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sanity, humanity and science post-autistic economics review(formerly
“newsletter”) Issue no.
12; 15
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In this issue: - Bernard
Guerrien
Is There Anything Worth Keeping
in Standard Microeconomics? - Susan Feiner Toward a
Post-Autistic Economics Education - Warren J. Samuels
Ontology, Epistemology,
Language and the Practice of Economics
- Katalin
Martinás Is the Utility Maximization Principle
Necessary? - George M. Frankfurter and Elton G. McGoun Quo Vadis Behavioral Finance? Is There Anything Worth Keeping in Standard
Microeconomics? Bernard Guerrien (Université Paris I, France)
The French students’ movement against autism in
economics started with a revolt against the disproportionate importance of microeconomics
in economic teaching. The students complained that nobody had really proved
to them that microeconomics was of any use; what is the interest of going
through “micro1”,
“micro2”, “micro3”, etc., using lots of mathematics
to speak of fictitious households, fictitious enterprises and fictitious
markets? Actually, when one thinks about it, it turns out that
microeconomics is simply “neoclassical theory”. Realizing this, I agree with the French
students when they say that: 1)
In a course on economic theories, neoclassical
theory should be taught alongside other economic theories (classical
political economy, marxist theory, keynesian theory, etc.) showing that it is just one among
several other approaches; 2)
The principal elements and assumptions of
neoclassical theory (consumer and producer choice, general equilibrium
existence theorems, and so on) should be taught with very little mathematics
(or with none at all). The main reason
being that it is essential for students to understand the economic meaning of
assumptions made in mathematical language. As they study economics, and not
mathematics, students must decide if these assumptions are relevant, or
meaningful. But, for that, assumptions
must be expressed in clear English and not in abstruse formulas. Only if assumptions, and models, are
relevant, can it be of any interest to try to see what “results”
or “theorems” can be deduced from them. I am convinced that assumptions of standard microeconomics
are not at all relevant. And I think that it is nonsense to say - as some
people do (using the “as if” argument) - that
relevant results can be deduced from assumptions that obviously contradict
almost everything that we observe around us. The main reason why the teaching of microeconomics (or of “micro
foundations” of macroeconomics) has been called “autistic”
is because it is increasingly impossible to discuss real-world economic
questions with microeconomists - and with almost
all neoclassical theorists. They are
trapped in their system, and don’t in fact care about the outside world
any more. If you consult any microeconomic textbook, it is full of maths (e.g. Kreps or Mas-Colell, Whinston and Green) or of “tales” (e.g.
Varian or Schotter), without real data
(occasionally you find “examples”, or “applications”,
with numerical examples - but they are purely fictitious, invented by the
authors). At first, French students got quite a lot of support from
teachers and professors: hundreds of teachers signed petitions backing their
movement - specially
pleading for “pluralism” in teaching the different ways of
approaching economics. But when the
students proposed a precise program of studies, without “micro
1”, “micro 2”,
“micro 3” ... , without macroeconomics “with microfoundations” or with a “ representative
agent ” -, almost
all teachers refused, considering that it was “too much”
because “students must learn all
these things, even with some mathematical details”. When you ask them “why?”, the
answer usually goes something like this: “Well, even if we, personally,
never use the kind of ‘theory’ or ‘tools’ taught in
microeconomics courses (since we are regulationist,
evolutionist, institutionalist, conventionalist,
etc.) -, surely there are people who do ‘use’ and ‘apply’ them, even if it is in
an ‘unrealistic’, or ‘excessive’ way”. But when you ask those scholars who do “use these
tools”, especially those who do a lot of econometrics with
“representative agent” models, they answer (if you insist quite a
bit): “OK, I agree with you that
it is nonsense to represent the whole economy by the (intertemporal)
choice of one agent - consumer and producer - or by a unique household that
owns a unique firm; but if you don’t do that, you don’t do
anything!”. There are also, some microeconomists
who try to prove, by experiments or by some kind of econometrics, that people
act rationally. But, to do that you
don’t need to know envelope theorems, compensated (hicksian)
demand or Slutsky matrix! Indeed,
“experimental economics” has a very tenuous relation with “theory”:
it tests very elementary ideas (about rational choice or about markets) in
very simple situations - even
if, in general, people don’t act as theory predicts, but that is
another question. Microeconomics:
“unrealistic ” or
“irrelevant” ? Most of the time microeconomics is criticized because of
it’s “lack of realism”.
