economics

Equilibrium schmequil-schmibrium

A comment by `Zamfir' at crooked timber (via Krugman) jumped out at me:

Lots of mechanics and other physical processes are modelled as equilibria, or quasi equilibria, even when people know that it is not correct. That's typically the opposite of purity-obsessed scholastism, it's more an engineering fix to get bad results that are still better than no results. You multiply the results by an out-of-the-blue correction factor for `dynamical effects', and hope for the best.

Contrast with Philip Ball:

[Economic] models take no account of real human behaviour, which is far too messy to permit any theorems that can be proved rigorously. Economic models become citadels of crystalline mathematical perfection that would shatter if touched by the harsh rays of reality.

(He does immediately go on to say "it would be grossly unfair to suggest that this describes everything that happens in economics, let alone in all social sciences... But it is widespread".)

His target isn't specifically the use of static equilibrium assumptions in economic models, but the view Ball gives is spot on for how most agent-based modellers and complexity thinkers view it. ABM and complexity are seen as "a pioneering break from a moribund Newtonian worldview" (Manson 2001 p.412), obviously superior to those silly static equilibria. Usually they will argue that's the case because it's `more realistic'. Hmm - so's Call of Duty 4, I'm not sure that makes it a better model of anything.

Slightly less flippantly: the models are never the problem. You try what you can and throw it at the wall of reality. Some things stick. Or, as Einstein put it, talking about physics: it's

"a logical system of thought which is in a state of evolution, whose basis cannot be distilled, as it were, from experience by an inductive method, but can only be arrived at by free invention. The justification (truth content) of the system rests in the verification of the derived propositions by sense experiences. The skeptic will say: `it may well be true that this system of equations is reasonable from a logical standpoint. But it does not prove that it corresponds to nature'. You are right, dear skeptic. Experience alone can decide on truth." (Quoted in Kaldor 1972 p.1239.)

Like I say: try what you can, throw it at reality. I'm not saying I'm any good at this - I have a definite tendency to prefer making little pretend worlds - but the point is, there's nothing intrinsically wrong with using static equilibrium as an assumption. Zamfir's quote made me happy thinking about it being used in a practical manner all over the place. In some situations it's useful, in others less so, in some it makes no sense at all. The point is how it's used (already rambled about that at some length).

I have this notion there's a direct parallel to `emergence' in agent modelling. ABM is all about interaction: that's its basic structure and its main strength. The use of physics ideas in classical economics is its strength, but it's also what makes it brittle. The same is true for ABM. To be useful, you want your method to be able to help examine any number of different questions - but in ABM, it's easy to end up defaulting to Epstein's `if you didn’t grow it, you didn’t explain it' (Epstein 2006 p.xii) and thinking you've answered something. Di Paolo and Bullock nail that one: conflating emergence and explanation means whatever you were wanting to look at has been `brushed under the carpet of emergence' (Di Paolo et al. 2000 p.8).

This is somewhat reminiscent of the final deathstar scene in Return of the Jedi: ABM ends up nearly becoming the thing it hates most: wedded to an obsession with realism, it can no longer experiment or pursue a diverse range of questions. Actually, that didn't sound anything like Return of the Jedi.

Oh good, another P3 short essay on economic models

Well, as long as it keeps on tricking me into writing shit down, I'll keep on unashamedly writing stupidly long comments no-one in their right mind would wade through and posting them here. Makes me feel like I'm keeping busy! That said, in a zero-sum world where I could be writing papers or blathering on blogs, I wonder which I should be doing...?

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We've got into discussions on P3 before, here and here, though not really coming to any conclusions. But you'll see we've picked up on a fair few things you've mentioned - one of my bugbears being the misuse of Friedman's 'F-twist' argument, claiming he says "unrealistic assumptions don't matter" (something I also repeated until, looking for ways to think about model-building, I actually read what Friedman said, which is subtly but vitally different to the caricature so often used to paint economists as naive Vulcan-like imbeciles.) A lot of that's come from my (still not quite finished!) thesis work; I've stuck the current version of the navel-gazing model chapter here. There's a lot of overlap, even many of the same quotes, with things your blog's discussing.

