Conflict reigns over the history and origins of money
sciencenews.org
sciencenews.org
He also seems to think that this is the foundation of all economic thought and thus he suggests that all of economics is wrong because they have assumed an incorrect origin of money. (I exaggerate, but not by much).
We use debts we own to settle debts we owe based entirely on our natural ability to know who owes us a favour and who we owe a favour. Write them down and exchange them and suddenly you have a money system. Get one trusted guy to issue his iou in exchange for the one you have and you have a banker doing discounting and a standard unit of exchange in an area.
It makes sense that relative value is established first by barter, but it is not such a stretch to think that people could work the same out relatively quickly, once the money value of one common thing is established.
Also, i think i once read that at some point Japan used a system based on a standardized rice bowl.
So in earlier days it may well have been easier to set the price of a service (or anything that involved laborers) based on the number of meals needed.
Instead of saying that money was used to facilitate trade OR used to pack back debts, why not both?
Given how useful money is, I only imagine that it solved many problems that many civilizations and villages ran into.
Recent research from the Americas adds new questions to
the debate. These investigations suggest that money
independently appeared for different reasons and assumed
different tangible forms in many parts of the world,
starting thousands of years ago.To me it seems like it's almost instantaneous, but you could imagine that there would be a period of time where the 100 shells couldn't be traded, they were there to represent the debt of the bride, which would be paid pack like any debt.
The myth appears to be that economists believe in the barter hypothesis. It was prompted by Adam Smith and subsequently disproven. Using the barter hypothesis as an argument against economics is like using Haeckel's embryos as an argument against evolution.
Anyway, the issue does run deeper, since the barter theory is implicit in for instance theories of banking, inflation and the money supply. See “veil over barter”. It’s pretty important economists get it right.
No it isn't. (There isn't a single theory for any of banking, inflation or monetary theory.) If anything, modern economics starts with the fiction of a perfectly liquid medium of exchange that can be infinitesimally divided, borrowed and loaned. Low-liquidity economics (e.g. bartering) is an edge case to modern theories.
Nope, this is another fictional fiction. Homo economicus is a pedagogical tool and toy model. Utilitarian economics feature pretty much nowhere because defining a single utility function for real people is impossible.
When modelling agents, it can be useful to start with a rationality assumption and then add complications. Or not. Depends on what you’re studying. The entire exercise of valuation, for example, asks “what would a rational person pay for this asset” and then looks to see if someone will sell it to you for less. The toy model is useful even if it doesn’t repreeent the present reality in the same way models of thermodynamic systems at equilibrium are useful.
Then what is the point? I mean, seriously, what is the point of teaching it? Why not simply use a different model that doesn't result in all kinds of awkward edge cases?
If the word rational bothers you, replace it with equilibrium. As to why we don’t use other models, these models predict realty better than purely behavioural and other exotic models. They’re Newtonian mechanics to the economics discipline.
The world is a complex adaptive system, how does micro or macro equilibrium fit that any better than homo economicus? If anything it sounds even worse to me...
> They’re Newtonian mechanics to the economics discipline.
To me this is really the crux of the issue... how is it desirable to model the world in terms of static mechanics, when it is clearly a dynamic system?
For example, I find this on the Wikipedia page about Market Clearing:
In economics, market clearing is the process by which, in an economic market, the supply of whatever is traded is equated to the demand, so that there is no leftover supply or demand. The new classical economics assumes that, in any given market, assuming that all buyers and sellers have access to information and that there is not "friction" impeding price changes, prices always adjust up or down to ensure market clearing.
And then at the bottom there's this nugget:
Most economists see the assumption of continuous market clearing as not very realistic. However, many see the assumption of flexible prices as useful in long-run analysis, since prices are not stuck forever: market-clearing models describe the equilibrium towards which the economy gravitates. Therefore, many macroeconomists feel that price flexibility is a good assumption for studying long-run issues, such as growth in real GDP. Other economists argue that price adjustment may take so much time that the process of equilibration may change the underlying conditions that determine long-run equilibrium. That is, there may be path dependence, as when a long depression changes the nature of the "full employment" period that follows.
I mean, I have never seen an econ 101 lecture mention things like path dependence, which seems to be a very big deal indeed. That to me makes it seem this emphasis on being the equivalent of Newtonian mechanics is a bug and not a feature. I mean, I don't want to single anyone out here, but it seems to me this talk about "simplifying assumptions" and "toy models" is just some elaborate ex-post justification for keeping outdated (and hugely invested-in) models around.
Chemistry is a field of complex and dynamic systems, yet we are still able to talk about equilibria there. Equilibrium doesn't mean nothing is changing - and in fact, it doesn't mean that the equilibrium corresponds to any actual observable state of the world. Due to aforementioned dynamism, observation effects, and other complications, it may not be possible to observe the true equilibrium state at all, but it's still a useful construct in our understanding of the chemical world.
