Man, if you want to hear about anti-intellectualism and bias, go and look at the SMD theorem. Economists will continue to assume that Macroeconomic demand curves will continue to slope downward.
The D in SMD was actually awarded the nobel prize in economics.
Debreu's work on general equilibrium, which was the basis of the award, had to skirt around the SMD theorem:
>Prize motivation: "for having incorporated new analytical methods into economic theory and for his rigorous reformulation of the theory of general equilibrium."[0]
In order for the Arrow-Debreu model[1] to give a unique equilibrium, which is usually desired, some strong (arguably, unrealistic) conditions must be assumed, otherwise there can be multiple equilibria, as guaranteed by the SMD theorem.[2]
In particular, the SMD theorem asserts that any polynomial function can be a market demand function, which fundamentally breaks the so-called "law" of demand in neoclassical economics. This is because most polynomial functions are not monotonically decreasing[3], as required by the "law" of demand, but give rise to demand curves that can curve up or down arbitrarily. As an example of such a function, just think of the curve generated by a generic cubic polynomial.[4]
This "anything goes" situation then leads to non-unique equilibria, since a supply curve can now intersect the market demand curve at more than one point. But since an equilibrium point is supposed to be where welfare is maximised in a society, the existence of non-unique equilibria means that there can be multiple economic arrangements under which social welfare is maximised. Then it's a matter of taste (i.e. "ideology") to decide which equilibrium point a society wants to be in.
[0] https://www.nobelprize.org/prizes/economic-sciences/1983/deb...
[1] https://en.wikipedia.org/wiki/Arrow%E2%80%93Debreu_model
[2] https://en.wikipedia.org/wiki/Sonnenschein%E2%80%93Mantel%E2...
[3] https://en.wikipedia.org/wiki/Monotonic_function
[4] A graph of such a curve is shown here: https://en.wikipedia.org/wiki/File:Monotonicity_example3.png
Watch out for moving the goalposts. He was awarded the nobel prize after all. "Rigorous reformulation" does not sound like skirting at all.
> This "anything goes" situation then leads to non-unique equilibria, since a supply curve can now intersect the market demand curve at more than one point. But since an equilibrium point is supposed to be where welfare is maximised in a society, the existence of non-unique equilibria means that there can be multiple economic arrangements under which social welfare is maximised.
Economy (or climate or orbits) exhibit chatoic and complex behaviour and it is not surprising that they can have multiple stable points (look up bifurcation diagrams for a simple representation of chatoic solutions). If I am not mistaken, one can hear such things routinely in university economy classrooms today especially when giving caveats about models being wrong in general. Even when you include game theory and Nash equilibria with respect to economic solutions, there might not be efficient ways to reach the equilibrium points at all!
> Then it's a matter of taste (i.e. "ideology") to decide which equilibrium point a society wants to be in.
That is to assume that every equilibrium solution you get is tied to a specific policy or a set of them (or even more, an ideology!) or that points can be reached easily which are very strong assumptions. Maybe some ideologies don't exhibit any reachable equilibrium points or pertain only to unstable ones.
Says the one who's been moving the goalposts in the first place. The point of this thread was about whether or not the Nobel prize in economics was anti-intellectual and ideologically biased. You chimed in with:
>>>The D in SMD was actually awarded the nobel prize in economics.
Which is why I responded, because this was a non-sequitur and an appeal to authority (of the people awarding the prize, and the question was whether or not these people were biased).
>He was awarded the nobel prize after all.
That means nothing in the context of this thread, and is another appeal to authority.
>"Rigorous reformulation" does not sound like skirting at all.
The SMD theorem was a big deal, yet Debreu wasn't awarded the prize for that, but for a rigorous reformulation of Walrasian equilibrium,[0] which has very strong assumptions.
In particular, that rigorous reformulation, known as the Arrow-Debreu model,[1] fails under weaker (i.e. more realistic) assumptions, because of the SMD theorem.
This is skirting the issue.
>Economy (or climate or orbits) exhibit chatoic and complex behaviour and it is not surprising that they can have multiple stable points (look up bifurcation diagrams for a simple representation of chatoic solutions). If I am not mistaken, one can hear such things routinely in university economy classrooms today especially when giving caveats about models being wrong in general. Even when you include game theory and Nash equilibria with respect to economic solutions, there might not be efficient ways to reach the equilibrium points at all!
A few points:
- It's nice and all that caveats are being given, but what tools are being taught to economics undergrads to handle chaotic and complex behaviour? Please supply links to some university course syllabus as evidence (I'm happy to read material in a language other than English).
- If economics students aren't being taught tools to handle chaotic and complex behaviour, then giving caveats is just paying lip service.