The most recent article of yours shares some of the same view of modelling in general. I'm not sure whether this eco-economics attack on modelling stems from quite the same source as MT's skepticism, would be interested to dig more into that. I think this starts getting close to the heart of this, which again comes down to what we're claiming models are *for* (which I waffle on about interterminably in that thesis chapter.) You quote the Daly/Solow argument (Daly: "If we want a bigger cake, the cook simply stirs faster in a bigger bowl and cooks the empty bowl in a bigger oven that somehow heats itself.") But you don't provide Solow's response; quoting meself quoting Solow:

"Solow's reply to this highlights a recurring argument used to defend the abstract nature of many economic models - critics are taking them too literally, and not considering how the models are used: 'We were trying to think about an interesting and important question: how much of a drag on future growth, or even on the sustainability of current production, might be exercised by the limited availability of natural resources and the inputs they provide? ... The role of theory is to explore what logic and simple assumptions can tell us about what data to look for and how to interpret them in connection with the question asked' (Solow 1997 p.267/8). Solow goes on to point out that the argument should be about how substitutable renewable and non-renewable resources are, given that the former are likely to be highly capital-intensive. (Ibid.) He appears to be saying that his critics have mistaken economists' models for their actual understanding of the world, rather than tools that aid that understanding."

Which is what I was arguing Krugman also says in the comment above, and what Friedman was saying way back in the 50s (though whether Friedman follows his own advice, I'm not qualified to say - I only really know his stuff from his 'essays on positive economics'). E.g.: when assuming s = 1/2gt^2, "under a wide range of circumstances, bodies that fall in the atmosphere behave *as if* they were falling in a vacuum. In the language so common in economics this would be rapidly translated into: the formula assumes a vacuum. Yet it clearly does no such thing."

And of course there are plenty of circumstances where it would be a completely inappropriate way to think about falling objects. But that doesn't make using it 'naive' or invalid, any more than using temperature and pressure measurements does (when we know that at atomic reality is more complex).

I haven't got to the bottom of this stuff to my own satisfaction at all. It would be great if we could carry on exploring them here at P3, but I wonder if that might require some kind of agenda!? I wouldn't mind starting with actually working up a common understanding of some economic models as they are. Stephen, it sounds like you have a solid economic background. I don't really; I've gone off and done this by myself while my supervisors looked on horrified, and found it immensely tricky to find economists to check my understanding with (perhaps my own networking failings, I shan't blame economists' closed-shop attitude!)

Some suggested things to discuss: understanding a basic general equilibrium model, how they've been used, how they're related (or not) to the actual policy workhorse DSGE models, what other models inform policy; whether economic training in these models is (as Krugman's own view seems to suggest) more a set of shared heuristics almost incidental to how economists are apprenticed in a policy episteme - so it's not 'about the truth of the models' so much about training and embedding policymakers. Which would mean we could attack the models til the cows come home and we'd be missing the point. You can actually see how that might function in a completely different context: Lansing's work on Balinese rice management, where a shared collective model allows autonomous ritual actions to both re-create the landscape and manage water to maximise crops/minimise pests across the Subaks. There's no 'correct' top-down model, there's a shared social technology tied into a specific landscape, kept alive in people's minds through ritual. Lansing calls it 'sociogenesis': "when Balinese society sees itself reflected in a humanised nature, a natural world transformed by the efforts of previous generations, it sees a pattern of interlocking cycles that mimic these cycles of nature" (priests and programmers p.133). Mainstream economics may partly work the same (esp. ritual!) but on quite a different scale (and of course with the open question of whether it's capable of ending in a cyclical self-maintenance or is instead a global virus; cf. Agent Smith).

