Saturday, March 19, 2016

New paradigms in economic theory? Not so fast.


I've recently read two big-think piece about new paradigms for economic theory - this one by evolutionary biologist David Sloan Wilson, and this one by venture capitalist and activist Nick Hanauer and speechwriter Eric Liu. Is economic theory due for a paradigm shift? Maybe, but I don't think we know what the new paradigm will be yet.

Wilson's piece - grandiosely titled "Economic Theory Is Dead. Here’s What Will Replace It." - claims that evolutionary theory will be the magic bullet that will breathe life into econ. The piece doesn't explain how to incorporate evolutionary thinking into econ, but it does link to a 2013 special issue of JEBO that Wilson edited along with Barkley Rosser about incorporating evolution into economics. In a paper in that volume, Wilson lays out his ideas slightly more explicitly.

But only slightly. Wilson's paper does three things: 1) it references economists who have suggested making use of evolutionary ideas in the past, 2) it discusses some arguments against using evolutionary theory in econ, and 3) it lays out some broad general principles of evolutionary theory. Concrete examples are left to the other papers in the volume (which are all sadly paywalled).

In principle I think evolutionary theory might add a lot to economics, because economies obviously involve things like birth and death of firms, competition, predation, and other features similar to natural ecosystems. 

But the case for using evolutionary theory in econ is not yet a slam-dunk. The big reason is that we don't have much evidence that inheritance of traits occurs in economies. In biological evolution, we have many clear examples of heredity. In econ, to my knowledge, we have none. Evolution needs heredity, so evolutionary theorists who want to change the econ world should focus on demonstrating the existence of traits that are passed from company to company, or person to person, or industry to industry, within economies. Or, alternatively, they should show that companies and/or individuals have traits that change over time in a way similar to the way that biological traits change between generations. They should be very concrete and consistent about how to measure these traits. Then we can start talking about using evolution to create a new economics. 

Would-be evolutionary economists should realize that the measure of their success will be quantitative prediction. Get some numbers right out of sample, and they will win. What won't be useful is for them to simply point at various economic phenomena and say "Hey, this looks kind of like it conforms qualitatively to one or more general principles of evolution!" That sort of vague hand-waving does not really generate any progress in humanity's understanding of our world - it merely creates a feel-good sense of "truthiness" that makes for some good hypey media articles but little else. Evolutionary theorists, like all other researchers in all fields, should focus on predictive power and leave the hand-wavey just-so stories to a minimum.

Hanauer and Liu's piece - similarly titled "Traditional Economics Failed. Here’s a New Blueprint." - is, in my opinion, much more promising, if also pretty vague. It is also much more diverse, specifying many different sweeping changes that they believe need to be made in economic theory. Among these are:

1) The replacement of reductionist models with ones based on "complex adaptive systems"

2) The use of network models

3) The use of disequilibrium models

4) The use of nonlinear models

5) The replacement of "mechanistic" theories with "behavioral" ones

6) The replacement of optimization with something resembling "satisficing"

7) The replacement of forward-looking agents with adaptive agents in econ theories

8) Modeling people as interdependent instead of independent

9) Modeling people as irrational approximators instead of rational calculators

10) Modeling people as caring about reciprocity

11) Modeling win-win situations instead of environments characterized by rivalry

12) Replacing models of competition with models of cooperation


There is a lot to digest here. I'd split these points into three categories:

Category 1: Good points. These include (2), (4), (6), (7), (8), (9), (10), and (12). Hanauer and Liu identify networks, nonlinearity, incomplete optimization, incomplete forward-looking-ness, externalities, behavioral heuristics, social preferences, and cooperative games as areas needing more attention in economics. I agree with all of this. Good job, guys!

Category 2: Points that misunderstand the current state of economics research. These include (3) and (11). Regarding "equilibrium", economists don't use it in the physics sense that Hanauer and Liu cite. Instead, they have redefined the word "equilibrium" to mean "any solution to a system of equations in any model." The term is thus now meaningless. Many, many mainstream economic models include "transition dynamics" or "short-run equilibrium" that is exactly the same as what Hanauer and Liu call "disequilibrium".

As for "win-win" models, most existing mainstream econ models are all about win-win situations. This is the concept of Pareto Efficiency

Category 3: Points that are not very well-defined. These include (1) and (5). "Complex adaptive systems" is a term that gets thrown around a lot but rarely gets a concrete definition. In computer science research, "complexity" basically just means "displaying emergent properties", and progress in that field has been rather halting. I'm still not sure what the term "complex adaptive systems" means in terms of economics. 

Hanauer and Liu assert that "We understand now how whirlpools arise from turbulence, or how bubbles emerge from economic activity." The latter is not the case; we do not actually know what bubbles are, or even whether they are a single phenomenon or several similar-looking phenomena. Are bubbles based on "greater fool" speculation? Rational mispricing? Emotion-based irrational mispricing? Information cascades? Other forms of herd behavior? Bayesian "information overshoot"? Some combination of these? None of these? We just don't know.

As for making economics less "mechanistic" and more "behavioral", Hanauer and Liu do not explain what this means, and merely reference a David Brooks book (which is not encouraging). 


So I agree with about two-thirds of Hanauer and Liu's points. The others need tightening up, but not bad overall. The question is whether these ideas, together, represent a new paradigm in economic theory. Hanauer and Liu argue that they do, but I am not so sure. There seem to be three mini-paradigms here: bounded rationality, interdependence, and holistic analysis. The first two have already been making inroads in economics, though I think they should make more inroads. The latter is kind of an older idea that doesn't seem to have panned out as well as many hoped - there isn't actually going to be a Second Enlightenment replacing reductionist science with holism.  

But I think that more important than any of these theoretical changes - or the evolutionary theory suggested by Wilson - is the empirical revolution in econ. Ten million cool theories are of little use beyond the "gee whiz" factor if you can't pick between them. Until recently, econ was fairly bad about agreeing on rigorous ways to test theories against reality, so paradigms came and went like fashions and fads. Now that's changing. To me, that seems like a much bigger deal than any new theory fad, because it offers us a chance to find enduringly reliable theories that won't simply disappear when people get bored or political ideologies change.

So the shift to empiricism away from philosophy supersedes all other real and potential shifts in economic theory. Would-be econ revolutionaries absolutely need to get on board with the new empiricism, or else risk being left behind.


Updates

David Sloan Wilson replies. He laughs at economics for being very very late to embrace empiricism. While the rebuke is very deserved, it's also true that good data is a lot harder to gather in econ, and that technology has made this a lot easier in recent decades.

Wilson also writes:
But there is more to Science 101 than the need to test theories. Let’s imagine that there were ten million cool theories out there. How long would it take to test them? Hundreds of millions of years. ...Does Smith really believe that any old idea that comes into the head of an economist is equally worthy of attention?
Answer: Of course not, but this is another reason empirical results are important. They typically leave a trail of clues that help guide scientists toward good theories. You see electrons making a sort of wavey pattern, and you invent quantum mechanics to explain that - and luckily it turns out to explain a lot of other stuff too. That's a typical progression - you start out with some fact or phenomenon, then you make a theory to fit it, then you test that theory on different phenomena to see if you've got something structural. Of course, sometimes pure intuition gets things right the first time around - general relativity and auction theory are examples of this - but usually we're not that smart, and theorists have to follow the empirical bread crumbs.

Wilson also writes:
The main reason that the so-called orthodox school of economics achieved its dominance is because it seemed to offer a grand unifying theoretical framework. Too bad that its assumptions were absurd and little effort was made to test its empirical predictions.
Well, there has definitely been some of that going on. But "orthodox" econ has achieved a lot of solid results, like auction theory, random utility discrete choice models, and a number of other models in tax, labor, and other areas. Nor are orthodox assumptions always absurd, since some of them hold up well in lab experiments and other micro-level studies. I think Wilson would enjoy learning about these successes, in addition to the well-publicized failures.

105 comments:

  1. I like that economics is shifting in the direction of empiricism, but I think philosophy is still indispensable. For example, in his interview with Ezra Klein, World Bank President Jim Yong Kim made references to Marx, Derrida, Friere, Post-Modernism, and Liberation Theology as totally relevant to his work. All the data and analytics in the world won't help you if you don't have an idea of what you want to do with it, or how it relates to other people.

