A new economics

1
A new economics?

• What would it (not) look like?

2
A profound irony

• Many critics of economics are fans of HET
  (History of Economic Thought)
• Many fans of economics are critics of HET
• Why study dead economists?
• Often regard HET specialists as
• antiquarians
• intellectual dinosaurs, trying to preserve old
  ideas which have long since been superseded

But
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What if

• All existing economists were wiped out by a
  meteor
• Economics had to start all over again from
  scratch
• Would it evolve into anything like todays
  economics?

4
Who would help build it?

• Mathematicians
• Scientists
• Physics
• Biology
• Chemistry
• Computing
• Engineers
• Process
• Production
• Systems

• Business professionals
• Managers
• Marketers
• Social Scientists
• Sociology
• Psychology
• Political Science

Would it have
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Would it have

• Utility maximising individuals?
• No way!
• Obvious information processing limitations
• Computer science Curse of dimensionality
• Number of combinations rises to the power of
  number of options
• Choice of quantities of 2 goods, and say, between
  0 and 10 units of each?
• 10 to power of 2 comparisons to budget, utility
  map just 100 combinations easy!
• What about choice between combinations of, say,
  30 goods, with between 0 and 10 units of each?

6
Utility maximising individuals?

• 1 million billion billion combinations
• If budget obviously ruled out 99.9 of these if
  each evaluation took 1 billionth of a second
• Process complete after 32 billion years
• Maximum (est.) age of universe 20 billion years
• Individual would take 1.6 times age of known
  universe to make utility maximising choice
• Maximising utility in typical supermarket (1,000
  different items) doesnt bear contemplation
• let alone millions of products in modern economy
• Instead, intelligent partitioning of commodity
  space vital

7
Utility maximising individuals?

• Sources of partitioning
• Culture
• some commodities not even contemplated (sea
  slugs, anyone?)
• Income Needs
• Fulfil hierarchy of wants from basic to ethereal
  (Maslows concepts)
• Rolls Royces not part of utility set of poor
• Baked beans not part of utility set of rich
• Habit
• Buy mainly what you bought yesterday
• Change in consumption
• Evolutionary rather than rational process

8
Utility maximising individuals?

• Individual tastes no longer a given but vital
  economic issue
• Explains individual partitioning of commodity
  space
• Selling new products requires movement of this
  space
• Marketing, advertising thus essential economic
  activities if new products are to be sold
• Co-evolution of products and tastes an essential
  aspect of economic development

9
Would it have

• Profit maximising firms selling homogeneous
  products, with output constrained by rising
  marginal cost and falling marginal revenue?
• No way!
• Production engineers know factories have
• enormous fixed costs
• constant/falling variable costs (below capacity)
• Marketing executives just want to sell as much as
  possible (forget stopping sales where MCgtMR!)
• Management executives know firms need investment
  in new product development to survive
• Marginal costs cant possibly equal marginal
  revenue (let alone price)

10
Profit maximising firms?

• We already know this from numerous surveys of
  plant managers/production engineers throughout
  20th century (Hall Hitch 1939, Eiteman 1947,
  1948, Bishop 1948, Haines 1948, Eiteman Guthrie
  1952, Means 1972, Lee 1996, 1998, Blinder et al
  1998)
• Over 89 per cent of respondents indicated that
  marginal costs either declined or stayed
  constant with changes in output (sometimes
  involving discrete jumps). Finally, only four of
  200 enterprises had both elastic demand curves
  and increasing marginal costs. (Downward Lee
  2001, reviewing Blinder)
• Fixed costs appear to be more important in the
  real world than in economic theory. (Blinder)

11
Profit maximising firms?

• Economists have ignored this empirical datum on
  the basis of their theoretical a prioris re
  profit maximisation
• Firms must be profit maximisers, otherwise they
  would not survive
• Marginal cost must rise, otherwise competitive
  firms would produce infinite output
• Firms conscious behaviour like that of billiard
  players (Friedman 1953)
• dont consciously calculate Newtonian formulae
  for ball impact/energy transfer/particle
  trajectory
• but unless unconscious behaviour has same
  outcome, wont be expert billiard players

12
Profit maximising firms?

• Excellent predictions would be yielded by the
  hypothesis that the billiard player made his
  shots as if he knew the complicated mathematical
  formulas , could make lightning calculations
  from the formulas, and could then make the balls
  travel in the direction indicated by the
  formulas. Our confidence in this hypothesis is
  not based on the belief that billiard players,
  even expert ones, can or do go through the
  process described it derives rather from the
  belief that, unless in some way or other they
  were capable of reaching essentially the same
  result, they would not in fact be expert billiard
  players.
• Yes, but could economists formulas guide firms
  like Newtons could guide billiard players? No
  way!

13
Profit maximising firms?

• Neoclassical profit maximising formulas derived
  by
• holding time constant
• partitioning time into market/short period/long
  period
• analysing profit maximisation as ordinary
  differential problem
• Solving first order optimisation problem
• If mathematicians tried to help out, modern
  mathematicians would express profit as a multiple
  differential function
• Profit as a function of quantity, time, area,

14
Profit maximising firms?

• Neoclassical logic
• Profit a function of quantity

• Price decreasing and cost increasing functions of
  quantity

• Maximise profit by setting marginal revenue equal
  to marginal cost

• Mathematical logic
• Profit at least a function of quantity and time
• quantity also a function of time

• Dynamic goal maximisation of rate of growth of
  profit

15
Profit maximising firms?

• Rate of growth of profit is

• This is MR-MC

• Substituting

• Under what circumstances will setting MRMC
  maximise the rate of growth of profit?

