Wednesday, November 30, 2016

Economic theory and male answer syndrome

I found this via Pedro Serôdio. Early on, it hit a phrase that made be LOL
For me the attraction of the work of Kondratieff, Schumpeter and Carlota Perez in the modern era, though I am critical of them all ...
The author probably would let us know that his likes and retweets aren't endorsements, either. There is literally no reason for the phrase "though I am critical of them all" in the paragraph in which it appears except as signalling (the criticisms are never discussed).

Anyway, let's look at a bit more:
First you would have to fix the problem Paul Romer identifies in “The Trouble With Macroeconomics”: over-abstract models, divorced from data, based on over-restricted assumptions. Deference to authority where “objective fact is displaced from its position as the ultimate determinant of scientific truth”.
Ah, good. Making macroeconomics more empirical is laudable.
Next, you would have to relentlessly chase down the sources of the massive miscalculation of risk preceding 2008. These include a failure to factor in crime and malfeasance; the inability to measure or trace risk in the shadow banking system; the failure even to model the dynamics of banking as a separate and distinct agent. And the complete failure to model or accept the need to account for irrational human behaviours.
Wait -- how do you know this? Didn't you just say in the previous paragraph that macroeconomics is divorced from data? Then there are no empirically grounded models you could be using to base the importance of these particular mechanisms in describing macroeconomic data. Basically, this paragraph is divorced from the data in exactly the same way the author just said macroeconomics is divorced from the data.

I've said this many times. Don't just say including irrational human behaviors or banking yields better models. Build these models and show that that they are better empirically. That is to say, understand the first paragraph before writing the second.
... macroeconomics should suddenly become instead of a theory based on the assumption of equilibrium and rationality, one based on the assumption of disequilibrium and shocks – not just external shocks but shocks generated inside the system.
Um, you probably shouldn't base a theory on assumption of what the theory is trying to understand.

This is something that many economists (of all stripes) seem to do and it baffles me. Well, it baffles me as a scientist -- I totally understand it from a sociological/human behavior perspective.

Let me call it "economist answer syndrome", which is very close (if not usually identical) to "male answer syndrome". What should be the fundamental questions of economics (What are recessions? What determines the economic state? Is there a useful definition of equilibrium?) are instead presented as answers (Recessions are monetary. Endogenous shocks. No.). The answers differ from economist to economist. The various "schools of economics" are probably best described as specific answers to what should be the research programs of economics.

A good example of this is that second paragraph above. It's all answers. Risk was miscalculated leading to a financial crisis that caused a recession that was missed because macro models left out banking. The question form is to ask what role banks played in the crisis. In fact, some theories out there say that the financial crisis was a symptom, not a cause of the recession. If we were being scientific, as Paul Romer would have us be, then we should present this as a question, potentially presenting a mechanism and some data as evidence backing up that mechanism. If we're just saying stuff, then there are people out there that say the financial crisis was a symptom. He said, he said.

People often say that economics is politically biased, but really I think the issue is more that economics simply uses the political mode of thinking (where there are answers for anything of political interest) rather than the scientific one (where there are questions about anything of scientific interest).
One thing that would happen is that the future would start sending signals to the present via the market ...
There is actually a way to turn this vague statement into something meaningful (using information theory to describe the communication channel carrying those signals). It leads to the theory advocated on this blog (which should be noted is not entirely at odds with mainstream economics).
... so that they assume breakdown, irrationality, crime, inadequate and asymmetric information ...
This is just more male answer syndrome, more assumptions.

But the information transfer framework does allow (from the start) for markets to breakdown (it's called non-ideal information transfer). It turns out that it might be useful when looking at recessions, but not for the typical market state.

Update 1 December 2016

I was one of the Dean's Scholars at the University of Texas as an undergrad, and the director of the program was Alan Cline. He was the one who introduced me to "male answer syndrome"; it was one of the things he highlighted in a message he gave us on graduation day. Ever since then I've tried to follow his advice -- to stop and listen first, to think before proffering theories.

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