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  2. For a second I thought these guys managed to acquire the domain economics.com, and used it to propagate blatantly non neutral articles in a deeply cynical move, then I looked at the spelling of the domain more closely.

    Still, this site is clearly, once again, overly adversarial and overly sectarian - it's like these guys go out of their way to hold the discipline back rather than move things forward.

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    1. Well, they aren't anywhere near part of the discipline, so they only hold it back in the sense that they contribute to filling the sea of economic misinformation on the internet.

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    2. Pablo1:26 PM

      Just wanted to upvote. Realizing Noah Smith spends time reading 'evonomic' articles made me lose a little respect for him (sorry Noah). The only thing evonomics is concerned with is creating its own macroeconomic school of thought. Which, apparently is all that any of the scientist on there know about economics.

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  3. Category ones are mostly examples of replacing simple models with more complex ones having more free parameters. These are exponentially more difficult to estimate and verify empirically without succumbing to problems like over-fitting.

    It really only makes sense to dig into the more complex models once you have settled the relative accuracy of the simpler summarizing ones. If you have difficulty getting enough good data to determine which simpler models are more correct, it's a good sign you won't be able to prove or disprove the more detailed ones.

    Increasing abstraction and complexity of your model and claiming you have a new distinct answer is also a common fallacy (see https://xkcd.com/1318/ )

    This type of confusion is rooted in the reification fallacy or the "mind projection fallacy". Different maps of the same place having different levels of details do not show something radically different and the more detailed ones are more difficult to maintain, more likely to be outdated and have errors.

    It is good to aspire to get to the most complete models of things you can reach with the data available but it is crucial to always be aware of the limits of what can be validated given the amount and the cleanliness of the data available.

    See also http://omega.albany.edu:8008/JaynesBook.html Chapter 24

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    1. While you're right about the danger of overfitting and the need for low dimension, you're very wrong that most of the things in Category 1 increase the number of free parameters in models. Many of these models reduce the parameter space instead of expanding it. They look at different things, not more things.

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    2. Benoit, here's a bit on overfitting you may like (or not).

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  4. Anonymous6:38 PM

    The problem with economics these days is that it's no longer about economics. The economics space is dominated by physicists and mathematicians. Obviously career prospects in these fields are not very good while economics is an attractive milch cow. Perhaps, even, there's too much competition in science or mathematics and they're tough games to make a name in, particularly when it is more difficult in these fields to originate a new theory and have it empirically validated or at least not falsified. So we now have a plethora of new economic paradigms which are just neoclassical economics in entropic drag or ecological drag or whatever. Strangely, it seems, I had always thought that economic behaviour was about human beings not atoms and amoebas. Maybe I should just dust off the old microscope and go and sample some murky pond water.

    Henry

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    1. Humans aren't special. We're just robots controlled by modest sized meat computers. We're even less special in large groups.

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    2. Anonymous7:14 PM

      Tom,

      That meat computer, I would argue, does not behave in ways analogous to the one in your iPod. It is a great deal more complex.

      " We're even less special in large groups."

      It doesn't stop large groups behaving in unpredictable ways or ways not amenable to stochastic modelling. Show me the stochastic model which explains 2008.

      Henry.

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    3. Huhuhu9:53 PM

      "Explaining" an economic event doesn't do much to show the value of stochastic models vs. any other methods. With such a vague goal, you could validate your explanation by matching it to your "definition" of whatever you are purporting to explain.

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    4. Anonymous3:19 AM

      ""Explaining" an economic event doesn't do much to show the value of stochastic models vs. any other methods."

      I wasn't suggesting that be done. I was asking whether there was any stochastic model that even came close. I'm not suggesting other model types were up to explaining 2008 either.

      Henry

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    5. Henry, we don't have any models that predict the precise timing of Earthquakes yet. That doesn't mean that the field of plate tectonics is without valid mathematical models. There are other predictions that the theory makes (i.e. the "ring of fire" etc.) which can be checked against the data (both old and new).

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    6. Anonymous2:55 AM

      Tom,

      I am not even necessarily talking about prediction.

      Let's start with explanation. I can't see how an economic model based on entropy or amoeba ethology would be able to do explain 2008. But then again, there's plenty of things I don't understand.

      Henry.

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    7. The entropy model (if you mean Jason's) is that something like 2008 represents a loss of entropy due to non-ideal information transfer (I think). In such cases the problem becomes more or less intractable in that framework. I don't think he has any strong claim of being able to predict or explain why the mob's actions suddenly become coordinated (rather than so complex as to look random and uncoordinated). The tractable problems are when information transfer is ideal (information equilibrium (IE)), and people look to be behaving randomly (or so complex so as to be indistinguishable from randomly). Jason might concede that 2008 may be a problem for behaviorists. However the liquidity trap itself (post 2008) does have an ITM explanation.

      I'm going off my understanding, so I could be wrong about any or all of that. Recall, it's supposed to be a low order model. Behaviorally sorting out why a mob panics is probably going to be higher order and thus more complicated. But you've got to crawl before you can walk, right?

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    8. ... although in terms of explanations (rather than predictions) there is a tie in with Friedman's "plucking model." Actually believing expectations (which turn out to vary somewhat ... it turns out not very much) from reality can cause that. It's the extremely rare case of an expectation that nails it which can result in better than random performance.

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    9. Anonymous8:07 PM

      Tom,

      "Recall, it's supposed to be a low order model."

      Given Jason's high handedness you would think he was offering the full monte.

      "The tractable problems are when information transfer is ideal (information equilibrium (IE)), and people look to be behaving randomly (or so complex so as to be indistinguishable from randomly)."

      And then it just becomes the facsimile of the good ol' neoclassical paradigm.

      Henry

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    10. Or maybe having theoretical people waving hands and speaking loudly is a waste of everybody's time? When you treat it as a real science you need people who can do Science, not witch doctors. Sorry if you have been out-evolved.

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    11. Right, people who can do science, like a venture capitalist and a speechwriter, and a very crusty evolutionary biologist. Gimme a break.

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    12. Henry, well like I said: that's my limited understanding. You might want to go to the source. Jason has hinted at building on what he has in the future... perhaps a higher order model? But of course that's totally useless until you can show you do a good job (as good as the order allows) with a low order model.

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    13. Anonymous4:40 PM

      "You might want to go to the source."

      Apparently the source will only treat with people of a similar mind.

      Henry

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    14. I think that post was part joke, part frustration and part hyperbole... he's dropped moderation since and Ramanan and Brian Romanchuk have commented there again recently... in fact he did another couple of SFC posts, one trying to cast it in an IT framework. Plus he and John Handley have been having some interesting disagreements (I couldn't replicate either of their results, in the case of Japan's Philip's curve).

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    15. ... also, Cameron Murray (commenting below) left a note of encouragement (especially regarding the Gary Becker angle), and I guess he's an econ educator, so I found that interesting.

      I'm still a tad mystified by the SFC thing... and as you know I spent a lot of time digging into it, even adding a bit yesterday. The fact that what I came up with (seemingly contradicting the point of that post) only works over a relatively narrow range of parameters I think has something to do with it.

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    16. Henry: my idea for a gameshow: take normal people off the street and read them some work from arrogant sounding mainstream, heterodox, and insane economics enthusiasts (professionals & amateurs)... and ask them to identify the crackpots. Trouble is, nobody wins... for 20 years, when the crackpots are finally committed and/or receive their Nobel prizes.

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    17. If nothin' else, I learned how to leave snazzy looking comments! e.g.
      $$(3)\:\alpha_{2} = \frac{1 - \alpha_{1}(1 - \theta) - \theta}{K_{H}\theta}$$
      (probably will look like crap here... the blogger needs to do this before we can arrogantly abuse them with perfectly typeset math)

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    18. Anonymous7:58 PM

      Gameshow? That sounds like reality.

      H.

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  5. "Would-be econ revolutionaries absolutely need to get on board with the new empiricism, or else risk being left behind."

    I agree with that.

    Also, the 1st part of Hanauer and Liu's 1st point sounds OK to me:

    "1) The replacement of reductionist models..."

