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John Quiggin 
Katz,
Thank you for the web-site. Apologies for the delay in replying. I look forward getting your comments at your convenience.
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“I find it quite interesting observing the reactions to theoretical models of ‘competitive private ownership economies’, published in the finest and most respected economics journals, written in a language that doesn’t change its meaning for as many generations into the future one wishes to contemplate (‘applied-postmodernism-proof’ so to speak).”
EG, this is a very interesting point.
The confidence of the proponents of the theoretical models you refer to is almost universally based on confidence in the predictive power of some version or other of the homo economicus construct of human motivation. (I don’t intend to rehearse these well-known arguments which have come to have the distinct flavour of “old chestnuts”. I merely point out that there are contradictory and tautological elements in these constructs of homo economicus that tend to be forgotten when the construct is required to bolster other, related models such as “‘competitive private ownership”.)
Of more interest is the historicist nature of these models. These models embody precisely what Karl Popper denounced as “poverty”: “an approach to the social sciences which assumes that historical prediction is their primary aim, and which assumes that this aim is attainable by discovering the “laws” that underlie the evolution of history” Thus Popper would call these classical and neo-classical economic model builders a very surprising and disturbing thing: “enemies of the open society” for propounding an inevitable and deterministic pattern to history.
Which brings me to your glancing reference to “applied post-modernism”:
Foucault countered Popper’s optimism that the error of historicism could be avoided with a fatalistic riposte. Individuals (including, presumably, builders of economic models) are inexorably entangled within their own cultural context. Thus these economic model builders who rely on the homo economicus construct may plead that they have no choice but to use the construct. “My culture made me do it! ”
I prefer to attempt to be as sceptical as I can be about these a priori constructs. But I know I can’t be “homo rationalus” because I too am entangled in my own cultural meanings. Thus there is no absolute solid foundation (like latitude). But that is no cause for despair. There are relative solid foundations (like longitude). We can measure with some accuracy differences between the perceptions of contemporary individuals and collectivities. And we can measure with some accuracy differences in perceptions over time. Thus the study of history is the most efficient means of monitoring the truth and relevance of social and cultural information.
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Katz,
Thanks for your comments. I need to reply. My apologies for the delay.
You make an assumption about the theoretical models I refer to. Your assumption is wrong. The models I refer to have nothing to do with caricatures such as ‘homo economicus’ or ‘homo rationalus’. The models are not historicist in nature but analytical and they use a methodology which checks for internal logical consistency (I should think it is not for economists or social scientists to decide whether the knowledge that is applied – eg Kakutani’s fixed point theorem – for this purpose has a flavour of “old chestnutsâ€?).
The models I refer to take their philosophical origin in A. Smith. All theoretical models of the class I refer to take individuals as the basic unit of analysis; they take as axiomatically given that humans are neither ‘dullards’ nor thieves, and they share another element, namely an endowment constraint, at least of natural resources. But, Smith’ ‘invisible hand’ is not taken as axiomatic; the models differ in this regard (complete commodity markets, sequential commodity and securities markets, partially segmented markets, incomplete markets, imperfectly competitive markets).
The micro-economic reforms during the past 20 to 30 years involved ‘free trade’, ‘markets’, ‘privatisation’, ‘competition’ ‘efficiency’. The models I refer to are theoretical models of ‘competitive private ownership economies’ for which notions of ‘efficiency’ are defined.
But these models are apparently irrelevant because:
“…Hahn’s (a contributor to this class of models) defense drops any claim that general equilibrium models describe actual capitalist economiesâ€? (emphasis added; source public domain)
This is an observation of what I call an instance of ‘applied post-modernism’. For the purpose of a blog-site, I suggest the example is sufficient to illustrate that the analytical models I refer to provide a means to monitor the truth and relevance of social and cultural information.
