Tag Archives: economics

Finding equilibrium

Posted on by

Well, I enjoyed [amazon_link id=”0691156646″ target=”_blank” ]Finding Equilibrium: Arrow, Debreu, McKenzie and the Problem of Scientific Credit[/amazon_link] bu Till Düppe and Roy Weintraub. The story is fundamentally simply: Arrow was a sunny-natured genius who excelled in many areas, Debreu a schemer who sought to maximise credit to himself and spent years fretting about whether he would get the Nobel Prize, and McKenzie was unlucky and undeservedly failed to get sufficient credit for his work. The book in the end puts this down to the ‘Matthew effect’, namely that those who are already better known or at more eminent places get greater credit: “for whosoever hath, to him shall be given, and he shall have more abdundance.” Whereas Debreu is (diplomtically) described thus: “His strategizing with respect to credit was the subtlest.”

[amazon_image id=”0691156646″ link=”true” target=”_blank” size=”medium” ]Finding Equilibrium: Arrow, Debreu, McKenzie and the Problem of Scientific Credit[/amazon_image]

The work they all did on existence proofs for general equilibrium was ‘in the air’ at the time. All three men had read the same papers, such as the newly-translated work by Abraham Wald, and John Von Neumann’s game theory: “John von Neumann’s authority fused pure mathematics with the eclectic spirit of applied research. The work of McKenzie, Arrow and Debreu would differently make manifest this fusion.” Early biographies treated von Neumann either as the deranged Dr Strangelove or a genius; Düppe and Weintraub cite more recent and more balanced biographies, to which I would add the portrait in George Dyson’s absolutely terrific book about that Princeton milieu, [amazon_link id=”014101590X” target=”_blank” ]Turing’s Cathedral[/amazon_link].

[amazon_image id=”014101590X” link=”true” target=”_blank” size=”medium” ]Turing’s Cathedral: The Origins of the Digital Universe (Penguin Press Science)[/amazon_image]

[amazon_link id=”0691156646″ target=”_blank” ]Finding Equilibrium[/amazon_link] identifies a 1949 conference under the auspices of the Cowles Commission as a launch event for “a new kind of economic theory growing from game theory, operations research and the related mathematical techniques of convex sets, separating hyperplanes and fixed point theory.” (I can’t resist retelling the story of the cookie recipe one of my colleagues put in the Economics Department newsletter when we were suffering through that work ourselves: roll the dough into balls; place the convex sets on a separating hyperplane and bake in a medium oven for 20 minutes.”) The idea was to extend successful wartime planning techniques to a peacetime economy; planning segued from being a political choice to being a question of productive efficiency in a mixed economy.

The conference was multi-disciplinary. “Nearly all the ingredients of an existence proof were on the conference table,” the book notes. Later (1987) Ken Arrow insisted that if he, Debreu and McKenzie hadn’t done the joining together, somebody else would have, using von Neumann’s work along with Tjalling Koopman’s work on production or John Hicks on consumer theory. However, Arrow stands out in this account for the breadth of his interests. “He was unsympathetic to the manner in which such analysis [ie. general equilibrium analysis] was increasingly being used in economic research; the hermetic spirit of such analyses stood in stark contrast to his open, interdisciplinary-cybernetics spirit.” He disliked the use of the Arrow-Debreu theory, concerning perfectly competitive markets, ‘precisely where it is not applicable’.

The last word ought to be the [amazon_link id=”0631125051″ target=”_blank” ]quotation from Wittgenstein[/amazon_link] that opens the final section of [amazon_link id=”0691156646″ target=”_blank” ]Finding Equilibrium[/amazon_link]:

“For it is not merely that the existence-proof can leave the place of ‘the existent’ undetermined: there need not be any question of such a place.”

The logical demonstration of the existence of equilibrium in the realm of topology is just that.

