Quotation of the Day…

by Don Boudreaux on September 16, 2011

in Economics, Scientism, State of Macro

… is from pages 7-8 of James Buchanan‘s essay “Economics and Its Scientific Neighbors” (reprinted as Chapter 1 of Jim’s Moral Science and Moral Order, Vol. 17 of The Collected Works of James M. Buchanan):

Contrast this [the development of game theory] with the Keynesian and post-Keynesian attention on macro-economics and macro-economic models.  Does this “theory” provide the economist with an additional set of tools?  Does it extend the application of the central principles of the discipline?  Unfortunately, the answer must be negative here.  Precisely because it has divorced itself from the central proposition relating to human behavior, modern macro-economic theory is really no theory at all.  It has evolved, and remains, a set of models for the workings of economic aggregates, models that have little predictive value.  Lord Keynes, of course, recognized this, and it was for this reason that he tried to tie his theoretical structure to basic psychological propensities.  These propensities, which were designed to replace the more simple neoclassical behavioral propositions, have never fulfilled the role that Keynes must have hoped for them, and the modern model builders seem largely to leave even these out of account.

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{ 11 comments }

vidyohs September 16, 2011 at 10:13 am

And there you have it, there is no us without an I.

Try to operate the us as if the I does not matter and it will go to crap in record time.

hyperhystorian September 16, 2011 at 10:54 am

I’m not an economist, just a lurker, so if this is a terribly dumb question, I want to apologize up front, but … what is “the central proposition relating to human behavior” referenced in the above quote?

Seth September 16, 2011 at 4:19 pm

Important information on how we behave and make decisions to get along with others in this world is lost when we sum up subsets of our actions into values like GDP.

Economic Freedom September 17, 2011 at 4:31 am

Human beings choose long-term goals — desirable for their own sake — as “ends.” To achieve them, human beings must also choose shorter-term goals — not desirable for their own sake, but only for the sake of the final goal — as “means.”

The fundamental necessity of choosing among desired “ends” and possible “means” (known as “Human Action” in the Austrian tradition of economics), and the fact that humans must economize their time and efforts to achieve both, is the fundamental proposition relating to human behavior.

R. Alazar September 17, 2011 at 12:07 pm

Dear hyperhystorian: the central proposition relating to economic behavior is, as Economic Freedom says, that we pursue what we think is good–utility, if you like–not any such thing as the social product, which doesn’t exist (Arrow Impossibility Theorem).

Utilities are not only interpersonally incommensurable, but potentially volatile (except under Becker’s restatement in terms of volatile stocks of consumption capital), and have other technical problems.

That means that the numbers in game theory payoff matrixes are not estimates of in-principle-measurable numbers. They are merely guesses at what numbers would provide a payoff matrix which will model behavior in the game that predicts what is observed–with no theory behind the guesses that would allow us to estimate them for a not-yet-analyzed game.

(Well, except that for organizations that are risk-neutral, and whose decision makers have no feelings about whether either they or others “play fair”, the payoffs are approximated by money profits. But there is no way to identify such organizations independent of whether the model fits reality.)

So in that sense game theory is not a model of reality. It is a model, but one of which one can only say ex post that a given game models a particular observed transaction or doesn’t.

Here is a second central proposition relating to economic behavior: people (and firms) are driven to a market equilibrium by incentives: thus, for instance, he who prices his goods or services above or below the market price loses money thereby. There is no similar incentive structure moving people and firms toward a Nash equilibrium in non-zero-sum game theory. Yet another problem for game theory.

SweetLiberty September 16, 2011 at 11:42 am

[Modern macro-economic theory] is really no theory at all. It has evolved, and remains, a set of models for the workings of economic aggregates, models that have little predictive value.

It is this “predictive value” that I find so intriguing. Many economists refuse to make predictions because these predictions can be falsified and the economists making them can end up with egg on their faces. But it is those few economists that do, that are willing to put their hypothesis to the test, that earn my greatest respect – for it is they who are engaging in a scientific method, one open to analysis, refinement, and growth.

gg September 16, 2011 at 1:23 pm

Because thoroughly microfounded models have perfomed so well, right?

Seth September 16, 2011 at 4:21 pm

There are micro models?

Greg Webb September 16, 2011 at 2:28 pm

Excellent quote, Don!

James Buchanan asked, “Does this [Keynesian] “theory” provide the economist with an additional set of tools? Does it extend the application of the central principles of the discipline?” And, the answer is clearly “No” to both questions. The question is “why” focus on macroeconomics? The answer is that the political elite did not like the central principles of economics because that limited the money that government could spend and the actions it could take.

Sam September 17, 2011 at 9:44 am

“[...] modern macro-economic theory is really no theory at all. It has evolved, and remains, a set of models for the workings of economic aggregates, models that have little predictive value.”

Is he saying that Keynesian macro-economics is not a theory simply because it is a set of models? Or just that it is not a theory because it is a set of models that have little predictive value (i.e. bad models). It seems that we should be able to model any good scientific theory. Right?

R. Alazar September 17, 2011 at 11:44 am

Speaking of basic psychological propensities, any economist with (ahem) a positive marginal propensity to reproduce would have been more likely to say that in the all run we are *each* dead, not “In the long run we are all dead.”

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