Home > Uncategorized > On Diane Coyle’s Cogs and Monsters

On Diane Coyle’s Cogs and Monsters

from Lars Syll and WEA Commentaries

Macroeconomists seem to me the biggest offenders n not taking such empirical issues (of practical data handling) seriously enough. This might sound like sheer contrarianism given that macroeconomists are constantly wielding data; after all, their business is analysing the behaviour of the whole economy and forecasting its future path. My concerns are, first, that too few think about the vast uncertainty associated with the statistics they download and use; and secondly, how difficult it is to draw definitive conclusions about economy-wide phenomena, the aggregated outcomes of choice made by millions of businesses and consumers interacting in specific historical and geographic contexts, and social and political relations.

There’s a lot in this new book by Diane Coyle that I like, and I highly recommend reading it.

Unfortunately, there are also some things in it I find very hard to swallow.

A recurrent theme in the book — as in her earlier The Soulful Science (2010) — is Coyle’s view that much of the critique waged against mainstream economics from heterodox economists like yours truly and others are more or less of a straw-man kind and that we haven’t really understood the fact that economics “has changed a lot in two decades.”

One example she refers to — to underpin her view — is the development of the ‘new’ behavioural, ‘experimental,’ and ’empirical turn’ in economics.

So let’s take a look at that and what some of us ‘heterodox’ economists really have had to say about it.

Coyle — as many other more or less mainstream economists nowadays — seems to maintain that the empirical methods developed within economics — natural experiments, field experiments, RCTs — help us to answer important economic questions. I beg to differ. When looked at carefully, there are in fact few real reasons to share the optimism on this ’empirical turn’ in economics.

Field studies and experiments face the same basic problem as theoretical models — they are built on rather artificial conditions and have difficulties with the ‘trade-off’ between internal and external validity. The more artificial conditions, the more internal validity, but also less external validity. The more we rig experiments/field studies/models to avoid the ‘confounding factors’, the less the conditions are reminiscent of the real ‘target system.’ You could of course discuss the field vs. experiments vs. theoretical models in terms of realism — but the nodal issue is not about that, but basically about how economists using different isolation strategies in different ‘nomological machines’ attempt to learn about causal relationships. I have strong doubts about the generalizabiy of all three research strategies because the probability is high that causal mechanisms are different in different contexts and that lack of homogeneity/stability/invariance doesn’t give us warranted export licenses to the ‘real’ societies or economies.

By this, I do not mean to say that empirical methods per se are so problematic that they can never be used. On the contrary, I am basically — though not without reservations — in favor of the increased use of experiments and field studies within economics. Not least as an alternative to completely barren ‘bridgeless axiomatic-deductive theory models. My criticism is more about aspiration levels and what we believe that we can achieve with our mediational epistemological tools and methods in the social sciences.

Limiting model assumptions in economic science always have to be closely examined since if we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we ‘export’ them to our ‘target systems,’ we have to be able to show that they do not only hold under ceteris paribus conditions and a fortiori only are of limited value to our understanding, explanations or predictions of real economic systems.

Real-world social systems are not governed by stable causal mechanisms or capacities. The kinds of ‘laws’ and relations that econometrics has established, are laws and relations about entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in real-world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made ‘nomological machines’ they are rare, or even non-existent.

Taking assumptions like utility maximization or market equilibrium as a matter of course leads to the ‘standing presumption in economics that, if an empirical statement is deduced from standard assumptions then that statement is reliable’ …

The ongoing importance of these assumptions is especially evident in those areas of economic research, where empirical results are challenging standard views on economic behaviour like experimental economics or behavioural finance … From the perspective of Model-Platonism, these research-areas are still framed by the ‘superior insights’ associated with early 20th century concepts, essentially because almost all of their results are framed in terms of rational individuals, who engage in optimizing behaviour and, thereby, attain equilibrium. For instance, the attitude to explain cooperation or fair behaviour in experiments by assuming an ‘inequality aversion’ integrated in (a fraction of) the subjects’ preferences is strictly in accordance with the assumption of rational individuals, a feature which the authors are keen to report …

So, while the mere emergence of research areas like experimental economics is sometimes deemed a clear sign for the advent of a new era … a closer look at these fields allows us to illustrate the enduring relevance of the Model-Platonism-topos and, thereby, shows the pervasion of these fields with a traditional neoclassical style of thought.