    If left there, or completed differently, that could just be read as an acknowledgement of appropriate scale. It's not appropriate to attempt to understand a natural structure on our scale (i.e. within a few orders of magnitude of the size of a human) by reducing it to one of elementary particles like quarks. However, for Hanauer and Liu to then go on and in the very next phrase and mention "complex adaptive systems" seems to contradict that. Oh well.

    I think this ties in with a sense of optimism and pessimism regarding economics being science.

    From a scientific perspective, I think the following are deeply pessimistic attitudes:

    1. Math cannot be useful in economics.

    2. Economic data is not and cannot be informative enough to falsify models or theories.

    3. Economics is so complex that it cannot be modeled successfully, or it requires no less than hyper-complex multi-million agent models, each with thousands of parameters.

    Now, if science isn't your thing, you might have the opposite view: those attitudes might be OPTIMISTIC from the perspective of a professional derp peddler.

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  6. I can't help but feel you hold new approaches to economics to a higher standard than standard approaches. If you started an economics undergraduate degree today with your current philosophical view on science and the progress of knowledge, what would you think?

    I could see you writing the same sorts of articles about the standard model -
    "Rationality, representative agents and partial equilibrium have made some inroads into economics, but really, unless they pass muster with out-of-sample prediction the new empirical world of econ they risk being left behind."

    I mean, any model with K (aggregate physical capital) in it can't actually inform empirical approaches because we know that it is impossible to determine a single measure of K in any unit of measurement. Yet, on we go pretending that we can, telling policy-makers about productivity, indoctrinating the next generation, and pretending this issue has never crossed our minds.

    As a final point, there are plenty of people researching cultural and economic traits of firms, individual etc. I mean, any time series aggregate is essentially a measure of the frequency of a trait in a population over time.

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    1. "any model with K ... can't actually inform empirical approache" ... here's one (two equations & five parameters total).

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    2. I can't help but feel you hold new approaches to economics to a higher standard than standard approaches.

      Well...probably not, no. If anything, the opposite, because cool new stuff is cool and new.

      "Rationality, representative agents and partial equilibrium have made some inroads into economics, but really, unless they pass muster with out-of-sample prediction the new empirical world of econ they risk being left behind."

      Well, the fact is, those things all do risk falling behind. All theories are in danger from the new empirical revolution.

      I mean, any model with K (aggregate physical capital) in it can't actually inform empirical approaches because we know that it is impossible to determine a single measure of K in any unit of measurement. Yet, on we go pretending that we can, telling policy-makers about productivity, indoctrinating the next generation, and pretending this issue has never crossed our minds.

      This paragraph shows just how much people are used to thinking about econ in terms of theory rather than evidence. What you're talking about is a theoretical argument against a modeling convention, not an empirical argument against a model.

      If models that use K can predict the dynamics of K (and/or other stuff), then who cares about that theoretical argument?? It's a model. It predicts something.

      Sigh.

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    3. How did you measure the dynamics of K that you are now successfully predicting without a theory of what K is?

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    4. You measure the number of dollars spent on capital goods and divide by a price index of capital goods to adjust for changes in the prices of said goods. Voila!

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    5. Without a theory of K, which good are capital and how do you create a quantity index?

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    6. Doesn't matter. Again you're going back to *theoretical* criticisms. But empirically, if the thing you decide is K can be described by models, and if it helps you make models that predict other stuff you care about, that's all that matters. Who cares whether your "theory of K" is good or bad in someone's opinion? It works. That's all that really matters.

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    7. There are implicit theories in all empirical work, and even more so when you translate "this seems to predict something I measured" into anything of use to anybody (except others who want to predict what you measured).

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    8. Anonymous9:18 AM

      "If models that use K can predict the dynamics of K (and/or other stuff), then who cares about that theoretical argument?? It's a model. It predicts something."

      But then you have to admit (and I think that this is a good thing) that you are not predicting the dynamics of capital but rather the dynamics of a specific measure, which is a more or less imperfect proxy for capital.

      My point is that as serious scientists, economists should avoid using general terms for their predictions of specific measures. E.g. capital and labour inputs are actually gross operating surplus and compensation of employees; these are social not technological categories. It is often misleading to talk in such general terms.

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    9. Pablo1:34 PM

      'It works. That's all that really matters.'

      I'd would go even further and say if it works and works best, it is a good theory.

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  7. Anonymous7:01 PM

    " Would-be econ revolutionaries absolutely need to get on board with the new empiricism, or else risk being left behind."

    Empiricism may be on the rise, however, an hypothesis or theory is still needed for data to be tested against.

    Leamer may want the "con" removed from "econometrics", unfortunately it still leaves the "tric" behind.


    Henry

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    1. "Empiricism may be on the rise, however, an hypothesis or theory is still needed for data to be tested against." Agree. If left unstated, then no doubt there's a implicit theory sneaking in anyway. Why not just be explicit about it?

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  8. So, neoclassicism is dead?

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    1. No, it is just one tool in the toolbox.

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  9. I'll foolishly stick my neck into the hand-wavey just-soification of evolution interjecting itself into economics, on the strength of my former career in corporate IT and having read way too many books by Dan Dennett and Richard Dawkins.

    The big problem with you hand-wavey dismissal of evolutionary applicability to econ is "Evolution needs heredity". This doesn't really reflect the way Dawkins and his school thinks about evolution. The one they prefer is something more like "entities capable of imperfect self reproduction constrained in their growth by limited resources". So strict genetic heredity with limited mutation as is seen in eukaryotes and multicellulars with germ cell lines is one variety of evolution, but the biology of viral evolution in which reproduction and mutation happen several orders of magnitude faster is sufficiently different that the terms "heredity" and "species" are sufficiently different as to strain meaning. With bacterial evolution, where horizontal gene transfer between discrete "species" is the rule instead of the norm, the concepts are even more strained.

    Dawkins positing of memes behaving like viruses as the foundational point of cultural evolution is probably flawed in as much as ideas reproduce and proliferate like bacteria instead of viruses, with idea "genes" jumping between wholley different and intuitively incompatible hereditary lineages in the connections a given human mind puts on them. Say, for example, a maverick economics blogger mashing up the sententious, utopian ponderings of Eliezer Yudkowsky with the image of the King of Town from "Homestar Runner" or utilizing the lyrics of "Particle Man" as a metaphorical backbone to a story about American Libertarianism's contempt for the rights of individuals other than themselves.

    Once you've acknowledged that ideas work that way, and you know the distinction between the approaches in programming between genetic algorithms and "centrally planned" software solutions, and you become familiar with the very big problems in scaling up the latter to ever more complex systems, I think understanding markets as large scale "genetic" algorithms for organizing efficient organizations of economic production becomes sufficiently compelling to not be just a metaphor.

    It works at the level of individual manager. She's always on the lookout for ideas about organizing, motivating or otherwise improving the productivity. Since this pattern seeking is intelligent and not rational, you get about as much witch doctoring as medicine. One of my former employers, DaVita, had a CEO laboring under the delusion that the company was saved by his dressing as one of Dumas' Three Musketeers.

    http://www.cbsnews.com/news/meet-the-ceo-who-makes-his-staff-sing-the-company-song/

    I rather suspect that the company's emergence from near bankruptcy around 1999-2001 had more to do with the long term drop in real interest rates making the debt load it had more sustainable. My suspicion is that Jack Welch's success in turning the cash rich GE into a financial company in the early 1980s had to do with the opposite trend at that time.

    In this understanding of markets, the importance of biodiversity and exogamy in robust ecologies and populations becomes a fairly exact analogues for the importance of competition in markets and a constant inflow of new ideas in firms.

    So how does one go about empiricizing that? To quote the late lamented Terry Pratchett: "sodomy non sapiens" (buggered if I know).

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    1. A lot of my thinking along these lines has been aimed at popularizing Brookings Institute style macro through entertaining sketch comedy in the Monty Python tradition. (Another form of intellectual miscegenation that would lead at best to sterile mules in a universe where intellectual heredity followed a strict genealogy.)

      And the problem with that is that although biological evolution may be a fertile source for your own understanding of micro and macro econ, if you plan on selling it in Tulsa, you then have to go to the immense trouble of weeding out ALL reference to biological evolution.