The public domain source of people’s understanding (perception?) of what is going on in the high-brow economics literature in relation to their understanding (perception?) of their environment contains a beautiful driver of an instance of ‘applied post-modernism’. It involves the notion of ‘rationality’. In terms of the internal logic of the models I refer to, it involves an ostensibly quite silly idea, namely that the words written on a sheet of paper have ‘preferences’. Furthermore, it involves equating ‘optimality of action’ with ‘rationality’. By doing so, the requirement on the models I refer to (which I call ‘non-dictatorial’) to make the objectives written on the sheet of paper at least logically consistent with the preferences of individuals, given the institutional environment (eg market structure) is spirited away. This simplifies the task of the model builder (because it is not easy to solve this problem – in the case of a partially segmented economy I could not find a solution and I have not as yet proven that none can exist, which is harder) but the implications of this instance of ‘applied post-modernism’ is fundamental. The whole idea that it is the material welfare of individual human beings that is central to economics is lost.
I can’t see any need for a builder of analytical theoretical models of economies to plead ‘my culture made me do it’. The notion of culture would seem to be redundant if it were otherwise.
Are you sure “Foucault countered Popper’s optimism that the error of historicism could be avoided with a fatalistic riposte� or is it your interpretation? In an interview Foucault identified himself as an ‘irrationalist’ (public domain). I have a simple mind. If someone tells me he or she is an irrationalist, I would be left with the question: How would he or she know that this is so – and move on.
“We can measure with some accuracy differences between the perceptions of contemporary individuals and collectivities. And we can measure with some accuracy differences in perception over time. Thus the study of history is the most efficient means of monitoring the truth and relevance of social and cultural information.�
People can’t eat perceptions.
EG, Thank you for your comments.
I’d like to pick your brains a little and perhaps clear up some miscommunications.
“You make an assumption about the theoretical models I refer to. Your assumption is wrong. The models I refer to have nothing to do with caricatures such as ‘homo economicus’ or ‘homo rationalus’.�
Thank you too for your extended discussion of “applied post modernism�. Just to clarify, when you say:
“It [The public domain source of people’s understanding (perception) [?]] involves the notion of ‘rationality’. In terms of the internal logic of the models I refer to, it involves an ostensibly quite silly idea, namely that the words written on a sheet of paper have ‘preferences’. Furthermore, it involves equating ‘optimality of action’ with ‘rationality’.�
1. What is the function of the word “ostensibly�. Do you mean it seems silly but in fact isn’t. Or do you mean it both seems silly and is silly?
2. I understood your earlier comments as expressing dubiousness of these vulgar models: that you were not purveying “old chestnuts�.
3. “I can’t see any need for a builder of analytical theoretical models of economies to plead ‘my culture made me do it’. The notion of culture would seem to be redundant if it were otherwise.� I didn’t intend to endorse Foucault’s fatalism. I perhaps failed to suggest that Foucault’s fatalism was itself historicist.
4. “People can’t eat perceptions.â€? As Moliere’s Jourdain expostulates: “By my faith! For more than forty years I have been speaking prose without knowing anything about it, and I am much obliged to you for having taught me that.” People participated in economies long before there was economics. As you say, you conceive that individuals’ behaviour to fall somewhere between the actions of “‘dullards’ nor thievesâ€?. It need hardly be observed that this is a very broad ambit.
A range of factors patterns these individual responses. And there are many statistically persuasive uniformities in these individual responses. One of those uniformities may even be acquaintance with the most advanced thinking on ‘competitive private ownership economies’.
But how persuasive has academic economics been in the hundred years or so it has existed as a discipline? Has the standard deviation in behaviour of the curve bounded by “dullard” and “thief” grown measurably smaller during this time?
Katz,
1. “What is the function of the word ‘ostensibly’. Do you mean it seems silly but in fact isn’t. Or do you mean it both seems silly and is silly?� I mean to say ‘it’ appeared silly and, upon reflection, I’ve come to the conclusion that it is silly.
2. —
3. “I didn’t intend to endorse Foucault’s fatalism. I perhaps failed to suggest that Foucault’s fatalism was itself historicist.� I didn’t draw any conclusions about you endorsing Foucault’s fatalism. I don’t know enough about Foucault to form an independent opinion. So, thanks for telling me that Foucault’s fatalism is itself historicist.
