So I haven't had time to completely finish this week's lecture, but one thing struck me near the beginning where Hayek is criticizing Mitchell's approach to economics...
...why does everyone assume that we need microfoundations for macroeconomics. There's no really obvious reason for this, it's just appealed to. I would imagine macroeconomics could benefit from some thoughtfulness about microfoundations, but microeconomics could also benefit from more macrofoundations. Why don't we hear anything about this?
The laws of physics weren't first figured out by looking at atoms.
The laws of evolution were sketched out by looking at population behavior well before we knew about genes.
I have yet to hear a good argument for the microfoundation obsession (which is not at all to say I haven't heard arguments).
Anyway - I have a blog post in the works that sort of addresses this... finishing off my NSF graduate research fellowship application this week, so we'll see how subsequent posting goes.
One more thing... reread the section where Hayek criticizes W.C. Mitchell. Doesn't he sound an awful lot like Friedman making a case for unrealistic assumptions that Austrians usually hate so much?
Monday, November 15, 2010
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I'm not sure it's worth getting into a detailed discussion with you on the topic, but economics is not physics. I'm not a physicist, in any case, so I can't make any valuable comparison between the two.
ReplyDeleteIn any case, I suggest reading Hayek's "The Use of Knowledge in Society". Maybe then it will become more apparent to you why these "microfoundations" are so important when studying macroeconomics. It's a question of subjectivity versus objectivity, and how this influences economic relationships and phenomena.
Jonathan - it's not physics, we agree on that. I'm not sure why noting it's not physics answers the question at all though, particularly hwen nobody claimed it was physics.
ReplyDeleteI think the use of knowledge in society makes an excellent case for microfoundations of our understanding of the price mechanism - which I suppose you could think of as "microfoundations for microeconomics". I'm not quite sure how it would be relevant to macro directly, but perhaps I should reread.
"It's a question of subjectivity versus objectivity, and how this influences economic relationships and phenomena."
Right, but subjectivity really only comes in when we're talking about choice - again, this is why I say it's a very good case for "microfoundationa of microeconomics", but perhaps less good for macro.
Daniel,
ReplyDelete"...it's not physics, we agree on that. I'm not sure why noting it's not physics answers the question at all though, particularly hwen nobody claimed it was physics."
I said that, because you made the comparison (not me). I was saying that the comparison is flawed.
"I think the use of knowledge in society makes an excellent case for microfoundations of our understanding of the price mechanism - which I suppose you could think of as "microfoundations for microeconomics". I'm not quite sure how it would be relevant to macro directly, but perhaps I should reread."
Because macroeconomics is directly dependent on the price mechanism. Macroeconomic trends are aggregate movements coordinated by the division of labor and the price mechanism. You can't divorce the two from each other, and so Austrians acknowledge that to get a better view of the macro trend one needs to understand the specific micro forces which make it possible.
"Right, but subjectivity really only comes in when we're talking about choice..."
All economic decisions are a matter of choice, and so all economic phenomena are derived from the choices of any given quantity of individuals.
"I said that, because you made the comparison (not me). I was saying that the comparison is flawed."
ReplyDeleteRight, but you were unclear on why the comparison was flawed. All that you said was "economics is not physics", but it doesn't logically follow from that point that the comparison is flawed. If economics were physics, it wouldn't be a "comparison" it would be a "description".
You can't divorce the two from each other
Again, I feel like you're drawing conclusions that are wildly disproportionate to the point at hand. I can't divorce the two from each other. I would be the last one to try! None of this speaks to the plausibility of macrofoundations of microeconomics working with reasonable microfoudnations of macroeconomics. Do you see me jettisoning the division of labor or the price mechanism here?
Daniel,
ReplyDelete"All that you said was "economics is not physics", but it doesn't logically follow from that point that the comparison is flawed."
I actually explained it in my first reply. Physics is based on objective phenomenon, economics is based on phenomenon that depends entirely on the subjective logic of choice. These foundations are entirely different, which is why economics and physics are incomparable.
"Do you see me jettisoning the division of labor or the price mechanism here? "
No, I see you - as usual - missing the point entirely. I also see you not taking concepts to their full logical extent.
"None of this speaks to the plausibility of macrofoundations of microeconomics working with reasonable microfoudnations of macroeconomics"
I'm not sure what this even means.
Jonathan, I feel like you're interpreting me as being more hostile than I am.
ReplyDeleteMy point is this - microfoundations make a lot of sense. However, deducing macrophenomena from microfoundations can be very hard - as hard as deducing astronomical phenomena from sub-atomic physics. Thye should be consistent with each other, but one should not assume that small->big is necessarily going to be practically fruitful.
And there's absolutely no reason to think that it is necessary. There's nothing that I'm aware of (granted, I've never been formally trained in logic - although I have been formally trained in how to construct proofs, which is similar) that says you have to work from constituent parts to a whole. You certainly have offered no such argument here.
So, if we know something definitively - either by observation, definition, or tautology - about either macrophenomena or microphenomena, that seems to me to be a reasonable basis for a foundational assumption in economics, and we should use that as a tool for derviving other, more complicated insights.
Nobody is challenging you on the price mechanism, division of labor, etc. Ricardo did division of labor as a macrofoundation, while Smith did division of labor as a microfoundation.