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    2. "Not so fast" seems like an understatement. The evolutionary stuff makes no sense. It's like the AI guys talking about singularity. The H&L list is shall we say, ambitious? There are ideas worth discussing here, but remodeling economics along the lines of even one of them would be an enormous undertaking. Meanwhile, as you you say, economists' current willingness to do a bit of measurement-without-theory seems to be paying dividends.

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    3. Is this comment actually in response to mine?

      I didn't say anything about "measurement-without-theory". And I assume the "H&L" list referred to is the numbered list in Noah's post attributed to Hanauer & Liu above?

      I don't mind being told I'm making intuitive leaps beyond reasonable bounds, but I generally prefer the criticism to actually be in response to my argument. :)

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    4. Huhuhu10:17 PM

      It's not an important tangent, but it's difficult to see how interest rates, real or otherwise, were important to Davita's turnaround from '99 to '01. The notable decline in real interest rates occurred in the subsequent boom period; nominal rates are more indicative of financial stability in a corporate level analysis; Davita's revenues and operating income significantly grew in that period. Even with the same debt load, and using 1999's nominal spread on 2006's CPI growth, Davita would have delevered due to very strong operating results. This is a textbook case of an actual turnaround, and not a real rates thing.

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    5. It was an intuition on relative timing rather than something based on looking at the actual numbers, and you're right it wasn't important.

      I'm reasonably sure that the costumes and singing were NOT the cause of the turnaround, and it was supposed to be an example of a management strategy that's clearly voodoo based.

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    6. Sorry, John. I was making a general comment and got in the wrong tree.

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  10. Hmmm, I guess I should reply to this given that my name has been brought up in regard to coediting the special issue of JEBO on evolutionary economics cited above (and I am sorry about the walls, but that is Elsevier; the journal I edit now, The Review of Behavioral Economics, is not published by them). I shall just note a few things.

    First I might concede that Noah makes a valid point that it will be hard to justify the evolutionary approach by empirical methods, although I do not say impossible. Indeed, part of the problem is pinning down what is the meme or object of evolution. In biology this is usually viewed as being the gene, but its equivalent in economics is not obvious. Many people think about natural selection as occurring in the competition between firms, a view that Armen Alchian argued for in 1950, but that is sort of like arguing in biology that it is about the competition between individual organisms. Most evolutionary economists either follow Schumpeter and say it is about technology, and this can be empirically studied, the diffusion of new technologies and all that, while others focus more on such things as behavioral practices (yes, evolutionary economics is consistent with behavioral, as Herbert Simon certainly argued), with people like Nelson and Winter prominently arguing this, although this view can be traced back to Veblen. Obviously this sort of thing is harder to estimate empirically than measuring the use of technology, although I will say that I do not think it is impossible.

    I would note beyond what Wilson and Gowdy argue that in fact the link between evolutionary theory and economics runs very deep and is a two-way street. In spite of the dissing of Adam Smith, he made evolutionary arguments and influenced Darwin. Another who crucially influenced Darwin was Malthus, from whom Darwin directly got the idea of natural selection (I could cite some of my own work on this, but will not do so tendentiously and suggest people read Geoff Hodgson on this stuff instead). Darwin then strongly influenced several important economists before Veblen put out his call for economics to become an "evolutionary science," with both Karl Marx and Alfred Marshall being among them, with Marshall famously arguing that "biology is the Mecca of economics," and specifically quoted Darwin on several points, even if he arguably followed physics models more than biology in developing his version of neoclassical theory. (Ironically, even though Schumpeter is generally viewed as being an evolutionary economist, he himself rejected biological approaches.)

    One problem is that there are many strands of evolutionary economics, most of them around for some time, obviously. So it is not clear which if any might be the key part of the paradigm that replaces standard modern economics. I note that among others there are old institutionalist strands coming from Veblen, there is the whole neo-Shumpeterian path, which includes the Nelson and Winter group (even if they focus on behaviors rather than technologies), there is evolutionary game theory, which like Darwinian natural selection itself involved a going back and forth between economists like Selten and biologists like Maynard-Smith. Then there are the modern complexity evolutionists like Kaufmann at the Santa Fe Institute, who upset many conventional biological evolutionary theorists. Coming out of that are such things as agent-based models that depend on genetic algorithsm (evolutionary biology for sure), which have been jockeying recently for attention, if not sweeping the board.

    I would close this by noting that the rather eclectic list of Hanauer and Li includes items that fit into this, an evolutionary economics that is consistent with complexity and behavioralism, which I think is where we are heading, even if it is matter of infiltration of the existing paradigm rather than a total paradigm shift.

    ReplyDelete
    Replies
    1. I meant to add signature to this last post, for anybody who does not know that it was by

      Barkley Rosser

      Delete
    2. Many people think about natural selection as occurring in the competition between firms

      If so, it's an interesting, new kind of evolution. Potentially immortal organisms that can change in response to stimuli, rather than heredity between finitely lived organisms. That's cool.

      Here is some evolutionary econ research I found interesting: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.8.6243&rep=rep1&type=pdf

      Delete
    3. Noah,

      Was not able to download that link. Who wrote the paper and what is its title, please?

      Delete
    4. Anonymous3:13 AM

      " Karl Marx and Alfred Marshall being among them, with Marshall famously arguing that "biology is the Mecca of economics," and specifically quoted Darwin on several points"

      One wonders whether this influence was just faddy, evolution being the latest scientific development to grab the imagination of the day?

      Henry

      Delete
    5. Try this one: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1495497

      "On the Evolution of Overconfidence and Entrepreneurs", by Antonio Bernardo and Ivo Welch

      Delete
    6. Noah,

      Thanks. Will check out.

      Henry,

      Maybe, but in the case of Marx, he jumped on the bandwagon almost the minute it went out the door with publication of Origin of the Species before it had become well known. As a completely distinctive uber heterodox, his view was serious, and he in fact took a mixed view, praising Darwin's view of biological evolution and natural selection (partly because it overturned the religious orthodoxy of the day), while rejecting it for human societies, arguing that a planned socialist society would move beyond natural selection.

      The argument might be made more seriously for Marshall, although by the time he published the first edition of his Principles of Economics in 1890, Darwin was no longer all that in fashion, with Herbert Spencer and Lamarckism more fashionable and prominent. It would take advances in genetics and probability theory over the next several decades to really put Darwin back on top, this not happening until the 1930s with the neo-Darwinian synthesis of Fisher, Haldane, and Wright. So, I do not think it applies to Marshall either.

      JBR

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    7. Anonymous8:32 PM

      "even if it is matter of infiltration of the existing paradigm rather than a total paradigm shift. "

      Barkly,

      I can begin to see how the sorts of models that are being proposed might apply to aggregate microeconomic behaviour (if that is not contradiction, some if not most would probably think it is). Personally, I think what is more of interest is how these models might explain aggregate macroeconomic behaviour. You mightn't agree there is a the difference, I don't know. (Personally, I don't think models like the New Classical say much about macroeconomics.) I wonder if you have any thoughts on the matter.

      Henry.

      Delete
    8. Henry,

      Basically the more aggregated one gets, the less the evolutionary approach is relevant.

      Delete
  11. "we don't have much evidence that inheritance of traits occurs in economies"

    We do for one aspect - the traits of the human agents.

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    Replies
    1. Good point. Also I suppose you could argue it from a "memes" perspective, but that would probably just lead to more trouble.

      Delete
  12. Anonymous6:40 AM

    A lot of what "empirical" means to economists is running through large numerical data sets through computers. OK, that is part of what it is. But it is also qualitative. Like an historian or any other investigator you have to find documentation that says "X has done or is doing this because of Y". And you need a lot of documentation from the contradictory mess of reality to make the case. And you do not make up stories for things that are too complex or for which satisfactory evidence has not been found to get a mathematical model. Rather you point out where the the things are for which we do not yet have a satisfactory answer and say, " but we DO know this...."

    Models have a role for forecasting. And ultimately they should be judged on how well they forecast. But they should not be used to explain society. Mathematical models can't possibly be expected to do that.

    Economics has a long way to go before it can be considered an empirical social science.