But “lack of realism” doesn’t necessarily mean irrelevance ; the expression is
usually understood as meaning that the
theory in question is “more or less distant from reality”, or as
giving a more or less acceptable proxy of reality (people differing about the
quality of the approximation). The
idea is implicitly this: “if we work hard, relaxing some assumptions
and using more powerful mathematical theorems, microeconomics will
progressively became more and more realistic. There are then - at
least - some
interesting concepts and results in
microeconomics, that a healthy, post-autistic, economic theory should
incorporate”. That’s what Geoff Harcourt implicitly says in the post-autistic economics review, no.11, when he writes: Against this macroeconomic
background, modern microeconomics has a bias towards examining the behaviour of
competitive markets (as set out most fully and rigorously in the Arrow-Debreu model of general equilibrium), not as reference
points but as approximations to what is actually going on. Of course, departures from them are taught,
increasingly by the clever application of game theory. Moreover, the deficiencies of real markets of all sorts
are examined in the light of the implications, for example, of the findings
of the asymmetric information theorists (three of whom - George Akerlof, Michael Spence, and Joe Stiglitz
- have just (10/10/01) been awarded this year's Nobel Prize. From Amartya Sen on, the Nobel Prize electors seem to be back on
track). What is Harcourt saying?
He is telling us that the Arrow-Debreu model
has something to do with “the behaviour of competitive markets”;
he is saying that game theory can be
cleverly “applied”; he says
that there are “findings” made by Akerlof,
Spence and Stiglitz. If all this is true, then students have to
learn general equilibrium theory (as giving “approximations to what is
actually going on”), game theory, asymmetric information theory, and so
on. That means that they need micro 1,
micro 2, micro 3... courses (consumer and producer choice, perfect and
imperfect competition, game theory, “market failures”, etc.). I don’t agree at all with Geoff Harcourt because: 1. The Arrow-Debreu model
has nothing to do with competition and markets: it is a model of a
“highly centralized” economy, with a benevolent auctioneer doing
a lot of things, and with stupid price-taker agents; 2. Game theory cannot be “applied”: it only
tells little “stories” about the possible consequences of
rational individuals’ choices
made once and for all and simultaneously by all of them. 3. Akerlof, Spence and Stiglitz have no new “findings”, they just
present, in a mathematical form, some very old ideas - long known by
insurance companies and by those who organize
auctions and second hand markets. 4. Amartya Sen, as an economist, is a standard microeconomist
(that is what he was awarded the Nobel Prize for): only the vocabulary is
different (“capabilities”, “functionings”,
etc.). But, perhaps, all “post
autistic” economists won’t agree with me. It would be good then that they give their opinion and,
more generally, that we try to answer, in detail, the question: Is there
anything worth keeping in microeconomics - and in neoclassical theory? If there is, what? SUGGESTED
CITATION: ___________________________ Bernard Guerrien is the
author of La Théorie
des jeux (2002), Dictionnaire d'analyse
économique (2002) and La théorie
économique néoclassique. macroéconomie, théorie des jeux, tome 2 (1999). Toward a
Post-Autistic Economics Education
Susan Feiner (Uni. of Southern Maine, USA
and The Hawke Institute, Uni. of South Australia)
Taken together, the articles by Marc Lavoie and Peter Earl
(PAE Review, no. 1; 30 January 2002)
can be seen as posing a set of interesting, important, and inter-related
questions. Lavoie asks, “what
are the connections between Post-Keynesian and feminist economics?”
While Earl asks, “how can we understand, and so transcend, the
resistance on the part of students to a more “pluralistic”
approach to economics education?” Lavoie’s investigation of the connections between
Post-Keynesian and feminist economics notes the importance of pedagogy, but
his essay does not discuss teaching.