Jakob Kapeller

Contrary to Coyle’s optimism, I would argue that although different ’empirical’ approaches have been — more or less — integrated into mainstream economics, there is still a long way to go before economics has become a truly empirical science.

Almost all the change and diversity that takes place in mainstream economics today only takes place within the analytic-formalistic modeling strategy that makes up the core of mainstream economics. All the flowers that do not live up to the precepts of the mainstream methodological canon are pruned. You’re free to take your analytical formalist models and apply them to whatever you want – as long as you do it using a modeling methodology acceptable to the mainstream. If you do not follow this particular mathematical-deductive analytical formalism you’re not even considered doing economics. “If it isn’t modelled, it isn’t economics.” This isn’t pluralism. It’s a methodological reductionist straightjacket.

No matter how many thousands of models mainstream economists come up with, as long as they are just axiomatic variations of the same old mathematical-deductive ilk, they will not take us one single inch closer to giving us relevant and usable means to further our understanding and explanation of real economies.

So — in conclusion — it is not that heterodox critics haven’t noticed the development in mainstream economics that has taken place during the past 20-30 years. We have noticed — and understood that it still far too much builds on the same old neoclassical straight-jacket methodology.

Download WEA commentaries Volume 11, Issue No. 4, December 2021 ›

  1. January 21, 2022 at 9:01 am

    How long will Academia be silent on the more than 30 years old bank capital requirements, which imply that what’s perceived risky is more dangerous than what’s perceived safe; and on bureaucrats knowing better what to do with credit than e.g., entrepreneurs?

    • Meta Capitalism
      January 23, 2022 at 11:24 am

      The claim that entrepreneurs know what is better than civil servants with regards to the Subprime predatory lending and the 2007-2008 GFC is a case if the terrible simplicator aka naive stereotypical nonsense.

      First, it fails to actually understand the historical causes of Subprime predatory lending and the role that market fundamentalism ideology played. Second, it fails to discern the difference between a Greenspan and those who did raise red flags. Worse, it reveals a disregard for the role played by banks, brokers, ratings agencies, and entrepreneurs who knew full well they we selling toxic junk as AAA rated securities but did so anyway because it was not their problem. Corrupt brokers and mortgage banks made NINJA loans and passed them on to investment banks on Wall Street (there is those entrepreneurs! aka predators!) who sliced and diced and colluded with entrepreneurial accountants, lawyers, financial advisors, and cosey ratings agencies. Yes, government civil servants bad entrepreneurs good mantra is pablum for idiots. How soon we forget how shrewd and craft those <a href="https://en.m.wikipedia.org/wiki/Libor_scandal"financial entrepreneurs are.

  2. Ken Zimmerman
    February 8, 2022 at 8:48 am

    Our concerns here as social scientists is and ought to be with how human societies sustain themselves materially and socially through projects of production, distribution, exchange, and consumption. With economies. Wherever that work information takes us or whatever methods we may choose to identify well grounded and durable knowledge. Obviously, Diane Coyle has no such intentions. As illustrated from her book, ‘Cogs and Monsters,’ “The economic catastrophe [2007-2008] could indeed be the making of a stronger economic science, re-rooted in the natural sciences, as it was at its birth in the Enlightenment.”

    Coyle plays the game of wanting a more historical, a more contextual, a more human form for the study of economies. But she misses fundamentals. Economics and economies only exist and function in conjunction with other institutions. Such as government, religion, and education. These are parts of society and culture where the whole is both emergent and always more than the sum of the parts. Exchange inside and outside of markets are a part of this mix. Sometimes even a major part.

    Paul A. Samuelson and William D. Nordhaus, define economics in the 1998 edition of their well-known text, Economics:
    Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.
    Behind this definition are two key ideas in economics: that goods are scarce and that society must use its resources efficiently. Indeed, economics is an important subject because of the fact of scarcity and the desire for efficiency.