It'd be good to explore a recent-history example of an economic model's impact: Krugman's core model again. Since 1991 it's gone from 'thought experiment to lure economists into thinking about geographical questions' (while also radically changing the profession's view of the central dynamics of international trade) to a World Bank report on geography coming straight from it, despite Krugman's own apparent caution on using it - and a continued suspicious lack of empirical support that shouldn't be a surprise given it was only ever meant as a toy model to make a point. (I've never quite understood what Krugman's own view of this is; initially caution and a notable silence as the Nobel prize arrived and some of the key ideas got absorbed by the body politic. But I'm sure he'd have some clear Views on it.)

And to ask the same question again: given all this, what role do we actually think models can / should play in both analysing and organising society? I have a book in front of me by Stan Openshaw, an ex-professor from my department, called "Using models in planning" (1978). A quote:

"Without any formal guidance many planners who use models have developed a view of modelling which is the most convenient to their purpose. When judged against academic standards, the results are often misleading, sometimes fraudulent, and occasionally criminal. However, many academic models and perspectives of modelling when assessed against planning realities are often irrelevant. Many of these problems result from widespread, fundamental misunderstandings as to how models are used and should be used in planning."

While he's writing about town planners, the same applies. We don't really understand how this is meant to work. It happens anyway, but without asking about this, we're stuck in this strange place where one side carry on using their models while others keep on going "ha! look at those stupid assumptions!" - as if by some miracle of alchemy, the models being criticsed will crumble like vampires at dawn. Kuhn's stuff makes clear it doesn't even quite work like that in the physical sciences: the relationship between discovering problems, errors, better models and the structure of a discipline is way more complex. If that discipline is then tangled into political power, there's a whole other bunch of stuff going on...

What are costs, actually? (Another P3 comment...)

Another comment at P3, responding to MT.

Me: "Economics is the study of how people react to cost changes." Hmm, you're right - I need to be more careful with nomenclature myself. I'm sure some of the heterodox econs would say the term is 'essentially contested'. Thinking about it, though, I think my def still works: economics concerns itself with the costs and benefits involved in human choices. I don't see that Marshall's questions contradict that: everything from how we structure institutions, what sectors should be state-owned, the ethics of wealth distribution - is all covered.

"presuming you mean 'cost' in the colloquial sense of money". No, absolutely not. The magic washing machine is a pretty perfect example: what are the costs/benefits of how we use our time? How does technology and societal structure alter that? Rosling very cleverly illustrates precisely this point by pulling books out of the washing machine: it's a machine that produces women's education as well as clean clothes. I see no problem in thinking about time this way while also thinking about how time is socially constructed (see this classic E.P.Thompson article, PDF) and how economic definitions themselves may alter us.

The transition from a mostly agricultural society to what we have today can be thought of in the same way. Two things have happened simultaneously: agri technology has improved, meaning waaay less people can produce massively more (put aside for now 'but it's all just eating fossil fuels'...) The rest of the economy has grown in a feedback process: enabling both increased agri output and freeing up people's time to work elsewhere. As a result, we've also seen a massive morphology change as food processing has moved out of the household/community and into today's sophisticated global industrial networks. A key part of that is how people value their time: we could all be growing food in community gardens and cooking it at home. We have the time to do that. Mostly, we don't. Why not? We prefer to work in paid jobs and access relatively cheaper food, as well as a set of other things we like. Computers, electricity, transport, beer, time to sit and stare at the wall...

Again, there's a whig history danger here: it was meant to be thus, and is natural and good (while forgetting small matters like kicking people off their land when sheep became more profitable, much as we're doing now because car-food is more profitable than people-food [my blog] in many places). But there's also a lot of value in thinking about these changes through the prism of how we value the costs and benefits of our time.