Earl’s discussion of pedagogy refers to critical thinking, and
the development of student’s capacity to handle intellectual ambiguity,
but his discussion does not mention feminist pedagogy. But pedagogy reform in economics, at least
in the United States, emerged as an organic concern of feminists seeking to
develop a new approach to the discipline. Beginning in 1985 and running through at least 1997, there
were panels at various economics meetings (including the ASSA),
conferences, faculty development programs, workshops, seminars, peer reviewed
published papers, as well as a number of edited volumes produced by feminist
economists and aimed at deep transformation of the teaching of
economics. In the early years,
feminist interest in pedagogy was manifest in the papers researching the
presentation of topics relating to gender and race in economics
textbooks. This work demonstrated the
extent to which introductory economics textbooks perpetuated sexist and
racist assumptions, reinforced existing biases regarding the perversity of
policy aimed at redressing sexual and racial inequality, and basically
ridiculed any but the “approved” points of view on these
controversial topics. Quite a number of highly esteemed, mainstream economists
were appalled by these findings. With
the help of Barbara Bergmann, I recruited such luminaries as Robert Solow, William Baumol, Lester Thurow, Alice Rivlin, and
Kenneth Arrow to work with me on The Committee for Race and Gender Balance in
the Economics Curriculum. My point
here is that “autism” and bigotry need not go hand in hand. With a lot of hard work, a great deal of
encouragement and helpful support from many quarters, Robin Bartlett (Denison
University) and I secured a series of grants from The National Science
Foundation to host faculty development programs to help economics professors
integrate the new scholarship on women and people of color
into the introductory economics curriculum. Economics
Pedagogy and the Feminist Classroom
From the outset, Bartlett and I knew that the standard
“sage on the stage” model of college teaching was not appropriate
for bringing these controversial topics into introductory economics
classrooms. How did we know this? We were both conversant with what was then
the cutting edge “active learning,” “student centered” approach to teaching which has its roots
in the feminist revisioning of education. As Peter Earl quite rightly points out, students come to college knowing all sorts of things, and one of the things they “know” is that the way to demonstrate “learning” is to parrot back what the teacher said. But when students are likely to disagree with the teacher (as many of them often do on the topics related to sex, race and the economy as seen from the eyes of a feminist) they are going to feel manipulated, brainwashed, and angry. When this is coupled with their almost total ignorance, if not complete misunderstanding, of the struggles for women’s liberation and racial justice, what was intended as a class discussion can turn into an awful round of name calling, intolerance, and all around bad feelings. (This is why economics professors often choose to avoid these topics). In Feminism and
Methodology philosopher Sandra Harding argues that one of the key distinctive
features of feminist research is that the researcher places her/himself and
the subject of research “on the same plane.” This epistemological position has direct
application in pedagogy. As we were trying to get economics faculty to rethink the
teacher role, we organized the faculty development conferences1 so that faculty could
re-experience the uncertainty, risk-taking, and mutual support that
characterizes classes which are open, non or minimally hierarchical, and
which actually welcome free discussion.
We knew that faculty needed to reacquaint themselves with what were
hopefully their own best experiences as students. We hoped that the insights gained from this
would lead faculty to realize the need for deep change in the structure of classroom
dynamics. The programs of these conferences2 had faculty
engage in competitive timed exercises, and then in cooperative, collaborative
exercises. We asked participants to
reflect on the different feelings these exercises provoked. Here too the recognition that feelings and
not just “right answers” are important in learning reflects
feminist epistemological commitments.