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    1. Anonymous12:23 PM

      >Rather you point out where the the things are for which we do not yet have a satisfactory answer and say, " but we DO know this...."

      Well, this goes on.

      >Models have a role for forecasting. And ultimately they should be judged on how well they forecast. But they should not be used to explain society. Mathematical models can't possibly be expected to do that.

      Why not? Do you think you're such a special unique snowflake that you can't be boiled down to a regression? Well, you're right. It takes a mixed logit.

      I have never understood the multitudinous existence of these sorts of internet commenters who seem to both have strong opinions about how economics should be done and painfully weak knowledge about how it *is* done.

      Delete
    2. I don't see how anon #1s comment reveals any sort of 'weak knowledge' about economics. It is true that the vast majority of empirical research in economics is done by running regressions on datasets from the comfort of an office computer. I read their comment as arguing that, while useful, this cannot substitute for an in-depth, qualitative understanding of the reality the datasets are supposed to approximate. I agree - economic practice would benefit from more of a systemic appreciation and assimilation of this type of evidence.

      Delete
  13. Shifting the means of production from economies/cultures with a history of technology and economic growth to economies/cultures that don't and measuring the difference in outcome would be an example of evolutionary economics.

    ReplyDelete
  14. Anonymous8:34 AM

    Noah,

    "2) The use of network models"

    I wonder for a long time why Econ make so few use of Graph Theory. Safe for a paper by Acemoglu, I could not find so much Econ paper using graphs. Even the link you provided altough disserting about network seem to ignore them.

    Such an under utilisation come from a too much Physic related way use in Econ Maths or is there any others reasons ?

    Ludovic Coval.

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    1. You might be interested in the work of UK economist Paul Ormerod who has made quite frequent use of network models:
      http://www.paulormerod.com/

      Delete
  15. I think the most important idea that is missing in all of these kinds of discussions about economics is a definition of the goal. This is why microeconomics has such a better reputation than macroeconomics, because the goal of microeconomics tends to be implied, universally understood, and generally agreed upon, whereas the goals of macroeconomics are not implied, not universally understood, and not generally agreed upon.

    Anyone suggesting that evolution is important seems to have some implied goals in mind: 1) optimization of something or other and 2) how optimization algorithms change over time.

    Optimization of what? This is the obvious question. GDP? Efficiency? Equality? Inequality? Dominance? Cooperation? Optimization of what, I ask again!

    In our world today, the goals seem intimately linked to politics. Rich people want to be richer, but they don't want to cause revolution that would undermine their position. People who are reasonably paid for their passions feel things are great and operate out of of fear of change. The status quo might be the goal here. Poor people want to alleviate their stressors in life, like finding food, clothes and shelter. Their goals are of progress, but defining that progress is hard and their motivations easily hijacked in the name of GDP gains.

    What is the goal? I depends upon who you ask, obviously. In macro, I'd suggest that predictability is the best goal, because if the result is predictable, honest politicians can use the model to best weigh the differing goals and come to the optimum policy prescriptions.

    Predictability in macro is severely lacking. I consider this the antithesis of evolutionary theory, which will never be predictable in my opinion. Despite our best efforts, evolution controls our very thoughts that contemplate the idea. Good luck beating that truth...

    I consider the best goal of macro to provide predictable results while providing policy prescriptions that if understood by everyone would be agreed to be fair and desirable.

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    1. Evolution does imply some near term optimization simply due to natural selection, that which does best (firms that make more profits) in the near term will survive. But it is a mistake to declare that there must be "goals." There are people who have posed teleological views on evolution, that it moves to higher levels of complexity or consciousness or even an Omega Point, to take the extreme example of Catholic theologian and anthropologist, Pierre Teilhard de Chardin. But most evolutionary theorists, including Darwin and even including such evolutionary economists as Veblen, impose nor posit any long run goals or direction. Evolution simply goes wherever it goes as it involves a co-evolution between the species and their environments.

      JBR

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    2. Agreed that evolution needs no goal. But I don't see an analogy to economics in general. This sounds like a confusion of capitalism with economics. The goal of capitalism is profits, and profits sometimes equate to survival, but do profits serve the motives of the actors? Not necessarily. I don't think evolution needs a goal, but I do believe that the pursuit of economic study needs a goal other than arbitrary outcomes.

      Humans have essentially conquered the environment in our current context. We have enough food, clothing and shelter that it isn't necessary for anyone to go with out these essentials. Nobody on the planet needs to go without these.

      Instead, we've turned to social darwinism as an argument for hierarchy and dominance.

      The unending goal of evolution is survival. Is that the same goal of economics? Has it shifted from the survival of the individual to the survival of the species? And if so, do you feel comfortable sacrificing the survival of individuals for the survival of the species?

      No matter the viewpoint, humans have a goal. Natural processes don't need a goal, but humans all have goals. So the goal is necessary if there is a reason to study economics.

      Delete
  16. I'm a late comer to the the problems we have. I defer to people like Mark Wojahn: http://www.markwojahn.com that are more in touch with this than I. It is shocking how similar our views are. Identical.

    I'm not worthy of Mark's dedication to the welfare of others. But can I bring some attention to it? Perhaps. He's just as good as he seems. I've known him since high school, and he's the real thing.

    ReplyDelete
  17. Noah, you have a response from John Handley.

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  18. Anonymous3:37 AM

    "ten million cool theories, " This is not a good thing. In critiques of Rodick - who says everything in economics post Financial crisis is well and good - people have called this "the smorgasbord of models" problem.

    ReplyDelete
  19. Vain hopes in the ruins of economics
    Comment on Noah Smith on ‘New paradigms in economic theory? Not so fast.’

    Economics is a failed science and the ultimate cause is the proven multi-generation scientific incompetence of economists. Since Adam Smith economists have not grasped what science is all about — despite the fact that it is unambiguously defined: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

    It is always BOTH, logical AND empirical consistency and NOT either/or. This is the critical hazard: instead of keeping the balance on the high methodological tightrope the incompetent researcher tumbles down either on the side of vacuous deductivism or on the side of blind empiricism. What the history of economic thought clearly shows is a pointless flip-flop between fact-free model bricolage and theory-free application of statistical tools or, worse, commonsensical stylized-facts storytelling.

    So it comes as no surprise that, after the proven failure of maximization-and-equilibrium economics it is again the turn of ‘empirical revolution’ (See intro). Needless to emphasize that this is just another instant of scientific incompetence because methodologically the theoretical revolution must precede any empirical revolution: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)

    Walrasianism, Keynesianism, Marxianism, and Austrianism is logically inconsistent or empirically inconsistent or both (2015).

    Always when economics is in open crisis four reactions are to be observed: (i) self-delusional denial, (ii) back pedaling and relativization, e.g. ‘economics is not a Science with a capital S’ (Solow), (iii) admission of the most noticeable flaws with the reassurance that our best brains are already working on them, (iv) clueless actionism and innovation showbiz.

    The two main pseudo-innovations consist of borrowing from either evolution theory or from the latest vintages of physics (complexity, networks, chaos, non-linearity, thermodynamics, disequilibrium, information, emergence, etc.). The actual confused state of these misdirected approaches may be gleaned from The Journal of Evolutionary Economics and from the EconoPhysics blog.

    Mindless copying/borrowing is the characteristic of what Feynman famously characterized as cargo cult science. Neither evolution theory nor EconoPhysics is the way forward. Economics has to redefine itself in a genuine paradigm shift. In very general terms, the methodological revolution consists in the switch from behavior-centered bottom-up, i.e. subjective microfoundation, to structure-centered top-down, i.e. objective macrofoundation (2014).

    First of all, the orthodox set of axioms (Weintraub, 1985, p. 109) has to be fully replaced.* Nothing short of a theoretical revolution, a.k.a. paradigm shift, will do. Needless to stress that the superior paradigm has to be logically AND empirically consistent. After more than 200 years of failure and Noah Smith’s latest methodological wind egg economics needs the true theory — fast.

    Egmont Kakarot-Handtke

    References see
    http://axecorg.blogspot.de/2016/03/vain-hopes-in-ruins-of-economics.html

    ReplyDelete
    Replies
    1. What empirical evidence will indicate that your theory is wrong? Please be specific.

