Home > Uncategorized > Sameness is just wrong

Sameness is just wrong

from Peter Radford

There is something truly odd about any economist who lives wholly in the world of equilibrium.  Truly odd.  Just think of what they have to assume to get there:

The first step is to make sure the problem they are tackling is well defined.  Really well defined.  Without ambiguous objects lurking in dark corners.  The problem must be well lit and sanitized of any potential taint.  And it mustn’t be connected to anything that might, under some circumstance or another, become entangled with it.  Good luck with that in the real world.

Then, this being economics, all the actors within the problem have to be identical.  They have to behave rationally — where rationality is something defined by the economist to make sure the math works out nicely — and they have to “know” everything, including what all the other actors know and will do.  Nirvana: we all know what we all know.

Next, the economist ensures that the actors behave in such a way that their aggregate behavior is both assembled from and validates their individual behavior.  Micro to macro is the watchword.  No emergence is allowed.  No nasty intermediate layers to get in the way of reductionist perfection.

With all this in place the preferred mathematics can then be applied.

And, hey presto, out can pop an equilibrium.

This is my version of the process that Brian Arthur described in a talk in 2019.  When followed rigorously and applied to the kinds of problems amenable to such a process, it can produce useful results.  Or at least that’s what Arthur said.  I am a little more skeptical.

The blandness, the sameness, the lack of difference, and the striking lack of reality make the process almost a caricature of itself.  I can comprehend why economics went down this road back in the 1800s, but why it became entrenched there is more confusing.  And more annoying.  Yes, there’s a great deal of work going on to lift it out of the hole it fell into, but, as yet, the public face of economics is still dominated by those who kneel before the altar of equilibrium.

Difference is the very core of economics: exchange is unnecessary without differences.  Asymmetry is the substance or the essence of an economy, it is not an aberration to be shunted off for later thought.  The economic landscape is rugged with enormous concentrations of resources, information, and energy surrounded by equally sparse regions.  It resembles a mountain range not a billiard table.  Sameness is the enemy of economic activity not its description.  Yet the equilibrium folks are enforcing sameness in order to use their preferred mathematics.  Talk about backwards.

This enforcement of sameness is a process that can be applied to an economy.  Which means that economists working in the realm of equilibrium thinking — if they’re being honest about it — have admitted they are discussing economics and not the economy.  They are refining and explicating a set of issues and problems that their limited method allows them to.  As Arthur said in this same talk: ” .. if we assume equilibrium so that we can do mathematics, it puts a very, very strong filter on what we can see”.  Which is why we need to move on and look at a more general approach.  Those interesting equilibrium problems are but a small subset of the larger, and far more interesting subject matter economists could engage if they would simply leave the world of equilibrium behind.

But, as the song goes, it’s cold outside.

Take the poor people of Texas.

They have suffered mightily in recent weeks because of the application of equilibrium economics to the provision of electrical power.  In many ways the Texas power debacle will surely become an object lesson when we finally move on from the modern standard textbook.

No, markets are not the be all and end all solution to every problem.  Indeed, most economic problems are beyond the grasp of the market.

No, efficiency is not a sensible or desirable goal.  Set aside the impossibility of computing an efficient solution in an open system like the economy, focus on the consequences: efficiency requires the elimination of redundancy.  There can be no inventories, spare parts, savings for a rainy day and so on.  Efficiency insists on there being no such thing.

So we are reduced to dealing with the average event.  We plan for that average to be the norm. We exclude anything odd, because to include them implies some level of redundancy.  And the sudden enormous spiking in energy prices are not a satisfactory consequence of the market reflecting supply and demand, they are a life shattering human moment that will, likely, produce misery and bankruptcy.

And, yes, there have been economists defending the spike in prices precisely because it defines the smooth operation of the interaction between supply and demand.  Such indifference to the over-application of what ought to be a restricted set of ideas is a stunning demonstration of cluelessness.  Being able to understand why prices spike under such circumstances is something different from applauding its occurrence as proof of a theory.  The ethically responsible way forward is to develop a theory that includes both an understanding of the simplicity of the workings of a market and the complexity of the more general economy.  Including, for example, the ramifications on the lives of human beings affected by the workings of simple markets.

But, to use the old saying, this is all a dead horse.  Why berate something that is manifestly in decay?  Remember the Great Recession?  Who knew?

Addendum:

The very last article in “The Economy as an Evolving Complex System II” [1997] is by Philip Anderson and consists of two pages of math and discussion of Pareto followed by this…

“In conclusion, I have tried to bring out one general ideas. [sic]  Much of the real world is controlled as much by the “tails” of distributions as by means or averages: by the exceptional, not the mean; by the catastrophe, not the steady drip; by the very rich, not the “middle class”.  We need to free ourselves from “average” thinking.  

Yes we do.

  1. February 26, 2021 at 4:12 am

    I think I have said it here multiple times. You can’t convince mainstream by criticising its assumptions because it needs them to fight its fear of the unknowable, uncertain world. Therefore, the solution can’t be “more realistic” assumptions but an alternative approach for tackling mainstream’s fear of uncertainty.
    In the end, mainstream’s approach will likely survive alongside other ways exactly because no definite answer to uncertainty exists in the real world.