Economics, general equilibrium and the Cold War

Posted on by

I’m well into [amazon_link id=”0691156646″ target=”_blank” ]Finding Equilibrium[/amazon_link] by Till Düppe and E Roy Weintraub, about the parallel proof of existence of general equilibrium by Arrow and Debreu and separately by the less well-known and unacknowledged Lionel McKenzie. OK, it’s a special interest subject, but I’m enjoying the book, which isn’t at all inaccessible or technical.

[amazon_image id=”0691156646″ link=”true” target=”_blank” size=”medium” ]Finding Equilibrium: Arrow, Debreu, McKenzie and the Problem of Scientific Credit[/amazon_image]

Its subject is the allocation of scientific credit. McKenzie’s proof paper was published first, but he did not win the Nobel and is not recognized now as the first person to prove existence using a fixed point theorem. The book also traces in both the personal stories of the three men and the intellectual history of the time (the 1930s and 1940s) the mathematization of economics. None of the men whose histories are described here started out interested in economics – they were mathematicians (Arrow, Debreu) or physicists (McKenzie). The latter seems to have regretted ever after that he didn’t stick with physics.

I’ll do a proper review when I’ve finished. Meanwhile, it’s interesting to note the role John Hicks’s [amazon_link id=”0198282699″ target=”_blank” ]Value and Capital [/amazon_link]played in stimulating the work of at least two of the three subjects of this book. I have a copy on my shelves, bought in 1981, but it has left no trace of having made any impression on me either in my memory or in the form of margin notes. I must confess also that the bits of graduate micro where we had to plough through the general equilibrium proofs left me absolutely cold, and I had the best possible teachers (Frank Hahn and Andreu Mas-Colell). Although the point that the economy is a connected system is clearly important, the mathematical formalism seemed to me then and now worse than irrelevant – possibly dangerous.

My other first impression of this book is how much more persuasive it is in its account of the role of the Cowles Commission than the earlier work by Philip Mirowski (in [amazon_link id=”0521775264″ target=”_blank” ]Machine Dreams: Economics Becomes a Cyborg Science[/amazon_link]).  Duppe and Weintraub reject Mirowski’s argument that the Bourbaki-influenced group of economists at Cowles were inspired by their work for the US military at RAND corporation, although some (including Arrow) certainly spent their summers at RAND in Santa Monica.

Instead, they suggest that the mainly European emigré, mainly socialist scholars at Cowles (then located in Chicago) needed to prove they were not politically motivated. This was in the context of the House Un-American Activities Committee getting into full swing. There was also a wider tension in American universities between the independence of research funded by peer-allocated competitive mechanisms and doing research at other institutes in the national interest. The ambition to stay out of politics was all the more relevant given the formal equivalence of a general equilibrium solution describing a competitive market economy and a centrally planned economy (with full information, of course). There is no better description of this equivalence than Francis Spufford’s marvellous book from a few years ago, [amazon_link id=”0571225241″ target=”_blank” ]Red Plenty[/amazon_link].

[amazon_image id=”0571225241″ link=”true” target=”_blank” size=”medium” ]Red Plenty[/amazon_image]

Anyway, to say the economists needed to avoid trouble by depoliticising their work is miles away from the Mirowski claim that the economics profession, directed by the military, became an active Cold War combatant, a claim Düppe and Weintraub describe as “a mish-mash of political pre-conceptions and historical confusions.”

This is a sub-plot in [amazon_link id=”0691156646″ target=”_blank” ]Finding Equilibrium[/amazon_link], with the main storyline being about the allocation of scientific credit. I’ll do a proper review when I’ve finished.

Economists and humanity

Posted on by

Peter Smith sent me his new book T[amazon_link id=”0957069707″ target=”_blank” ]he Reform of Economics: How the complex systems approach is building a realistic and humane alternative to laissez-faire[/amazon_link]. In a letter accompanying it, he said he has two motivations. One is to get economics out of the trap of over-simplifying so that models can use linear algebra and thus be made ‘tractable’. This is one of the things that makes complexity economics and agent-based modelling appealing; virtual economies run on a computer do not need to be solved algebraically.

