Monday, February 16, 2009

On Homo economicus





Gavin Kennedy

'Oz Andrew’, a correspondent writes a ‘Comment’ to my post "Evolution Challenges Homo Economicus", Friday last (13 February):

“As for the rational homo-economicus model itself, it will be staying in place until someone comes up with a superior and complete alternative. No amount of data contradicting the model can change that.”

To which I agree completely and replied:

Homo economicus cannot be improved; it is just plain wrong as it pretends to model behaviour in an economy representative of the real world. It isn't. It models behaviour in an imaginary economy that does not exist.

It's like Des Cartes' model of the solar system with 72 concentric circles, which Adam Smith discusses in his "History of Astronomy" (1744-?).

That is the point I tried to make.

Unlike the solar system for which a better model was developed which can predict eclipses ten, a hundred, a million years hence. Homo economicus cannot predict anything outside of the assumptions of the model

This week I am working on my paper “The Alleged Religiosity of Adam Smith: evidence from the History of Astronomy and Moral Sentiments” for presentation in the summer, and I am checking references in Moral Sentiments, and I came across this short note by Adam Smith on the other-worldliness of mathematicians, which I think says a great deal about the continuity of their temperaments through the ages:

Mathematicians, on the contrary, who may have the most perfect assurance, both of the truth and of the importance of their discoveries, are frequently very indifferent about the reception which they may meet with from the public. The two greatest mathematicians that I ever have had the honour to be known to, and, I believe, the two greatest that have lived in my time, Dr. Robert Simpson of Glasgow, and Dr. Matthew Stewart of Edinburgh, never seemed to feel even the slightest uneasiness from the neglect with which the ignorance of the public received some of their most valuable works. The great work of Sir Isaac Newton, his Mathematical Principles of Natural Philosophy, I have been told, was for several years neglected by the public. The tranquillity of that great man, it is probable, never suffered, upon that account, the interruption of a single quarter of an hour. Natural philosophers, in their independency upon the public opinion, approach nearly to mathematicians, and, in their judgments concerning the merit of their own discoveries and observations, enjoy some degree of the same security and tranquillity.”

Smith goes on the compare mathematicians with other men of letters:

"The morals of those different classes of men of letters are, perhaps, sometimes somewhat affected by this very great difference in their situation with regard to the public.

Mathematicians and natural philosophers, from their independency upon the public opinion, have little temptation to form themselves into factions and cabals, either for the support of their own reputation, or for the depression of that of their rivals. They are almost always men of the most amiable simplicity of manners, who live in good harmony with one another, are the friends of one another's reputation, enter into no intrigue in order to secure the public applause, but are pleased when their works are approved of, without being either much vexed or very angry when they are neglected.
" (TMS III.2.20: p 124-5)

How true this remains I could not say, but high-level mathematicians among economists, do tend to be exclusisve among themselves, and are distant from the general public; they also have a reputation for not looking outside their windows.

They don't share the comfort of their astronomer relations, who at least see their work vindicated by observations. After 130 years of mathematicising economics, pray tell us what they have either explained about events that have past, or predicted about events which actually happened, the last a much vaunted test of a 'hard science'?

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Blogger Dan said...

According to Michel Callon, and others since, economics can be thought of as not a bad model for how people behave but a prescription that actually makes itself more true. Economics makes possible rational economic action by framing the world in ways to make it calculable (e.g. quantifying value, ignoring externalities, etc.) and then providing rules for calculation. Thus, homo economicus exists (in a way), but is a historically specific product of economics and related disciplines. The argument is fascinating, and has been very productive for sociologists studying finance (e.g. Donald MacKenzie and Yuval Millo's work on the history of the Chicago board of exchange options market and the Black-Scholes model). Check out Michel Callon's introduction in "The Laws of the Markets", or the edited volume "Do Economists Make Markets?" for details. It might be of interest.

4:40 pm  
Blogger Gavin Kennedy said...

Hi Dan

The main problem with Homo economicus is that it assumes 'rational economic action' to suit its claims to predictability. It exists nowhere but in the model.

Some merchants react to, say, risk, by degrees of aversion not shared by other metchants, hence they tend to act differently.

This comes from the chapter of Wealth Of Nations (Book IV, ii), where some merchants trade with the British colonies in America, and others trade domestically. (Yes, the famous 'invisible hand' mentioned on page 456).

Two sets (for simplicity) of rationality, two quite different outcomes, which, in principle, can be expanded to multi-different 'rationalites', including many merchants who had no ideas about the 'rational' thing to do; thye did what their husband told them, or how they read their tea leaves.

Try predicting what rational traders will do tomorrow, based on the model. You know it won't work, otherwise you'd already be a millionaire - even a 'quillionaire.

And then there are 'black swans' ...

Thanks for the references.

7:59 pm  

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