Home > Uncategorized > The pretense-of-knowledge syndrome​

The pretense-of-knowledge syndrome​

from Lars Syll

What does concern me about my discipline … is that its current core — by which I mainly mean the so-called dynamic stochastic general equilibrium approach — has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one …

caballero8While it often makes sense to assume rational expectations for a limited application to isolate a particular mechanism that is distinct from the role of expectations formation, this assumption no longer makes sense once we assemble the whole model. Agents could be fully rational with respect to their local environments and everyday activities, but they are most probably nearly clueless with respect to the statistics about which current macroeconomic models expect them to have full information and rational information.

This issue is not one that can be addressed by adding a parameter capturing a little bit more risk aversion about macro-economic, rather than local, phenomena. The reaction of human beings to the truly unknown is fundamentally different from the way they deal with the risks associated with a known situation and environment … In realistic, real-time settings, both economic agents and researchers have a very limited understanding of the mechanisms at work. This is an order-of-magnitude less knowledge than our core macroeconomic models currently assume, and hence it is highly likely that the optimal approximation paradigm is quite different from current workhorses, both for academic and policy​ work. In trying to add a degree of complexity to the current core models, by bringing in aspects of the periphery, we are simultaneously making the rationality assumptions behind that core approach lessplausible …

The challenges are big, but macroeconomists can no longer continue playing internal games. The alternative of leaving all the important stuff to the “policy”type​ and informal commentators cannot be the right approach. I do not have the answer. But I suspect that whatever the solution ultimately is, we will accelerate our convergence to it, and reduce the damage we do along the transition, if we focus on reducing the extent of our pretense-of-knowledge syndrome.

Ricardo J. Caballero

Caballero’s article underlines — especially when it comes to forecasting and implementing economic policies  — that the future in many areas is inherently unknowable, and using statistics, econometrics, decision theory or game theory, does not in the least overcome this ontological fact.

It also further underlines how important it is in social sciences — and economics in particular — to incorporate Keynes’s far-reaching and incisive analysis of induction and evidential weight in his seminal A Treatise on Probability (1921).

How strange that social scientists and mainstream economists, as a rule, do not even touch upon these aspects of scientific methodology that seems to be so fundamental and important for anyone trying to understand how we learn and orient ourselves in an uncertain world. An educated guess on why this is a fact would be that Keynes concepts are not possible to squeeze into a single calculable numerical “probability.” In the quest for measurable quantities, one puts a blind eye to qualities and looks the other way.

So why do economists, companies and governments continue with the expensive, but obviously worthless, activity of trying to forecast/predict the future?

A couple of months ago yours truly was interviewed by a public radio journalist working on a series on Great Economic Thinkers. We were discussing the monumental failures of the predictions-and-forecasts-business. But — the journalist asked — if these cocksure economists with their “rigorous” and “precise” mathematical-statistical-econometric models are so wrong again and again — “why do they persist wasting time on it?”  Yes, indeed, why do they?

  1. Prof James Beckman, Germany
    May 6, 2018 at 1:41 pm

    After decades as both a prof & consultant, I believe we could make more accurate forecasts of measured economic activity, for example, but the complexities of nature are always bringing one or another “black swans”–a Trump election or earthquakes/volcanic eruption on Hawaii’s big island which is now occurring.

  2. David Harold Chester
    May 6, 2018 at 3:04 pm

    I too believe that scientific macroeconomic forecasting is not only possible but the means for it already exist, see my book! However we must be careful to limit what we forecast to the more general aspects of our social system and not confuse (as does this article) the micro- aspects from the macro- ones.

  3. May 6, 2018 at 7:37 pm

    Being classically educated Keynes (JM) was familiar with discussions about the limits to human understanding. He was much taken with induction as a route to useful knowledge – though always subordinated to the exercise of human judgment and intuition that he saw as characterizing the lived world.

    From a very different background Herb Simon also spent his career pondering these limits. He wrote: “Nothing is more fundamental in setting our research agenda and informing our research methods than our view of the nature of the human beings whose behavior we are studying” (APSR 1985, p. 303). This is much quoted – always approvingly without analysis of its implications – yet obviously bears on the discussion of the clarifying power of presuming Rational Man.