The gulf between this position and the view of personhood (if you can
call it that) embodied in Rational Economic Man should be obvious. Participants also spent a good deal of time reflecting on,
and working through, activities designed to highlight the way their own
attitudes and histories of sex, gender, race, and ethnicity had shaped them
as learners. These sessions were invariably
highly charged. Emotions ran high as economists recounted personal stories
of being shunned, or humiliated for who they were; we heard stories about the
shame people felt when they realized that their parents were racist, homophobic, or anti-semitic;
others told of how they had participated in harassing behaviors;
still others revealed that they hadn’t known that whiteness was itself
a racial identity. I cannot count the number of people who told me that these
sessions provided some of their sharpest insights into the problems with the
mainstream approach. Providing a venue for self-reflection is also a hallmark
of feminist pedagogy. Feminists have
long insisted that social position affects knowledge, and that every view is
a point of view. Feminist epistemology
is clear on this point: recognizing that power and privilege shape knowledge
leads to more—not less—rigor and “objectivity” in
scientific inquiry. Faculty had to recognize that they too, were marked by the
social processes of race, gender, ethnicity, and sexual orientation. This self-awareness is an essential
pre-requisite for creating a classroom where students feel safe enough to
self-reveal. All of our students carry
a personal history relative to race, gender, class, sexual orientation, and
ethnicity. Ignoring the emotional
underpinnings of their understandings of diversity and the social conflict
attendant on diversity virtually guarantees that a classroom discussion will
explode with misunderstanding, disrespect, or worse. Another reason why it was important to self-disclose
around our experiences is that this placed the participants outside their
“comfort zones.” Faculty (in general) and economists (in
particular) are probably not used to talking about feelings, especially not
in relationship to economic concepts.
Once they had taken this risk and discovered that the group would
support them, they could see for themselves that “the economic is as
personal” as the “personal is political.” Only after we had created an atmosphere of trust and
community did we turn to the formidable tasks of reinventing introductory
micro and macro-economics. Over the
next two days, faculty work groups developed creative exercises, all based on
active, collaborative learning, which brought questions of gender and race to
the center of classroom economic discussions. I recall a simulation exercise in which
students were to research and the represent the various people who would be
affected if a factory in the Southern U.S.A., shut down in order to reopen in
El Salvador. Another group came up
with the idea of holding public hearings on Federal Reserve policy, with
students representing a wide range of social organizations. Yet another traced the effects of inflation
on different occupational groups. One
of my favorites was a skit of a romantic couple
using Becker’s logic to sort out the decision to marry. A blind eagle in a blizzard could recognize the
connections between this approach to teaching economics and feminist
pedagogy. But what is the connection
to critical thinking? The topics of gender and race are especially helpful for
introducing competing points of view because everyone “knows”
that people disagree. As Peter Earl
points out, students often believe that disagreement on such issues exist
because the “experts” still haven’t discovered the
Truth. I will go out on a limb here
and just flat out insist that you cannot disabuse students of this point of
view if your reading assignments are confined to a textbook, regardless of
its orientation to economics. That
means you need to find articles that students can read—they often need
help with this because they are not especially skilled readers—that
express different points of view. Working in small groups during class will help students
learn how to read critically. In
groups of 3 to 5 have them identify the 4 most important points of each of
the articles you’ve assigned.
Make sure they reference each important point to a specific paragraph
in the essay. After you’ve
gotten these points on the board (and there should be a goodly number of
“most important points” since you have 4 points per group) the
class discussion can focus on which of these points are most important and
why. By the conclusion of this
exercise every student should understand the articles. Now you have prepared them for selecting the argument with
which they agree. A great homework
assignment: “why I rejected
argument X.” Critical thinking requires the ability to recognize and understand what are often complex arguments. In economics, the points of view associated with the heterodox approaches are quite likely to be diametrically opposed to the views of society with which students are familiar. Getting students to actually “think” about these ideas, rather than see this as an attempt to brainwash them, is tricky. So is getting students to do more than parrot back your politics. As I’ve argued here, feminism informs a pedagogy which is up to the challenge. Notes
[1] Robin
Bartlett and I were co-principal investigators on two NSF sponsored grants
that funded three summer faculty development conferences, open to all
professors of introductory economics.
We also held follow up sessions at the Allied Social Science Association
meetings. I subsequently received
another NSF grant that funded an additional three conferences for professors
of economics at community colleges, at women’s colleges, and at
historically black colleges and universities.
