Arrow-Debreu

/ / , , , , /

“A Primer For the Perplexed”

That’s the subtitle of Robert Skidelsky’s little book “What’s Wrong With Economics”?.  A primer for the perplexed.  With the U.S. election past us, I decided to start reading some of the books that had accumulated in my “to read” pile.  Skidelsky being one of my favorite authors I started with his.  The problem is that perplexity is insufficient to describe my usual emotion or state of mind whenever I engage with economics.  So, here I am, a mere fifty or so pages in, and already I am experiencing that same exhaustion I have felt these past few decades any time I wander into the morass that passes for economics.  Time and again I do this to myself.  It seems such an important topic.  It seems so relevant and useful to understand.  It seems so necessary for anyone who wants to think about the policy or policies we need to further the lot of our fellow citizens.  But.  Then economics slaps you on the side of the head.

Just what purpose does all this nonsense have?

It employs lots of economists.  So that’s useful.  It is the intellectual equivalent of digging holes and then filling them in.  No long term use comes from the endeavor, but paychecks are cut and unemployment is lower.

I know.  I know.  I am being a tad critical.

Which is why it’s useful to read someone like Skidelsky.

He is clearly exasperated too.  He feels what I feel: that there’s a whole lot of gibberish masquerading as pseudo-science.  And yet, below all that mathematical disguise are a few useful nuggets, that might, in the right hands, contribute to our collective aim.  The problem is that sifting those few nuggets from the vast pile of chaff is no mean task.  It is a task that leaves many of us mightily perplexed.

Just how did this discipline get to be so warped and littered with irrelevancy?

I cannot answer that.  I am too jaded by the nonsense and the overly inflated sense of self importance that the discipline is weighed down with.  It just isn’t worth the time.  Is economics simply a whole basket of mathematical techniques?  In which case it is a branch of mathematics and ought to conform itself appropriately.  Is it a coherent body of thought distinct from the other social sciences?  In which case it ought to pay attention to its boundaries and conform them to the thought in its related disciplines.  Is it simply ideology?  In which case it ought to come clean and subject itself to the disciplines of political theory.  I could go on.  So could you.  Your list is probably better than mine.  I think one reason the the flummery that passes for economics survives is precisely because no one quite knows what it’s all for.  The answer seems to slide about before us.  Economists have a bevy of answers, each contingent upon the circumstance of the question.

Ultimately economics is, of course, what economists do.  Whether it’s useful is not for them to say.  We consumers of the product, to use a clever intellectual device used by economists themselves, are the ones who decide.  What’s the saying? “The consumer is king [or queen depending on your point of view]”.  If so, economics lacks — how should I say this?  — credibility.

Nonetheless Skidelsky gives it his best shot.  The problem with demystifying economics, so as to clear the fog of perplexity, is that it runs the risk of exposing what remains as something open to ridicule.

Take equilibrium as an example.

Never has a concept been more debased than that of equilibrium.  Skidelsky devotes a short chapter to trying to explain what it means to economists and how odd it is that they still cling, despite all the evidence, to it.  Skidelsky tells us that Schumpeter saw equilibrium as the “magna charta ” of exact economics.  There is nothing exact about equilibrium in the real world economy, but in the confines of the straight jacket imposed on the test economies that economists study, it is of critical importance.  It is a way of imposing order where there is none.  Apparently Samuelson  said that: “There may have been an initial period of trial and error, of oscillation around the right level, before price finally settles down in balance”.  Notice his hesitation, there may have been.  You can sense the economist in him screaming in horror that there may have been a disturbance in the price system.  Surely this is an error.  Prices are just wonderful.  Whatever they are.  Wasn’t a Nobel prize awarded to someone for arguing that prices always reveal the truth?  No matter what they are.  A Nobel prize, dammit, that’s proof right there that economists are right.  Markets are “efficient”, remember ?

