[From Bill Williams 17 January 2004 12:20 AM CST]
[From Rick Marken (2004.01.16.1130)]
Oops. Hit the wrong button before. Let's try again.
Bruce Gregory (2004.01.16.1202)--
Well, the good news is that a single-consumer, single-producer model is
no worse than the models most economists work with every day. The bad
news is these models cannot accurately reflect the behavior of real
economies. As Keen says, "... the peculiar language and mathematics
used to derive these results makes it difficult to see just how absurd
the assumptions needed to sustain the aggregation process are. It
sounds much more highbrow to say that 'preferences are assumed to be
homothetic and affine in income' than it does to say 'we assume all
consumers are identical and never change their spending habits'."
Can't this be fixed by assuming that that the aggregate entities (producer
and consumer) are not made up of individuals that are identical?
No. This wouldn't help. The search for a "fix" has been going on for more than a century. So far the results have been that a solution for the difficulties of orthodox theory are more remote than they were when the search began late in the 19th century. Now, people are publishing claims that it can be "proved" that no solution is as a matter of math and logic possible.
And how do we know that this really needs to be fixed?
If an economic agent can't learn, then the resulting economic theory is obiviously going to be of quite limited use and if economic agents are all the same then this also creates problems such as limited scope of relevance. Or, ask yourself, do we really want to make policy decisions based upon "models" that assume that all economic agents are the same, and that economic agents either can't or don't learn?
Does Keen show how what he refers to as theh "absurd assumptions" affect the behavior of the model?
Yes. I say this without having read the book.But I'm not worried about making such a claim based on the chapter headings. Also, the use of the book here as a sort of "pony" to provide efficient access for students to contemporary problems in orthodox theory is supportive. Then there are Bruce's remarks that, would so indicate. So, there is a basis for affirming that "yes" the book does provide such explainations. But, this should be no surprize-- given that the book is a heterodox critique of orthodox theory-- this is a standard feature of the literature. Which, is why I was only mildly interested in the book. As C.E. Ayres (1944) "All the criticism can do has already beem done."
As lots of people now agree, the question has shifted from critique to, "Can you generate something better?" I doubt Keen has a clear idea about how to do
"something better." If he did, I think he wouldn't be publishing more critique. But, he's done a nice job, and aside from reading the journals and going to seminars you can read what he says, and be pretty much "up-to-date" in regard to economic issues view from a heterodox standpoint.
Actually, it's not quite clear to me that assumptions like the one you quote
..... are actually made in models of the aggregate economy.
First, how would you know? You've recently made a survey of the literature? Of, course not. Take my word for, assumptions like the ones Bruce quotes have been and are still in widespread use. There is a very extensive literature of this stuff published in what are considered to be the "best" journals.
Or, don't take my word for it, consider a paper by, Quah, John k-h. 1997 "The Law of Demand When Income is Price Dependent" Econometrica, Volume 65 Number 6 November pp. 1421-42. On the first page of the paper (p. 1421.)in footnote 2 it is declared that, "Homothetic transformations are a special case of affine transformations." For those not intimately familiar with the character of contemporary economic theoretical research Quah's paper might prove as Bruce Gregory says, "an eye opener." Clouds of integrals fly like snow. And, the argumentation reminds me of French cybernetics.
A JSTR search for the keyword "affine" returned over 200 references, I assume that most of these papers will also include a consideration of the "homothetic" issue-- so take your pick. At some point I'm going to have to read this literature--sigh...
The neo-classical approach has been every bit as absurd as Keen claims. And, nothing much has changed in more than a century, consider Veblen's (1909) statement,
"This supposition [of the maximization of utility ]
may be objected to as a bit of purerile absurdity; but
it has been a long time since puerility or absurdity has
been a bar to any suposition in arguments on marginal utility.
footnote 38 p. 225.
page from _The Place of Science_ reprint
Veblen, Thorstein 1908 "Professor Clark's Economics" Quarterly Journal
of Economics Volume 22 Issue 2
for psychologists and others outside economics, the Quarterly Journal
of Ecnomics has been published by Harvard since the late 19th century.
