Home > Uncategorized > Noah Smith’s unicorn defence​ of economics

Noah Smith’s unicorn defence​ of economics

from Lars Syll

Unlike the old neoclassical theories, game theory concerns strategic interaction between different people. It can encompass things like wage bargaining, fraud and lots of other things that neoclassical equilibrium glosses over or leaves out.  And in game theory, free markets full of rational actors can easily, even regularly, lead to inefficient outcomes that require government intervention.

Noah Smith/Bloomberg

unicorn“Free markets full of rational actors.” Sounds great does it not? The problem? In the real world,​ there is no such thing! Defending mainstream economics against its critics with game theoretical unicorns actually only confirms how justified the critic is.

Half a century ago there was​​ widespread hopes game theory would provide a unified theory of social science. Today it has become obvious those hopes did not materialize. This ought to come as no surprise. Reductionist and atomistic models of social interaction — such as those mainstream economics and game theory are founded on — will never deliver sustainable building blocks for a realist and relevant social science. That is also the reason why game theory never will be anything but a footnote in the history of social science. 

Heavy use of formalism and mathematics easily foster the view that a theory is scientific. But although game theory may produce ‘absolute truths’ in imaginary model worlds, in the real world the game theoretic models are nothing but fables. Fables much reminiscent of the models used in logic, but also like them, delivering very little of value for social sciences trying to explain and understand real-life phenomena. The games that game theory portrays are model constructs, models without significant predictive capacity simply because they do not describe an always much more complex and uncertain reality.

canopenrAlthough some economists — obviously including Noah Smith — consider it useful to apply game theory and use game theoretical definitions, axioms, and theorems and (try to) test if real-world phenomena ‘satisfy’ the axioms and the inferences made from them, that view is without a ​warrant. When confronted with the real world we can (hopefully) judge if game theory really tells us if things are as postulated. The final court of appeal for models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, model building is little more than hand-waving that give us a rather​ little warrant for making inductive inferences from the model world to the real world.

The real challenge in social science is to accept uncertainty and still try to explain why different kinds of transactions and social interactions take place. Simply conjuring problems away by assuming patently unreal things and treating uncertainty as if it was possible to reduce to stochastic risk, is like playing tennis with the net down. That is not the kind of game that scientists working on constructing a relevant and realist science want to play.​

  1. June 26, 2018 at 1:42 am

    As shown in my paper on  “The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature,” International Journal of Pluralism and Economics Education, Vol. 3, No. 4, 2012, pp. 366-414 — Game Theory blindfolds Economists, making them unable to understand real human behavior. For example, in fixed finite repetitions of the Prisoner’s Dilemma, conventional game theoretic analysis shows that the size of the Temptation (to betray) payoff and the size of the Sucker payoff does not matter. Both rational players will betray in fixed finite repetitions of the game. This prediction has no match to real human behavior, where cooperation dominates (except when economists play).  This is regarded as an ANOMALY by economists, just as players splitting the amount fairly in the Ultimatum Game puzzles economists (see my post on Behavioral Versus Neoclassical Economics). But the DEEPER problem is the METHODOLOGY — How is it the methodology allows economists to IGNORE conflicts between economic theory and facts? As Keynes said — economists are unmoved by lack of correspondence between their theories and facts. Romer rediscovered this in Trouble with Macro when he noted that Macroeconomists’ dismissal of fact goes so far beyond
    post-modern irony that it deserves its own label. I suggest “post-real.” Similarly, Olivier Blanchard said that DSGE models make “assumptions profoundly at odds with what we know about consumers and firms”
    So the REAL PROBLEM is a methodology which allows creation of theories which have no connect with empirical realities, and no concern with matches between predictions of theories and observations. How this methodology came to be dominant is a serious problem is history of science, and a brief preliminary sketch is given in my previous post on Economists Confuse Greek Methodology with Science

  2. June 26, 2018 at 3:34 am

    Asad Zaman’s paper “Economists Confuse Greek Methodology with Science” is really a good piece of overview on the history of scientific thought since classical Greece period. It makes clear how deep the neoclassical misbelief is rooted.