4. “ As you say, you conceive that individuals’ behaviour to fall somewhere between the actions of “‘dullards’ nor thieves�. It need hardly be observed that this is a very broad ambit.�.
No, this is not quite what I said or intended to say. I said: All theoretical models of the class I refer to take individuals as the basic unit of analysis; they take as axiomatically given that humans are neither ‘dullards’ nor thieves … . . . . To translate back, the phrase ‘no dullards’ stands for: Each individual is characterized by preferences, defined over objects of choice, which is restricted to material objects (as understood by natural scientists) and contracts which specify the terms of exchange of the said objects of choice. The term ‘preferences’ translates into an ‘an ordering’ (as understood in mathematics). Theoretical models can differ in the specific assumptions made on the ‘ordering’. When I consider the ‘weakest’ set of assumptions (I’ll skip the meaning of this term) on preferences I’ve come across, then the phrase ‘no dullards’ seems appropriate. However, something of the precision of the concept in the original language tends to get lost in the translation into English (or other languages). Someone else may find a much better expression than ‘no dullards’. Another way of putting it is to say the reasoning ability of individuals is acknowledged and it is not under dispute. Not all theoretical results can be obtained from the weakest set of assumptions. To go from ‘preferences’ (ordering) to ‘behaviour’ requires much more (eg information available to people and restrictions on what people can do within a society – eg given what all the others do and restrictions arising from the ‘institutional environment’). I used the phrase ‘no thieves’ because in these models it is assumed that each individual takes his or her ‘endowments’ as given. This entails a respect for property rights. But, this is not unconditional. That is, people are assumed to take ‘endowments’ as given if the endowments are ‘big enough’ such that each individual can have at least a ‘little bit of everything’ if they want to (eg your ownership fraction of the Sydney Harbour bridge may be x% bigger than mine assuming the Sydney Harbour bridge is ‘privatised’ – I am not saying the S.H.B. should be privatised). This assumption is missing on the web-site (and in many micro-economic textbooks). The absence of this assumption on the web-site is a bit surprising because I am not aware of an ‘existence proof’ (checking for internal logical consistency) which does not use a ‘minimum wealth constraint’ assumption. (Apologies if the foregoing is an old hat too you.)
True, a wide range of empirical observations of human behaviour, both across individuals at a particular time and in a particular situation, and over time or across a range of situations or both, is consistent with the notion of preferences in these models (in contrast to the caricature ‘homo economicus’).
“A range of factors patterns these individual responses. And there are many statistically persuasive uniformities in these individual responses. One of those uniformities may even be acquaintance with the most advanced thinking on ‘competitive private ownership economies’.� This paragraph is unintelligible to me. To begin with: Responses of individuals to what? What would constitute ‘advanced thinking on competitive private ownership economies’?
“But how persuasive has academic economics been in the hundred years or so it has existed as a discipline? Has the standard deviation in behaviour of the curve bounded by “dullard� and “thief� grown measurably smaller during this time?�
Analytical economics does not aim to persuade. Against the background of an education policy that encourages students (and universities) to take (offer) ‘applied courses’, it seems to me the influence of analytical economics (and the range of questions asked that come with it) on the population is declining. In case it is unclear, analytical economics is not confined to ‘competitive private ownership economies’ only. To the best of my knowledge, the idea of a “curve bounded by ‘dullard’ and ‘thief’ � makes no sense in the context of the theoretical models of economies in question.
EG,
1. “A range of factors patterns these individual responses. And there are many statistically persuasive uniformities in these individual responses. One of those uniformities may even be acquaintance with the most advanced thinking on ‘competitive private ownership economies’.�
This paragraph is unintelligible to me. To begin with: Responses of individuals to what?
I apologise for my own telegraphic lapses. The missing stimulus experienced and differentially experienced by individuals would be, to use your words:
“Each individual is characterized by preferences, defined over objects of choice, which is restricted to material objects (as understood by natural scientists) and contracts which specify the terms of exchange of the said objects of choice.”
2. “What would constitute ‘advanced thinking on competitive private ownership economies’?”
