In reply to Jim Devine's interesting comments:
Say, economics is whatever economists do. They provide ideological ammunition to the class enemy. That should be obvious on this list. But, why is their ideology so effective? Under certain conditions, some ideas become material forces. Not any ideas. Some ideas. A Hollywood movie may be trash, but not all trash becomes a Hollywood blockbuster. Perhaps the *content* of economic theory (and the way economic theories are constructed) has something to do with its effectiveness. But let's see.
It turns out that fundamental uncertainty is crucial to fixed investment decisions. Further, if one does not acknowledge the existence of uncertainty, money is neutral, which empirically it is not.
Why does the "recognition of fundamental uncertainty" has not gotten much traction in economic analysis while, say, "rational expectations" and "informational imperfections" have? Is it that such "recognition" is potentially subversive, while the hypothesis of "rational expectations" or "imperfect information" foster acceptance and adherence to the status quo? Is it that the powers that be are afraid that the notion of "fundamental uncertainty" be used by the workers' movement to hit the system on the head? I don't think so.
Here's a straightforward conjecture about why some economic ideas don't travel far, and others do:
http://web.mit.edu/krugman/www/dishpan.html
Back to Jim Devine's remarks, "fundamental uncertainty" is "crucial to fixed investment decisions." Okay. Assume "fundamental uncertainty." Now, what kind of definite, unambiguous long-run investment behavior follows from that assumption? None in particular. All types of behavior would be consistent with that kind of uncertainty. People "need conventions." So how do you decide what conventions are best? How are those conventions formed? How does that sharpen your analysis?
Say that, "empirically," money is not neutral even in the very long run. Now, say, you need to conduct a policy intervention in the real world. Say, you need to provide union leaders or the leaders of a popular movement with a good rationale to oppose or push some monetary policy reform or measure. So you need to quantify the non-neutrality of monetary policy in the long run to argue the impact. In other words, you need to estimate the linkage between, say, interest rate and employment. So you need a theory (a model) that implies non-neutrality in the long run. Do you assume "fundamental uncertainty" in your model? If so, how do you derive logically the non-neutrality from your assumption, to the exclusion of -- say -- neutrality? You can't! Actually, from "fundamental uncertainty" you can derive *anything*, including neutrality in the short run! On what grounds do you discard short-run neutrality then?
The question here is: How does the "recognition of fundamental uncertainty" help an economist discipline her analysis? The answer is: It's not clear how.
[Actually, in the last few days, I've come across a series of paper that claim to model "Knightian uncertainty." I'm moving slowly with this stuff. It comes from the decision theory literature applied to economics. Here are some references: L. Epstein & T. Wang, 1994, "Intertemporal Asset Pricing under Knightian Uncertainty," Econometrica, 63; W. Brock & S. Darlauf, 2001, "Growth Empirics and Reality," The World Bank Economic Review 15-2; and W. Brock & Anastasios Xepapadeas, 2003, "Regulating Nonlinear Environmental Systems under Knightian Uncertainty" in R. Arnott et al. (eds) Economics for an Imperfect World: Essays in Honor of Joseph E. Stiglitz, MIT Press. It seems to be a Bayesian approach where you try to derive robust choices (a "precautionary rule") when there's uncertainty, not only about the sample from which your parameters are estimated, but about the underlying theory itself. It's not clear to me that this would be enough to satisfy a hardcore, nihilistic Knightian either. Because, what's the "scientific basis" to estimate theory uncertainty if not subjective belief and/or some assessment of previous historical experience? Jim Devine says that according to Keynes, in the face of fundamental uncertainty, people need conventions. Well, precisely. Think of "rational expectations" and hypothesis of the sort as Keynesian conventions, except that they're justified on the basis of their contribution to the tractability and sharp implications of the theory.]
Third, the idea of uncertainty tells us to reject models that assume that there are perfect futures market (i.e., standard general equilibrium theory).
This is a misunderstanding. Nobody (but a Republican I met the other day while canvassing for ACT in Montgomery County, PA) believes that "there are" complete or perfect future markets in the real world. That is not what general equilibrium theory is about. Actual future markets are whatever they are in real life. *Assuming* that there are complete markets for contingent commodities is not believing that they exist. The assumption is a simple way to deal with uncertainty in economic theory. That's the Arrow-Debreu approach. But, again, that is *not* an ontological assertion. They couldn't care less about the actual nature of uncertainty in the world. All they want is some simple way to model it so that they can derive testable implications. Would you fault car manufacturers for not using human beings in their car-safety tests? Shouldn't they keep using rubber dummies instead, even though dummies have *only some* (very superficial) but *not all* of the attributes of actual human beings?
We need to make up our mind. If we are going to criticize Hollywood's output on the grounds that car chases in real life are not nearly as spectacular as those we see in Schwarzeneger's movies, I don't think we'll be able to understand why and how those movies command the audiences they do. If you have a better make-believe world, show us.
I didn't say that either simplicity or internal logical consistency was dispensable. Rather, the problem is that many if not most neoclassicals see them as _substitutes_ for an empirical orientation (as do dogmatists of other schools).
Frankly, I don't understand this statement. I'd think that most economists believe that theoretical and empirical work are complements, not substitutes. In theory, you want parsimonious, tractable "mechanical analogs" that replicate *some* (not all) of the attributes of a real economy. From those devices, you wish to deduct assertions about the behavior of the economy when certain things change, assertions that you can then test against available empirical information.
They are not. This is especially a problem since the theory that emphasizes deduction over empirical orientation is used to dream up policies which are then actually put into practice by organizations such as the International Monetary Fund. (For example, I heard one IMF economist say that the determinant of the level of employment was the size of the labor force.) The cookie-cutter/one-size-fits-all approach of the IMF follows from not only its top-down (dictatorial) approach but also its application of neoclassical dogma, caring only about the logical consistency and simplicity of their models.
Are you saying that we should reject Marx's insights because some Marxists exhibit the political behavior of a toddler? So, are you saying that we should reject the implications of an abstract, deductive "mechanical analog," not because the mechanical analog is logically flawed, but because IMF demagogues use it to validate their decisions?
Let me clarify this in case it is not obvious: The ideological role that economic theory plays is evident. It's not reasonable for us to expect professional economists to undertake a comprehensive and radical critique of capitalism. As a rule, professional economists (like computer programmers or poets) respond to the incentives the system has in place. That's to be predicted from a straightforward application of their own models. But for an *economic* ideology to be of any use, it has to have a modicum of practical relevance, which is to say that -- one way or another -- it has to deal with the real world. Actually, if you push me, it's clear to me that for the longest time in modern history it's been the advocates of capitalism -- not its enemies -- who have been more willing (and able) to acknowledge and deal with the real world as is. Else we'd have a different world already.
Of course, we should never take those results at face value. They should be criticized. And critique, in the tradition I'm most familiar with, means not only rejection, but also a painstaking appropriation of the germs of rationality contained in a given doctrine. And in this task, conventional economists have made (and continue to make) things increasingly *easier* for us. By clearly specifying the assumptions of their theories, and by deriving their results with strict compliance to public-domain mathematics and formal logic, these guys are doing us a big favor. It becomes much easier for the critics of capitalism to find when and where the Man is sticking the rabbit into the hat before he pulls it out. Still, we need to do our homework.
Talking about homework, that's all I can type for now.
Julio
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