In a somewhat earlier and famous passage, Veblen {1896) says,
The hedonistic conception of man is that of a lightning calculator
of pleasures and pains, who oscilates like a homogenous globule of
desire of happiness under the impluse of stimuli that shift him
about the area but leave him intact. He has neither antecedent nor
consequent. He is an isolated, definitive human datum, in stable
equilibrium except for the buffets of the impinging forces that
displace him in one direction or another. Self-imposed in elemental
space, he spins symmetrically about his own spiritual axis until
the parallelogram of forces bears down upon him, whereupon he
follows the line of the resultant. When the force of the impact
is spent, he comes to rest, a self-contained globule of desire as
before. Spiritually, the hedonistic man is not a prime mover. He
is not the seat of process of living, except in the sense that he
is subject to a series of permutations enforced upon him by
circumstances external and alien to him. p. 73-74.
Page numbers _Place of Science"
Veblen, Thorstein 1898 "Why Economics is not an Evolutionary Science"
Quarterly Journal of Economics Volume 12
Reprinted in _The Place of Science_
Among other qualities, Veblen is pointing out that the economists were assuming that economic agents were, in the current lingo, "homothetic and
"affine."
What are the results of the assumptions and methods of orthdox economic theorists? Consider a paper
Clark, Colin W. 1973 "Profit Maximization and The Extinction of
Animal Speciesq." Journal Political Economy vol 81 # 4 July/August
p. 95O-61.
"In this paper I construct and analyze a simple mathematical model for
the commercial exploitation of a natural animal population. The model
takes into account the response of the population to harvesting pressure,
the increasing harvesting costs associated with decreasing population
levels, and the preference of the harvesters for present over future
revenues. The principle conclusion of the analysis is that, depending
on certain easily stated biological and economic conditions, extermination
of the entire population may appear as the most attractive policy,
even to an individual owner."
Enough said already??? But, there is more, much more,…
Consider,
Kremer, Michael and Morcom, Charles. "Elephants" American
Economic Review Volume 9O Number 1 March p. 212-34.
"Many open-access resources, such as elephants, are used
to produce storable goods. Anticipated future scarcity
of these resources will increase current prices and
poaching. This implies that, for given initial conditions,
there may be rational expectations equilibria leading to
both extinction and survival. The cheapest way for
governments to eliminate extinction equilibria may be to
commit to tough antipoaching measures if the population
falls below a threshold. For governents without
creditablity, the cheapest way to eliminate extinction
equilibria may be to accumulate a sufficient stockpile
of the storable good and threaten to sell it should the
population fall." p. 212.
What the authors are suggesting is, if it isn't clear from the absract is that a weak government that wishes to prevent a wild animal, such as an elephant, that is in danger of becoming extinct as a result of poaching may do the following: First it can kill _more_ elephants, second stockpile the elephants ivory, third threaten to dump the stockpiled ivory on the market if the poaching continues. Unless someone is really interested, I don't think it is owrth going into the convoluted logic and assumptions that generate this conclusion. However, a discussion that the "Elephants" paper generated here may be of interest. When I found the paper I brought it to the attention of a graduate inter-disciplinary seminar on social theory as an example of one strand of thinking in contemporary economics. The unexpected result was the eruption of a shouting-- it wasn't a "match." I was unprepared for the uproar that follow distribution of the paper-- so I wasn't really in a "match." But, then the uproar changed into a screaming fit when a French Marxist joined into the discussion. I was of the opinion that it wasn't going to do much good to kill _more_ elephants when the basic problem was that too many elephants were being killed. So, I was grateful that the French Marxists took the side of the elephants-- that is don't kill more elephants.
One of the more lasting effects of the "elephants" discussion was a persistent difficultly explaining to the non-ecnomics grad students just what, and why the uproar had taken place. This was a difficulty, that was evidenced by a lot of eye rolling, and it was never really adaquately sorted out.
So, when you raise the question,
Does Keen show how what he refers to as theh "absurd assumptions" affect the behavior of the model?
The answer, of course, is "Yes." But, this isn't any longer the question. The obvious and urgent question has become "What would Ayn Rand do?"
Bill Williams