    Long an admirer and examiner of Simon’s life and work:

    Spender, J.-C. 2013. ‘Herbert Alexander Simon: Philosopher of the Organizational Life-World.’ In M. Witzel & M. Warner (Eds.) Oxford Handbook of Management Thinkers: 297-357. Oxford: Oxford University Press

    I now believe some readers may miss what Simon was up to, in part because we mis-read his commitment to ‘rational discourse’ – abetted by his claim to be some kind of ‘positivist’. How can we talk meaningfully about ‘non-Rational Man’ if not rationally? Everything has to be ‘modeled’. Hence we limit our attention to the model-able – in contrast to what we might otherwise observe about the human condition.

    Simon’s struggles with ‘bounded rationality’ suggest his mind’s eye ranged with Keynes’s beyond the domain of the model-able. But what can be said? Poets and others sometimes go beyond the bounds of rationality by speaking of qualities. But is their discussion of ‘feelings’ relevant to those seeking insight and clarity about economic actors and the socioeconomy they create with their ‘choices’? The question matters even more now ‘business ethics’ is resurgent.

    Simon explored the boundary between the rational and beyond domains. Maybe what he meant by ‘the nature of the human being’ was the very opposite of Rational Man, which supposition simply pulls a blind down on those who imagine themselves within the model-able, excusing them from seeing anything meaningful beyond. The irrational, they claim, cannot be modeled.

    Instead of deploying a rationality-blind, Simon may have thought the ‘nature of the human being’ as our experience of making sense of experience or, more specifically, a capacity to make sense of experience that goes beyond our capacity to be rational. The focus shifts onto our capacity to imagine or judge, thereby enabling us to transform the un-discussable into the discussable. When the particulars of this practice are generalized into ‘rationality’ we deny our awareness of what lies beyond its pale. Presuming we inhabit an uncertain world invokes our imaginative capacity (note that we cannot be certain our world is uncertain). Simon (and Keynes) moved beyond mere probabilistic computation and invoked other human capabilities.

    Which leads us to refashion Simon’s comment into ‘nothing is more important than the theorist’s assumption about the human capacity to engage and resolve uncertainty’. And this leads on to choosing whether to ignore uncertainty, which seems to be no professional impediment or, second, to engage it in the spirit, if not the manner, of Keynes, Simon or others. Knight and Shackle are other elephants in this room.

    But, seeing an opening, the second also appeals to those offering psychological models of human beings they find richer (discursive- and revenue-wise) than Rational Man – though ultimately their new-and-improved psycho-model’s rationalist foundations must emerge from behind the arras – at which point their gig is up. How might a boundedly-rational being come up with a model that resolves the problems bounded rationality creates for every beings of that genus? Shades of truth-by-revelation.

    A different route is to explore an uncertainty-resolving model of the human being that goes beyond the ‘single boundary’ model – rational versus imaginative.

    This is not a discussion of types of imagination – clearly nonsensical – but of experiencing, more specifically of how we categorize the situations in which we are conscious of using our imagination. First, along with Descartes, we can ponder whether ‘the problem’ is ‘in the world we are experiencing’ or ‘in us because we do not perceive and think in ways that would resolve all our questions even if we had certain knowledge of the world to hand’ – we are only boundedly rational.

    Obviously we cannot ever be certain that any categorization of the imagining situation is correct. But, and this is the point, we act on a categorization nonetheless, with some confidence that we have categorized appropriately. We are always diagnosing the uncertainties affecting or impeding our purposive activity.

    It may be that these different categories have different economic implications and thereby provide a route to an economics that is richer that either offered by – on the one hand – simplistic rationality and – on the other – equally simplistic un-ground-able assertions about a necessary connection between imagination and profit. The idea that there is some naturally or inherently positive outcome from imagining (innovation) is both stupid and a denial of what we know about uncertainty’s impact on the human condition. History is replete with examples of misdiagnosis and who among us has not said ‘it seemed a good idea at the time’?

    So what is the point of this long post? Ignoring uncertainty seems pretty stupid – and aside from shaping who one associates with it is bound to end in tears as Gradma told us.