- Game theory and Nash equilibria are tools to deal with equilibria, which is what neoclassical economics is comfortable with. To be more realistic, you need to look at what happens in disequilibria, as you've pointed out yourself.
- Chaos theory also showed that equilibria may never be attained at all by a system, so the obsession with equilibria in economics is, at best, unproductive.
>That is to assume that every equilibrium solution you get is tied to a specific policy or a set of them (or even more, an ideology!) or that points can be reached easily which are very strong assumptions. Maybe some ideologies don't exhibit any reachable equilibrium points or pertain only to unstable ones.
Agreed. Unfortunately, neoclassical economics, thanks to its underlying ideology, assumes that equilibrium points can be reached by the "free market" and are desirable.
[0] https://en.wikipedia.org/wiki/Competitive_equilibrium
[1] https://en.wikipedia.org/wiki/Arrow%E2%80%93Debreu_model
I think this statement is quite representative of the world we live in, don't you? My personal experience is, strongest adherents to an ideology are the least productive people .
[1] https://web.archive.org/web/19991009000912/http://lheawww.gs...
I would agree.
> Just because a model is simple doesn't mean that it is bad or worse than a model with more complex assumptions.
I'm not condemning it being simple. If we were just talking about small or exceptional exclusions to the rules like Giffen or Veblen goods, then I wouldn't have made the above post. We're talking about fundamentally incorrect building blocks that aren't even acknowledged in the literature.
It's a joke to remind us of a sobering fact: that unreal assumptions lead to unreal results.
>Just because a model is simple doesn't mean that it is bad or worse than a model with more complex assumptions.
But if a model with more complex assumptions is a better approximation to reality than a model with simpler assumptions, would you not adopt the former?
What has happened in economics is that people have clung on to, say, Newtonian mechanics, instead of embracing Einstein's relativity.
Even this does not quite adequately express the enormity of the inertia that you see in economics, because at least Newtonian mechanics is right most of the time, whereas neoclassical economics is wrong most of the time. The SMD theorem guarantees, for example, that most market demand curves will NEVER satisfy the fundamental neoclassical "law" of demand.
Let me also point out that your comment is rehashing Friedman's positivism.[0] Even in quantum mechanics, which has for decades been dominated by the positivism of the Copenhagen interpretation, people are now transcending that positivism because they've come to the realisation that quantum mechanics can't be advanced without overcoming the crutch of positivism. And Friedman's assertions about assumptions are unsound anyway.[1]
[0] https://en.wikipedia.org/wiki/Essays_in_Positive_Economics
[1] For a critique of Friedman's argument about assumptions in models, see https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-6435....
Not necessarily. Maybe the simpler model is enough to understand what is going on. Maybe a more complex model suffers from over-fitting and performs worse than the simpler model. It really depends.
> The SMD theorem guarantees, for example, that most market demand curves will NEVER satisfy the fundamental neoclassical "law" of demand.
Does it really say that? Or simply that weird market demand curves are possible in a few exceptional situations?
If only physics departments everywhere would adopt this philosophy! Physics undergrads would then be liberated from the yoke of Einstein's relativity, let alone the tyranny of the mind-blowing quantum field theory with its insufferably complicated Feynman diagrams.
It does not depend. The simpler model in economics is fatally flawed, and is the one suffering from over-fitting (to a straight line, no less) and contributing to the bad reputation of economics as a "dismal science".
>> The SMD theorem guarantees, for example, that most market demand curves will NEVER satisfy the fundamental neoclassical "law" of demand.
>Does it really say that? Or simply that weird market demand curves are possible in a few exceptional situations?
Yes, it does.[0] The exceptional situations are precisely those that neoclassical economics assumes are the norm, namely, that there is only one agent and one commodity in the market.[1]
As soon as you have more than one agent/consumer in an economy, the mathematics will undermine the "law" of demand, because the inter-agent interactions would generate non-linear terms in the market demand function.
And once you have terms of higher order, the demand curve generated by that function will have sections that slope upwards, exactly what is being forbidden by the "law" of demand.
And we haven't yet taken into account the very real fact that multiple consumers cannot possibly have the same preferences. Or that these preferences can change with different levels of income.[2]
In short, neoclassical microeconomics only works in a communist economy of identical clones with identical preferences and incomes.
Oh, the irony.
[0] https://en.wikipedia.org/wiki/Sonnenschein%E2%80%93Mantel%E2...
Let's take electrical engineering as an example. If you model an electrical circuit, you assume that there simply is a voltage source where electricity comes from. That assumption is of course complete nonsense: In reality, electrical energy is not just there, it has to be generated somewhere, for example in a power plant. The electricity also flows through a grid that is shared with many other consumers.