Snark aside, the desperate clinging on to equilibrium despite the apparent constant disequilibrium around us can be quite baffling.  It’s a sifters economics defies any conclusion that might move it beyond that desperation.  For instance, I still regard the so-called socialist calculation debate of the 1930s as one of economics’ low points.  Not because of the debate itself, but because of what was learned: nothing.  The discipline has done this a few times: whenever its preferred theory, concept, or idea takes a beating, it moves on and ignore the argument.  As if nothing happened.  In this case the argument was about a logical extension of the Walrasian vision of general equilibrium.  The entire concept of GE obviates the need for markets.  As was pointed out in the controversy, a central planner could, with the necessary information, execute an equilibrium solution.  So what’s all this hoo-ha about markets?  It was Hayek who tried to resolve this inconvenience by arguing that the information is so diffuse throughout the economy that it is impossible, in practical terms, for such a central planner to gather and process the data.  Only the markets can undertake such a task.  Phew!  Market ideology can rumble on.  Except: notice that caveat is not based on any logic, it might be theoretically possible for a central planner to do the job.  It’s just that it isn’t practical.  Hmm.  What about “big data”?  What about our current computing power?  Is it getting closer to practical possibility nowadays?

No.  It isn’t.  I would agree with Hayek on this.

But there is another problem that follows from the Hayekian position:  how would we ever know if the current situation represents an equilibrium of the sort economics postulates?  Surely we can never “know”.  The information, as Hayek argues, is simply too diffuse.  We have no idea of whether there is an equilibrium.  It’s impossible to tell.  That’s the essence of Hayek’s position.  Not one, not even the cleverest economist, can gather enough information to know whether there is an equilibrium.

This was, as I have argued many times, decisively proved by Arrow and Debreu.  Their triumphant work on GE concluded that the entire concept is a fantasy and only exists under such ridiculous restrictions, that it is patently absurd to consider it a useful concept.  Or, at least, that would have been the conclusion had the entire effort not been wrapped in such glittery mathematics that the process swamped the conclusion.  Indeed, this is an iconic display of what perplexes us all about economics:  here is a magnificent disproof of GE for all to see.  The concept is throroughly debunked and ought to be discarded as an irrelevancy, or as an example of a bad turn in the history of the discipline.  Instead, economists become bewitched by the virtuoso mathematics and logical chicanery and prefer to continue as before, only now secure that GE can exist, even if only in their dreams.

There is, as Skidelsky tells us, a slight variation on this story, one that is a better explanation of the continued existence of GE in the vocabulary of economics: it was ideological necessary to move on, even with the absurdity of the Arrow-Debreu assumptions.  After all, if there is no “proof” that markets are naturally “self-balancing”, and if governments are not simply an example of a friction in the magnificent market machinery, chinks in the market edifice open up.  And economics wanted to avoid accepting that as fact.

Don’t forget the moment and the historical context in which both the socialist calculating debates and the Arrow-Debreu tour-de-force were taking place.  It was necessary, in the minds of the leaders of the discipline, to construct a market based, anti-statist, theory.  They were willing to shed their pretense to science in order to create a more ideologically tenable home base.  Which is where, by and large, economics remains.  Is it inevitable that economics is ideological?  Is it because of this inevitability that it has wrapped itself in excessive mathematical adornment in order to disguise itself as a pseudo-science? What nuggets its masters have turned up during its history can we trust?

Perplexing indeed.

/ / , , , , /

What Would Smith Say?

Sometimes I pity poor Adam Smith. I really do. He’s an accidental icon of all that’s wrong in economics. And let’s face it that’s a lot of wrong to be an icon of. How many times have we all been reminded that his metaphorical reference to an invisible hand performing some wild and strange magic is the root of most modern economics? And how often are we reminded that he used those words just once in a book of over eight hundred pages?

The invisible hand was just not that important to Smith. He didn’t mean to launch economics into a century or more of quixotic and ever more bizarre search for something that he meant as a passing reference to the superficial order he saw around him.