This later conference became the jumping off point for a Ford
Foundation grant aimed at improving economics education at Historically Black
Colleges and Universities. 2 I
apologize in advance for any errors here as I am reconstructing these
programs from memory. I am on leave
in Adelaide, Australia and all my notes, grant applications, and conference
schedules are on computers in Portland, Maine. References
The inaugural article framing this critique of
mainstream education appeared in The
Journal of Economic Education, See S. Feiner
and B. Morgan, Fall, 1987, “Women and Minorities in Introductory
Economics Textbooks: 1974 to 1984." Two relevant essays appearing in The American Economic Review are: S. Feiner and B. Roberts, May 1995, "Using an
Alternative Paradigm to Teach Race, Gender and Critical Thinking," and
S. Feiner and R. Bartlett, May 1992,
"Balancing the Economics Curriculum: Method, Content and Pedagogy." For an explicit discussion of the connections between
mainstream method, economic education, and racial/sexual bias see, S. Feiner and B. Roberts, "Hidden by the
Invisible Hand: Neoclassical Economic Theory and the Textbook Treatment of
Minorities and Women," in Gender
& Society, June, 1990.
SUGGESTED
CITATION: Ontology, Epistemology, Language and the Practice of EconomicsWarren J. Samuels (Michigan State University, USA) The post-autistic movement in economics is the latest,
certainly a welcome, effort to restructure and refocus the teaching and
practice of economics. Limitations of
space prevent the articulation of everything that needs to be said about the
movement but a few key points can be made, especially regarding some
ontological, epistemological, and linguistic concerns. Some preliminary points: (1) The practice of economics has always been more diverse
than Whig historians have made it out to be.
This was true of both the interwar period and the period, following
World War II, of manifest neoclassical hegemony. Heterogeneity has characterized economics
as a whole, heterodox economics, and orthodox economics. (2) A driving force within economics is status
emulation. Decisions as to department
type, membership, publication outlets chosen and rewarded, curricular
content, attitudes toward mathematics and econometrics, the sociology of training
graduate students, the finessing of criticism, and so on, are driven by
considerations of rank and power. Some
heterodox economists have undertaken work to impress—be read
by—leading orthodox economists rather than to promote their heterodox
paradigm. Some economists within
orthodoxy have downplayed the radical aspects of their ideas so as to avoid
endangering their status. The combination of heterogeneity and status emulation has
resulted in increased hierarchy, including the gradual weakening of
heterodoxy and general heterogeneity. 3) Every discipline, every school of thought and every
reform movement must confront the tension between being so diffuse that it
stands for very little and being so definitive that it appeals only to a
narrow and perhaps fanatical group. (4) Economists have, for almost two centuries, been
concerned that the discipline does not speak with one voice. One concern is that a multi-vocal economics
would not be perceived to be a science—and during that period of time
status emulation has increasingly taken the form of emulating one or another
version of what is perceived to be “science.” I now turn to my principal topics: ontology, epistemology, and language. Ontology has to do with the ultimate
nature of reality and of those objects that putatively comprise reality. With regard to economics, the key questions
are, first, is there a fundamental, ultimate economic reality? and, second,
if so, what is it? The realist position is that such an ultimate reality
exists. The burden of the realist
position is that realists do not agree as to what it is. One must choose between alternative
specifications of reality. The
idealist position, in partial contrast, is that no such given ultimate
reality exists and that it is thereby open to human social construction. The burden of the idealist position is that
idealists do no agree as to what it should be. One must choose between alternative
specifications of the ideal, socially constructed economy. In the light of such ubiquity of choice,
the use and role of ideology in channeling social
construction is understandable. In economics, a further dichotomy exists. The principal approach to the economy
within mainstream neoclassicism is that of positing a pure a-institutional
conceptual model of “the market” and examining it under the aegis
of the neoclassical research protocol, that of seeking unique determinate
optimal equilibrium results. The
principal alternative approach is to study actual markets and the
institutions that form and operate through them. Those who follow the former approach feel
that they are reaching conclusions applicable to all economies, even if not
to any economy in particular. Those
who follow the latter approach both wonder about conclusions that apply to no
particular economy and emphasize that—in the allocation of resources,
etc.—institutions matter. The conflict between those two approaches involves both
ontology and epistemology. Ontology,
in regard to the nature of reality:
purely conceptual market or actual institutionalized markets. Epistemology, as to the object, domain or
level of inquiry with respect to which principles of “true”
knowledge apply. This should not be an either-or matter. Abstraction is inevitable. There can be different pure a-institutional
conceptual models of the market. Some
can be orthodox and others heterodox.
