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Blind leading the blind

from Peter Radford

A few days ago David Ruccio posted an article titled “Crash and Learn” on the state of economics education. I want to elaborate a little further, although my usual skepticism on this subject does bridle a tad at the concept of economics education. Is that the same as “military intelligence”?

Anyway, in that article is this quote:

In Manchester, Diane Coyle also defends the basic methodology of economics. She says there is confusion among critics between microeconomics, the study of the behaviour of individuals and firms, and macroeconomics, the study of whole economies. Macroeconomics, she admits, “is broken”. But microeconomics is both robust and often verifiable with real-world data. What, she asks, can heterodox economists contribute to typical concerns of microeconomics, such as discovering the right mix of policy incentives to discourage obesity?

Therein, as someone once said, lies the tale.

Macroeconomics is “broken”. I quite agree. It’s nice to see an august member of the trade admitting that snake oil is snake oil no matter how clever the mathematics looks. Not that I blame the math. You can’t make something silly into something smart simply by expressing it in the formal language of math. If the root is rotten so is the formal outcome.

But that part I like more is that she goes on to laud the robust nature of microeconomics.


Micro, if anything, is worse than macro. It is so utterly disconnected from reality that it is incapable of anything other than talking about itself. Which it does loudly and proudly.  

Let’s begin with a broad observation: one of the problems with the mess that is macro is that for decades we have been told to build on micro foundations. Not only does this deny the existence of any phenomenon that might emerge from higher level interactions between lower level phenomena, it assumes that micro has anything useful to say. Yet it is at the level of micro that much of the absurdity of modern economics has festered. Rational behavior in all its ridiculous glory is a tenet of micro. So is all the nonsense about perfection of information. To pick up a microeconomics text is to enter an alternative universe where real people have been replaced by packets of data especially created by economists so that their incentive models, constrained optimization methods, and other paraphernalia all work smoothly.

These packets of data, we call them ‘agents’, have no choice even in the artificial domain of rational choice. Why? Because the rationality impose upon them is uniform. It conforms to special rules. Those rules dictate the response an agent gives in any situation. Those responses are thus entirely determined, not by the agent, but by the combination of rules and circumstances. So much for freedom of choice. No one, in this setting, makes a whimsical choice. Indeed they never change their mind. Ever. Instead they plod on under the tyranny of a rule-laden simplicity obeying the orders of their economist experimental overlords.

This is not human behavior, the essence of which is the variety of response and the diversity of interpretation of identical circumstances. It is exactly that diversity that promotes robust and sustainable growth. It provides alternatives. It opens spaces for argument and thus learning. Most importantly, it is the groundwork for survival in the face of the endemic uncertainty that permeates life. The basis of all problem solving is the possibility of alternatives.

Microeconomics in its mainstream versions falls far far short of talking about this kind of real world problem solving; the kind that takes place in unconstrained open systems; the kind that is influenced by higher level pressures like social power structures bearing down on the agent; the kind that real people have to make when faced with limited or asymmetrical information; and certainly not the kind that deals with complex and manifold solutions.

No, microeconomics is deeply deficient and is thus the root error in economics. It is a badly misshapen replica of a small aspect of the totality of human behavior. But it is what economists play with. Dabbling, as some do, with institutional or incentive structures can only partly mask the error. The same goes for tricks like the introduction of transaction costs. It is relatively easy to use the techniques of economics as it is now taught to advise on the construction of contracts, incentives and so on. All you have to do is to limit the responses of your agents, give them a limited palette of possibilities, and to presume that they all behave the way they do in the utopia of the textbooks. All you need to do, in other words, is shackle them far from reality.

One more thing: the typical concerns of microeconomics have wandered so far afield from the core of economic behavior and into distant fields such as obesity precisely because of the failure to create a microeconomics that could deal with, explain, or predict that care behavior. All micro has become is a sophisticated technique. It is a technology or a method. It has no explanatory power in real world economies so it has been exported to deal with problems elsewhere.

Perhaps it has value out there. I do not know. But is is certainly not the robust portion of economics.

As for the aspect of microeconomics that purports to be the study of business firms. The less said the better. The entire purpose of business is to create and then exploit asymmetries of information. This is accomplished by the conversion of learning into routine and replicable activity so that cost can be driven out and profit enhanced. It has nothing to do with maximization or any of the other oddities that prowl about in the economics textbooks. But it does have a lot to do with the existence and history of social structures and networks, power relationships, culture, technology, geography, and the institutions that govern our lives.

No. Micro is just as big a bust as macro.

  1. Neville
    October 15, 2016 at 1:47 am

    I agree entirely. Also, there can never be a “one size fits all” model for economics as social and cultural factors influence human behaviour in different countries in different ways. Also, technology is not evenly distributed across different countries and more and more, the use of this medium is affecting buying patterns and supply chains.

  2. October 15, 2016 at 8:24 am

    I dont think the situation is all that different from physics—both micro physics (quantum theory, condensed matter) and macro (cosmology) can explain a whole lot, but really in terms of the whole maybe 50% or even much less–it can’t explain consciousness, or ‘what is life’ (tho there are some good ideas on this). in cosmology it can’t explain the missing ‘dark matter’ which is by calculations 90% of the universe (though there are plenty of alternative theories—many of which basically say its a pseudo-problem).

    gary bcker’s ‘economics of addiction’ (or similar stuff on obesity) i think are reasonable on a very local, micro view—but it doesn’t ‘scale up’. people dont really try to model how ‘consumer choice’ or preferences are linked to a global manufacturing industry, advertizing, government policy etc. Most microeconomics reminds me of the research done by people who taught me quantum theory—they spent their entire careers calculating the spectrum of the hydrogen atom to extreme precision—millions of digits. They didnt even try to deal with something like carbon. But calculations like that make computers possible.

  3. October 18, 2016 at 7:07 am

    As the old saying goes, “where we end up depends on initial conditions.” In this case, when economists (mainstream and heterodox) use terms like agent, micro, macro, economic what are they looking for? What is an agent, economic or otherwise? When is something, economic or otherwise micro, or macro? And of course we’d all like to know what economic action is. How do we know it when we see it? One approach to these questions, the preferred one for many social scientists and apparently almost all economists is that a specified theory or theories provides us with the definitions and features of these things and events. And using these we look for them. The other approach is to allow the actors and events to reveal the situation we’re interested in studying, including the definitions and features of agents, the economic, etc. These will likely change over time, so no study of them is final or fixed. We always need to go “back to the sources” again and again. We can of course construct a theory or theories based on our observations, which like the situations we study will change as the situations change. This in my view puts the focus where it belongs in any social science, including economics – on the actors, interactions, and meanings of those whom we are supposed to be studying. Those who invent social life, including economic social life. Sounds simple! But’s it’s oh so difficult to pull off for real.

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