      Delete
    2. Tom Brown

      Specifically, I propose to test the structural-axiomatic employment equation/Phillips curve (33) of the working paper ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster’

      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421

      because of its overriding importance for improving the actual employment situation.

      Egmont Kakarot-Handtke

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    3. Egmont, have you shared your views with Scott Sumner at www.themoneyillusion.com? Scott welcomes all in his comments section and would probably enjoy delving into your ideas. The sole exception (after 7 years of blogging) being a gentleman (or gentlewoman... hard to tell which) commentator referring to themselves as "Shmebulock, Crusher of Pussy."

      Delete
  20. Some observations:

    1. Quantitative validation rather than quantitative prediction would be a hallmark of success. It may turn out that certain variables are inherently impossible to predict, for example because they behave chaotically. ‘Prediction’ could give the impression to policy-makers and central bankers that economic variables can be accurately forecast from period to period – let’s face it, what they really want – rather than shown to follow a particular statistical distribution or pattern of behaviour. The latter is a much tougher sell in policy circles.

    2. 10-12 in Hanauer and Liu’s list sound normative, therefore not scientific.

    3. Economics would benefit from a more meaningful concept of equilibrium, more akin to the concept of dynamic equilibrium in the natural sciences and dynamical systems theory. Its use in meaning “the solution to a set of equations”, often a set of solutions with no concept of time, is portentous and obfuscating to people from other disciplines. Why not just call that a solution?

    4. I’d say a “complex adaptive system” is a system of inter-related parts which is capable of change over time both through internal interaction of those parts and changes in exogenous factors. These changes may be inherently unpredictable due to the configuration or dynamics of the system. They may also affect different parts of the system at different times.

    5. Perhaps a more important distinction between "mechanistic" vs “behavioral" is that between "unfounded but nicely mathematically tractable behavioural assumptions" vs observed ones.

    6. I totally agree about the need for empiricism in economics, which really should be a given. However, it would concern me if empirical macro relationships would still be seen as needing to be derived from microeconomic foundations based on unrealistic assumptions. An empirical finding should be seen as valid even if we don’t ever fully understand its underlying causation in terms of a straightforward mathematical model.

    7. “good data is a lot harder to gather in econ, and that technology has made this a lot easier in recent decades”. Absolutely, economics need to harness the data revolution. In the UK GDP is still calculated through company surveys – not even using electronic tax records – which I find incredible. If anyone's interested, this is coming on the policy radar. A recent government review of economic statistics in the UK has recommended that national statistics need to catch up with data science: https://www.gov.uk/government/publications/independent-review-of-uk-economic-statistics-final-report

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  21. Dr. Smith, here's some data to help you pick a theory: If your culture has deadly relationships with the sky and ocean, your cultural genome sucks.
    We absolutely need a physics / evolution based economic theory.
    Physicist David Deutsch: "And since inductivism is false, empiricism must be as well." "Empiricism never did achieve its aim of liberating science from authority." David Deutsch "Beginning of Infinity"

    “The story of human intelligence starts with a universe that is capable of encoding information.” Ray Kurzweil – "How to Create a Mind"
    Here's a working hypothesis re code in a physics / evolution context, including monetary code, then add exponential complexity:
    http://postgenetic.com/Postgenetic/Culture,_Complexity_%26_Code.html

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  22. Well, now that David has provided his own reply I think I shall add just a bit more. I guess I find Noah's view that the choice is either philosophy or some sort of crude predictive empiricism to be a false one, or at least a very limiting one. Really, can't we do better methodologically than Milton Friedman circa 1953? And that is from someone who fully welcomes and supports the greater emphasis on all sorts of empirical testing that has been going on now in economics for a good three decades or so.

    Let me note that even in biology, evolutionary law (a better term than "theory," which has opened the door to too many creationist wackos) does not provide neat predictions in the sense of forecasting. However, there have been many chances of refuting it, and none have happened. It is a fact or a law that organizes and integrates biology as a whole, thus possibly falling into that useless category of "philosophy" as Noah poses it.

    It may be similar in economics. I think the economy is an evolving complex system, to quote titles of some old SFI volumes, and that this is an overarching fact, and that there has been this deep interaction between economics and biology regarding evolution going back centuries is just part of this, and I think it is worth keeping this in mind, even if it is just useless philosophy. I have muddied the waters by noting the many strands of evolutionary economics, but I do like to think that the ABM complexity version of this offers a way forward and may be useful even empirically, even if it is still being kept at bay among most macroeconomists. I guess I shall let this stop here, other than to reinforce that I think the philosophy side of this is still important and useful, whatever comes out on the empirical side in the end.

    Barkley Rosser

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    1. I guess I find Noah's view that the choice is either philosophy or some sort of crude predictive empiricism to be a false one, or at least a very limiting one.

      This does not characterize my views at all, actually. Though it does seem to characterize the views of people who troll my comments section and Twitter feed!

      What I think really works is the combination of theory and empirics. Use empirics to give you clues as to which theories to make, and to test theories after you make them. The theories represent our understanding of the world, but empirics are there to make sure we're not just theorizing about a made-up world in our heads. That is my view, rather than what you said.

      As for evolution, it's possible the whole economy evolves like a single organism, I suppose, but that's going to be hard to test. The kinds of evolution I was talking about in my post - evolution of firms, or of strategies - seems much more promising in terms of testability, for obvious reasons.

      As for "complexity", I'd encourage you to read the blog post I linked to about the progress of complex-systems research in computer science.

      Delete
    2. Fair enough, Noah, although I would say that your post certainly looked a lot like you were making the sharp dichotomy I posed, even if I imagine what you have stated here is really what you think.

      On the link, I shall note that quite a few of us (will not cite my own work, but it has done it) have been making this distinction between complicated and complex for quite a long time. Although this post by this Ben is getting a lot of airplay, maybe because of the term "complexicated," which may be useful, it certainly has been known for quite awhile by most complexity theorists that that most systems are both complicated and complex.

      BTW, not everybody does or has agreed that these are to be distinguished, with two exceptions being the very late, but important, John von Neumann, and the still alive (and now a star in the movie "Bridege of Spies"), Fred Pryor.

      JBR

      Delete
    3. Fair enough, Noah, although I would say that your post certainly looked a lot like you were making the sharp dichotomy I posed

      You're certainly not the first to have said this, though I've taken great pains to try to disabuse people of this. "Theory vs. data" is a false dichotomy.

      Delete
    4. I think some of the confusion arises due to the use of Words, semantics.
      There is no meaningful distinction between "empiricism" and "philosophy". Rather its a Classic discussion in the philosophy of science as to what sort of methodology or epistemology should be employed in the pursuit of knowledge. The two main camps are traditionally rationalism and empiricism. Rationalism typically employing some sort of logical deductive method of enquiry, rooted in pure thinking and the creative use of the faculty of mind. Empiricism has traditionally been contrasted, where sense experience is seen as the main source of knowledge. But today this is really regarded as a false dichotomy, since Kant demonstrated back in late 18th Century that we employ a combination of the two. Something that has been aptly confirmed by recent research in cognitive science.
      Economics as a science has just for some time strayed of into the realm of theory building, employing the axiomatic deductive method typical in mathematics. But a change is already taking place and has been so for some time. The complex problem is really detailing what weight should be given to the two faculties involved. Sloan Wilson is therefore constructing a strawman when he claims that economics is not an empirical science.

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  23. I would note that the idea of using evolutional approaches to economic theory are hardly new; the problem is that making progress in using concepts from evolution in analyzing economic systems is fairly difficult. Among economists who have explored evolutional approached, two stand out, Ken Boulding and Nicholas Georgescu-Roegen (whose name I have probably misspelled), whose work dates to the late 1960s/early 1970s.

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    1. Don,

      I did not mention this strand, which I would label as being an ecological economics strand. This is what would probably be relevant to Noah's suggestion that the economy as a whole is an evolving organism. Given that most views of evolution involve natural selection amongst competing entities (of some sort) would rule out a single organism "evolving," the only way to make this sensible is to view the economy "as a whole" being the entire world economy in some sense co-evolving with the global environment.

