Certain decisions

by
Peter Radford
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from Peter Radford

One of the books I keep close by on the shelf is Paul Glimcher’s “Decisions, Uncertainty, and the Brain: The Science of Neuroeconomics”.  It dates back to 2004 and is one of those books that provides a glimpse of what a dialog between economic theory and psychology might produce.  More to the point it explores the issues surrounding economic decision making at a deep biological level.  It thus adds substantially to the behavioral explanation of economic activity.

Apart from making me think about the practical problems of decision making, one of the additional benefits I had from reading the book was that it introduced me to David Marr whose work was instrumental in the development of neuroscience. a few decades back.

Here’s a very long quote taken from Marr’s book “Vision” and I hope you can see its relevance to the plight of contemporary economics:

” Almost never can a complex system of any kind be understood as a simple extrapolation from the properties of its elementary components.  Consider, for example, some gas in a bottle.  A description of thermodynamic effects — temperature, pressure, density, and the relationship among these factors — is not formulated by using a large set of equations, one for each of the particles involved.  Such effects are described at their own level, that of an enormous collection of particles; the effort is to show that in principle the microscopic and the macroscopic descriptions are consistent with one another.  If one hopes to achieve a full understanding of a system as complicated as a nervous system, a developing embryo, a set of metabolic pathways, a bottle of gas, or even a large computer program, then one must be prepared to contemplate different kinds of explanation at different levels of description that are linked, at least in principle, into a cohesive whole even if linking the levels in complete detail is impractical.  For the specific case of a system that solves an information-processing problem there are in addition the twin strands of process and representation, and both these ideas need some discussion.”

One of the great failings in mainstream economics is its futile insistence that all theory must stand on the shoulders of what are called “micro foundations”.  Such an insistence is a clear denial of the complexity of a modern economy and that within such complexity phenomena worthy of study can emerge at different levels of detail.  Of course there is the additional issue that economists of this ilk also deny that the faux-psychology upon which they construct those micro-foundations is naively simple and hopelessly inadequate.  Yes, behavioral economics is beginning to change that, but the damage being done every day by the adherence to rational expectations based micro is too awful to contemplate.  Marr is clear that the macro and micro descriptions ought to be consistent, but that one follows necessarily from the other is not the same thing.  Need the micro must be consistent with the macro.  So descriptions developed at a more aggregate level ought inform our thinking lower down.

Not everything can be reduced to the decisions of individuals as if the interactions between individuals doesn’t produce phenomena of interest also.  Glimcher, of course, is writing his book at the level of the individual, and looking at the brain as a complex system, but Marr reminds us that emergence is something we need to deal with as we scale upwards through larger and larger aggregations of activity.

Mainstream economics has, by and large, obstinately refused to embrace such an approach.  By so doing it has denied itself the ability  to interpret or explain some aspects of the macro economy,  and has isolated itself from the kind of fresh thinking that might have helped it avoid the calamity of its failure prior to the 2008 crisis.

Until the entire concept of rationality is re-worked to adhere to real world experience and behavior, and until the consequences of complexity are fully brought on board, modern economics will continue to flail and will continue to decline in relevance.  So it will leave open the opportunity for other disciplines to offer more relevant and coherent explanations of economic activity — if they haven’t done so already.

Addendum:

For fans of the intersection between neuroscience and economics here is another quote I dug up from another Glimcher book.  On one of its early pages, as he describes the arc of progress in recent years, he remarks on a special conference issue of the journal of the Society for Neuroscience.  The editors, he says, write in their introduction:

” Within neuroscience, for example, we are awash with data that in many cases lack a coherent understanding … Conversely, in economics, it has become abundantly evident the pristine assumptions of the standard economic model — that individuals operate as optimal decision makers in maximizing utility — are in direct violation of even the most basic facts about human behavior.”

The gig’s up.

It is time to reinvent economics.