    Admitting almost all Zaman’s marvelous account of the history of scientific thought, I would like to add one point that he did not emphasized enough. It concerns the status of logic (or axiomatic thinking). Zaman is totally right in pointing that economists are confusing Greek method with science, Still I want to point that logic and axiomatic construction are a necessary part of science.

    Zaman points: “The radical innovation of the Muslims was to drop axioms, deductive logic and thought experiments, and base science directly on observations and real experiments.” This was really a great turn in our scientific spirit, but it would be better say that Islamic science introduced “directly on observations and real experiments” on the basis of Greek “axioms, deductive logic and thought experiments.”

    Zama criticizes vehemently Eurocentrism. But Islamic world id not the only world outside of Europe. Let me add a case of East Asian experience: mainly China, Korea and Japan. East Asia received Greek science very late in the 15th century and later through Jesuits and other Christian missionaries. As I have wrote some other place, it is said that Chinese could not understand the significance of proofs and axiomatic construction of a theory when Euclid’s Elements were translated into Chinese. East Asians had a very pragmatic spirit. They knew the value of “observations and real experiments”. There are huge literature on botany, medicine, and engineering. Perhaps we can compare them with Aristotle’s works. Until the 15th century, there were no big differences in the levels of engineering and technology. But East Asia did not produced modern science. I am thinking that it was logic and axiomatic construction that have been lacking (if this may not be the unique reason).

    Most of economists are wrong to believe that axiomatic construction is the evidence that their economics is a science. But to emphasize “observations and real experiments” alone is a dangerous idea as a strategy to reconstruct economics. Zaman informs us that Kenneth Arrow appreciated his paper The Empirical Evidence Against Utility Maximization and said that the remaining question is “what should take the place of this theory?”. Indeed, in place of neoclassical economics, we need a theory that can take place of it. To construct a theory (i.e. a new economics), logic must play an important role, because (as Zaman pointed it) facts and observations were not enough by themselves as empirical positivists (logical positivists) imagined.

    • June 26, 2018 at 5:09 am

      For a long time, Physics, though empirical in the extreme, devolved to observations about the nature of things. For example it is the nature of water to flow downhill. It is the nature of a rolling ball to slow down and then stop. Really before Newton this was pretty much what passed as Physics. It was even worse for Chemistry with humors, and vapors, and so on. Even Sir Thomas Aquinas was a big improvement. Science as practiced before Newton, Leibniz, and the rest of the Renaissance is a good template for the foolishness of economics today.

    • Calgacus
      July 5, 2018 at 6:02 pm

      Yoshinori Shiozawa: Agree entirely and more – one can go too far in not confusing Greek method and modern science. For many uses they are the same. Mathematics was to the Greeks the paradigm of the sciences, and this classical viewpoint should still be respected. There are many other traditions and contributions of great value, like Islamic, Indian or Chinese. But only the Greeks tied together mathematics/geometry/science and logic/philosophy, with influences both ways.

      For instance, the Chinese discovered Gaussian elimination for linear equations B. C. but the obstacle to progress was always being too pragmatic, too algebraic – not being geometric, metaphysical. Not saying that your mathematical theories really are about the real world as the Greeks had the courage to.

      The Ancient Egyptians and Mesopotamians understood Pythagoras’s theorem, but It took the Greeks to understand it was important to prove it – and as W. W. Sawyer ( a favorite of Dave Taylor too) pointed out, it took longer to go from knowing that theorem to knowing you should prove it, than to go from Euclid to the modern world.

  3. June 26, 2018 at 4:31 am

    Yohsiori Shinozawa — thanks for your comments, which I appreciate very much. The history of science and scientific method is far more complex than is available in my summary. A most enlightening work is “Is Science Western in Origin?” By CK Raju —

    Muslims were very eclectic in acquistion of knowledge — so when I say “Islamic”, I really mean the knowledge which was available in libraries and books of the Islamic Spain, which was the transmission route to Europe – this could be from many different sources

    • Calgacus
      July 5, 2018 at 6:19 pm

      Raju is a smart man and his math and his philosophical viewpoint or even his scholarship when he is not grinding absurd axes, is worth thinking about.
      But his historical claims are frequently laughable, to the point that it is a disgrace to a major publisher to publish them, to the point that he can never be used as a reliable reference.

