Unlearning Unlearning.

Great example of some overshooting in providing valuable critiques of Economics. Let’s go straight to quotes:

The idea that there exists some entity, a ‘market’, which is then passively ‘intervened in’ by government simply makes no sense in the real world. To start, well-defined property rights are necessary for a capitalist economy to function effectively*. But defining property rights is highly complicated – intellectual property, public property, zoning, environmental property rights are all open to debate. Contracts, too, are highly complex; ask anyone trained in law. Fraud is also open to interpretation – predatory lending and ‘looting’ can both be considered types of fraud; some consider FRB and fiat to be fraud. The line between fraud and information asymmetry is blurry to the point of non-existence.

First, there is the public and there’s the private. Passive intervention by the public elements into the private dealings of individuals does make some sense. It’s a heuristic to be sure, but I can’t imagine myself saying the concept makes no sense at all. The market and the government are not mutually exclusive, but they are largely separate entities.

I think it’s totally reasonable to say that states do, and are expected to, set the rules for a market economy. But there seems to be a clear distinction to me between setting the rules, and engaging as a player in the game. Surely, the real world is a muddled place where we often can’t tell how close a government intervention comes to crossing the line from being referee to player — but we should be able to agree that these are two roles. The problem that defenders of the free market have is that it’s clearly not “fair” and is highly distortionary for the agent that sets the rules to play the game. I don’t think people are being intellectually disingenuous when they attack some government actions and say they are fine with the government having a robust regime for contracts and liability. I think they are making an intellectual distinction.

Next:

You will often see an academic economist say something along the lines of ‘in the real world, we accept that conditions for perfect competition are rarely, if ever, fulfilled’. At first glance, this sounds OK. But imagine if physicists modelled orbits as perfectly circular, and then noted that ‘the conditions for perfectly circular orbits are rarely, if ever, fulfilled’. You’d immediately be inclined to ask: why on earth do you still model orbits as circular?

Physics envy. It’s real and it’s one of the problems with economics. So I’m confused as to why such an apples to oranges comparison of economic/physics models would even be contemplated. Human interactions may be governed by some general rules that we can build models for, but these models will never have perfect predictive power. I expect NASA physicists, on the other hand, to tell me if the asteroid is coming to destroy Earth because bodies in space move based upon known and calculable rules that are, as far as we can tell, inviolable. So yes, I hold the economist and the physicist to a different standard of accuracy. In fact, I like to see modesty in economists who assess the inevitable shortcomings of economic models.

People love to hate on rationality and perfect competition. Economists often start with these assumptions because they allow the model to be simpler. Then, one can engage in introducing greater complexity into the model and see how predictive power improves. Some economists prefer to start at different levels of complexity. Industrial organization models don’t assume perfect competition anymore. But what’s really important, which is something Friedman admirably defended to seemingly deaf ears, is not the assumptions. It’s the efficacy. It feels right to have accurate models that have real-world assumptions. But a good model can be based on rationality and perfect competition if it consistently has proven to be a useful tool for prediction. You wouldn’t throw a useful model out just because you don’t like it’s assumptions. This is why you still see things like perfect competition thrown about in models.

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One thought on “Unlearning Unlearning.

  1. Hey mate, thanks for the reply. Must have gone into my spam for some reason because I only came across it by chance.

    The problem with your ‘setting the rules versus being a player’ is that every player in the game can set the rules somewhat, and some more than others. In the real world, corporations and advertising have massive effects on people’s behaviour and to say the government is ‘intervening’ ignores the fact that the corporations are doing something similar, albeit more subtly. If you’ve read Nudge by Thaler and Sunstein it becomes apparent that many of the ‘moral’ arguments made by libertarians actually have their roots in rational economic man.

    Secondly, I actually question the existence of an entity called ‘the market’. I mean sure, we have a few examples – stock markets, eBay, fish markets etc. But a lot of what happens in the economy is a product of decisions made by corporate executives.

    As for models, I think you’ve missed my point. I don’t expect models to have perfect predictive power; it’s the way economists see the real world as a deviation. You will see them dismiss problems with income disparity as ‘envy’, which is outside their definition of what humans should behave like. Many have an image of an entity called the market in their head, disrupted by the government. It’s a silly way to think about the economy.

    And Milton Friedman – that essay could be interpreted as him advocating any methodology whatsoever – he’d love the octopus that correctly predicted the world cup outcomes. ‘Assume a spherical cow’ – engineers and scientists know the difference between a useful assumption and a bad one; in most cases their assumptions simply eliminate a known variable.

    David Orrell and Steve Keen have both built some interesting complex models of the economy without using assumptions. Keen actually remarked that it was easier without them.

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