      JBR

      Delete
    2. You are, of course, right. I was working from memory rather than checking...I will say, though (having checked Boulding's essay on economics as an evolutionary science), that Boulding did seem to mean it as an evolutionary process. I think he meant, and intended to mean, that evolution could work at the societal level.

      Delete
  24. How to get out of the morass of ignorance

    The natural cognitive state vis-à-vis reality — and by implication vis-à-vis the economy — is this: “We are lost in a swamp, the morass of our ignorance. ... We have to find the roots and get ourselves out! ... Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits an pieces together in an orderly fashion.” (Schmiechen, 2009, p. 11)

    How to get out of the swamp is known since more than 2000 years as the scientific method: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)

    Orthodoxy has followed this method and laid down its hard-core propositions: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.(Weintraub, 1985, p. 147)

    Orthodoxy is a failed approach because this axiom set contains nonentities, i.e. HC2, HC4, HC5 cannot by any stretch of the imagination taken to be true. Clearly, when the premises are not ‘certain, true, and primary’ the whole theoretical superstructure falls apart. Exactly this happened with maximization-and-equilibrium economics.

    In this situation an ‘empirical revolution’ is pointless. Propositions that contain nonentities like utility, equilibrium, or Easter Bunny are not testable to begin with.

    What instead has to be done is to replace the orthodox set of foundational propositions with a new set. J. S. Mill identified the very first question of methodology: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”

    The current state of economics is that Heterodoxy, too, has failed at the opus magnum. It is not sufficient to throw in any number of unrelated concepts like evolution, complexity, networks, nonlinearity, incomplete optimization, incomplete forward-looking-ness, externalities, behavioral heuristics, social preferences, cooperative games. This only proves the utter confusion about the subject matter.

    Economics is about the properties of the monetary economy. Because of this, economic analysis has to start with the objective system component of reality. The necessary paradigm shift requires the replacement of the false orthodox axiom set by an entirely new one.

    The most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm and is given by these three objective structural axioms: A1. Yw=WL wage income Yw is equal to wage rate W times working hours L, A2. O=RL output O is equal to productivity R times working hours L, A3. C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

    These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The paradigm shift consists of the move from HC1/HC6 to A1/A3. Everything else is frog quacking in the morass of ignorance.

    Egmont Kakarot-Handtke


    References
    Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition.
    Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149.

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    Replies
    1. Egmont,

      What a joke. Your supposed axioms are nothing more than accounting identities, things that are true by definition. They lead nowhere at all other than to help in a "measurement without theory" sort of empirical investigation, which you claim is "pointless." But your axioms are good for nothing more, and not even all that useful for even that. Sorry, this is as a joke, and pretty pathetic one, especially coming from somebody as totally pompous as you seem to be.

      Barkley Rosser

      Delete
    2. Barkley Rosser

      (i) As you should know from econ101, accounting identities consist exclusively of nominal magnitudes. The three structural axioms consists of nominal AND real variables. Therefore, they are NO accounting identities, stupid.

      (ii) The three structural axioms constitute the formal backbone of economics. Models that do not consistently fit into this elementary mathematical framework, e.g. real models or Keynesian models, are out of economics for good.

      (iii) The three structural axioms define the elementary consumption economy which every economist should thoroughly understand.* Because, who does not understand the most elementary case has no chance at all to understand anything.

      (iv) Your problem is that you are not even aware that you never understood what profit is. For your overdue enlightenment see the Palgrave Dictionary: “A satisfactory theory of profits is still elusive.” (Desai). What do you call an economist who cannot tell what profit is? Clearly, incompetent would be an euphemism.

      (v) From a deeper analysis of the consumption economy follows the most elementary version of the Profit Law.** Every economist — even you — has now a chance to understand the basics of economics.

      (vi) From the differentiated structural axiom set follows the employment equation, see eq. (33) of the working paper ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster’ http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421. Either you empirically refute this equation or simply get out of the way. To recall, science is about formal and material proof. Blather does not count for much.

      Egmont Kakarot-Handtke

      * See ‘Toward the true economic axioms’ http://axecorg.blogspot.de/2016/03/toward-true-economic-axioms.html

      ** See ‘How the intelligent non-economist can refute every economist hands down’ http://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html

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    3. Oh gosh, Egmont, I take it all back. I now understand the true nature of profit thanks to you informing me that the wage bill equals the number of hours worked times labor productivity! I had never known that the wage bill equaled labor hours worked times labor productivity. All these years I thought that the wage bill was one half of the hours worked times labor productivity. Now that I realize the truth, mine eyes have been opened and now I see the glory of the Lord, not to mention what profits REALLY are. Wow! Danke schoen!

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    4. Barkley Rosser

      You say: “Your supposed axioms are ... true by definition.” Yes, this is exactly what I assert. So we have common ground. Not only this, we are in perfect accordance with what Aristotle defined as scientific method: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”

      Having established a rock solid starting point we now can advance: “The object of reasoning is to find out, from the consideration of what we already know, something else which we do not know.” (Peirce)

      From the axioms we have agreed upon to be true follows that Walrasianism and Keynesianism is provably false.

      This, in a nutshell, is the straightforward application of the axiomatic-deductive method to economics. The method is known since more than 2000 years and you can look it up in Wikipedia: “Euclid’s method consists in assuming a small set of intuitively appealing axioms, and deducing many other propositions (theorems) from these.”

      One very important theorem is the Profit Law which says in its most elementary form (i) Qm=-Sm (Qm monetary profit, Sm monetary saving). This is the beauty of the scientific method to ‘find out, from the consideration of what we already know, something else which we do not know.’ What theorem (i) tells you is that all I=S models are false and by implication that both Walrasianism and Keynesianism are as dead as a doornail. I am pretty sure that you did not know this until now.

      You say about the axioms A1 to A3 “They lead to nowhere at all other than to help in a ‘measurement without theory’ sort of empirical investigation, which you claim is ‘pointless.’ But your axioms are good for nothing more, and not even all that useful for even that.”

      It cannot be said that my axioms ‘lead to nowhere.’ At minimum they have led to the incontrovertible conclusion that you have been hanging around for too long in the scientific Neanderthal.

      Egmont Kakarot-Handtke

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    5. Egmont, your concept of science sounds more like mathematics: start with axioms and deduce conclusions from those. Mathematics doesn't necessarily have anything to do with reality. Science makes use of mathematics, but does something entirely different: proposes hypotheses and then tests those against nature (i.e. reality) to see if they're false and/or useless. If the hypothesis pass these empirical tests, then we are justified in incrementally increasing our confidence in them... and the testing never stops, until the hypothesis fail our tests, or until a better, simpler, more explanatory hypothesis comes along which is equally successful empirically.

      Science produces a series of improving approximations to reality. At any one time in this process, each most accepted approximation has a region of validity it can be used over: thus Newtonian mechanics are a justifiable simpler approximation over certain "everyday" conditions, while general relativity must be used outside of those conditions (at the cost of a bit of extra complexity). Meanwhile Aristotelian physics has been completely invalidated. There's no region of validity left for it: other approximations do a better job in all circumstances.

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    6. Egmont,

      It remains a fact that your "axioms" are just accounting identities. Here is another fact: in the National Income and Product Accounts I = S is an accounting identity. They are equal by definition. You can disagree with their definitions and say that you have the REAL definition, which has savings equal to profits. But what the official accountants of the GDP define investment to equal savings. If you want to play with your own definitions, claimed to be a "theorem," fine, but nobody will pay any attention to you. Nobody.

      Barkley Rosser

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  25. Anonymous8:22 PM

    "I think Wilson would enjoy learning about these successes, in addition to the well-publicized failures."

    Maybe, but you know he won't!

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  26. Tom Brown

    You say: “Your concept of science sounds more like mathematics.” This is perhaps because you have a wrong idea of what science is all about. Science was already well established when Adam Smith declared that economics, too, is a science. Economics defends this claim until this day but has never delivered anything fitting the description of science.

