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[personal profile] sophiaserpentia
In college I studied a significant amount of economics: 12 upper-class hours. All of that stuff I learned about -- the curves of supply and demand, economies of scale, the money supply, etc. -- the entire edifice of academic economics -- sounds really great, but it is all based on the assumptions of open information, rational self-interest, and product equivalence. Economists shrug off the gap between these assumptions and reality, saying, "Well, the math is valid for those assumptions, so it should approximate reality to some degree. However:

"Economics has hit the wall," said Andrew Lo, director of MIT's laboratory for financial engineering. "It has explained about as much as it can with the tools it has. There are too many inconsistencies between theory and data."


The problem with economic theory is that it assumes that scarce resources are being handled by robots, not by domesticated primates, with our biological responses to scarcity and our tendencies for stratified culture. The gap between real behavior and assumed behavior is so big, that economic theory is a hollow abstraction so far removed from reality that leads not to better policy, but to inhumane policies and justification for imperialism.

The other day I posted about behavioral finance; today there is a story in the news about neuro-economics, a new field which examines the ways the brain responds to classical resource-scarcity situations.

Economics -- the study of how people react to resource scarcity -- is going to be completely turned on its ear within the next twenty years. There will be a paradigm shift comparable to that inspired by Marx or Keynes. I see considerable opportunity for the development of a more humane socio-economic-political theory.

From the story linked:

In virtually every area of markets, human behavior has economists stumped. "We don't know why stock prices go up and down," said Caltech economist Colin Camerer. "We don't know why savings rates are so dramatically different in different parts of the world. We don't know why there is labor market discrimination." People trust other people when economic theory says they should not. They cooperate when betrayal seems more rational. They gamble foolishly, overestimating risk when they are losing, and underestimating it when they are winning. They spend too much and save too little.

Economists know all this from personal experience, but they don't know how to factor the quirks of human behavior into their mathematical models. This is no small matter. Efforts to set interest rates, revamp health insurance, privatize Social Security, revise pensions, police the sale of securities and alter legal liability rules rely to some degree on economists' ability to make reliable predictions about the choices people will make.

... Pioneers in neuroeconomics believe the key to understanding economic behavior lies deep in the brain, at the level of cells and synapses.

The brain is above all an economic engine forged by evolution through eons of scrounging for scarce resources, they argue. So the ability to trade things of value is the defining characteristic of the brain, the keystone of human character.

"Trade preceded agriculture; it preceded cities; it is a major component in human sociality. More than anything, it explains our success as a species," said Vernon Smith, an economist at George Mason University whose work in experimental economics earned him a Nobel Prize in 2002.

Some experts suggest that stock markets and other financial exchanges, as creations of the human intellect, may mirror the biological networks in the brain.

Date: 2005-03-19 07:04 pm (UTC)
From: [identity profile] theodora.livejournal.com
Thanks so much for this!

I agree with the bulk of this post.

Date: 2005-03-19 07:19 pm (UTC)
From: [identity profile] daoistraver.livejournal.com
I definitely think mainstream economics is mostly bunk.

I think everything developed between Keynes and Game Theory is pretty much statistical nonsense.

"Economists know all this from personal experience, but they don't know how to factor the quirks of human behavior into their mathematical models. This is no small matter. Efforts to set interest rates, revamp health insurance, privatize Social Security, revise pensions, police the sale of securities and alter legal liability rules rely to some degree on economists' ability to make reliable predictions about the choices people will make."

I don't think it's possible to do that.

On the other hand, some of the more recent developments in Game Theory and Experimental Economics and stuff like this, possibly, could be more promising in working out new theory that doesn't rely on neoclassical nonsense. Perhaps, though I am skeptical, they will develop reliable prediction models. But they better stay away from curve-fitting and data reduction.

Date: 2005-03-19 07:20 pm (UTC)
From: [identity profile] daoistraver.livejournal.com
On the other hand, just because academic economics is BS, doesn't mean that economics is BS.

Date: 2005-03-19 07:59 pm (UTC)
From: [identity profile] winegodeatsyou.livejournal.com
Agreed, Austrian and Chicago economics are not popular in University studies since their lexicon does not obfuscate, and while both schools have a few difficult lexicon issues to handle, they generally produce interesting results.

One of the most interesting things I do is apply Misian economics to French Marxist social criticism (such as Althusser or Giles Deluze) and come up with Rothbardian conclusions with it.

Date: 2005-03-19 08:49 pm (UTC)
From: [identity profile] daoistraver.livejournal.com
Yes, I want to go way myself, more in the Baudrillard / Debord situationist direction. I'd be interested to read some of it. Let me add you.

I think Marx was the apotheosis of classical economics, the most consistent applier of the labor theory of value.
Henry George also had some good things to say, but slightly missed the mark.
I want to look at Georgist/Marxist analysis through the lens of subjective value theory, and see what I can salvage.

Date: 2005-03-20 02:41 am (UTC)
From: [identity profile] winegodeatsyou.livejournal.com
I do really love applying Baudrillard to everything, including Buadrillard.

Date: 2005-03-21 06:55 pm (UTC)
From: [identity profile] sophiaserpentia.livejournal.com
Right. I think there will definitely be much that can be kept from current theoretical economics. The question is, is human economic behavior mostly rational with irrational deviations, or is rational behavior the deviation? It will be interesting to see what the evidence suggests.

I am learning that it is problematic to say that anything has its roots in neurology, because brain-wiring is so heavily affected by culture and upbringing. Genetics paints only in broad brush-strokes -- and so pinning anything to neurology points only to one stage in a complex feedback loop. Just because neurology might point to certain patterns of human behavior, does not mean that biology is the ultimate root of that behavior, or that culture is a justified reflection of biology.

Date: 2005-03-21 07:12 pm (UTC)
From: [identity profile] daoistraver.livejournal.com
I think it's an interactive system - perception shapes the brain, which shapes perception, round and round.

I think the best ideas in economics are those outside of the neo-classical/neo-keynesian mainstream.

Date: 2005-03-19 07:57 pm (UTC)
From: [identity profile] winegodeatsyou.livejournal.com
Fascinating, maybe we can spread into neuro-political studies.

Date: 2005-03-21 06:55 pm (UTC)
From: [identity profile] sophiaserpentia.livejournal.com
Yes, I think that could be very interesting too.

See the caveat I just gave to [livejournal.com profile] daoistraver, though.

Date: 2005-03-19 11:39 pm (UTC)
From: [identity profile] beowulf1723.livejournal.com
Yep. Oil prices of $55/bbl have nothing to due with current and future supplies but everything to do with how scared people are.

This is the problem I have with game theory, namely, its stated assumption that the players are acting rationally and in their own best interest. While probably a reasonable assumption for most people, all it takes is one "irrational" person as the head of a country and things can become unpredictable.

As far as the experiment in the article goes, I would like to see this redone with people who do this for a living, e. g., a couple of NYSE or Chicago Board of Trade brokers. That would give more "real world" results, I would think.

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