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alternative foundations of economics

Every once in a while, I think about heterodox economics, like the feminists, or the Austrians. What they all share in common is a of critique of mainstream neo-classical economics. Sometimes, it’s a demand for modification (e.g., feminists who want to us to more carefully consider women’s roles in the labor market). In other cases, it’s radical – people want a reconstruction of mainstream economics (e.g. Marxists). But in the end, it’s usually futile. The critiques aren’t enough to make people abandon the mainstream, nor have people fully articulated a compelling alternative.

The main issue is that if you answer the same questions that the mainstream answers, you’ll fail at making the case that the mainstream is defective. Why? The mainstream of any discipline is the culmination of generations of peer reviewed puzzle solving. The mainstream represents the best efforts of talented people who are all trying their best to address some basic questions. It’s highly unlikely that you’ll do a better job than that. For this reason, barring a Kuhnian style crisis, it’s nearly impossible to overturn the mainstream.

This suggests that heterodox economics is best served by responding truly distinctive questions that the current mainstream is unsuited at answering. Right now, I’d say that much contemporary mainstream economics is built around questions of choice. Once you define economics as an issue of choice, then it’s easy to build the science around maximized utility, probabilistic reasoning, marginal thinking, etc.

What would be the alternative foundation for economics? Here’s a few candidates:

  • Economics as the study of non-optimizing choices: Think about Simon & March. They started this in the 50s and 60s, with a whole style of social science built around ambiguity, bounded rationality, routines, etc. Teppo wrote a post about all kinds of different theories of choices that aren’t neo-classical economics. A serious challenge to neo-classical could be built by systematically testing these models and finding when the neo-classical actor applies, and when other models of reason are better (and no, behavioral does not count). How do the major theorems of economics change if you drop utility maximization and use satisficing instead?
  • Economics as the study of complex systems: Most economic models have relatively simple populations of actors who respond to relatively simple forces. The maximization problem is complex, but the actors have simple relations among themselves. However, real economic systems have dense networks of actors. This is important because we know that systems with loops (actor A affects B, who affects C, who affects A) can have very bizarre, chaotic, properties. I think Harrison White’s network/market book is a positive development in this respect.
  • Economics as the study of value: Sure, contemporary economics tells us much about utility, but why do we value some things over others? Is there anything more than the Maslow hierarchy? How do we incorporate new values into our lives? How does technology change our ability to conceptually new valuable things? How do our institutions affect what we see as valuable, and thus economically important?
  • Economics as the study of historically contingent bundles of institutions and technology: I suppose this is a variant of the complex system question, but it’s much more historical. The key issue would be about how institutions piggy back off each other. This is epitomized by Weber’s work (he was an economist by training), but it can also be the foundation of a successful modern heterodoxy.

You’ll notice that each of these topics are deeply economic and they can be formalized, but they don’t rely on the logic of utlity maximization, or they are orthogonal to that topic.

Written by fabiorojas

May 11, 2009 at 12:09 am

19 Responses

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  1. Damn you, orgtheory. Every time I visit, new angles on disseration ideas multiply faster than I can jot them down. Bah. I should be outside.

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    Mark Hunter

    May 11, 2009 at 12:23 am

  2. First, the last point sounds a lot like economic sociology, especially the institutional variants on it. What, if anything, would distinguish econ soc from a historically-minded heterodox economics?

    And second, hopefully not to be dense but… what does contemporary economics tell us about utility? As I read it (which is less well than I ought, but so it goes) economics does a good job of saying assuming specific exogenous preferences, what kinds of results can we expect in the system? But I’m not sure what that tells us about utility per se – isn’t it more of an axiom than an empirical finding? Cf. Mirowski’s work.

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    Dan Hirschman

    May 11, 2009 at 12:34 am

  3. Mark: Yes, please go outside. It’s nice out.

    DH: True #4 is essentially econ soc, but that’s been pushed by sociologists. What would it look like if it were pushed by economists? Also, on your second point, modern economics treats utility as a given. Economic analysis happens *after* people define utility. That’s what motivates my third point. What if economists worked on the origins of value?

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    fabiorojas

    May 11, 2009 at 1:07 am

  4. @FR: Right, I think your third point is a great suggestion, I’m just wondering why you qualified it with, “Sure, contemporary economics tells us much about utility…”. That’s what I was asking about – what is economics already telling us? Not much, by my reading.

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    Dan Hirschman

    May 11, 2009 at 1:11 am

  5. Well, to be charitable, economics tells us what a coherent theory of utility might look like and how to reasonably translate certain behaviors into utility theory. For example, saying something like “interest rates indicate the preference for money today rather than money tomorrow” ,akes total sense in utility theory and you can formalize and analyze it.

