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> I get the argument that the real world is less constrained and more chaotic than chess and that lots of people suck at playing chess anyway, but rational expe
by CPLX 5y ago
> I get the argument that the real world is less constrained and more chaotic than chess and that lots of people suck at playing chess anyway, but rational expectations in most models isn't the assumption that every individual in the economy is always right in their predictions, it's the absence of an assumption about the types of mistake the average human must always make in response to policy changes which was explicitly or implicitly embedded in all the non ratex models. A model of chess which assumes the opponent considers the best possible moves available to them will make fewer bad mistakes than one which assumes they always take the pawn even if the opponent isn't very good and likes taking pawns.
Not sure you actually get my argument. I could have articulated it better.
My argument is that there is no such thing as a rational strategy in something as complex and nonlinear as a global economy.
There just isn't. It's not that some participants are more or less rational. It's that you (the implicit analyst in the discussion) have no ability to define rationality at all.
The chess metaphor is to show that in chess which is profoundly simple, the idea of a rational strategy is just barely discernable at best, and only after decades of supercomputing research.
The assumption inherent in the concept of rationality in the context of economics is the argument that one has the ability to base current strategy on the ultimate outcome. But you can't.
The outcome is unknowable and the system is non-linear, often random, and resistant to cause and effect analysis to a degree that the basic premises of rational expectations and EMH type theories are useless. Or to use jargon, economic systems display emergent behavior which does not follow in an orderly fashion from initial inputs.
The only way to proceed in an environment like this is via a heuristic approach. Which, of course, is how agents in economic decisions actually formulate strategy.
The EMH/rational expectations argument implicitly states that there IS an optimal path for agents in the system, and that while it may be difficult to discern for any given participant, the sub-optimal decisions are random and cancel out leading to the system at large acting rationally.
It's bullshit. The world just doesn't work like that. And one of the reasons is that optimal strategy isn't a concept that actually exists, the system isn't orderly. The entire premise is unworkable.
It's as much a disruption of certain classical/neoclassical models as quantum physics is to classical physics. The rules work, until they don't. And when they don't what you thought you knew is worse than useless.
- notahacker 5y agoBut rational expectations is just "people make error of random size and magnitude when predicting stuff". It's an absence of auxiliary assumptions about strategy, that's more compatible with complex emergent behaviour or people following a range of heuristics than the various forms of [implicit] consumption/production/etc function that preceded them. Ratex isn't "there's a single rational strategy", it's "these alternative specifications rely on a single fundamentally irrational strategy". You can still get path dependent outcomes with ratex models tending towards equilibria, just like many economists have managed to build many simplistic and wrong models of human behaviour with other specifications of expectation. Anyway, epistemological agnosticism about outcomes is arguably much more compatible with the laissez-faire positions you seem to hate the most. If responses to and outcomes from public policy are unknowable, why do anything? The classical physics analogy fits my position so perfectly I'm pretty sure I've used it before. Sure, Newton's theory of classical mechanics has no concept of subatomic particles and quarks simply don't behave like it suggests. But just because it's oversimplification at best and fundamentally wrong in other areas, and careless physics costs lives doesn't mean "caring about stuff falling down" and handwaving about complexity theory will build better bridges than the gravity-obsessed professional engineers you've confined to the cruise ship.
- CPLX 5y agoRight but you have the protagonists and antagonists in your metaphor reversed. The academic economists are the ones that claim to be professional engineers but keep building bridges that fall down while everyone keeps screaming they have no idea what they are doing. The Midwest‘s jobs empty out, the former Soviet Union is plunged into violence, the top 1% capture nearly all the productivity gains from the digital revolution, entire generations are unable to house themselves, pay for school, or raise children. Yet these assholes keep saying just trust me and let’s try more “free markets.” Who’s handwaving again?
- CryptoPunk 5y ago>>Yet these assholes keep saying just trust me and let’s try more “free markets.” People don't listen to economists, and it's not "free markets" that are being tried. You're raging against a system where market rights have been increasingly encroached upon over the last century, as a result of politically instituted government interventions, that according to basic economics, reduce productivity growth, exacerbate income inequality, or both. Two major examples: 1. The rapid rise of social democracy: https://ourworldindata.org/grapher/social-spending-oecd-longrun https://ourworldindata.org/grapher/social-spending-oecd-long... Which is feeding the emergence of a highly paid cadre of government workers: https://www.hoover.org/research/140000-year-why-are-government-workers-california-paid-twice-much-private-sector-workers https://www.hoover.org/research/140000-year-why-are-governme... To say nothing of the rapid expansion of the regulatory bureaucracy, and the barriers to competition it creates for major private sector incumbents, and highly paid consultants/lawyers/lobbyists who know how to navigate it. 2. The rapid increase in land-use restrictions in the major high-productivity population centers, which according to many analyses, has massively increased income inequality, while inhibiting productivity growth. E.g. this study estimates that reducing land-use restrictions in just three cities: New York, San Francisco and San Jose would increase GDP by 36.3 percent: https://www.aeaweb.org/articles?id=10.1257/mac.20170388 https://www.aeaweb.org/articles?id=10.1257/mac.20170388 This finding was echoed by the White House's Council of Economic Advisers in 2016: https://obamawhitehouse.archives.gov/sites/whitehouse.gov/files/images/Housing_Development_Toolkit%20f.2.pdf https://obamawhitehouse.archives.gov/sites/whitehouse.gov/fi...