I picked that topic simply because it had already been mentioned in this thread. I guess I intended to ask whether you think that knowledge of analytical economics may influence economic behaviour.
Your final paragraph in your last post doesn’t clarify whether you believe that analytical economics is inherently a non-persuasive discipline or whether it has been rendered non-persuasive by the culture of the Australian Academy and the broader culture of Australia.
To rephrase my question, if the latter statement is true, how might a broader influence of the results of analytical economics be detectable in economic behaviour?
Katz,
1. I am still not quite clear on this one. But, let’s set it aside for the time being.
2. I consider analytical economics to be inherently non-persuasive in the sense that it does not involve methods aimed at persuading people what they should think or do (eg the economic sky will fall down and you will suffer if you don’t agree with me.) I don’t know whether “…it has been rendered non-persuasive by the culture of the Australian Academy and the broader culture of Australia.� However, I have observed many instances during the past 25 years where public comment tended to be much more compatible with the results in analytical economics than with the doctrine known as ‘economic rationalism’ (supply side economics, ….). My haphazardly collected observations include my memory of two quite well known business men from the ‘big end of town’ having publicly expressed their concerns during the 1980s about ‘entrepreneurial excesses’ and I remember a ‘small business man’ from Sydney suburbia having appeared on TV pleading that the Government should enforce award conditions. It is as if many people (in Australia and elsewhere) had made similar observations and had asked similar questions to those that underlie the work that may be said to represent major mile-stones in analytical economics. The work in analytical economics is largely curiosity driven.
In answer to your specific question, it might have influenced the ‘micro-economic reform’ policies and we might not have as many angry and aggressive young people.
Incidentally, Milton Friedman seems to have realized that things might not be as he tried to persuade others to believe they are. The two economists, whom he refers to, are analytical economists. Friedman could have paid respect to people who worked on the problems many years ago http://www.digitalnpq.org/archive/2006_winter/friedman.html.
Thanks EG,
I read your exchange on the Friedman observation on another thread
Reading his responses in the quoted interview it would seem to me that he is suffering a dose of cognitive dissonance.
1. Friedman: They [“old” Europe”] all ought to imitate Margaret Thatcher and Ronald Reagan; free markets in short.
…
2. NPQ: British Prime Minister Tony Blair argues there is a “third way�—for example, flexible labor markets without hire-and-fire American-style. This, he argues, is more suitable to the “European social model� with its enduring concern with social justice. Is there an in-between way, or must it be all or nothing?
Friedman: I don’t think there is a third way. But it is true that a competitive market is not the whole of society. A great deal depends on the qualities of the population and the nation in how they organize the non-market aspects of society.
…
3. Friedman: Oh no. “Free markets� is a very general term. There are all sorts of problems that will emerge. Free markets work best when the transaction between two individuals affects only those individuals. But that isn’t the fact. The fact is that, most often, a transaction between you and me affects a third party. That is the source of all problems for government. That is the source of all pollution problems, of the inequality problem. There are some good economists like Gary Becker and Bob Lucas who are working on these issues. This reality ensures that the end of history will never come.
He seems to be admitting that there are:
1. Cultural predeterminants of economic transactions that influence these transactions but which remain more or less immune these transactions.
2. Perceptible consequences of economic transactions that cannot be quantified by means that Friedman would recognise to be “economic”.
Thus, like Occupied Iraq, the boundaries of economics are porous and subject to uncontrolled penetration.
Katz, thanks for your comment. I’ve spent a bit too much time on blogging. So I’ll be silent for a little while.
Katz, I tend to agree with your items 1 and 2. As for boundaries of economics, it seems to me it is useful to acknowledge boundaries. For example, I can’t see anything wrong with saying the fundamental research question, which defines the boundaries of economics, is concerned with the material welfare of humans. I seem to recall an article by John Hewson, published in the Fin Review a couple or more years ago, which overlaps with the specific point you are making. I thought it was a good article.
‘…the fundamental research question, which defines the boundaries of economics, is concerned with the material welfare of humans.’