    Following up the paths indicated by Knight, Keynes, Shackle, Simon, and Coase, engaging uncertainty may offer something valuable to those in the lived world even if it is professionally unrewarding in the curious wonderland of economics’ practice.

    But we all know the problem is not merely ‘technical’, of doing better theorizing that gets closer to ‘rigorously explaining’ the phenomena of interest to economists and policy-makers. It is more likely to be some of the bitter fruit of legal, normative, and political aspects of our community – that lead to the allocation of our community’s rewards. Even the most casual look at our history shows we are not engaged in pursuing an a-political science.

    As we mark Marx’s bicentenary we must eventually appreciate that the very opposite applies, that economics’ survival proves its dependence on an ideology that we must eventually confront. As they say, doing more of the same while failing is a handy definition of stupidity. Put another way, we get the economics we deserve while pulling the blind down on whom it serves.

    • Prof James Beckman, Germany
      May 7, 2018 at 4:39 pm

      Hi, Spender7, I was a student of James G March, the organizational theorist, after he departed Carnegie Mellon, where he had been a close associate of Simon, for California. Jim has written many volumes of poetry & about poetry, which was his way to enter this world of uncertainly which seems to exist in the brains of most of us. Indeed, isn’t poetry often about uncertainty: Will she/he come or not? Will she/he love me or not! Even when anticipation of a likely future event enters, normally I find there is at least some uncertainty present.

      • May 7, 2018 at 5:30 pm

        Hi Prof Beckman, thanks for your post.

        Yes indeed, she loves me, she loves me not. That’s our uncertain world.

        I have known Jim for many years. On one occasion I was asked to introduce him for a professional award. Which caused me to re-read much of his oeuvre. I concluded there are two Jims – one the GSIA modeler – perhaps best known among the younger folk for his 1991 Org Sci paper – the other who works beyond the pale mentioned in my post, especially fascinated by the Don Quixote stories and the possibilities of non-print media. I have to really grasp how he sows his seam between the two Jims.

      • Robert locke
        May 7, 2018 at 6:20 pm

        For me passionate
        Fullfillment drives irrational behavior,

      • Prof James Beckman, Germany
        May 7, 2018 at 7:21 pm

        Robert, I think you’ve got it: the illusion of the dispassionate thinker or researcher should be put to rest. Ideas, data & experience sure makes life interesting, don’t they?

      • May 7, 2018 at 6:26 pm

        Or its anticipation ?

      • Prof James Beckman, Germany
        May 7, 2018 at 7:25 pm

        Hi, Sprender 7, I believe we agree that anticipation relates to the positive evaluation of uncertainty. It allows us to bridge the emotional gap often laden with fear, as best I can see.

      • May 7, 2018 at 8:21 pm

        Indeed Prof JB, I cannot think of a better way of illustrating the point I was struggling with in my post – i.e. that it is NOT useful – from the point of view of understanding our economic activity – to presume we are computers, or billiard balls, or naively agentic, or mere creatures of imagination – rather we ARE how we respond to the particular uncertainties we encounter, and this presupposes passion.

        There can be no totalizing answer here (definitive model) – because the variety of the uncertainties that impinge on us as we pursue our varied goals is infinite beyond our imagining.

        Nonetheless categorizing our responses, inducing some generalities and so avoiding the epistemological trap of trying to categorize the uncertainties themselves – might help us build a practical ‘model’ of relevance to economic thinking. It not only presupposes individuals’ capacity to imagine – as an abstract capability – but also a complementary capability to be impassioned in a timely manner. The Greek notion of ‘phronesis’ might apply, complementing appropriate emotion with appropriate timing.

        Fear suppresses the passion that leads to action.

        The ‘wealth effect’ seems like the opposite.

    • May 8, 2018 at 9:04 am

      Spender on May 6 at 7.37: “This is not a discussion of types of imagination – clearly nonsensical … “.

      Robert: “For me passionate Fullfillment drives irrational behavior”.

      Spender here: ” it is NOT useful – from the point of view of understanding our economic activity – to presume we are computers, or billiard balls, or naively agentic, or mere creatures of imagination – rather we ARE how we respond to the particular uncertainties we encounter, and this presupposes passion. … Fear suppresses the passion that leads to action.”

