3 ms·

The necessary sub header from the article: Actually they’ve done no such thing. But they do effectively assume that it’s unnecessary all the time. This article

The necessary sub header from the article: Actually they’ve done no such thing. But they do effectively assume that it’s unnecessary all the time. This article is just a short rant about how simple, traditional, econ 101 models from the 19th century assume purely rational actors whereas the author has decided that not everyone is a "Nostradamus" with infinite knowledge and wisdom. Nobody believes the rational agent assumption to hold at the individual level, but it is sometimes a useful approximation that can build the foundation of a macroeconomic model that sometimes makes sense. It's also a necessary stepping stone on the way to more complex models. An unnecessary article with a clickbait title. That said, his book Debunking Economics is very good and I'm glad that he's advancing the state of modern economics by relaxing traditional assumptions and building better models based on more realistic heuristics. But I don't think this should be getting voted up HN.

exelius 11y ago
Incorrect assumptions are still useful for determining what happens most of the time. That's the reason we have assumptions: we know they're technically wrong, but the assumption is true often enough that we state it up front. It also is basically a sign that says "This model will not tell you anything about what happens when market actors are acting irrationally." Assumptions are the "buyer beware" notice on a mathematical model. They are informative because they limit the scope to which the model applies, not because the assumptions themselves are correct.
- jedharris 11y ago
  So you are saying the representative agent assumption limits current models to 100% centrally plannable economies? If that is not the implication, please tell us what limits this assumption implies. Careful buyers want to know.
  - exelius 11y ago
    No, but there is an assumption that the representative agent is actually representative of the "average" of the agents participating in the market. So when we apply a model with this assumption to real world data, we are making an assumption that the "representative agent" described in the model is truly representative of the market participants. This causes a range of potential error in the outcomes predicted by the model (based on how representative the "representative agent" might actually be) on top of any error introduced by the model itself. In many circumstances, this amount of error is acceptable, and thus the model is useful even if the assumptions are incorrect. If you want to reduce the error further, come up with a series of categories (or multiple representative agents) to describe the behavior of the buyers participating in your market. There's always going to be some margin of error on predictions though, because the future isn't predetermined and events can happen randomly.
    - jedharris 11y ago
      I don't think this addresses the issue. First, I think multiple representative agents have to be carefully defined to generate an equilibrium solution -- which implies some strong limitation on the space of possible agents. Second, and more important, you have not described the "Buyer beware" message you claim is implicit here. What limitation does the requirement for representative agents impose on the behavior or range of applicability of these models? Unless you can get specific about that we have to fall back on our dark suspicions.
jedharris 11y ago
You greatly underestimate the depth of the problem. Mainstream economic theory provably leads to economies that are unstable -- they don't converge to equilibrium, and in fact can end up arbitrarily far from equilibrium. This is not due to old or simple models, it is baked into current foundations. Keen makes fun of the assumptions economists use to avoid that instability -- more the representative agent assumption than unbounded rationality. The representative agent assumption is that all economic actors in the model behave exactly like each other, and like the theory predicts would be rational. Without that, the models would not converge. With that assumption, as Keen points out, we can simply delegate all economic decisions to a central planner. If this is a joke, it is one the economists are playing on us all the time.
- roymurdock 11y ago
  "Mainstream economics" moved away from convergence in the 1950s to the Solow-Swan exogenous growth models and more recently the controversial endogenous growth models such as the AK and the R&D models. They allow for differences in savings rates and human capital respectively that determine whether or not different economies will reach a steady state or converge with one another. But this is all academic fluff: I doubt anyone at the Fed is plugging data into any of these simple models that professors use to illustrate high level empirical trends ex post facto. Ultimately, your comment is much more concise and insightful than the post itself. You get to the heart of the matter: central planning vs. free markets. No organization can know enough about every variable that affects an economy to do a perfect job of governing it. On the other hand, without central planning there is little incentive to build infrastructure, protect borders, provide affordable education and healthcare, and create a place where people (excepting Ayn Rand) generally want to live. Could we have a better system? Probably. Almost everything in the world can be "improved" in one way or another depending on your viewpoint and agenda. But I think its a bit dramatic to hold the viewpoint that "the economists" (whoever they are) are playing a joke on us all the time. They're fallible humans playing their part in a fallible system just like you and me. It would have been great to see a careful consideration of the other side's viewpoint and a proposal for a better system rather than a short, click baity rant.
  - 11y ago