• Is this condition relevant to a dynamic economy?
• No, it is the definition of a static one

No way!

• Are the values of MR and MC relevant to the
  conditions for maximising the rate of growth of
  the rate of profit?

16
Profit maximising firms?

• Even assuming that the rate of growth of the rate
  of profit is monotonic, the rate of change of the
  rate of growth of profit is zero where (courtesy
  of Mathematica)

• Would any mathematician in her right mind advise
  a firm to manage this function?

17
Profit maximising firms?

• Mathematicians guidance?
• Maximisation problem far too complex (a.k.a.
  travelling salesman)
• No simple maximisation routine available
• Several functions needed clearly cant be known
  (dq/dt, dP/dt)
• Experimental search algorithms only way to
  explore such a complex space
• Suck it and see
• Genetic algorithms, neural networks
• Other fatal logical errors in neoclassical theory
  (Keen, Legge Fishburn 2001)

18
Would it have?

• Collective as simple sum of individual
  behaviours?
• No way!
• Emergent behaviour concept still developing,
  but common across sciences
• reductionism losing sway compared to organicism
• Awareness than biology cannot be reduced to
  chemistry, chemistry to physics (or effort
  involved in so doing far exceeds benefits)
• Awareness that properties of collective cannot be
  reduced to summed properties of constituents
• Nonlinear relations between constituents as/more
  important than properties of individual
  constituents

19
Whole as simple sum of parts?

• Advanced economics has proven this too
• Sonnenshein-Mantel-Debreu conditions for utility
  aggregation
• Bhaduri conditions for income distribution
• Euler conditions for supply aggregation
• Kirman 1989 if one maintains the fundamentally
  individualistic approach to constructing economic
  models no amount of attention to the walls will
  prevent the citadel from being empty. Empty in
  the sense that one cannot expect it to house the
  elements of a scientific theory, one capable of
  producing empirically falsifiable propositions.

20
Would it have?

• Ceteris paribus in initiation, General
  Equilibrium in the high temple?
• No way!
• Economic methodology made analytic choices to
• ignore feedback effects
• ignore disequilibrium processes
• when intellectual technology made such choices
  advisable (though still far from optimal)
• 19th century statics (linear algebra)
  mathematics more advanced/accessible than
  dynamics (differential equations)
• Computors used pencils and wore dresses

21
Equilibrium methodology?

• Jevons 1871 If we wished to have a complete
  solution ... we should have to treat it as a
  problem of dynamics. But it would surely be
  absurd to attempt the more difficult question
  when the more easy one is yet so imperfectly
  within our power.
• Marshall 1907 ...dynamics includes statics...
  But the statical solution is simpler... it may
  afford useful preparation and training for the
  more difficult dynamical solution and it may be
  the first step towards a provisional and partial
  solution in problems so complex that a complete
  dynamical solution is beyond our attainment.

But today?...
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Equilibrium methodology?

• Modern mathematics
• knows static and dynamic answers to problems
  differ
• Static real part of dominant eigenvalue lt 0
• Dynamic real part of dominant eigenvalue gt 0
• understands nonlinear (dynamic) as well as
  linear (static) methods
• has sophisticated means to analyse nonlinear
  dynamical systems
• Chaos, complexity the modern fads, vs
  linear algebra of Walras day (which was already
  antique then)

23
Equilibrium methodology?

• Modern engineering
• No longer mechanics but systems dynamics
• Any serious modern engineering task a complex
  dynamic far from equilibrium project
• Feedback effects and management of far from
  equilibrium processes the go today
• Modern digital computers
• Massive computation/simulation/modelling feasible
• Patently dynamic processes (e.g., weather)
  modelled using patently dynamic tools
• Some examples

Vissim
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Would it have?

• No role for evolution?
• No way!
• Evolutionary logic now permeates not just biology
  (Marshalls Mecca of the economist), but
  virtually all sciences
• Evolutionary theories of universe formation,
• Evolutionary methodologies in comparative
  infancy, but evolving with growth in computing
  power, development of GA/GP search algorithms,
  etc.
• Game theory a pale imitation of this work
• Veblens Why is economics not an evolutionary
  science? even more poignant than at turn of 20th
  century.

25
A new economics would

• Be evolutionary and dynamic in character, not
  mechanical and static
• Treat individual behaviour as exploratory/satisfic
  ing, not optimising
• Treat collective behaviour as emergent, not
  necessarily consistent with individual behaviour
• Embrace rather than avoid feedback effects

26
Who are the real antiquarians?

• Modern economics preserves
• antiquated
• invalidated
• irrelevant
• approaches to analysing economic issues
• Neoclassical economists (and, strangely enough,
  most Marxists) are the real antiquarians

Bring on the meteors!
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• In other disciplines, history of
  thoughtsubservient to modern theorywhere did
  our modern ideas come from?Antiquarianinterest
  in past for its own sakeIn economics, HET
  oftenHighly critical of modern theoryLooking
  for the lost way