Home > Uncategorized > Dani Rodrik’s Ten Commandments

Dani Rodrik’s Ten Commandments

from Lars Syll

Moses-and-the-Ten-Commandments-GettyImages-171418029-5858376a3df78ce2c3b8f56dDani Rodrik is not satisfied with the critique of mainstream economics put forward by yours truly and other mostly non-orthodox economists. So he has put up a list of ten commandments for economists, hoping thereby to somehow ‘save’ mainstream ‘the model is the message’ economics from the critique. The two central commandments are

3. Make your model simple enough to isolate specific causes and how they work, but not so simple that it leaves out key interactions among causes.

4. Unrealistic assumptions are OK; unrealistic critical assumptions are not OK.

Although this may look as good advice, it turns out it really says nothing at all.

Rodrik’s ten commandments portray economics as advancing through a judicious selection from a continually expanding library of models, models that are basically seen as simplifications designed to show specific mechanisms at work. 

But the thing that’s missing in Rodrik’s view of economic models is the all-important distinction between core and auxiliary assumptions. Although Rodrik repeatedly speaks of ‘unrealistic’ or ‘critical’ assumptions, he basically just lumps them all together without differentiating between different types of assumptions, axioms or theorems. In his book Economics Rules (W. W. Norton 2015) Rodrik e. g. writes (p. 25):

Consumers are hyperrational, they are selfish, they always prefer more consumption to less, and they have a long time horizon, stretching into infinity. Economic models are typically assembled out of many such unrealistic assumptions. To be sure, many models are more realistic in one or more of these dimensions. But even in these more layered guises, other unrealistic assumptions can creep in somewhere else.

Modern mainstream (neoclassical) economists ground their models on a set of core assumptions (CA) — basically describing the agents as ‘rational’ actors — and a set of auxiliary assumptions (AA). Together CA and AA make up what I will call the ur-model (M) of all mainstream neoclassical economic models. Based on these two sets of assumptions, they try to explain and predict both individual (micro) and — most importantly — social phenomena (macro).

The core assumptions typically consist of:

CA1 Completeness — rational actors are able to compare different alternatives and decide which one(s) he prefers

CA2 Transitivity — if the actor prefers A to B, and B to C, he must also prefer A to C.

CA3 Non-satiation — more is preferred to less.

CA4 Maximizing expected utility — in choice situations under risk (calculable uncertainty) the actor maximizes expected utility.

CA4 Consistent efficiency equilibria — the actions of different individuals are consistent, and the interaction between them results t in an equilibrium.

When describing the actors as rational in these models, the concept of rationality used is instrumental rationality – choosing consistently the preferred alternative, which is judged to have the best consequences for the actor given his in the model exogenously given wishes/interests/ goals. How these preferences/wishes/interests/goals are formed is typically not considered to be within the realm of rationality, and a fortiori not constituting part of economics proper.

The picture given by this set of core assumptions (rational choice) is a rational agent with strong cognitive capacity that knows what alternatives he is facing, evaluates them carefully, calculates the consequences and chooses the one — given his preferences — that he believes has the best consequences according to him.

Weighing the different alternatives against each other, the actor makes a consistent optimizing (typically described as maximizing some kind of utility function) choice, and acts accordingly.

Beside the core assumptions (CA) the model also typically has a set of auxiliary assumptions (AA) spatio-temporally specifying the kind of social interaction between ‘rational actors’ that take place in the model. These assumptions can be seen as giving answers to questions such as

AA1 who are the actors and where and when do they act

AA2 which specific goals do they have

AA3 what are their interests

AA4 what kind of expectations do they have

AA5 what are their feasible actions

AA6 what kind of agreements (contracts) can they enter into

AA7 how much and what kind of information do they possess

AA8 how do the actions of the different individuals/agents interact with each other.

So, the ur-model of all economic models basically consist of a general specification of what (axiomatically) constitutes optimizing rational agents and a more specific description of the kind of situations in which these rational actors act (making AA serve as a kind of specification/restriction of the intended domain of application for CA and its deductively derived theorems). The list of assumptions can never be complete, since there will always unspecified background assumptions and some (often) silent omissions (like closure, transaction costs, etc., regularly based on some negligibility and applicability considerations). The hope, however, is that the ‘thin’ list of assumptions shall be sufficient to explain and predict ‘thick’ phenomena in the real, complex, world.