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    fabiorojas

    May 11, 2009 at 1:14 am

  6. Well, to be charitable, economics tells us what a coherent theory of utility might look like and how to reasonably translate certain behaviors into utility theory

    On one view, anyway (the normative view of RCT). But this is by no means the only, or even the dominant, self-conception in the field.

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    Kieran

    May 11, 2009 at 3:16 am

  7. K: What is the self-conception of the field? Do economists not believe that utility theory is valuable because it provides a way to easily describe how people rank outcomes and act on the ranking? Or are you using the trademark Healy snark?

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    fabiorojas

    May 11, 2009 at 4:20 am

  8. Perhaps it’s time to stop trying to be “charitable” and to learn some utility theory and how economists think about it and use it.

    I recommend David Kreps *Notes on the Theory of Choice*. Binmore *Playing for Real* (chapter 4) is a broader but less detailed introduction.

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    Chris Edmond

    May 11, 2009 at 5:39 am

  9. Its funny, but I’m not sure how many actual economists define themselves as “neo-classical” anymore. Having spent 4 years at Chicago, the belly of the beast so to speak, I don’t know anyone who does. The closest are the price theorists and they are, for sure, a sizable block. But, they are balanced off by the applied folks (think Steve Levit (i.e., Freakonomics), Kevin Murphy, etc) and by the behavioral economists (led by the mighty Dick Thaler). Applied economics can be thought of as derivative of neo-classical (tho not entirely), but Behavioral represents a real shift. To the point about “utility”, this, it seems to me, is the main point the behavioralists are trying to unpack by incorporating ideas from psychology and if we are looking for an area of economics which could pose a ‘threat’ to the unique value added of economic sociology it would be there. Do we essentially agree with them (in which case, maybe better to jump ship now folks because they seem to be on the rise). Or, do we have something distinct to say about decision-making under uncertainty that they aren’t already formalizing and colonizing?

    Personally, I’ve never had a problem identifying myself as an economist in the sense that I study the economy and how it works. In Europe, it would be completely uncontroversial that all of us who contribute to this blog are economists (its worth remembering that both Weber and Marx called themselves economists, not sociologists). Its only in North America that legitimacy to study the economy is limited to a group of people who are trained narrowly in micro- and macro-economic theory.

    I’m not sure the thing to do is to build a discipline in opposition. I’m more interested in simply claiming territory and gaining ground in the court of public opinion rather than letting the economists decide whether we’re in their club or not.

    That said, one serious candidate I might add to your list is environmental economics which I think of as an economics based, not around the maximization of scare resources, but rather around the preservation of abundant resources. This leads down a “Tragedy of the Commons” road and, more concretely, toward institutions.

    And I would agree with previous comments that #2 and #4 essentially capture much what many of us who define ourselves as ‘economic sociologists’ see ourselves as doing.

    Finally, a plug for an organization of people who see themselves as filling out the broader spectrum of economic thinking: I am a longstanding member of the Society for the Advancement of Socio-Economics. Their conference–in Paris this year–is worthwhile to anyone interested in fostering alternative bases of economics. http://www.sase.org/

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    seansafford

    May 11, 2009 at 12:49 pm

  10. @fabio No snark. I think there are a number of different views within the field (as Sean partly outlines), each with its own constituency. You often see outsider critics of the field as a whole get tripped up because they focus on bashing one stream of thought, and then a representative of one of the others will come along and say “But that is not what economics is about at all! You obviously know nothing of the field”.

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    Kieran

    May 11, 2009 at 1:27 pm

  11. Chris & Kieran & Sean: Here’s the deal – in nearly every intro course at a mainstream dept, you start by teaching about the axioms of utility theory: every state is assigned a number (utility), these assignments have to be consistent (transitivity) and stable over time. Modern economics also has more subtle aspects of utility theory – people care about marginal effects; there are opportunity costs; etc. Furthermore, econ papers in top journal often (but not always) are built around maximization problems. Sure, some people may do things a little differently. Chicago price people for example, rarely do game theory, but they all buy into the framework at some level.

    To be a card carrying member of modern econ you have to at least pretend to use the basic ideas above. To reject marginal utility, or opportunity costs, is really to not be an economist. Every time I raise this, people say that I’m off, but at the same time, freshmen econ students get flunked all the time for not making the distinction between average and marginal effects.

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    fabiorojas

    May 11, 2009 at 2:02 pm

  12. I am a hyphenated (applied) economist, and I have spent 30 years in applied econ and management departments actively fighting with the economics department about doctoral theory courses that they were meant to offer to PhD candidates in cognate departments, like mine. Econ departments have been resolute in moving farther into abstraction; building micro-theory on ever more arcane postulates. Psychology is NOT welcome. I am now in my third applied economics department that is teaching theory in-house to doctoral students because the gap between what is being taught in the parent discipline is too far removed from empirical application. Most econ doctoral students finish their grad school careers without ever stumbling across a datum.