  2. February 26, 2021 at 10:59 am

    I agree with Christian. Endless criticism of neoclassical theory goes nowhere. The point must be to develop a better alternative – to leave *reactive mode*. And when doing that, it is not enough to say “people are all different, the assumption of an average or representative individual or firm needs to be replaced by realistic heterogeneity”. That too is reactive – and orthodox economists have been incorporating heterogeneity in their models for at least 20 years – see for example Marc Melitz’s highly-cited paper of 2003 on international trade, in Econometrica.
    The main point of any new theory must be not only that agents are heterogeneous, but also that they interact. *All of the regularities we see in the economy are patterned interactions with system effects*. Many can readily be understood – and modelled – using simple feedback concepts. Ordinary market behaviour, the operation of supply and demand in e.g. established product markets, i.e. the price mechanism, is a simple balancing (negative) feedback system. Markets with fluctuations, e.g. real estate: balancing feedback with delay. Bubbles: reinforcing (positive) feedback . Path-dependent technological development: another type of reinforcing feedback (Brian Arthur’s contribution). Capitalist growth: a third type of reinforcing feedback, arms-race competition between firms that have unlimited potential to expand. These three types of reinforcing feedback are respectively interaction of real economic events and perceptions of them – self fulfilling prophecies (due to trend extrapolation); interaction between complementary agents; and interaction between competitors. I have a chapter that explains all this coming out soon in “Feedback Economics: Economic Modeling with System Dynamics” edited by Bob Cavana et al (Springer). There are also other types of system – see e.g. work by Benoit Mandelbrot, Steve Keen and others – including a recent review paper by Cesar Hidalgo of his approach to complexity: “Economic complexity theory and applications” in Nature Reviews (Physics).
    Talking of Brian Arthur, he tends to emphasize the contrast between traditional (neoclassical) economic theory and his approach. I have tried to convince him that his work on increasing returns and the market mechanism are just two examples of feedback systems, but I think he likes to make it a more dramatic contrast of the old and the new. But the market mechanism actually does apply to routine, ordinary markets of things like bicycles – just that it is a causal process operating through time, not a static equilibrium as depicted in locus diagrams of supply and demand curves. (The convergent properties of the market mechanism make it unnecessary to assume extreme rationality to attain stable properties – a 1962 paper by Gary Becker “proved” this using neoclassical analysis!) Once you see it as a causal system, you can see how the feedback concept can be generalised (as I described in the previous paragraph) to include a large proportion of the main phenomena that occur in the economy.
    And obviously (I hope): all new theories need to correspond with the evidence on how the causation actually works in reality!

  3. February 28, 2021 at 4:05 pm

    Welcome back, evidencebas. I am happy that you are back again to RWER blog.

    I agree with Christian and evidencebas. As evidencebas put it,

    Endless criticism of neoclassical theory goes nowhere. The point must be to develop a better alternative – to leave *reactive mode*.

    Although I am rather sympathetic to Peter Radford, because he is trying to find something new and good, I must say that he is confused in criticizing the extant economics and prospecting alternatives. I say he is confused, because he notes every kind of bad points of mainstream economics as something disorganized elements of equal importance: equilibrium, identical actors (sameness), rationality, omniscience, and use of mathematics.

    In spite of this, he knows various essential characteristics of the market economy:

    (1) Difference is the very core of economics: exchange is unnecessary without differences.
    (2) Asymmetry is the substance or the essence of an economy,
    (3) The economic landscape is rugged with enormous concentrations of resources, information, and energy surrounded by equally sparse regions. It resembles a mountain range not a billiard table.
    (4) No, markets are not the be all and end all solution to every problem.
    (Numbers in parentheses are mine)

    These are important aspects of the market economy that Radford knows and common economists (both mainstream and heterodox) often forget. Even though, I must say he is confused in the way he prospects an alternative economics.

    Peter Radford’s crucial error would be that he thinks it is possible to find or construct a new theory once we abandon the old beliefs. A typical announcement is this:

    Those interesting equilibrium problems are but a small subset of the larger, and far more interesting subject matter economists could engage if they would simply leave the world of equilibrium behind.

    Is it so easy to leave “the world of equilibrium”? If so, why did tremendous number of economists could not leave it behind? There were many economists who thought just like Peter Radford, but they could not succeed in finding good analytical method to treat “far more interesting subject matter”. He is not reflective enough, because he does not consider that he is not so intellectually different from those past economists.

    One of reasons that this kind of confusion occurs is the lack of deep study of mainstream economics. Many critics in this blog lack a study of mainstream economics. Another reason is that almost all critics dream to obtain a theory all at once that covers the economy as a whole. In view of our intellectual capability, it is an impossible attempt. Another side of this dreaming impossibility is the neglect of complexity for us economists. As I have argued here and my post that follows, we should always keep in mind the complexity for us economists. This is the reason why I emphasize the relevance of the old maxim: It takes a theory to beat a theory.

    It is a sheer dream that we can construct a new economics (or any other social sciences) once we overthrow the extant economics. We must know that a long, sinuous, and difficult path waits us before we arrive at an economics that we can compete with actual mainstream economics. Even though we must restart our economics by overthrowing the mainstream economics, because it is fundamentally wrong. We cannot expect that we can get from the start an economics that covers the economy as a whole. We may aim it as a final objective but we must restart with small pieces of theories just like Galileo and Kepler who discovered the law of falling bodies and the three laws of orbital movement. Newton comes much later.

    With this respect, I believe evidencebas has a good research program.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.