But in Rodrik’s model depiction we are essentially given the following structure,

A1, A2, … An
———————-
Theorem,

where a set of undifferentiated assumptions are used to infer a theorem.

This is, however, to vague and imprecise to be helpful, and does not give a true picture of the usual mainstream modeling strategy, where — as I’ve argued in a previous post — there’s a differentiation between a set of law-like hypotheses (CA) and a set of auxiliary assumptions (AA), giving the more adequate structure

CA1, CA2, … CAn & AA1, AA2, … AAn
———————————————–
Theorem

or,

CA1, CA2, … CAn
———————-
(AA1, AA2, … AAn) → Theorem,

more clearly underlining the function of AA as a set of (empirical, spatio-temporal) restrictions on the applicability of the deduced theorems.

This underlines the fact that specification of AA restricts the range of applicability of the deduced theorem. In the extreme cases we get

CA1, CA2, … CAn
———————
Theorem,

where the deduced theorems are analytical entities with universal and totally unrestricted applicability, or

AA1, AA2, … AAn
———————-
Theorem,

where the deduced theorem is transformed into an untestable tautological thought-experiment without any empirical commitment whatsoever beyond telling a coherent fictitious as-if story.

Not clearly differentiating between CA and AA means that Rodrik can’t make this all-important interpretative distinction, and so opens up for unwarrantedly ‘saving’ or ‘immunizing’ models from almost any kind of critique by simple equivocation between interpreting models as empirically empty and purely deductive-axiomatic analytical systems, or, respectively, as models with explicit empirical aspirations. Flexibility is usually something people deem positive, but in this methodological context it’s more troublesome than a sign of real strength. Models that are compatible with everything, or come with unspecified domains of application, are worthless from a scientific point of view.

So — if you want to ‘save’ economics you certainly have to come up with something more substantive and informative than telling people to work with simple models built on unrealistic assumptions.

  1. Rob Reno
    January 13, 2018 at 3:04 pm

    I find Marques idea cogent that first comes common sense (BK) and then models that accord with what is plausible with what we experientially know about reality. Hope I’m reading him correctly 😄

  2. January 14, 2018 at 2:26 pm

    In reality, rational decisions are never made without an emotional component. To separate the two in order to obtain simplicity, alters the decision itself and is the weakest part of orthodox economics as practiced by, say, bankers. Do you think that the fraud perpetrated on home owners in order for banks to accumulate multiple sub-prime mortgages for creating and selling derivatives was only a rational decision? I think not because the contemplation of earning billions of dollars through accounting fraud surely was not separate from feeling something like great elation when the fraudulent act was completed and the money rolled in.

  3. January 14, 2018 at 6:20 pm

    As always, you – and Rodrick and, more generally, neoclassical economists – forget the most obvious “irrealistic” assumption : efficiency (pareto optimality) supposes a high centralised economy and (stupid) “price takers” agents.
    Knowing that, all the boring discussions about “rationality” are a waste of time. Orthodox economist LOVE to discuss about it – they can say that it is an “approximation”, etc. – but they avoid like the plague the question of the (autoritarian) auctioneer and his long list of delirious tasks – conditional contracts for all agents’ life, computing equilibrium prices (or unending “tâtonnement”, etc.

    • January 14, 2018 at 7:45 pm

      Bernard, I certainly agree that efficiency/optimality is a very central and limiting assumption in most neoclassical models and well worth criticizing. And I have done so — e.g. in this article already back in 1993:
      http://www.tandfonline.com/doi/abs/10.1080/03585522.1993.10415866

      • Rob Reno
        January 14, 2018 at 8:34 pm

        Thanks, looks interesting, but the market is so efficient I can’t afford the $42 for 24 hour access or the $100 plus access for 30 days ;-) Guess I’ll have to wait until I can drive into the UW and see if I can find there. Knowledge is very expensive!

