Unreal

As someone who laments misperceptions of what economists are and do, the barriers to communication with anti-capitalist groups make me very sad indeed. How did I get there? I was looking for something entirely different when I stopped to read an article by Roy Weintraub talking about neoclassical economics. To someone with my beliefs in what economics is, it’s a bit schizophrenic. This is nice:

“Neoclassical economics is what is called a metatheory. That is, it is a set of implicit rules or understandings for constructing satisfactory economic theories. It is a scientific research program that generates economic theories.”

This is pretty good news: the beast called “neoclassical economics” is merely a box inside which we concoct scientific theories: inside our box, this would lead to that. Weintraub continues to say that the assumptions of neoclassical economics

“include the following:

1. People have rational preferences among outcomes. 2. Individuals maximize utility and firms maximize profits. 3. People act independently on the basis of full and relevant information.”

Of these, 1 is redundant to me because I think rationality is not testable and is therefore irrelevant, especially since it’s probably implied by 2, and 3 is at best outdated (economists these days are very interested in the implications of imperfect or asymmetric information). If I was pressed to define neoclassical economics, I think perhaps the definition I would use is similar to 2. I’d say that neoclassical economics is the branch of economics that models entities (individuals, firms, governments, etc) as if they try to get the outcome they like best from the ones that are available.

I disagree more with the stance of the article when Weibtraub repeatedly invokes “the neoclassical vision”. The connotations of this phrase probably reinforce the misconception that economists think the box in which neoclassical economics works obeys the same rules as the real world. I doubt a physicist thinks that a vacuum is the same as the real world, just as I doubt that any economist thinks that the abstractions of economic modeling are the same as the real world.

It’s true that a positive economist who seeks to explore “what is” should not neglect to examine the differences between abstraction and reality, but again we must ask at what point the value of realism is eroded by its inability to draw any conclusions. I think the real choice we’re faced with is the application of the economic method that says “if this unrealistic simplification, then that” versus a shrug of the shoulders; if it were possible to achieve the ideal “if this, then that”, who would reject it? Should we stop trying because we can’t be perfect?

Perhaps partly because of such confusions, “neoclassical economics”, aside from having a silly name, seems to have become something of a lightning rod for the anti-capitalist set as much as it is for economists with different ideas. Google neoclassical economics and you get – on page one – a page from adbusters (an anti-consumerist publication – Wikipedia entry), and a less histrionic “critique of neoclassical economics” by Herb Thompson.

“Neoclassical economists normally treat economic instability as the effect of exogenous, stochastic factors even though nonlinear economics suggests that what may previously have been considered exogenous, or random, may more likely be endogenous to capitalist social formations.”

I confess I’m not sure what “nonlinear economics” means (the almighty Google was inconclusive): clearly I, too, have been indoctrinated to the neoclassical cabal. However, I actually think that the quotation touches on an interesting idea. Can we figure out if the primacy of money as a measurement of outcomes “caused” the rise of the capitalist method of organizing resources, or if the capitalist method “caused” the rise of the primacy of money?

A difficult one. For example, to take a typical example of an anti-capitalist complaint, do people buy sweatshop goods because they don’t know they’re sweatshop goods or because they care more about cheap goods than where they came from? I think the latter is more consistent with “money primacy leads to capitalism” and the former is more consistent with “capitalism leads to money primacy”, although I’m sure that could be debated.

It is possible to imagine that incorrect normatization of positive economics – by which I mean the mistaken assumption that some measurable positive economic variable is a measure of the quality of an outcome – actually causes problems within the economic system. People will do what they will, but if a policymaker chooses a policy based on the primacy of money as a measure of the quality of an outcome, there’s a real possibility that the system itself is influenced by its measurement.

The Thompson article also includes the following excellent paragraph:

“The ‘rational’ consumer of the mainstream economist is a working assumption that was meant to free economists from dependence on psychology…. The dilemma is that the assumption of rationality as intertemporally optimising is often confused with, and regularly presented as, real, purposive behaviour. In fact, the living consumer in historical time routinely makes decisions in undefined contexts. They muddle through, they adapt, they copy, they try what worked in the past, they gamble, they take uncalculated risks, they engage in costly altruistic activities, and regularly make unpredictable, even unexplainable, decisions.”

First of all, this is crucially wrong: “rationality” is not something that can ever be more than an assumption, unless you think you can test it. Further, assuming rationality does not exclude any of the motivations Thompson talks about. It would be trivial to write down a model of a rational person who “engaged in costly altruistic activities” – I simply have the person care about others and optimize rationally. The assumption that Thompson is really discussing here is the straw man of “rationality equals maximizes money”, which I have previously argued is absolutely not an assumption of any economic theory, neoclassical or otherwise.

Beyond that, this is really back to the same problem that the Weibtraub article was getting at: we’re doing the “if this unrealistic simplification, then that”. There’s a strong push in so-called “behavioral economics” to figure out if there’s a workable way to first make realistic generalizations on how people behave and second to incorporate them into the unrealistic simplification of neoclassical economics. While that goes on, the economist who seeks to defend his method must be clear on what his unrealistic simplification actually is and what it is used for.

As usual, no-one is fit to judge if the anti-capitalist model is “better” than the capitalist status quo, but I greatly hope that we would be able to talk about what each would mean. If somehow I were able to convince adbusters to sit down with me and I asked them what they wanted to do and what they wanted to achieve, what might they reply? I don’t know what they would say, but whatever their answer, I would like to figure out what it would take to achieve their goals, what the consequences of their chosen actions would be, what it would mean for people, not just them or me. I hope they would like to figure that out too. That’s positive economics.

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