There can be different modes of putatively actual markets and the
institutions that form and operate through them. Some can be orthodox and others
heterodox. Individual economists can
have different notions of what constitutes interesting and useful objects of
study. Kevin Hoover, in his message on
the HES list of September 9, 2000 pertaining to
autism in economics, correctly combines the possibility, if not
inevitability, of narrow, hyper-focused research that is also, on its own
terms, quite accomplished activity. It seems to me that to some extent economics already is
ontologically pluralistic but that it is not enough so. Epistemology has to do with the rules or criteria
by which a statement is to be deemed true.
Two approaches, or classes of approaches, to epistemology have been
followed. By prescriptivism, the quest
is for specific conclusively prescriptive rules; by these rules and by these
rules alone may truth be determined.
By conditionism, no such singular conclusive
quest is contemplated; a variety of rules is formulated, and thinkers make
their choice (s) from among them. Transcending even those rival approaches is a fundamental
dichotomy as to the nature of truth:
rationalism versus empiricism; and a parallel one as to
procedure: deduction versus
induction. Without examining these
dichotomies closely here, it can be said, first, that both rationalism and
empiricism and both deduction and induction are also complements, each
mutually influencing the conduct of the other; and, second, that deduction
yields not truth—defined as correct description or
explanation—but validity—understood as a conclusion properly
derived from premises, given the system of logic. It seems to me that to some extent economics already is
epistemologically pluralistic but that it is not enough so. I would make the same points with regard to theoretical
pluralism, including pluralism of models. I come next to language. Here I begin with two dichotomies. The first juxtaposes language as (an effort
at) truth from language as (an effort at) power. The former has to do with description
and/or explanation as at least an end in itself; the latter has to do with
the motivation of belief and/or behavior. The former informs; the latter moves. The second dichotomy juxtaposes (through the early Ludwig
Wittgenstein) language as corresponding, in substance or logical structure,
to reality from language as a tool.
The former ties and subordinates us to reality; the latter ties and
subordinates reality to us. One’s position with regard to these dichotomies will
be reflected in how one treats theories of profit, the existence of the
Federal Reserve System, and/or cross elasticity of supply. Other problems of language in economics include the
following. Definitions often
assume, embody, and give effect to theories, theories as hypotheses. Definitions not only define words, when the
words are used they define the world for us and that definition may
misleadingly or incompletely define the world. Very often terms are
used in a primitive or generic sense.
Terms like "private," "public,"
"voluntary," "freedom," "coercion,"
"property," “morality,” “liberty," and so
on, are used with unspecified meaning.
They are kaleidoscopic, subject to selective perception, and almost
invariably given variable specification.
Their use facilitates the entry into analysis or argument of selective
implicit antecedent normative premises.
This allows an author to escape questions of both substantive content
and the mode of its determination, thereby usually begging a, if not the,
important substantive question, leaving it to each reader to provide
substantive content. Such terms are often identified with the status quo
somehow selectively perceived--often the point at issue. Economists generally
work with some notion of a pure abstract a-institutional conceptual model of
the economy. Economists also tend to
identify the status quo with that conceptual model. This can only be done by assuming that the
primitive terms of the model are to be understood only in terms of the status
quo. One problem is that the so-called
status quo is a matter of interpretation—selectively perceived and
identified. Second, the status quo
itself is the ultimate object of inquiry.