exelius 11y ago

Incorrect assumptions are still useful for determining what happens most of the time. That's the reason we have assumptions: we know they're technically wrong, but the assumption is true often enough that we state it up front. It also is basically a sign that says "This model will not tell you anything about what happens when market actors are acting irrationally." Assumptions are the "buyer beware" notice on a mathematical model. They are informative because they limit the scope to which the model applies, not because the assumptions themselves are correct.

jedharris 11y ago
So you are saying the representative agent assumption limits current models to 100% centrally plannable economies? If that is not the implication, please tell us what limits this assumption implies. Careful buyers want to know.
- exelius 11y ago
  No, but there is an assumption that the representative agent is actually representative of the "average" of the agents participating in the market. So when we apply a model with this assumption to real world data, we are making an assumption that the "representative agent" described in the model is truly representative of the market participants. This causes a range of potential error in the outcomes predicted by the model (based on how representative the "representative agent" might actually be) on top of any error introduced by the model itself. In many circumstances, this amount of error is acceptable, and thus the model is useful even if the assumptions are incorrect. If you want to reduce the error further, come up with a series of categories (or multiple representative agents) to describe the behavior of the buyers participating in your market. There's always going to be some margin of error on predictions though, because the future isn't predetermined and events can happen randomly.
  - jedharris 11y ago
    I don't think this addresses the issue. First, I think multiple representative agents have to be carefully defined to generate an equilibrium solution -- which implies some strong limitation on the space of possible agents. Second, and more important, you have not described the "Buyer beware" message you claim is implicit here. What limitation does the requirement for representative agents impose on the behavior or range of applicability of these models? Unless you can get specific about that we have to fall back on our dark suspicions.

jedharris 11y ago

You greatly underestimate the depth of the problem. Mainstream economic theory provably leads to economies that are unstable -- they don't converge to equilibrium, and in fact can end up arbitrarily far from equilibrium. This is not due to old or simple models, it is baked into current foundations. Keen makes fun of the assumptions economists use to avoid that instability -- more the representative agent assumption than unbounded rationality. The representative agent assumption is that all economic actors in the model behave exactly like each other, and like the theory predicts would be rational. Without that, the models would not converge. With that assumption, as Keen points out, we can simply delegate all economic decisions to a central planner. If this is a joke, it is one the economists are playing on us all the time.

roymurdock 11y ago
"Mainstream economics" moved away from convergence in the 1950s to the Solow-Swan exogenous growth models and more recently the controversial endogenous growth models such as the AK and the R&D models. They allow for differences in savings rates and human capital respectively that determine whether or not different economies will reach a steady state or converge with one another. But this is all academic fluff: I doubt anyone at the Fed is plugging data into any of these simple models that professors use to illustrate high level empirical trends ex post facto. Ultimately, your comment is much more concise and insightful than the post itself. You get to the heart of the matter: central planning vs. free markets. No organization can know enough about every variable that affects an economy to do a perfect job of governing it. On the other hand, without central planning there is little incentive to build infrastructure, protect borders, provide affordable education and healthcare, and create a place where people (excepting Ayn Rand) generally want to live. Could we have a better system? Probably. Almost everything in the world can be "improved" in one way or another depending on your viewpoint and agenda. But I think its a bit dramatic to hold the viewpoint that "the economists" (whoever they are) are playing a joke on us all the time. They're fallible humans playing their part in a fallible system just like you and me. It would have been great to see a careful consideration of the other side's viewpoint and a proposal for a better system rather than a short, click baity rant.
- 11y ago