> I mean, I have never seen an econ 101 lecture mention things like path dependence
I'm sorry to hear that you've never experienced a good introductory economics course. However, that experience (or lack thereof, as the case may be) doesn't serve as testimony against the field.
It starts with an acknowledgement that the theory is stylized beyond any practical purpose, or that it is merely a pedagogical "tool". They then point out that any fault I see with economic theory and/or methodology must be my own failure to understand the material. Like, sure, go read Varian or Mas-Colell's tomes before you try to bring up anything wrong with elementary supply-demand analysis. It's worth noting that they never go out of their way to explain what the supposedly superior methods are. To me it's just moving the goalposts.
In fact, I just stumbled on this paper, the conclusion reads as something straight out of Monty Python's Flying Circus:
Complexity and Economics: computational constraints may not matter By F. Echeneque, D. Golovin and A. Wierman
Conclusion: "We show that the notion that economic agents have limited computational resources adds no empirical content to the theory of utility maximization. A data set of observed consumption at different budgets is either in contradiction with the hypothesis of utility maximization, or it can be explained using a utility function that is easy to maximize. Our paper is not a critique of the literature on complexity and economics in general; rather, we take issue with the idea that worst-case hardness of a model implies that the model is flawed. We emphasize that the existing results on complexity are useful for understanding how economics can be applied in a normative and algorithmic way — for example, to engineer economic systems with desirable properties. We posit that while computer scientists tend to think ‘algorithmically’ about economic models, economists tend to think ‘empirically’ about the models. There is a need for considerations of computational complexity in both views. In particular, an algorithmic view of economic models assumes that the model is fixed and literally true, and then proceeds to ask about the computational demands placed on the agents by the model. That is, it assumes that the agent is simply an implementation of the model and asks whether the agent can efficiently compute its decisions. In contrast, an empirical view takes the model as a tool for thinking about reality. One does not presume agents literally follow the model, only that the model provides a way to explain the observed behavior. In this view, a model still loses credibility if the agents must solve computationally hard problems; however, worst-case complexity is no longer the relevant concept. Instead, the question is whether data from an observed phenomenon can always be explained by the theory with the additional constraint that agents are not required to solve computationally hard problems. This is the case with the theory of the consumer. On the other hand, we expect complexity to matter empirically for other economic models. When that is the case, one would want to characterize the added empirical consequences of assuming that economic agents do not solve hard problems." Source pdf: http://users.cms.caltech.edu/%7Eadamw/papers/letter_sigexc.p...
TL:DR; Yes the critique is completely valid, except in highly restricted environments that never occur in the real world. But look, that's not what we are actually trying to do, oh and by the way, those critics just don't understand economics. In any other field you'd be laughed out of the room, economists parade this stuff with a straight face, and if you object "you just don't understand economics".
> > The world is a complex adaptive system, how does micro or macro equilibrium fit that any better than homo economicus? If anything it sounds even worse to me...
> Chemistry is a field of complex and dynamic systems, yet we are still able to talk about equilibria there. Equilibrium doesn't mean nothing is changing - and in fact, it doesn't mean that the equilibrium corresponds to any actual observable state of the world. Due to aforementioned dynamism, observation effects, and other complications, it may not be possible to observe the true equilibrium state at all, but it's still a useful construct in our understanding of the chemical world.
I might have worded that awkwardly. Yes equilibrium is a thing, I don't see how modeling markets as tending towards equilibrium is helpful in any meaningful sense. In fact, I think it actively obscures the dynamic nature of real world economics.
> > I mean, I have never seen an econ 101 lecture mention things like path dependence
> I'm sorry to hear that you've never experienced a good introductory economics course. However, that experience (or lack thereof, as the case may be) doesn't serve as testimony against the field.
No comment :)
I could say the same, in that I notice a pattern too. It's like HN commenters are trained to engage in extremely facile criticisms of fields that they have little knowledge of, understanding of, or respect for, and then reject any substantive critiques to the contrary due to their lack of understanding.
> It starts with an acknowledgement that the theory is stylized beyond any practical purpose, or that it is merely a pedagogical "tool"
Nobody has said either of those things. They've said that it's a model. As Box famously said, "All models are wrong, but some models are useful". The key to using a model, though, is understanding its scope and limitations - where it does not apply, but also where it does, and in which ways.
> They then point out that any fault I see with economic theory and/or methodology must be my own failure to understand the material. Like, sure, go read Varian or Mas-Colell's tomes before you try to bring up anything wrong with elementary supply-demand analysis. It's worth noting that they never go out of their way to explain what the supposedly superior methods are. To me it's just moving the goalposts
Nobody's saying that you have to do doctoral research in order to discuss the limitations of elementary supply-demand analysis. It's just that the critiques you're bringing up (in this thread, but with this pattern more broadly) are somewhere between "not very interesting, because they have no relevance or are mitigated elsewhere", and "based on complete misunderstandings of the fundamental concepts at play".
Ultimately, it ends up something like the physicist from XKCD #793.
Yes, this is what I have in mind.