirely at the right places and times. With today’s high-tech econ this amounts to almost everywhere & everywhen. But with everyone being assaulted by these theories at every corner, in every turn of speech, the name, even among the hardworking, hardthinking heterodox tribe, for the most hyper-intuitive, natural ideas becomes – “counter-intuitive”. :-)

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