5/09/2008

i enjoy philosophy, in the sense of always wanting to dream up beautiful explanations of things in the world, even though the real world possibly defies order. of course, these come with the usual critique that it is all very well and good to think up a grand scheme of things, but what matters are the actions which we act upon on this world. well, i have a day job studying, and will have a day job somehow contributing productively to the economy soon, but let us take it that i do this as a hobby, as some people may riff on a guitar when it becomes second nature to them.

so i took a break from the usual tasks of the day to have a drink in the tuns, but also to read some economic theory. i was tired of the usual churn of cranking through economic models (many of which i don't believe in) and read a few more papers regarding the more philosophical aspects of economics. my desire to learn more models and more mathematics can be viewed in this light: you cannot philosophize if you do not understand the language your opponents argue in, or the workings of the model. with this caveat, we shall begin.

1st thought-provoking paper:
arielrubinstein.tau.ac.il/papers/74.html
Dilemmas of an economic theorist

I enjoy reading Ariel Rubinstein because he is honest (at least in impression), in the sense of revealing a little of his psychology and how he comes to his conclusions. Also, his books are all free and downloadable from his website. This paper came out of a guilt from being a theoretician and a profound admiration for nurses, teachers and writers. He studied logic because he thought it would help him in his debating and in becoming a great solicitor fighting evil in the world. He then became an economist. I see a lot in what he says which applies to philosophers as well, especially in ethics. There is so much hand-wringing going on, because there are all these theories on ethics, but who really behaves ethically? Can we make moral judgements or prescriptions?

It poses 4 dilemmas for a theorist

1. Dilemma of absurd conclusions - should we reject a model if it produces absurd conclusions?
2. Dilemma of responding to evidence - should our models be judged according to experimental results?
3. Dilemma of modelless regularities - Should models provide hypotheses for things we see in real life or should they be exercises in logic which have no use in doing so
4. Dilemma of relevance? Do we have any right to offer advice or to make statements that are intended to influence the real world?

His short, emotive, answer by analogy

It is time to sum up. How do I relate to these four dilemmas? As economic theorists, we organize our thoughts using what we call models. The word “model” sounds more scientific than “fable” or “fairy tale” although I do not see much difference between them. The author of a fable draws a parallel to a situation in real life. He has some moral he wishes to impart to the reader. The fable is an imaginary situation that is somewhere between fantasy and reality. Any fable can be dismissed as being unrealistic or simplistic, but this is also the fable’s advantage. Being something between fantasy and reality, a fable is free of extraneous details and annoying diversions. In this unencumbered state, we can clearly discern what cannot always be seen in the real world. On our return to reality, we are in possession of some sound advice or a relevant argument that can be used in the real world.
We do exactly the same thing in economic theory. A good model in economic theory, like a good fable, identifies a number of themes and elucidates them. We perform thought exercises that are only loosely connected to reality and that have been stripped of most of their real-life characteristics. However, in a good model, as in a good fable, something significant remains.

Like us, the teller of fables confronts the dilemma of absurd conclusions, because the logic of his story may also lead to absurd conclusions.
Like us, the teller of fables confronts the dilemma of response to evidence. He wants to maintain a connection between his fable and what he observes; there is a fine line between an amusing fantasy and a fable with a message.
Like us, the teller of fables is frustrated by the dilemma of fableless regularity when he realizes that sometimes his fables are not needed to obtain insightful observations.
Like us, the teller of fables confronts the dilemma of relevance. He wants to influence the world, but knows that his fable is only a theoretical argument.
As in the case of fables, absurd conclusions reveal contexts in which the model produces unreasonable results, but this may not necessarily make the model uninteresting.
As in the case of fables, models in economic theory are derived from obser- vations of the real world, but are not meant to be testable.
As in the case of fables, models have limited scope.
As in the case of a good fable, a good model can have an enormous influence on the real world, not by providing advice or by predicting the future, but rather by influencing culture.
Yes, I do think we are simply the tellers of fables, but is that not wonderful?

With this philosophy in mind, perhaps, he sees the teaching of economic theory as an analysis of different strategic sets or ways of thinking, which bring up a particular strategic aspect of a situation. Therefore, economics should not be a single prescription: do this. (now, won't that limit its usefulness? we will come back to this) Again, I will use one of this examples. There is a game known as "traveller's paradox." There are 2 contestants. A contestant can choose a number from 150-300. The lower of the 2 numbers is then taken and that amount of dollars is given to both participants. Then, 5 dollars is taken from the participant with the higher bid and given to the one with the lower bid. The textbook answer: the unique Nash equilibrium for this game is then (150, 150). When performed empirically though, there was a mix of people who bid the NE amount (150), the full amount (300), other random amounts, and a set of people who bid what was called "strategic amounts" in the 297-298 range. These people did the best, and those who bid the textbook amount suffered, and were "victims" of the theory. They had taken the lesson too seriously. The key lesson to take from Nash equilibrium, is that the highest bid is not necessarily the most optimal one in these scenario, and so you should bid slightly lower than that. Then theory has its use in telling us that there is a point in picking something other than the directly intuitive answer.
(That's why if you try to play textbook poker on lower limits using game-theoretical methods, it doesn't perform so well)

In fact, I see economic theory performing best as a skeptical tool casting doubt on certain intuitions. For example, given a set of assumptions of what you want to maximise, then it can tell you if you are pursuing these objectives in a consistent way. It is able to cast logical doubts on the wisdom of mercantilism (treating trade between countries as competition between each other, rather than gains for all). There are certain economic relations which hold through common sense, such as no-arbitrage. But in a world where you have to balance so many practical considerations, then each theory then just becomes a strategic tool for you to consider. Then, what is the use? Why not have a super-theory which overarches and tells you how to balance strategic considerations? Why not have a supreme theory of ethics, and shouldn't this be what theorists aim for? But the key point, perhaps, is that it is not possible, and we should not take our theories, on their own as edifices too seriously. Well, everyone knows this as just common sense, but at the same time perhaps it is necessary that theoreticians need to make those assumptions and tell those fables with as much conviction as possible, and the collision of ideas creates the world that we have.

In his other book, he considers the relations between economics and language. It attempts to be a serious linguistic study in its own right, exploring the use of context and pragmatics in language, but I will give an economic example. He did a paper with Piccione about "jungle economics", where, using the same relations between agents as in the standard economic model, but substituting power relations for price vectors, etc. Everything was there, the first and second theorem of welfare economics, that the invisible hand was efficient. However, by replacing the interpretations of the mathematical logic, one comes up with the conclusions that the "iron hand" is efficient in the sense that wealth follows power, and the greed (utility) which the market economy is based on is analogous to the strong taking advantage of the weak in a jungle economy. The market economy encourages everyone to produce more, while the jungle economy furthers everyone's expansionist ambitions. Same mathematical conclusions, but different normative and emotive appeal. Why?

So, is everything we do in theory just an attempt to win the culture war? And so this explains why when I read Ayn Rand, I want to be Howard Roark. When I read Rawls I want to redistribute. And so we can have 2 competing visions for the world. One in which people hold their positions and ideologies with a certain strength of conviction, and push through the change they wish to see in the world. The resulting collision creates the world and its chaos. (I suspect this is rather true). The other is just like us being the father in Cormac McCarthy's novel, The Road, trying to find the balance in teaching your son how to fend for himself, and when to help, which is how so many of us live our lives. The truth is, there's a bit of the extreme and a bit of the moderate in large numbers, and so I have no conclusion for you today. I was just riffing!

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