      No, Euclid really did exist and he was not an invention of medieval Christian monks. As evidence adduced by Raju himself shows a few pages after he makes such crazy claims in one of his books: Hellenic commentators on Euclid a millennium before he says the monks supposedly created Euclid. Or you believe them monks invented time machines in order to concoct their remarkably consistent history?

      His crazy, tendentious and logically impossible, self-refuting chronology is similar to the “New Chronology” of the fine Russian mathematician Anatoly Fomenko and others, like the chess champion Gary Kasparov. Same villain – them medieval Christian scholastics who screwed Russia or India with their magical fakery. There were early 20th century Brits who insisted that the Greek achievements were actually due to the British – because Athens was really located at Bath, England! I forget who their bad guys were – maybe the monks again?

      All, patent and entirely unnecessary self-justification and ego protection. There are plenty of real Indian, Russian and British accomplishments to be proud of without making up fairy tales.

  4. Craig
    June 26, 2018 at 7:40 am

    Science ONLY is what must be transcended because it is currently the ONLY paradigm for inquiry….hence it is just another orthodoxy to de-bunk.

    Wisdom, not religion, but natural philosophy is what economics needs….because it completely includes yet transcends science….because it is the process of integration itself and the integration of the truths and only the truths in opposites which if done thoroughgoingly leads to the pinnacle concept of Wisdom….and historically the concept behind every paradigm change mankind has ever cognited on…..grace in its many aspects.

    Did I hear a thousand minds clamp shut because I used a word and concept that is traditionally religious? Shame on you for your religious scientism! You strain at a knat and attempt to swallow a camel because you use an old/current paradigm that has ossified into an orthodoxy.

    The policies of Direct and Reciprocal Monetary Gifting thoroughly and intelligently integrated with Debt Only will awaken you to the new economic and monetary paradigm….because Gifting is a relevant economic concept that is at the same time an aspect of grace.

    Ponder grace. It’s worth your time as an individual and as an economist.

  5. Helen Sakho
    June 26, 2018 at 12:33 pm

    The real issue was, is and will remain POVERTY.

    It is the paucity of dialogue that concerns me here.

    Knowledge (theory and practice) has to be CONTEXUALISED in its historical and cultural background. It is this PROCESS that will lead to relative WISDOM. Perfection is yet to be defined by any ideology, belief system, or individual.
    Nobody is perfect outside these frameworks, and nobody will be. The same applies to collective thinking.

    Our task is simply to build on previous knowledge and not negate each other. This simply requires an inquisitive mind which is open to genuinely new and challenging inquiries. It is ultimately seeking better questions that might stand a chance of achieving better solutions.
    Uncertainty of the right kind is what keeps our hearts beating and our minds active. Otherwise we are either brain dead or will fall in love at first sight with whatever theory takes our fancy.

    Poverty surrounds us. And unlike this great science (Economics and many related so-called social sciences) that unfortunately do require a sting of formal examinations to be taken and PhDs to be acquired, it really does take a post-doctoral degree in biology, chemistry, mathematics and the rest to analyse the food content of each and every “fresh” product in modern supermarkets to which the poor do not even have access. You will see them waiting outside hoping for a charitable hand (of any ideological persuasion, anywhere in the world) to make a contribution to their daily lives wasted away day in day out.

    • Craig
      June 26, 2018 at 9:55 pm

      “The real issue was, is and will remain POVERTY.”

      Poverty is the inevitable effect of the paradigm of Debt Only. A $1000/mo. universal dividend paired with a 50% discount/rebate policy at the point of sale throughout the entire economic/productive process and also at the point of retail sale, immediately gives every adult $2000/mo of free and available purchasing power….and thus immediately ends poverty! And as a kicker, being strategically implemented at the terminal expression point for any and all price inflation, turns that chronic vice of profit making systems….into painless and beneficial price deflation!

  6. Helen Sakho
    June 30, 2018 at 2:34 am

    Yes, plus stagflation for those lucky enough to even experience it for a while.

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