    But even the slightest examination of peoples’ beliefs and actions yields much than Samuelson’s and Nordhaus’ meager insight. “The economy is not just a material world. It is the portion of the world where human beings are tied to each other through their relationships with things they have created. Social institutions are basic to any substantive definition of the economy because relationships between people and artifacts are usually managed and enforced through institutions like households, lineages, courts, and contracts.” If we consider describing the economy in terms of a logic (set of beliefs), denoted as a formal ‘definition,’ it might be this, “… choice and decision making. This definition drops the economist’s insistence on choices involving scarce goods and defined ends. Instead, it broadens the object of study to include all the different ways that people acquire values, desires, and needs and all the ways they set about fulfilling them. Conventional economics tends to ignore values—it assumes that people have them but says nothing about where they come from. One truly distinctive contribution of recent economic anthropology is that it restores values to a central position. Economic anthropology asks why people want things, not just how they set about to satisfy those wants.” But … this should not blind us to the realities of power and to the fact that many people today are systematically denied choices.” (Richard R. Wilk, Economies and Cultures, Foundations of Economic Anthropology)

    Looking further at economics, maximization means that people predictably “choose the alternative that gives the most satisfaction, value, or benefit in a context of limited means (‘scarce resources’).” [Which is impossible] (Stuart Plattner, Economic Anthropology 1989) The notion that people everywhere maximize or ‘economize’ in this way suggests both the universally perceived experience of resource scarcity relative to needs and wants and a view of human beings as predominantly rational, choice making creatures. [Which the study of history shows is not the case]

    The emphasis on market equilibrium points, first, to the tendency in current economic thought for the economy and the market to serve as interchangeable concepts. The notion of equilibrium suggests that the market is self-correcting toward balance and efficiency (through laws of supply and demand, for instance) and timely in its tendency–when not meddled with–to contribute to the wealth of nations and the maximum welfare of all people. Markets, in turn, can behave in this way only if all goods and services (including land, labor, and capital) are available to be traded and are convertible, especially through the medium of money. [None of which is supported by any research or data]

    Transactions in the market, finally, are based upon stable individual preferences, which are defined as being ‘revealed’ in the market through the choices consumers make. Market choices and transactions are held to add up to familiar concrete and abstract economic institutions, such as the used car or labor markets, rather than the reverse. They are also analyzed by some economists as determinative of behavior in many institutions not ordinarily thought of in economic terms, such as the family, ethics, health care, communal solidarity, education, or art. [Again, unsupported by any reputable research or data]

    Within markets, so broadly defined, individuals are seen to pursue their preferences in rational, maximizing, competitive, and ultimately self-interested ways, independent of or even in opposition to communal norms and expectations. The unit of analysis is the individual decision-maker rather than the group, which may itself be seen as an epiphenomenon of economic transactions. Geographical or sociocultural environment, historical precedent, and various other intermediary institutions are factored out.[This is 180 degrees out of parallel with any historical economy]

    Extrapolating collective phenomena from aggregates of individual behaviors is perhaps the single greatest error of economists. As Michael Chibnik points out “the historical changes, cultural norms, and socioeconomic institutions that constrain the choices possible for different groups of people at particular places and times” (2011) are considered by all economic anthropologists,. The worrisome element here for economic anthropologists is this view of human decision making denies inventiveness. Humans are taken as reactive decision makers rather than active creators. A view no anthropologist would or could accept. To borrow a phrase, economics compared to economic anthropology is “stuck in a rut.” That rut is the assumption that humans are fundamentally selfish. And that that selfishness is always or mostly beneficial for all of society. A perspective partly refuted by historical studies. But this remains the basis for the dominant approach in microeconomics, the part of economics that is concerned with individual behavior. The self-interested rational individual, or “economic man,” has been a feature of social science since the Enlightenment (Jane J. Mansbridge 1990). The key element that distinguishes all approaches based on self-interest is that the individual is taken as the basic unit of analysis.

    Economic anthropology on the other hand assumes that each society is based on a culture. This means we cannot settle the issue of what human nature is by an act of faith or through human paleontology. Which leaves us with the skeptical empiricism of science and the historian’s questioning. In other words, we have to make our choices about human motives by studying and listening to the ideas and behavior of actual human beings. Therefore, instead of pinning down some illusory “human nature,” the highest goal for economic anthropology is to find out what makes people self-interested, moral, or social. We need to think critically about the circumstances that can turn any human being into an altruistic saint, a self-interested monster, or a trend follower.

    Each culture is really the sum total of social, self-interested, and moral behavior. The problem is explaining why people are guided sometimes by one set of motivations and at other times by one or more of the others. And how, in practice, do people balance these different motivations? By suspending our preconceptions about human nature, we can give more direct attention to this fundamental question, which is basic to grasping and understanding human motivations, actions, and history.

    Coyle seems quite comfortable with Samuelson’s and Nordhaus’ views on economies and economics, dressed up in the garb of science and the Enlightenment. A poor choice in light of confusion (messiness) and uncertainty as endemic in human existence. Neither can be avoided nor resolved.

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