By identifying it in particular, selective terms and identifying it
with the pure conceptual model, economists selectively reify the existing
system, rendering it more concrete than it really is. A further problem is that the primitive
terms of the model itself--such as “competition”--can be given
variable specification. Specific, definitive
texts do not necessarily have definitive meanings. Selective interpretation engenders
different reifications. As conditions
and therefore interests change, different readings of texts are advanced and
adopted. All this is part of the role
of language in the continuing social construction of reality, a putative
reality that is given selective reification. It seems to me that to some extent economists already are sensitive to
problems of language but that they are not enough so. Such views as I have promoted here can advance
post-autistic economics; and a strong post-autistic economics can advance
both such views and economics. SUGGESTED
CITATION: ____________________________ Warren J. Samuels is Professor Emeritus of
Economics at Michigan State University.
The foregoing is based in part on “Deduction and the Practice of
Economics: The Necessity of a Sense of
Limits,” Journal of Economic Methodology, vol.8 (March 2001),
pp. 99-104; “Some Problems in
the Use of Language in Economics,” Review of Political Economy,
vol. 13, no. 1 (2001), pp. 91-100; "Methodological Pluralism," in The
Handbook of Economic Methodology, John B. Davis, D. Wade Hands, and Uskali Maki, eds.
Northampton, MA: Edward Elgar, 1998, pp. 300-303; "The Case for
Methodological Pluralism," in Andrea Salanti
and Ernesto Screpanti, eds., Pluralism in
Economics, Brookfield, VT: Edward Elgar,
1997, pp. 67-79, and "Methodological Pluralism: The Discussion in Retrospect," in
Andrea Salanti and Ernesto Screpanti,
eds., Pluralism in Economics, Brookfield, VT: Edward Elgar,
1997, pp. 308-309. "Postmodernism
and Knowledge: A Middlebrow
View," Journal of Economic Methodology, vol. 3 (June 1996), pp.
113-120. Is the Utility
Maximization Principle Necessary? Katalin Martinás (Dept.
of Atomic Physics, Roland Eotvos University,
Hungary) Microeconomics and thermodynamics are both based on the idea of
exchange. In thermodynamics the
irreversibility of exchanges is a key idea and one that my physics students
sometimes have difficulty understanding.
So about twenty years ago I went looking for examples of irreversibility in economic theory that I
could use in my teaching of thermodynamics.
What I found, however, was no irreversibility in the neoclassical
paradigm. As a physicist this struck
me as preposterous and incredible.
Without irreversibility, microeconomics might be a wonderful
mathematical theory, but it could not offer a theory of economic activity.
This encounter marked the beginning of my long-term interest in economic
research. Most economists living today grew up with the idea, even if not
always agreeing with it, that there is and should be a master theory, neoclassicalism. [1]
Central to this theory are the principles of utility and profit
maximization. I am going to argue that
in spite of their ever-growing dominance in journals and textbooks (in
Hungary they are now taught in secondary schools), these maximization
principles are neither sufficient nor necessary conditions for building a
mathematical economic theory. “Childish pleasure” The founding fathers of modern theoretical economics chose
profit and utility maximization as foundational principles for the
description of economic decisions, a choice that resulted in a timeless
mathematical economics. From its
earliest days, however, neoclassicalism has been
subject to empirical and theoretical critiques that have called the
legitimacy of its maximization principles fundamentally into question. Already in 1918, Gustav Cassel
wrote [2]: "This purely formal [utility]
theory, which in no way extends our knowledge of actual processes, is in any
case superfluous for the theory of price. It should further be noted that
this deduction of the nature of demand from a single principle, in which so
much childish pleasure has been taken, was only made possible by artificial
constructions and a considerable distortion of reality." Cassel’s charge of
childish pleasure is justified because the existence of the utility and
maximizing principles have been refuted from various points of view. Briefly, I will review some of the arguments. It does not exist Hall and Hintch in 1939 investigated
whether entrepreneurs did in fact conduct the price and output policy that
was ascribed to them in neoclassical theory.
These Oxford economists chose to use the 'method of direct question'
to find this out. The results were clearly negative. Almost all business men followed a 'full
cost' pricing rule, that is they took prime (or 'direct') cost per unit as
the base, added a percentage to cover overheads (or 'indirect' cost), and
made a further addition for profit. [3] It may not exist Profit and utility maximization demand perfect information.