    I’d agree that there is more interest in heterodox economics now than any time in the past 35 years, but you will find it in the hyphenated fields: consumer economics, labor economics, agricultural economics, and natural resource/environmental economics. I have several colleagues in the latter field who were indoctrinated with institutional theory (esp. Commons) as a basis for work on property rights.

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    REW

    May 11, 2009 at 2:11 pm

  13. Fabio, these are good questions, but I’m not sure I buy the premise. Today’s “orthodox” economics, the mathematical, “neoclassical” approach that emerged in the late 1940s and early 1950s, wasn’t born out of any sort of Kuhnian crisis, nor did it ask novel questions — it simply provided a different language for asking the traditional questions, and gave the traditional answers to boot! Its adoption is a complex cultural and institutional story, described for example in Michael Bernstein’s _A Perilous Progress_, and can’t be described neatly in philosophy-of-science terms.

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    Peter Klein

    May 11, 2009 at 2:57 pm

  14. How about if you demonstrate that mainstream economics obtains at the limit of some more general theory — like newtonian mechanics obtains at the macroscopic limit of quantum mechanics?

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    Michael F. Martin

    May 11, 2009 at 3:32 pm

  15. I just discovered functionalism over the weekend in Robert C. Ellickson’s *Order Without Law*. I think Ellickson’s critique of functionalism needs to be updated in view of the fact the E.O. Wilson and a few other evolutionary biologists no longer reject out of hand group selection theory.

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    Michael F. Martin

    May 11, 2009 at 3:34 pm

  16. Nice post, Fabio, and I have enjoyed the comments.

    I think the premise is OK. Most economists I know are well aware of many of the limitations of economics methodology and are happy to consider alternative ideas. The difficulty is finding a foundational point of reference which can be used to revamp the bulk of micro theory (modern macro is just a version of micro). Nothing comprehensive enough has come along.

    Re non-optimizing choices, I’d say neuroeconomics may make some headway in the future, though right now it’s still a blunt research tool.

    Re complex systems, I actually think this is where economists really could develop their work because, though the paridigm seems different from standard theory, it could be adapted to a RC framework. Prices, etc., coming out of networked relationships of individuals with lots of incomplete information, etc.

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    Mike McBride

    May 11, 2009 at 10:11 pm

  17. @Mike (and Fabio’s first point): I’ve been re-reading Polanyi’s The Great Transformation, and this issue of satisficing vs. optimizing plays a key role in his argument (although not precisely in those terms, of course). In Polanyi’s story, 19th century economics has to somehow make the motive of gain, of unlimited wants vs. scarce resources, the central motivation in economic life in order to accomplish its quixotic quest to establish a self-regulating market system. His analysis inclines me to agree that an economics that really held satisficing rather than optimizing to be its central model of behavior would represent quite a radical shift.

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    Dan Hirschman

    May 11, 2009 at 10:18 pm

  18. Following Ellickson:

    Economics as the study of non-optimizing choices

    This breaks out into (1) taking administrative costs of gathering and processing information in prep for decisionmaking; and (2) the difference between first- or second-person and third-person assessment of value. The differences between welfare-maximization by satisficing and wealth-maximization through third-party control is indeed profound.

    Economics as the study of complex systems

    That’s what economics has always been for some economists. It’s just that the neoclassical model reproduced so much of group behavior in so many different contexts that the profession got distracted for awhile. Maybe he was publishing in the Journal of Sociology, but Granovetter’s weak-ties hypothesis is an economic hypothesis to the extent that it explains the mechanism whereby micro and macro are connected — i.e., through a spectrum from weak to strong ties that evolve over time.

    Economics as the study of value:

    The quantitative way to tackle this is to start not from market prices as do neoclassical theorists, but rather from the underlying supply and demand. How can you be objective about inframarginal supply and demand? How about by looking at the frequency of consumption and production within one-window of time and hypothesizing that it will be the same in the next window. This is the ergodic hypothesis, and when it obtains, so also will neoclassical theory. When it is violated — and it’s easy to see that by looking at the Fourier-transform of these distributions — then we see growth and decay. Market price signals synchronize supply and demand.

    Economics as the study of historically contingent bundles of institutions and technology:

    This is the hardest. But if you start by looking at the periodicities in consumption and production, then at some point we should see path-dependence to sequences of consumption and production of different goods. We have to walk before we crawl, but there is non-abelian gauge field theory that could be applied to model such path-dependence.

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    Michael F. Martin

    May 12, 2009 at 5:21 pm

  19. […] and “rational” have “shed more heat than light”. Fabio recently asked over at OrgTheory, are there other foundations for economics that might make more sense than the dominant model based […]

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