I've found myself looking at my own 'revealed preference' and changing my views. I used to be a lot more fervent about local food growing, until I realised what my shopping habits were telling me: I actually prefer to earn a living in academia and spend time I'd be putting into agriculture on other things, like commenting at P3. If other people feel differently, fine. But I don't think the existence of supermarkets is necessarily a sign of collective moral failure. I also reserve the right to a) reflect on that and change in the future but b) not to have anyone else actually force me to change, unless I've taken part in a democratic process to enforce it ->

Cos maybe supermarket are evil, and individually we're too vulnerable. Marshall lists this in his questions: "what are the proper relations of individual and collective action in a stage of civilization such as ours? How far ought voluntary association in its various forms, old and new, to be left to supply collective action for those purposes for which such action has special advantages?" In the case of supermarkets - and some other market structures - perhaps we should not trust the emergent result of all our collective value-judgements. Instead, maybe we need to get together and decide a set of constraining rules: those we agree are needed, but that we recognise individual actions will tend to corrode over time. That would be democracy. It's also why people who claim that money represents the zenith of democracy [me again] are talking nonsense. If individually we are incapable of making the right carbon choices, collectively we can decide to restrict our choice set.

Marshall's questions

From one of the founders of modern economics. From p.114 in the physical book (1895) which I'm sure the library shouldn't let me take out - it's an antique! It's got errata pasted in by hand. Online here. The first three paras are quite dry, but give a good outline of the full meaning of 'general' analysis in economics. As far as I can tell, we're some way from knowing all the answers, especially as regards the general effect of - say - energy cost changes. It picks up at para four, 'How should we act so as to increase the good and diminish the evil influences of economic freedom?' Later, 'taking it for granted that a more equal distribution of wealth is to be desired...', ho ho, how quaint!

If the government restructured the laws of physics...

A commenter over at Tamino's blog puts in a good word for economists:

How would you physicists like it if you had to survey a bunch of molecules to find out what they planned to do, only to have most of them change their minds anyway, and the government restructure the laws of physics because of some opinion poll?

Price waffle

I caught a programme last night on the beeb about property. Nothing new there - you can be guaranteed to find a property programme of some description 50% of the time the telly goes on: if the schedulers are to be believed, we're obsessed. (Indeed, there was another property prog on Channel 4 at the same time.)

But this one was a little more thoughtful. The last person to be interviewed was an estate agent based in Sandbanks, Poole - not too far away from where I used to live in Bournemouth. A few years back, one place sold for a particularly large amount of money, and worked out at something like £900 per square foot. This particular estate agent did a quick calculation and discovered this made it the fourth most expensive place to live in the world. The next step is brilliant: he then trumpeted the whole area as such. 'Sandbanks: the fourth most expensive place to live in the world!' Thus began Sandbank's insane rocketing into the property stratosphere, accompanied (as he notes) by developing new offices and a whole selling style suitable to people wanting to buy into the Sandbanks glow.

Impact of the minimum wage: how hard can it be?

Over at Crooked Timber, there's a great post on the minimum wage where Kathy argues that 1) there are plenty of empirical reasons why increasing a minimum wage may not lead to higher unemployment and 2) that you'll get into trouble with the economic 'fundamentalists' if you try and work on this issue without concluding that it does.

Inequality: a natural consequence of randomness. Honest.

This is probably a foolish venture (given my math ignorance) but here's some thoughts on an economic random walk. (Any pointers to elementary fuck-ups / blindingly obvious things I'm missing appreciated.) I've come across the graphs here in each of the simple models I've done of trade exchanges. This one isn't a real trade exchange - it's had price decisions removed entirely. So apart from the limit on the amount of money in the economy and the requirement that money is 'exchanged', they are random walks. It's like this. We start with:

  • 100 people, 100 pounds each (so the amount of money in this 'economy' remains constant: the mean is always 100.)
  • Run for 200,000 days
  • On each day, each person randomly chooses someone, and gives them a pound if they have a pound to give. If they don't, on to the next person's random choice.

(See links below for graphs and code.)

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