  4. Rob Reno
    January 14, 2018 at 11:42 pm

    The history of the study of judgment and decision making has been marked by an iterative tension between what are known as _prescriptive_ and _descriptive_ advances. Prescriptive theories, which typically have their roots in economics, seek to define efficient or optimal decision making. Descriptive empirical advances, with roots typically in psychology, then invariably suggest these prescriptive theories do not accurately describe human behavior. (Paul W. Glimcher 2009, 261. Neuroscience, Psychology, and Economic Behavior: The Emerging Field of Neuroeconomics. In Cognitive Biology: Evolutionary and Developmental Perspectives on Mind, Brain, and Behavior. MIT Press)

    Add one more commandment. Thou shalt not covet physics.

    • Rob Reno
      January 14, 2018 at 11:44 pm

      Or more defined, Thou shalt not covet thy neighbor’s physics.

      • Frank Salter
        January 15, 2018 at 6:15 am

        Or simply apply physics correctly!

  5. Edward Ross
    January 15, 2018 at 2:43 am

    “In Cognitive Biology: The emerging Field of Neuroeconomics. I Cognitive : Biology: Evolutionary and Development Evolutionary and Developmental Perspectives on Mind, Brain, and Behavior. I have not read this and do not discount it. However I think before we get into this academic theory the conversation should begin with anthropological study of how community culture effects peoples thinking and actions. Here I also admit my understanding of the subject has been influenced by the variety of people in different situations I have lived and worked including an isolated Papua New Guinea village, then as a mobile plant operator in a coal mine where my work mates were generally heavy drinkers heavily influenced by pub talk. Toping that of were undergraduate studies in anthropology and third world development.
    Hence :
    “That anthropology, in representing ‘other societies’, has voiced values and perspectives which , in hindsight, were clearly entangled with and expressed global inequalities is only to acknowledge, however, that it, like other fields of academic inquiry, is of its time an place. The inextricable connections between knowledge and power, between social control and systems of meaning, between domination and structures of discourse, are now so well established that complete escape from such entanglements is clearly self deception.— IN fact, anthropology in the 1990s is no longer the discipline which so many of its critics have pilloried. A useful literature has existed for some twenty years(for instance Asad1973;Etiene &Leacock 1980; Huizer &Mannheim1979;and Hymes; 1974 which ended the erstwhile deafeningly innocent silence about various political and ethical dimensions of anthropological work and thought” Malcolm Crick Entangled lives and meanings:acaolonialism and its cultural Legacy(1997)

  6. Edward Ross
    January 15, 2018 at 2:54 am

    “In Cognitive Biology: The emerging Field of Neuroeconomics. I Cognitive : Biology: Evolutionary and Development Evolutionary and Developmental Perspectives on Mind, Brain, and Behavior. I have not read this and do not discount it. However I think before we get into this academic theory the conversation should begin with anthropological study of how community culture effects peoples thinking and actions. Here I also admit my understanding of the subject has been influenced by the variety of people in different situations I have lived and worked including an isolated Papua New Guinea village, then as a mobile plant operator in a coal mine where my work mates were generally heavy drinkers heavily influenced by pub talk. Toping that of were undergraduate studies in anthropology and third world development.
    Hence :
    “That anthropology, in representing ‘other societies’, has voiced values and perspectives which , in hindsight, were clearly entangled with and expressed global inequalities is only to acknowledge, however, that it, like other fields of academic inquiry, is of its time an place. The inextricable connections between knowledge and power, between social control and systems of meaning, between domination and structures of discourse, are now so well established that complete escape from such entanglements is clearly self deception.— IN fact, anthropology in the 1990s is no longer the discipline which so many of its critics have pilloried. A useful literature has existed for some twenty years(for instance Asad1973;Etiene &Leacock 1980; Huizer &Mannheim1979;and Hymes; 1974 which ended the erstwhile deafeningly innocent silence about various political and ethical dimensions of anthropological work and thought” Malcolm Crick Entangled lives and meanings:acaolonialism and its cultural Legacy(1997) Cited Global forces, Local realities p 6591997) Another anthropological book is Anthropology and Third world development 1994 where Bill Geddes describes how social templates affect status and the individual pp64-127

    • Rob Reno
      January 15, 2018 at 5:15 am

      Thanks Edward, I enjoy anthropology and appreciate the references. Indeed, “connections between knowledge and power, between social control and systems of meaning, between domination and structures of discourse” from an anthropological perspective are important. I shared the quote not to dive deeper into the theories of neuroecomics (?) for I was surprised to see the topic of “neuroeconomics” at all when the book arrived ;-) But I did find it interesting that the gist of the quote supports idea that mainstream economics doesn’t accurately describe reality! Hum, where have I seen that argument before? Beyond that I’m staying focused on working my way through the stack of books (Marques, Fullbrook, Zamman, …) from WEA that are sitting ready and loaded. And Lars has interesting reads almost daily!