[amazon_image id=”0957069707″ link=”true” target=”_blank” size=”medium” ]The Reform of Economics[/amazon_image]

The other aim is to make economic methodology something more like normal scientific methodology. Economic method consists of choosing some basic postulates and making deductions from them. The deductions can then be tested against data. Normal science involves both induction and deduction. Careful empirical observation will shape theory.

The book dates the choice of the purely deductive path to Lionel Robbins and his 1935 essay [amazon_link id=”B001037AGS” target=”_blank” ]The Nature and Significance of Economic Science[/amazon_link]. He defined economics as the science of constrained choice, which, “Not only excludes uncertainty, but it also excludes from the scope of economics both institutions and the medium-term evolution of economic systems.” This isolates economics from the institutional framework of the economy, and hence from what determines the availability of resources over time – it makes economics an inherently static subject.

Natural scientists do regard economics as bizarrely non-empirical – I’ve been in multi-disciplinary conferences about both macroeconomics and behavioural choice at which biologists exclaim about how rarely economists discuss data, for all that they might go away and test hypotheses. One of the joys of being on the Competition Commission for eight years was how profoundly evidence-based the process is, and hence a real insight for an economist used to generalising about how companies behave. There aren’t many business people who think about marginal cost curves and production functions.

[amazon_link id=”0957069707″ target=”_blank” ]The Reform of Economics[/amazon_link] is a game of two parts (not halves). It is mostly a critique of economic methodology but also has a useful introduction to agent based modelling. It ends on an upbeat note I very much like:

“Economics is becoming a much more interesting area in which to work and learn; and we have every hope that a more realistic and effective reformed science of economics will also be a more humane one. For, ultimately, economics is about the well-being of humanity.”

Resources on complexity economics

Posted on by

Following my posts last week on complexity and economics, Professor Leigh Tesfatsion of Iowa State University sent me this very useful website with links to loads of resources on the subject – including an introductory self-study course.

Prof Tesfatsion wrote to me that the complexity approach has real momentum but added: “In macroeconomics, however, bitter resistance has been encountered, particularly from those who have devoted themselves to mastering DSGE modeling.” However, there is also some work on agent-based macroeconomics.

One general book I spotted in this list, one I’ve not read, is Mark Buchanan’s [amazon_link id=”1408827379″ target=”_blank” ]Forecast: What Physics, Meteorology, and the Natural Sciences can Teach Us About Economics[/amazon_link]. Nate Silver’s [amazon_link id=”0141975652″ target=”_blank” ]The Signal and the Noise[/amazon_link] doesn’t feature agent-based modelling but does talk about the macroeconomy as a complex (non-linear multivariate dynamic) system.

[amazon_image id=”1408827379″ link=”true” target=”_blank” size=”medium” ]Forecast: What Physics, Meteorology, and the Natural Sciences Can Teach Us About Economics[/amazon_image]

Serendipity, complexity, and loneliness

Posted on by

No sooner (literally)  had I written about the complexity economics of the new book by David Colander and Roland Kupers, [amazon_link id=”0691152098″ target=”_blank” ]Complexity and the Art of Public Policy[/amazon_link], than (in one of the many instances of serendipity in life) another book  on complexity turned up in the post, courtesy of its author, Peter Smith. The book is [amazon_link id=”0957069707″ target=”_blank” ]The Reform of Economics: How the complex systems approach is building a realistic and humane alternative to laissez-faire[/amazon_link].

[amazon_image id=”0957069707″ link=”true” target=”_blank” size=”medium” ]The Reform of Economics[/amazon_image]

The book looks like it argues for a more realistic alternative to mainstream economics by actually developing it, using agent-based modelling. In a covering letter, Dr Smith says the intelligent agents: “learn by experience how to respond to market conditions. … They can engage in price exploration, and learn to manage their inventory, plant renewal and cashflow (or go bust), all starting from far-from-equilibrium states.” He also describes his research, and his search for a post-crisis renewal of economics as “a mite lonely.” I think it might be less lonely than he fears.