Monday, March 16, 2015

There is no theory?


I think I mis-categorized Scott Sumner's viewpoint in my posts on expectations here [1] and here [2]. In this post, Sumner says:
The markets view QE as expansionary. The market monetarist view is the market view. Whenever the market changes its view and becomes more Keynesian, or MMTist, or Austrian, or more new classical, I’ll change as well.

In [1], this is actually option 3 (instead of option 4): 
"This implies that all you need to do is convince markets that Keynesianism is right to make Keynesianism right. Or you could convince markets that monetarism is right, which would make monetarism right."
In [2] this is the first of the two possibilities (instead of the second): 
"First, is that E(x) ≈ T[E(x)] doesn't specify T. In that case ... T ... depends on what humans believe and there is no specific theory of pure expectations (or you just have to convince the market that T = X and it is entirely political ... X could be communism or mercantilism or the Flying Spaghetti Monster). "
This is actually remarkably nihilistic (and basically why I misunderstood Sumner's view). Sumner, an economist, seems to believe there is no fundamental theory of economics. The economy of an alien civilization would most likely work entirely differently from ours.

However, I don't actually believe Sumner has ridden this trolley all the way to the end. It means you can't actually use "economics" to explain why one economic theory failed or another succeeded, e.g. as is frequently done in reference to communism. The reason communism failed in this view is because the economic agents didn't expect it to succeed. Likewise, welfare-state economy works fine if everyone expects it to.

Then why does he tout Reagan and Thatcher? According to Sumner's view, their accomplishment appears to be that they introduced confidence and groupthink to the US and UK. Calling this supply-side reforms is then a misnomer. They have nothing to do with "reform" or the mechanics of supply and demand -- remember, there are no mechanics!

What I really think is happening is something like the two-step of terrific triviality. The strong claim is market monetarism is the optimal theory of expectations. The weak claim is that any theory of expectations is possible.

The strong claim is behind Sumner's view of Reagan and Thatcher -- it matters which theory of expectations is the one to rule them all. The weak claim is behind Sumner's reasons to discount other possible explanations -- sure, your mechanism is plausible (or even observed), but what does the market think? In one case, market monetarism is purely an idea. In the other, it is purely observational.

8 comments:

  1. "However, I don't actually believe Sumner has ridden this trolley all the way to the end. It means you can't actually use "economics" to explain why one economic theory failed or another succeeded, e.g. as is frequently done in reference to communism. The reason communism failed in this view is because the economic agents didn't expect it to succeed. Likewise, welfare-state economy works fine if everyone expects it to."

    Actually, there might be truth to this. Why did Soviet socialism collapse? Sure, there were structural problems--just as there are in the USA, the UK, etc. Why did the Soviet economy collapse when it did? Partly for economic reasons, but don't rule out politics and geopolitical reasons. (E.g. Gorbachev's perestroika unleashed a whole lot of opportunistic rent-seeking.)

    But back to my point. Steven Solnick, Mark Beissinger, and many others suggested that the reasons things fell apart is because there was a shift in understanding what "socialism" was and whether it would survive or fall (politically as well as economically). Things began to unravel when there was a sea change in how actors at various levels--inside the government, inside enterprises, etc.--began to think that maybe, just maybe, this could all fall apart. Very abruptly there is this infusion of market categories in managerial discussions--and not just because glasnost let them talk openly about what they had been thinking all along (there is too much of a lag).

    There is an assumption in much economics that there are objective, universal criteria for judging success, failure, efficiency, etc. Take that out and you ride that trolley.

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    1. I think that just makes the point clearer -- the fall of the USSR was purely political expectations and had nothing to with the math and mechanisms of economics! The problem is that economists want to take both sides -- the economic mechanisms are key to understanding the fall of the USSR, but then the expectations mechanisms seem to be purely political, not economic.

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  2. As an aside, between this post and your March 5 post (your comment on a pate tectonics of recessions), I think you've rediscovered some Marxist principles: power to define categories and measurement (hegemony), and structural foundations of economic crises. Just some food for thought.

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    1. In this post I link to two other posts:

      http://informationtransfereconomics.blogspot.com/2014/04/economics-is-neither-physics-nor.html

      One is about how markets are basically algorithms (Hanauer and Beinhocker), the other is about a planned economy as an algorithm (Shalizi). I would say that we should understand whichever algorithm we use for the allocation of resources (its benefits and drawbacks) -- and as a people, decide how we want to go about it. Markets work a certain way, but need corrections to improve equality. Command economies work a different way and different corrections to improve efficiency.

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  3. Thanks for the links. I will try to look over them in the near future. What do you recommend as a good introduction to field theory--how to think about fields (modeling, underlying causal mechanisms, etc.)?

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    1. If you are referring to quantum field theory, then this is probably the best:

      http://en.wikipedia.org/wiki/QED:_The_Strange_Theory_of_Light_and_Matter

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    2. No, more broadly and generally: what are "fields"? I know there are different types of fields, but something that gives a good way to think in "field theoretic" logic.

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    3. I'm not entirely clear on what you mean. Fields are basically mathematical objects that have a value at practically every point in the space under consideration. For example, temperature is a field over the surface of the Earth.

      That's a scalar field.

      Wind is a "vector field" in that it has a value and a direction in our space under consideration (the surface of the Earth).

      There are more complicated "tensor fields", for example, gravity in Einstein's General Relativity.

      However, the logic behind fields is not much more than calculus of several variables, including some partial differential equations:

      http://en.wikipedia.org/wiki/Multivariable_calculus

      http://en.wikipedia.org/wiki/Partial_differential_equation

      The first link describes the properties of fields, while the second link is about how fields change.

      [Also, "field theory" means something a bit different in mathematics -- fields are a step up in complexity from "groups" which delves into the general properties of addition, multiplication, etc]

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