    So, it is not “my” concept or “your” concept. Science is well-defined and economists either stick to the rules or they will be thrown out of science. According to the criteria of formal and material consistency (Klant, 1994, p. 31), economics is indisputably a failed science. In methodological terms this means that the old paradigm is dead and a new paradigm is urgently needed. Because a paradigm is defined by its foundational propositions, a.k.a axioms, a paradigm shift means practically to fully replace the old axiom set, i.e. HC1 to HC6 above, by a new one. This has nothing to do with mathematics as such. Newton put his PHYSICAL axioms on the first pages of the Principia.* In methodological analogy ECONOMIC axioms have to be laid down by economists. This defines the subject matter.

    The actual situation is this: Orthodoxy clings to a thoroughly refuted axiom set and Heterodoxy so far has failed to formulate a new one. As Keynes famously put it: “Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)

    As a matter of fact, Keynes’s paradigm shift (= overthrow of axioms) failed. This means in the strict sense that economics has no scientifically valid axiomatic foundations at all. Walrasian and Keynesian economics is what Feynman famously called cargo cult science. In other words, economics is de facto OUT of science.

    Economists violate well-defined scientific standards on a daily basis. To recall: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

    In the proto-science of economics it is indeed possible to teach falsified theories like supply-demand-equilibrium generation after generation ‘as if nothing had happened’.

    Therefore, in economics the task is NOT to replace true ‘Newtonian’ axioms with true but more general ‘Einsteinian’ axioms but to replace the neoclassical axioms which are KNOWN to be FALSE.

    There is not “my” or “your” concept of science or different concepts in mathematics, physics, the so-called social sciences, or economics. There is only ONE way to build up a valid theory: “The basic concepts and laws which are not logically further reducible constitute the indispensable and not rationally deducible part of the theory. It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” (Einstein, 1934, p. 165)

    The methodological term for ‘basic concepts and laws which are not logically further reducible’ is axioms. As long as economic theory is not based on a consistent set of axioms it is out of science. This is the case since Adam Smith. There is no use to wish-wash around this embarrassing fact.

    Egmont Kakarot-Handtke

    References
    Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL http://www.jstor.org/stable/184387
    Keynes, J. M. (1973). The General Theory of Employment Interest and Money.London, Basingstoke: Macmillan.
    Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
    Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL http://www.jstor.org/stable/1824735.

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    Replies
    1. Having a consistent set of axioms is not a guarantee that you're doing science (try finding a use for the field of "nondefinable numbers").

      But lets get straight to it: can you use the models you derive from your theory to forecast the inflation rate (core CPI or core PCE), price level, exchange rates, monetary base, interest rates, or NGDP for a couple of dozen large population countries around the world, maybe two years out? If, not, what can we do with it? How does it stack up against the NY Fed DSGE? Please share with us. Maybe some charts like this and a place to download your source code so we can all give it a go.

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    2. Tom Brown

      (i) You say: “Having a consistent set of axioms is not a guarantee that you’re doing science.” Yes, indeed, because science requires formal AND material consistency. THIS is the guarantee: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

      The fact of the matter is that orthodox economics lacks BOTH formal AND material consistency. This in turn is the guarantee that economics is NOT a science. In order to refute a theory it SUFFICES to prove EITHER logical or material inconsistency.

      Walrasian and Keynesian economics is logically defective and the proof has been carried out by using the axiomatic-deductive method. No scientist will ever accept Walrasian or Keynesian economics.

      (ii) Walrasian and Keynesian economics is refuted. Economists either do not know it, do not understand it, or ignore it. Either way, they are violating the well-defined standards of science. This is inexcusable.

      (iii) It is a silly game to challenge a scientist by asking him to predict the future. He will simply tell you “The future is unpredictable.” (Feynman)* Predicting the future is the business of imbeciles.

      (iv) Because of this, economics from Jevons/Walras/Menger onward to DSGE is NOT dismissed because it has not predicted crises. Neoclassics is unacceptable because it is logically and empirically inconsistent.

      (v) From the structural axioms follows the elementary version of the Profit Law.** You, or a competent economist for that matter, are invited to test it against the DSGE profit law. This test, though, is an entirely separate issue and should not distract from the fact that neoclassical economics is axiomatically false since more than 140 years.

      (vi) That the FED uses DSGE does not speak for DSGE but against the FED.

      Egmont Kakarot-Handtke

      * For details see the posts ‘Scientists do not predict’
      http://axecorg.blogspot.de/2016/02/scientists-do-not-predict.html

      or ‘Prediction does not work? Try retrodiction first’
      http://axecorg.blogspot.de/2015/11/prediction-does-not-work-try.html

      ** See ‘The three fundamental economic laws’
      http://axecorg.blogspot.de/2016/03/the-three-fundamental-economic-laws.html

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    3. Addendum

      The complete formula for the simulation of the elementary structural axiomatic consumption economy is given here
      https://commons.wikimedia.org/wiki/File:AXEC25.png

      You are certainly in the position to produce the source code yourself.

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    4. “The future is unpredictable.”

      And yet predictions are made: about the climate, about gravity waves being detected, about where Jupiter will be a year from now, about the death of stars, about what kinds of fossils will be found in specific geological layers, about where Earthquakes are most likely to take place, about radioactive decay, about chemical reactions, etc, etc, etc. I'm not asking you to predict a lottery winner, I'm asking for what you say the trends will be for some very broad market indicators. Even a zeroth order model will do (up or down). Is your theory useful? I'd like to see the evidence that it is. Make them conditional if you like: tell me what things cannot happen and what's more likely to happen. Tell us the kinds of states we'll likely find the economy in, and those that are excluded by your theory (past, present and future).

      I'm not asking you for anything unusual: other people make exactly the kinds of forecasts I requested based on theory. Are you willing to put your theory up against theirs?

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    5. Egmont, I take it all back. You win. I'd love to see you talk some sense into this guy now.

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    6. Tom Brown

      We have two SEPARATE issues (i) orthodox economics is false and thoroughly refuted according to well-defined scientific criteria, and (ii), given that Orthodoxy is dead, what does the new paradigm look like?

      The problem with Noah Smith and you is that you have not yet realized (i). Because of this you are hopelessly locked in at the proto-scientific stage. With regard to Orthodoxy or so-called mainstream economics this is the situation: “... we may say that ... the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend)

      Therefore, for every economist there is but ONE worthwhile task: to contribute to the NEW paradigm. All the rest is pointless behind-the-curve blather.

      Instead of doing your scientific homework you argue with regard to (ii): “Even a zeroth order model will do (up or down). Is your theory useful? I’d like to see the evidence that it is. Make them conditional if you like: tell me what things cannot happen and what's more likely to happen. Tell us the kinds of states we’ll likely find the economy in, and those that are excluded by your theory (past, present and future).”

      Obviously you cannot read. With regard to the issues of scientific prediction and testable economic laws I have referred you above to the pertinent posts which are in turn backed up by working papers. You have not realized this either.

      Economics could make much faster progress toward science if failed mainstream economists could simply get out of the way — NOW.

      Egmont Kakarot-Handtke

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    7. ...preaching to the choir Egmont. It's "Major-Freedom" that desperately needs your insights. (link above)

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    8. Tom Brown

      Science is not about preaching but proof. You are provably false and are defending the indefensible.

      Thank you for the link to TheMoneyIllusion. See my comment there ‘The futility of testing economics blather’

      http://axecorg.blogspot.de/2016/03/the-futility-of-testing-economics.html

      Egmont Kakarot-Handtke

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  27. Anonymous6:08 PM

    "Evolution needs heredity, so evolutionary theorists who want to change the econ world should focus on demonstrating the existence of traits that are passed from company to company, or person to person, or industry to industry, within economies."

    That's actually not the key point of evolution. The key point is variation and selection. You don't need heredity, you simply need to define how variation and selection occur. This is simple in econ - once a company tries an idea, that idea will be tried out by various other companies in slightly different ways. New companies will form based on some amalgam of existing ideas and (possibly) novel ones (these are akin to random mutations). You don't need an explicit form of mating and heredity to generate evolutionary effects - just a way to create variations of existing entities, then a way to select among those variations which ones persist to influence the next crop of variations.

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  28. Anonymous1:53 PM

    Noah writes: The lesson appears clear: Bubbles exist. Investors aren’t just rational, patient, well-informed, emotionless calculators of risk and return.

    Didnt we already know that from Keynes ?
    pe

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