So, according to your requirement to always use the more realistic model, electrical engineers should always model a whole power plant and an entire power grid in each circuit, because otherwise their model would be bullshit.
> Yes, it does.[0]
Do you know of any empirical studies that show that the models currently used in macroeconomics actually cause problems with real data?
I'd usually say you're shifting the goal posts, perhaps muse about how dehumanising and simplistic it is to think of humans as components in an electrical circuit, and move on. Then I thought that it'd be more illuminating to address your analogy, because your reasoning suffers from the same problem that I've been talking about.
>If you model an electrical circuit, you assume that there simply is a voltage source where electricity comes from. That assumption is of course complete nonsense: In reality, electrical energy is not just there, it has to be generated somewhere, for example in a power plant. The electricity also flows through a grid that is shared with many other consumers.
I think it might help to read Musgrave's paper[0] (the abstract will do if you can't get the paper itself) on the three kinds of unrealistic assumptions, in which he attacked Friedman's twist. The assumption you pointed out is the most benign type: a negligibility assumption. It's like assuming that a object falling through air experiences no friction: complete nonsense, but air friction exerts only a negligible effect on most falling objects, unless the object is, say, a feather.
In the case of your example, taking into account the power plant adds nothing to the analysis, because the electrical circuit you're concerned with usually doesn't output electricity. Usually. But in the 21st century, that can change...
>So, according to your requirement to always use the more realistic model, electrical engineers should always model a whole power plant and an entire power grid in each circuit, because otherwise their model would be bullshit.
Firstly, I did not say the more realistic model should "always" be used. The situation in economics is more like the more realistic model is ignored in favour of the incorrect unrealistic model, even when the more realistic model is appropriate. The analogy with Newtonian/Einsteinian mechanics is quite shaky here, since as I've said, Newtonian mechanics is vastly more accurate than neoclassical microeconomics.
To take another example from engineering and continue the theme of relativity, error corrections required for GPS depend on an understanding of relativity.[1] If, as you've previously suggested, the simpler and more easily understandable model should be preferred, then we would not have GPS and allied technologies today.
Secondly, in the 21st century when we have renewable energy, electrical engineers are now required to take into account a power grid, because consumers are now also power plants if they have solar power, for example, and want to feed the excess power generated into the power grid.
The point is this: if the circuit you're modelling is a passive one that doesn't generate electricity, sure, make use of the unrealistic assumption that there's an unknown voltage source. However, if your circuit is also a voltage source, that assumption is then false, and you need to update your model.
The same should apply in economics. Unfortunately, it turns out that markets and economies are far more complex systems than power grids: as soon as you have more than one agent (e.g. humans, corporate entities, HFT algorithms, etc.), the simplistic analysis derived from marginal utility theory fails. So, outside of the laboratory perhaps, the models used in neoclassical microeconomics are probably almost never appropriate for the problems they're treating.
>> Yes, it does.[2]
>Do you know of any empirical studies that show that the models currently used in macroeconomics actually cause problems with real data?
This is a really garbled question. Firstly, nowhere did I assert that economic models "cause problems with real data". I really don't understand this assertion and would welcome any clarifications.
Secondly, I think you misunderstand the point of my argument about the SMD theorem. The point is that, as soon as you have more than one agent/consumer (human, firm, algorithm, what-have-you), they will interact in a non-linear way, giving rise to a nonlinear market demand function that gives a "weird" market demand curve.
This has nothing to do with any effect that the belief in a certain economic model would have on the economic behaviour of an agent. That is an entirely separate question altogether.
Back to your question about whether "weird market demand curves are possible" only "in a few exceptional situations". The SMD theorem basically says no: in all but the most exceptional cases, multiple market equilibrium points can exist.
The implication is that the aggregation problem[3] is not solved by the neoclassical assertion that the market demand curve for a well-defined commodity has the same pleasant mathematical properties -- in particular, that it is monotonically decreasing ("downward-sloping"), i.e. obeys the "law" of demand -- as the demand curve for that commodity of a rational agent.
And the reason why the aggregation problem isn't solved is because, as soon as you have more than one agent or commodity (like in most IRL markets), you get a complex system. And when you have a complex system, you can't draw line diagrams like you do in the textbooks. You need to do modelling and numerical analysis. There's a field called complexity economics[4] that's only beginning to do that, some 40 years after the SMD theorem appeared. Better late than never, but it's still a lot later than the other less "dismal" sciences, which have come to realised that they're dealing with complex systems and have updated their thinking accordingly.
[0] https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-6435....
[1] https://en.wikipedia.org/wiki/Error_analysis_for_the_Global_...
[2] https://en.wikipedia.org/wiki/Sonnenschein%E2%80%93Mantel%E2...