Frog’s (next) attack on “economics”

Frog has again attacked economics – however, this time the attack has been painted out in a more substantive manner, a manner that will allow us to actually discuss the methodology of economics and see where this critique fits in.

Frog’s claim is that:

The neoclassical economic model is failing us. It is based on some pretty poor assumptions and defies the laws and rigour of science

I find this, interesting. In order to analyse it we have to step back and ask: What is the neo-classical model? and how is it “failing us”?

I will have a first crack at saying what I think neo-classical economics is and what is going on with it. Then you guys can attack it and hopefully teach me a thing or two – as I am very interested in trying to understand “what is economics” in more detail.

The neoclassical “model” and prediction

What is the neoclassical model – well the initial neo-classical model had several major attributes:

  1. They believe in methodological individualism – fundamentally when an economist analyses the economy he believes the whole is the sum of its parts.
  2. People act at the margin to maximise net “happiness” – fundamentally this suggests that make choices based on the associated additional costs and benefits associated with the action.
  3. People have preferences.

This set of fundamental assumptions allows economists to represent a market. Given different value judgments surrounding parameters in the model economists find out what happens to this hypothetical market. Now this won’t represent the real world – that is true. However, given our belief in methodological individualism we believe that there is some combination of assumption that do define the real world.

Now, if we analyse a bunch of hypothetical realities and we find that a result holds strongly over a large range of assumptions (possible realities) – then we feel confident stating that this relationship could hold in the real world. Fundamentally, the more hypothetical situation we find that provide credence for a certain result, the more “credible” it is to assume that this result will hold in reality. (if you want more on this idea read “Credible worlds” by Robert Sugden).

Of course, nothing beats reality for describing reality 😉 . As a result, careful empirical analysis provides an important role, both in determining the value of assumptions (providing “facts”) and allowing us to check the results of our hypothetical worlds. When it comes to a description of what has happened, data does that – however, analysing the data also requires a model, implying that there is a feed-back loop between the data and the model.

Even when describing facts we have to be willing to indulge in heavy critical analysis of our “parameters” is required – hence even when we have the data, description without value judgments is impossible.

However, ex-ante we do not have the data – as the outcome has not occurred yet. In this case the best thing we can do is analyse the data that has occurred, analyse our description of a bunch of hypothetical worlds, and then apply value judgments to get a conclusion – our prediction.

So its all about value judgments
Very good question – the answer for economic scientists is … no. Economic science is there to frame the issues in an objective, value free, way. Once the issue is framed then someone else can come along to add value judgments. The confusion about the role of economic scientists stems from the fact that economists often take that extra step and make conclusions.

However, this is the role of the economic policy maker. Note, this distinction is important – because I do not believe that Frog is attacking the economic scientist, I believe Frog is attacking the poor value judgments that the economic policy maker often applies.

This sounds like a whole lot of crap

Really, I thought you might say that 😛

However, this is what every discipline does. It comes up with models, looks at the relevant “facts”, and then applies value judgments to reach a conclusion.

The use of mathematics and explicit models in economics makes our value judgments TRANSPARENT – which is why economic analysis is so popular. Compare this to some sociology work where rhetoric and conjecture is used to hide value judgments. Of course there is good sociological work out there – but this was just the example I read in a book recently 🙂

Conclusion

I do not believe that Frog’s criticism of economics truly has to do with the “model making” which is a feature of economic science – I think the criticism (which asks for a new conception of economics) is actually an attack on the value judgments that are often applied to economic models.

Value judgments that often turn out to be wrong (which isn’t in itself a big deal) and sometime wrong in systematic ways (which is in itself a big deal – as it implies that there is some type of inherent bias).

I have seen Frog himself use economic models (although not of the mathematical ilk they still hold the idea of individual choice and optimisation) when describing thinks such as carbon taxes and externalities.

One thing I would like to note is that economics is an open discipline. Much of what is currently termed “heterodox” economics will make it into “neo-classical” economics overtime. Thirty years ago game-theory was called heterodox, now it is an essential part of the mainstream.

However, the value judgments these disciplines have won’t be part of the “hard core” of economics – even if they are widely used. The entry of heterodox disciplines into the hard core will occur through the way that they “generalise” the economists economic model.

Game theory generalised the model by introducing strategic interaction – something economists had implicitly assumed was zero without realising it. Heterodox economics can show the mainstream what other implicit assumptions they are making – and need to loosen.

Economic science as a discipline does want to integrate increasing levels of physical reality, more structural variables, and more generality – however integrating these things takes time. The ultimate goal of this is to create the best framework possible to analyse scarcity, given the three assumptions I have provided above.

Many of the critics of mainstream economics treat it like an “ideological monster” that is unwilling to evolve – anyone that thinks this should read a little more on economic history and talk to some full economics professors.

  • Matt, I notice you have treated “realism” as a goal of policy – is that really consistent with Friedman’s call to arms, that all that matters is predictive accuracy?

    Note I am asking myself this question – as it needs an answer

  • People who don’t understand economics often get confused between economics being stupid and stupid economists:)

  • Kimble

    They also cannot distinguish economists from hedge fund managers, investment bankers, and Gordon Gecko himself.

  • George Bolwing

    Rather than blame economic methodology for the current state of the world economy, I think that it is pretty clear that what we are seeing is the result of a series of pretty bad failures of governments.

    As Eamonn Butler of the Adam Smith Institute put it:

    “This crisis was not caused by capitalism being fatally flawed. It was caused by politicians forcing banks to give out bad loans, monetary authorities flooding the West with cheap credit and regulators being asleep at the wheel.

    “When the government is persuading the casino to hand out free chips and the regulators are standing drinks at the bar, you shouldn’t be surprised if the customers place a few risky bets.

    “It’s the management and not the system that deserves our scorn for breaking the basic rules of economics: There is no such thing as a free lunch.”

    There is another basic rule of economics that they forgot: “incentives matter”.

  • goonix

    “They also cannot distinguish economists from hedge fund managers, investment bankers, and Gordon Gecko himself.”

    LOL!

  • “People who don’t understand economics often get confused between economics being stupid and stupid economists:) ”

    Agnitio that was brilliant 🙂

    Kimble’s statement was also awesome 😉

    “Rather than blame economic methodology for the current state of the world economy, I think that it is pretty clear that what we are seeing is the result of a series of pretty bad failures of governments.”

    No doubt – however, the economics discipline did not foreesee the crisis. If we believe that such prediction is the role of economics (as economists have sold themselves to be on many occasions) then in some sense it does constitute a failing of the practice of economics.

    “There is another basic rule of economics that they forgot: “incentives matter”.”

    I believe that is capture by the existence of preferences and the fact that behaviour occurs at the margin 🙂

  • also, weren’t we (just for fun) going to title any posts about the greens and economics as “Greens Watch:[insert topic here]” 😀

  • This isn’t really a Green party post – it is a Frog post. Frog is a scientist and supporter of the Green party – and he thinks we are “quasi-scientific”.

    I am not really sure what he means by that – but I have tried to describe what I think is the methodological hard core of economics (very little – although a useful little) and state that the problem Frog has surrounds subjective value-judgments made by economists. My best answer to that is simply: At least using a clear economic method makes our value judgments transparent – so that they can be criticised easily.

  • Top work