"I actually explained it in my first reply. Physics is based on objective phenomenon, economics is based on phenomenon that depends entirely on the subjective logic of choice. These foundations are entirely different, which is why economics and physics are incomparable."
ReplyDeleteAnd you wonder why I don't trust my economic analysis to the logical deductions of the Austrians... look at this passage, Jonathan. Are we just redefining "different" to mean "incomparable". This is not a logical argument Jonathan. You think you've made a point when you haven't.
I actually made a very similar objective/subjective physics/economics critique of a metaphor on Cafe Hayek here: http://cafehayek.com/2010/11/son-kills-parents-and-the-complains-of-being-orphaned.html#disqus_thread (scroll down to my response to geoih). The difference is, I restricted myself to conclusions that are logically implied by the initial point. I didn't stray into broad, undefended, "incomparable" claims like you do here.
Is there a logical link between "economics is based on subjective values and physics is based on objective values" and "economics and physics cannot be compared on the basis of their level of analysis (micro to macro vs. macro to micro vs. both)"? What is the logical implication of the first claim that leads to the second claim that I am missing here, Jonathan? Is there one?
ReplyDeleteBesides, I think the first claim is even stated a little strongly: economics is the objective study of human beings who act on subjective valuations. It is not, like art appreciation, a subjective endeavor itself. Economics is an objective assessment of agents acting on the basis of subjectivity.
On the subject of economics vs physics, has anyone seen this video?
ReplyDeletehttp://mitworld.mit.edu/video/794/
(Title: "WARNING: Physics Envy May be Hazardous To Your Wealth!")
Alongside making a number of interesting points, the speaker (Andrew Lo of MIT), manages to keep it pretty humorous as well... No easy task for an hour long talk on finance!
If you don't have the time to sit through the whole thing, I wrote some notes on it here: http://stickmanscorral.blogspot.com/2010/11/physics-envy-again.html
o-[-<
oh crap - thanks for noting this! I thought I added your blog to my blogroll and that you just haven't been posting lately... apparently I didn't end up adding you and you've posted many times. OK - problem solved! Sorry! Now I get to go back and look at posts I've missed... I should do a "call for blogs" soon to make sure I'm not missing any that any readers are writing.
ReplyDeleteDaniel,
ReplyDeleteIt's obvious that you've misunderstood the Austrian penchant towards uniting microeconomics and macroeconomics. It's not a "chicken or the egg" argument; it's not that macro phenomenon should be studied only after their microeconomic causes have been studied. The relationships is the other way around (would there be business cycle research if man would have never experienced the business cycle?).
So, what you're criticizing (your opinion on what this Austrian "obsession for microfoundations" actually consists of) is actually not what Austrians really believe. Rather, they believe - as I put it earlier - that macro phenomenon are made of factors which themselves have to be studied (for example, the structure of production, which in turn requires a study of the firm and the entrepreneur).
This is where one of the arguments brought forth by Hayek in the first lecture is relevant. One does not precede the other, rather they are both part of the same science and economics must be studied as interconnected theory.
You are simply saying that "aggregates are aggregated from non-aggregates"? OK, that hasn't been my impression of Austrians who I've talked to about microfoundations before, but I would love to be wrong.
ReplyDeleteWhat you're saying here sounds like precisely what I've thought all along.
So are we on the same page on macrofoundations? There are certain properties of macro phenomena that we are confident enough in that we oughta conform our understanding of micro-phenomena to?
"There are certain properties of macro phenomena that we are confident enough in that we oughta conform our understanding of micro-phenomena to? "
ReplyDeleteI don't think this fits in with what I said in my previous comment. There's no reason that anything should conform with anything else. The Austrian causal approach to economics establishes relationships by looking at how factors interact with each other, and use this to logically explain economic phenomenon. So, if some micro factors behave in such a way that it questions the validity of an established explanation of any given macro trend, it doesn't make sense to make the micro factors "conform" with the macro trend. It makes more sense to reevaluate the causal explanation of that macro trend.
So, in short, no, we are not on the same page.
You're misunderstanding me. I'm not suggesting that micro "trends" conform to macro "trends". I'm talking about far more axiomatic points than that.
ReplyDeleteThere are genuinely axiomatic macroeconomic phenomena. If micro derivations or micro observations or micro models can't conform themselves to that, then you've missed something. The same goes for macro trends/observations/derivations that can't conform to axiomatic points of microeconomics.
We are clearly on the same page with your post at 11:09, November 15th. I don't see anything there I disagree with. I suppose there are still lingering disagreements on macrofoundations. Oh well.
ReplyDelete"If micro derivations or micro observations or micro models can't conform themselves to that, then you've missed something."
ReplyDeleteI think it works both ways. In Monetary Theory and the Trade Cycle Hayek elucidates his methodology, which is generally the same (if the theory obviously doesn't fit the facts, then the theory is wrong or missed something).
But, I have reservations about the above, because given the scope of the empirical evidence, it's hard to tell oftentimes whether there is a weak link in the theory or you haven't sufficiently analyzed the body of evidence (or have left evidence out of the analysis). This is why, most likely, Mises denied the ability of empiricism to falsify theory.
Although again, I'm not talking about fitting empirics to theory. I'm talking about fitting empirics AND theory to axiomatic microfoundations and macrofoundations.
ReplyDelete