Home > Uncategorized > Amazon is not identical with your corner shop.

Amazon is not identical with your corner shop.

from Gerald Holtham (originally a comment)

Radford’s points are true but the microfoundations movement in macroeconomics is guilty of greater intellectual crimes than merely attempted reductionism. It is not as if the foundations are built on extensive empirical study of the decision-making elements in an economy. We have a representative consumer who behaves according to the axioms of rational choice under conditions of certainty equivalence. Similarly there is a representative firm modelled in the same way. So we start with illegitimate aggregates, illegitimate because the behavioural reaction functions are not strictly linear so the aggregate would behave like an individual only if all individuals were identical. Spoiler alert: Elon Musk is not absolutely identical with the homeless guy in the doorway. Amazon is not identical with your corner shop. Moreover, there is no empirical basis for the supposed individual behaviour anyway, since empirical work from the Allais paradox on has often found the axioms of choice are violated in the case of the consumer.. And companies do not generally have a set of well defined strategies before them and know the consequences of each at least probabilistically. People do not operate under conditions of certainty equivalence and how they actually deal with uncertainty is not considered or explored. These are not microfoundations. They are not really micro and are themselves without any empirical foundation. Yet every macroeconomist who produces a theory or proposition is encouraged to jump through the pointless hoops of showing it is consistent with optimisation by non-existent representative agents. I wonder if there has ever been a greater distortion of a serious discipline. On top of that, Radford is right. Even if we had real microfoundations we should have to deal with emergent properties as the elements interacted to yield group behaviour. .

But we cannot keep beating the dead horse. We have to do better. Agent-based models with diverse participants and reasonable behaviour based on empirical observation are one way forward. They can either be very detailed to apply to a particular question or highly stylized to try and get more general insights. They will not be solvable mathematically but their consquences and patterns have to be explored by computer simulation. Experiments can explore the effect of changing different factors. Empirical verification is extremely difficult since there will be many formulations that can be calibrated to resemble the available data. We must not let an inability to achieve perfection, though, stop us from doing the best we can..

  1. December 2, 2021 at 9:48 pm

    Use paragraphs to break up the wall of words.

  2. yoshinorishiozawa
    December 3, 2021 at 2:03 am

    Let me add a first part of Gerald’s comment on December 2, 2021 at 3:30 am on Lars Syll’s article What killed macroeceonomics? on November 25, 2021, because it contains Gerald’s core message, with which I strongly agree.

    Indeed, uncertainty is badly handled or rather not handled at all in much mainstream economics. No-one here is disputing that. Anyone who might dispute it doesn’t read this blog.

    And no-one who reads this blog has any doubt about it either. So apart from repeating it to each other when the culprits are not listening, what are we going to do about it?

    Let’s take the next step. The point has everything to do with “the way ordinary people cope with future events” because that is what we have to understand how the economy works. A convincing account of it would do more to unsettle neo-classical economics than pointing out that risk and uncertainty are not the same thing; people have been pointing that out for a hundred years.

    N.B: Letters in bold style is mine. I have eliminated one of two “to understand.”

    When I read the last sentence in the above citation, I first thought that Gerald is exaggerating. A moment later I acknowledged that his expression is exact. Both Keynes’s A Treatise on Probability and Frank Knight’s Risk, Uncertainty, and Profit were published in 1921, just one hundred years ago.

  3. Ken Zimmerman
    December 15, 2021 at 9:36 am

    Let’s just cut to the chase because the argument is never ending when from all sides the debate is I know micro, but you don’t. I suggest the test be framed using micro theory to create possible solutions for a problem agreeable to all participants. With the added privisio that observers take part as well for the express purpose of pointing when those involved in doing the work jump over or around missing, uncertain, or assumed data to reach conclusions. A common occurrence for all people, including scientists.

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