      Let me first express my appreciation of Spender’s arguments here, even though (for reasons explained today in the blog on “Mathematics and Economics”, about things being not what they look like but what they do) I disagree with them. He has got hold of the wrong end of the stick. There are two views of “types of imagination”: his that he can’t see them so they are literally nonsensical, and mine, that if one understands how brains and hence their languages and imaginations work (which, I say with due reservations and modesty my scientific work and unusual personal experience has enabled me to do) then it makes sense to say that, there being four different ways of thinking there are four different manifestations of imagination.

      Clearly, from the point of view of appearances and at the level of chemistry, computers are not people. But from the point of view of what they do, which is not “computing” but more generally “processing information”, they are becoming indistinguishable. There is no “presumption” in this: it is a conclusion. Only the very naive (or wreckers putting up straw men) would claim people are computers, but they are analogous to to computers and by seeing how they work in terms of how they use the different parts of their architecture – their input devices, processors, memory and output device – one can learn to understand a great deal about how people work and thus what economics has to enable them to do.

      So computers don’t have “passions” and “free will”. But what do passions do? Drive behaviour? Energise certain patterns of behaviour? Computers have operating systems which perform that function: which load the programs we want to run or (instrumentally) they need to run to achieve what we want them to do. As a scientist (and indeed as a Christian) I try to be objective, not letting my passions drive my actions and perceptions. But that doesn’t mean I haven’t got passions driving me. What it does mean is my passionate concern about the state of our world has been translated into commitment to do do something about it. I made the commitment first, programming my operating system so it turns on the relevant parts of my scientific programming; reducing chaotic interaction between the four parts of my brain to an (over all) orderly three stage process of relating inputs to outputs.

      In everyday life, if political commitment doesn’t come first, economics is chaotic. Sadly, if the political commitment is to politicians and their ilk, lies can achieve their political end while wreaking havoc on the economy by playing games with it. Clumsily put, I know, but I offer it as an exercise for the imagination.

      • May 8, 2018 at 10:53 am

        See PS. below [May 8, 2018 at 10:46 am]. During assembly this somehow lost its ‘reply’ status and appeared as a new comment.

    • May 10, 2018 at 4:34 am


      “Rational man” in the mainstream construction of economic theory is very much like the Grasshopper in Aesop’s fable of the Grasshopper and the Ants: devoted to ‘maximizing’ satisfaction in the moment without much regard, if any, for what the future portends. Whereas ‘momentary’ satisfaction –especially given ‘subjective preferences’ rather than objective ones– is spine-tingling ‘fun’, it is irrational for any life form to ignore objective needs. Thus, “improvidential behavior” cannot characterize ‘rationality’ in the manner that economists have ‘defined’ rationality –a manner that follows from how it has defined ‘utility’, albeit indifference analysis pretends to have moved away from ‘utility’ per se while, in point of fact, it has simply ignored value-in-use as a definitive factor in actual decision-making. {Ironically, it hasn’t quite done so for the firm, though it’s use of isoquants with ‘rubbery capital’ comes awfully close as a ‘good try’.

      • Prof James Beckman, Germany
        May 10, 2018 at 6:57 am

        Larry, I think you have nailed it: even as we want a “good enough” deal for NOW, it is likely we have some thought about future benefits from this transaction. Of course, everything is conditional upon new personal tastes & changing environmental factors as the agent (us, here) moves forward in time & perhaps place.

  4. Craig
    May 6, 2018 at 11:10 pm

    Probably the closest one can come to complete and intimate knowledge for both the temporal universe and self knowledge is to understand that both are in continual process. In other words they follow the pattern of starting, changing/persisting through time and then ending, stopping…and viz economics summing. This knowledge/reality comes to us from the Rig Veda, and as the time/temporal universe MUST follow that same pattern its scientific bona fides are just as valid.

    Looking, direct looking as an a priori ethic followed by abstraction must be our process. That integrative approach will render us both knowledgeable and wise.