Smith spent no more time on the invisible hand metaphor than he did on other phrases that are much more concrete. How about this one:

“Regulation is in support of the workman, it is always just and equitable.”

Where in the corpus of mainstream economics is this phrase worked up into a fully fledged and extended effort in the manner that the throwaway reference to the invisible hand is?

Well we don’t need to explain much further: economics was and is an extension of politics. It is politics waged by other means. It doesn’t exist as a coherent entity, it exists as variations to be deployed preferentially to support some other argument. And that other argument is usually political.

So early economists latched onto the magic of the invisible hand to explain why state interference was a ‘bad thing’. They worked away at establishing what looked like a scientific explanation of what they called the ‘market system’ or the ‘price mechanism’ and why those magical and, I must admit, mythical phenomena produce an ‘order’ that cannot be improved upon by government intervention. The conclusion of their epic trek into the intellectual desert was that any form of government intervention is perverse, no matter how well intentioned.

Take that you regulatory fools!

Except they could just as easily have started with that other quote I gave above. They could, had they been so disposed, have started with the magic of regulation and its unchallengeable efficacy in the ‘regulatory system’. At least I think so. The real economy is so darned complex and inscrutable that pretty much any grand theory can be created to explain it. There’s sufficient evidence to support all sorts of wild and contradictory ideas. That’s why the economy is so much fun to talk about. It’s an intellectual playground. The only way you can ever actually ‘prove’ a theory is to take a look at its plausibility and especially at the foundational assumptions upon which it stands.

Which brings me back to poor Adam Smith: the ultimate end point of that trek into the market magic desert and the quest for a ‘proof’ of the invisible hand’s status as the ultimate allocator-in-chief in an economy is the edifice known as General Equilibrium. The great crescendo of work that ended up with Arrow-Debreu is nothing short of stunning. It is architecture of the highest order. It is an analytical tour de force. And it proves beyond reasonable doubt that there is no such thing as general equilibrium. The restrictions economists have to place on the world in order to arrive at their hold grail totally destroy its relevance and utility. They have proved the trek was worthless.

Not that they stopped. Economists rarely do. They are too proud of their efforts. Even if those efforts were in vain.

So, having invested so much effort into such an elaborate fiction, and no doubt so embarrassed by its utter futility, they plod on as if nothing happened. They use general equilibrium as if it is indeed general and as if indeed there is such a thing as an equilibrium. Whilst the world around us suggests that neither is remotely a plausible explanation  an actual economy.

But never mind: it keeps economists employed. And it provides useful input for another of my pet peeves about mainstream economics. Which is that marginal productivity theory must be bogus. The employment and remuneration of economists is disproof of it.

Anyway I am plunged into this dishumor by the spectacle of economists ranging far and wide over the current presidential election and, in particular, pronouncing that the reform of the rotten American health care system and its replacement with some form of a single payer system is ‘impractical’.

The evidence from around the world suggest this is not true. Indeed, on the contrary, the evidence suggest it is overwhelming probable.

So why are so many of our leading economists lamenting want they call the ‘misleading’ and ‘impractical’ quest for a single payer system here? What would Smith say?

That they are referring to the political practicality. They are referring to various cultural and institutional rigidities that apparently channel our economy down a path that other economies do not follow. They are, in short, announcing that they believe the economy is deeply and profoundly influenced by its historical and institutional setting.

Which, seems to me, to be a considerable blow to their mainstream thought that economics is somehow independent of such trivia. In fact, were I so bold, I would argue that their own argument against the impracticality of single payer is an admission that their entire mainstream enterprise of so-called ‘positive’ economics unconstrained by mere politics, history, and so on is a farcical and dangerous illusion. It is so dangerous to the commonwealth – now there’s a thought – that it ought to be heavily regulated.

Regulation! What was Smith saying about that? …