Saturday, March 30, 2013

When One Paragraph Contradicts the Next One

Peter Boettke on the Coordination Problem Blog on “How the Keynesian Revolution Changed EverythingHERE 
 Consider the straigthforward approach of Buchanan and Richard Wagner in their wonderful book, Democracy in Deficit (1977):
Such complex budgetary rules as "balance at full employment" serve to rationalize budgetary irresponsibility by playing upon the sense that the present is unique and involves special circumstances, and that once these circumstances have been dealt with, we can revert to the rules applicable to "normal" settings. This is like the alcoholic who has some sense that all is not well with his conduct of his life, and who resolves to get hold of himself once the particular tensions he currently finds unbearable have passed him by. Only each day, week, or month presents a fresh set of tensions, unusual circumstances, and special conditions, so "normalcy" never returns, for either the alcoholic or the Keynesian political economy. (165-66)
I argued that we must pursue a true microeconomic analysis of monetary and fiscal policy, and see economics as a coordination problem guided by price signals and acted upon by rational actors.”
Though I agree with much that Peter Boettke teaches in his Blog, I disagree with his emphasis when he writes “economics as a coordination problem guided by price signals and acted upon by rational actors”.  The reference to “rational actors” is too close to the neoclassical obsession, which Professor Deirdre McCloskey dubbed as “Max U” economics, and is associated with rational expectations theory.
Such rigid thinking is absolutely necessary when ideas are applied to mathematics, which requires stable behaviours, and upon which an image of an imaginary world is preferred to the real world, where people certainly reason but they are not necessarily bound by a common rationality (all of us do not make the same choices).  Adam Smith described humans as using their ‘reason’, bounded by their self-interests.
The mathematical treatment of two or more variables requires predictable behavioural stability for a stable result, yet much of the behaviour of humans is unpredictable in practice, saints and sinners alike, and by preferring rigour to the messiness associated with humanity, exponents of “Max U” claim the high ground of a “hard science” over the “softer” narratives of verbal treatments, such as those by Adam Smith (who was accomplished in mathematics by 18th century university standards).
By formulating economics as a “coordination problem guided by price signals and acted upon by rational actors” Professor Boettke is insightful about “price-signals”, though much less so by seeing “the invisible hand of the market economy (Smith)” in his “Living Economics” (2012) (“On Teaching Economics”, p 164) as integral to “price signals”.  But what exactly does this invented notion of the “Invisible-Hand”, wrongly attributed to Adam Smith, do which is not fully explained by those very same “price signals”?
[Note: I recommend regular reading of Peter Boettke's Blog" "Coordination Problem".]


Blogger michael webster said...

Gavin writes about Peter: "“economics as a coordination problem guided by price signals and acted upon by rational actor"

I agree with Peter's formulation, as long as we understand the referent of "rational actor" to include the sort of coordination rules that bounded rationally agents actually use.

Our current mathematical/game theory understanding of cooperation, coordination and conventions is relatively weak.

In cooperative game theory, we have no idea what individual actions make up the characteristic function of the game.

In coordination game theory, we have no good theories about how to select amongst the various equilibrium, and our examples are largely restricted to thought experiments about 2 x 2 games.

We have to review the actual conventions people do use in the bazaars before we will get closer to Peter's guiding principle.

1:02 pm  
Blogger Gavin Kennedy said...

Hi Michael
Thanks for your observations.
Qualifying Peter Boettk's "rational actors" as 'actors" "bounded" as "rational agents" that makes the formulation "acceptable" I do not think saves its asserted "generality".
It is the existence of a defined quality of "rationality" as operated by all humans making decisions whose diversity in the conclusions of their reasoning is heroic.
"Max U' predicts behavioural responses even though it is often the case that individual from the same circumstances do not act the same, and often act differently.
I have argued against arguments, such a those put forward by Tim Hartford, etc., purportedly explaining why youths in certain circumstances join gangs and behave in a certain manner. Yet other youths in the same area and in the same circumstances do not join gangs, nor join in drug use, nor trade in drugs, etc. or engage in criminality.
Likewise, with people in market societies. People are not some kind of sophisticated Pavlovian responders explains their behaviours than can be credited to "rational humans" (or by something described as Homo economicus).
Human reasoning can produce flawed answers. It is not a mathematical equation with only one correct answer. I am prepared, lie Adam Smith, to accept that individual humans "reason"; I do not accept that rationality, bounded or absolute, explains or predicts human behaviour.
I am working on this area at present.

4:06 pm  

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