  5. May 7, 2018 at 9:53 am

    Caballero concludes ” I do not have the answer. But I suspect that whatever the solution ultimately is, we will accelerate our convergence to it, and reduce the damage we do along the transition, if we focus on reducing the extent of our pretense-of-knowledge syndrome”.

    Given his problem, it seems inappropriate for Lars to show hm smiling! James and David, of course, pretend to belief in trying harder – David at least with system structure in mind – but Spender says “we all know the problem is not merely ‘technical’ … It is more likely to be some of the bitter fruit of legal, normative, and political aspects of our community – that lead to the allocation of our community’s rewards”. So the problem is the outcome? No, it is “Not merely technical”, so technical as well. I will argue that it is not merely these, but philosophical (i.e. involves choice of aims as well as methods), and that the methods ultimately rest on the unlikely event of our understanding the “mechanisms” by which they work (as in the hardware logic of a computer) and of their capability. Craig I think is near to locating “the bounds of rationality” in the distinction between things (the ratios between which are only as stable as they are) and flows (which we can only stabilise as snap-shot measurements of rates of flow over a given time, and even here the uncertainty principle operates). But surely, behind Craig’s solution of “direct looking” lies the philosophical problem of deciding where to look? What drives the flows? Sure we can get stored energy from atom bombs, but how did it get in the atoms in the first place? Shall we assume a Creator, or assume not: choose not to look?

    Evidently we cannot see everything, so necessarily we envisage “everything” by analogy with particular situations we can see. The most visualisable example of a flow (at least in my country) is a river, where the banks provide a fairly stable “snapshot” of where to look for it. Imagine a log floating down it represents one atom of water. One can say it will stay within the banks, but not precisely how centrally, nor even for how long (for it may get stuck). One may observe the direction of flow is from heights to lowlands, and label what energises it “gravity”, and note that people not living next to the river drink it, but require an economic subsystem to cleanse and supply it. All these are stable enough to be rationally discussed. What is not rational is to assume we can know which atom of an upland river we will end up drinking, as those seeking micro-foundations of macroeconomics seem to be assuming.

    As far as I can see, the word ‘rational’ came from the discovery that one always creates a whole number by multiplying two other whole numbers, but not conversely by dividing them: the ratio of two whole numbers only sometimes produces a whole number of equal-sized bits. In particular, if one measures the circumference of a circle 1 metre across in metres (or even micrometres) it will not be exactly accounted for in a complete number of the same measurement units. Mathematicians called such situations irrational; later ones accounted for the problem in the theory of complex number, which is not the same as Caballero’s adding a “degree of complexity” to economics theories: it is more like what happens when two rivers flowing at different rates feed into a circular canal. The mathematical solution to that has not been rationality, it has been topology, Sawyer’s “rubber” mathematics, where the size and precise shape of the system don’t matter, only the number of circuits, reducing mathematical operations to logical ones – involving ‘all’ or ‘some’ rather than measures – and accounting for the banks but not the content of the river system. To be able predict where a floating log will go one needs to look for it a little upstream.

    What I am trying to say is put very simply by the title of W W Sawyer’s “Prelude to Mathematics”. Mathematics as most of us know it is not the basis of rationality: there is a logical prelude to it. (I personally would emphasise that logic in computers – and evidently in brains too – is hardware circuits). In chapter 2 Sawyer discusses generalisation and simplicity, picking out the problem which besets us here in economics:

    “This particular puzzle uses a kind of camouflage. It tells you something you didn’t need to know, and by so doing distracts your attention from the real point”.

  6. May 8, 2018 at 10:46 am

    By way of PS to this, read sections 1 and 2 on models, metaphors and analogies in

    Mabsout, R. (2018) ‘The Backward Induction Controversy as a Metaphorical Problem.’ Economic Thought, 7.1,pp. 24-49. http://www.worldeconomicsassociation.org/files/journals/economicthought/WEA-ET-7-1-Mabsout.pdf.

    In particular (p.27): “Models connect to the world in two distinct ways, firstly, in building the
    model, that is in the mathematics themselves involving the realism of assumptions and
    ‘deeper questions about the nature of representation and denotation’ (p.192), and secondly,
    in connecting the mathematics of the model to the world via story.”

    So I go into deeper questions, but with no derogation of [your] history intended!

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