Franco Modigliani once said that when people asked him for advice on the economy he felt as an entymologist would, if asked what advice he had for the ants. If someone studies macroeconomics theory, masters econometrics, gathers vast amounts of data and runs a lot of regressions, all in order to win a bet on when the next recession will happen, what fundamental research question is she engaged in?
I wonder what Franco Modigliani would have said had he been asked about his notion of the boundaries of economics.
Its too late now to ask him.
EG, on the idea of the time limiting of corporations, you might want to look at the thinking behind the 13th century Statute of Mortmain. It was aimed at preventing resources being sidelined by enduring religious corporations.
Elizabeth
I must learn to be less obscure. My point about Modigliani was that his conception of the bounderies of economics, unlike John Hewson’s, did not involve human welfare. I wondered if it is actually possible to frame the discipline without reference to normative concerns.
No doubt much has been written about this, which I ought to have read. Don’t give the matter another thought, at least not until you have done justice to the Statute of Mortmain, with which I wish you luck.
Ernestine, I mean. Sorry. At least I’m not confused about your gender.
P.M. Lawrence, thank you for pointing to the Statute of Mortmain.
James,
Did Modigliani know what you ascribe to him? Incidentally, I did not ascribe the sentence I wrote on the boundaries of economics to John Hewson.
No need to apologise – my sister’s name is Elizabeth. During childhood years it did happen that even my mother confused the names in circumstances when one could hear in her voice an exclamation mark after the name. I thought the grandpa comment by the author of the F*-book was quite amusing.
James Farrell
“Franco Modigliani once said that when people asked him for advice on the economy he felt as an entymologist would, if asked what advice he had for the ants.
…
“I wondered if it is actually possible to frame the discipline [of economics] without reference to normative concerns.”
Historians face a similar question. George Dangerfield (an historian much admired on this blog) wrote “The Strange Death of Liberal England” too late to be of any use to Herbert Asquith or the Liberal Party. However, Dangerfield did imply that proponents of liberal principles would need to use different methods to promote them.
Any discipline that has at its core human choices has to take account of the ways in which perceptions of choice are created and elaborated. This is essentially a cultural question.
One of my favourite instances of this human feature is the La Brea Tar Pits in Los Angeles. Over hundreds of thousands of years millions of creatures have fallen to their doom in the sticky tar. You can still see it happening when birds land are are swallowed up. Yet only one human has ever been dug out of the tar, and she was a victim of homocide.
Humans have the choice to avoid the tar, which they have exercised with notable effect.
But ants don’t.
Ernestine
Modigliani said that in an interview, but I don’t remember where. It just stuck in my mind. I can’t quote it verbatim, and I readily concede that I never had a chance to confirm my particular version of with him personally. Do you think I might have got it wrong? Anyway, I just found it interesting that an eminent economist like that would want to detach the scientific and normative aspects of the discipline so cleanly.
Katz
Of course the exercise of choice makes human sciences less deterministic than biology, but does that mean the science has to be defined in terms of human welfare. Hannibal Lector is fascinated by psychology but doesn’t care about the welfare of his subjects. Of course the human subjects themselves are motivated by a concern with their welfare, but is that fundamentally different from the fact that animals (except lemmings and some whales) have a survival imperative?
I’m worried about that girl they found in the tar pit. I hope she wasn’t still alive when she was thrown in.
James,
Whether or not you quoted Modigliani verbatim is not the issue – nor the absence of a reference.
The point is: Why do you think a person gives you an answer to the question: How would you define the boundary of Economics, as a discipline? in response to the asking the person for advice on the economy?
James,
You’re correct to imply that ethics and choice are by no means the same thing.
Human welfare is, at root, an ethical concept.
One of the major challenges for the social sciences and the humanities is to find means of explaining how people understand and value human welfare and how these understandings change over space, social distance and time.
Human behavioural modes are dominated by variations over space, social distance and time. Animals’ aren’t. Reductionist theories about sublimation of biological urges just don’t wash. Such theories can’t explain why humans are the only species to sublimate in the first place.
(The girl was an Amerindian who was killed thousands of years ago. Her skull had been crushed and she was thrown fully-dressed and probably already dead into the tar pit.)