  7. January 16, 2018 at 9:42 am

    Rationality and irrationality are human constructs. In other words, humans make them up. They’re make believe. When social scientists study human societies their attention is on all such constructs. All the so-called assumptions of these models are also human constructs. (1) What kinds of societies create such constructs? (2) What’s the process of their creation? (3) How are these constructs applied and changed? These are the questions we need to ask, and answer as social scientists. This is the work of anthropologists. Generally defined such as this, “…the comparative study of humans, their societies, and their cultural worlds. It simultaneously explores human diversity and what it is that all humans have in common.” This is from “What is Anthropology” by Thomas Hylland Eriksen (2017). A few more titles representing current anthropology include: Pierre Bourdieu, Outline of a Theory of Practice, 1972; Marshall Sahlins, Stone Age Economics, 1974; Marshall Sahlins, Culture and Practical Reason, 1976; Jack Goody, The Domestication of the Savage Mind, 1977; Bruno Latour and Steve Woolgar, Laboratory Life, 1979; Eric Hobsbawm and Terence Ranger (editors), The Invention of Tradition, 1983; James Clifford and George Marcus (editors), Writing Culture: The Poetics and Politics of Ethnography, 1986; Bruno Latour, We Have Never Been Modern, 1991 (English translation: 1993); Jack Goody, The East in the West, 1996; Talal Asad, Formations of the Secular: Christianity, Islam, Modernity, 2003; David Graeber, Debt: The First 5000 Years, 2011. Anthropology was changing direction just as I got into it in the 1970’s.

    • January 16, 2018 at 10:41 pm

      This from an older, saner anthropology:

      “We need not debate about the mere words … We are not altering the real to suit the ideal. We are altering the ideal. It is easier”.

      G K Chesterton, Orthodoxy, 1908.

      • January 17, 2018 at 11:06 am

        Dave, certainly older. But not in my view saner. The concepts Chesterton uses are all human constructs — words, real, ideal. The processes through which these are created and used by humans is part of the subject matter of anthropology (and the other social sciences). Otherwise, why invent social science at all?

      • January 17, 2018 at 4:58 pm

        Yes, why invent social science at all, when it tells you nothing you can’t see better with your own eyes with their kinesthetic sensing.

    • January 20, 2018 at 6:31 am

      Dave and Edward, like science generally, social science is not just a modern invention intended to take the place of ordinary peoples’ ongoing efforts to construct civilization and culture, and to explain both them and nature. Beginning from the cognitive revolution (about 70,000 years ago) Sapiens wanted to understand and cooperate more fully with one another, to figure out why humans act as they do, and to use this knowledge to improve the life of their communities. Those who arrange and lead such efforts go by a variety of names – shaman, healer, priest, etc. All doing their work long before the invention of modern social sciences. Social sciences have literally been part of Sapiens cultures for 70,000 years. And far from telling Sapiens nothing, it was and remains one of the main tools Sapiens use to create cultures and continue the survival of their species.

  8. Edward Ross
    January 19, 2018 at 10:34 pm

    Dave Taylor “Yes, why invent social science at all when it tells you nothing you can’t see better with your own eyes with their kinaesthetic sensing”
    Perhaps this is a case as ‘there is none so blind as those who do not want to see.’ On this subject even non academics will tell you we all see things differently Then if we turn to the scorned social sciences Edward Fullbrook in real world economics describes how we all may see differently but by combining those differences it is possible to gain a more complete understanding. Then Bill Geddes an anthropologist explains how early experiences form subconscious perceptions that affect our conscious decisions and interpretations of what we see.

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