Moreover they need the perfect knowledge of the future too. Further, as the decisions (and actions)
take finite time, in real life the action and the result appear in different
environments. Maximization at the
moment of decision does not necessarily mean maximization for the result. The world changes. That problem is "solved" via the
assumption of equilibrium (not changing environment). This results in a
timeless theory. The (in)famous proof of the existence of a general
equilibrium state is in some sense a tautology, as it is a built-in
conclusion. It cannot exist It is an oxymoron for a human being to be an economic agent in
the neoclassical sense, because an economic actor cannot behave
simultaneously as a profit and a utility maximizer.
[4] In standard economics, production
and consumption are two different activities done by different actors. But in reality the same human being is
often both a producer and a consumer.
True, not every consumer is a producer, but all producers are
consumers. Both production and
consumption require human time, so that in reality any profit and utility
maximizing by a producer/consumer would have to be done against the same
limited fund of time. Consequently a
description of the real behavior of such agents
would have to incorporate both dimensions simultaneously. Neoclassical theory does not do this. It must not exist It violates the traditional ethical principles of humanity [5]. It does not need to exist (it is not necessary) There is a general belief that utility maximization principle is
needed to ensures an ordering of the commodity space, and that it is the only
possible approach. This is not the
case. A weaker postulate - the no-loss
rule - is sufficient to construct an economic theory [7, 8, 9, 10]. The no-loss rule The no-loss rule first appeared in the Austrian school when Menger stated the necessary conditions for an exchange.
[6] For a free exchange of goods among
economizing individuals the following triad of conditions must be fulfilled: a. one economizing individual must have
command of goods which have a smaller value to him/her then other quantities
of goods at the disposal of another economizing individual who evaluates the
goods in reverse fashion, b. the two
economizing individuals must have recognized this relationship, and c. they must
have the power actually to perform the exchange of goods. The absence of any one of the above three conditions means that
an essential prerequisite for an exchange is missing. The first condition, essential in free
economic exchange, is the no-loss rule: an economic individual never acts if that
action would result in an immediate loss.
The no-loss rule is postulated as a decision rule for economic agents
instead of utility/profit maximization.
It is extremely important to note that the no-loss rule holds only for
the moment of action. The natural and
economic environments, as well as the economic agents themselves, are in
continuous transition, so that today yesterday’s decision may seem to
have been a bad decision. The no-loss
criteria is weaker than the utility maximum principle. It presupposes only that every economic
unit has common sense, and hence does not do anything which impairs its
economic state. It does not presume
perfect “rationality”, that is, it does not suppose perfect foresight,
nor does it necessarily follow that
the actions taken are optimal. Some basic features of the no-loss approach Under this approach an economic system (state, market, etc. )
consists of economic agents interacting through exchanges of materials
(goods), money and information. An
economic agent (EA) is the smallest entity with an implicit or explicit
decision-making rule. In most cases
the EA is either a firm or an individual. EAs are
characterized by the scope of their activities, by their knowledge, their
experiences and their stocks. Their the
list of stocks (N) may contain money (M), but money is not conceptually
necessary. Every economic activity of an agent is represented as a
decision. There are 'free" decisions (concerning production and trade -
based on the economic interest of the EA) and "forced"
decisions. The latter result from
physical/biological constraints (e.g., degradation, depreciation) and
political constraints (e.g., regulations of the state, taxes, or robbery). A necessary criterion for every voluntary action (free decisions)
is that the agent’s economic welfare will not be worse than in the
initial state. This no-loss rule only
forbids those decisions which would result in a worse economic state than the
initial one. That is a fundamental difference from the utility and profit
maximization principles. The latter define the actual decision, while the
no-loss rule specifies only that an action is allowed or forbidden. The no-loss rule demands that every economic agent is characterized
by a function , called wealth function. Z(X,...,M), where X is for stocks,
and M for money. The wealth function
is a measure, in non-monetary units, of the wealth or welfare of the economic
actors. The wealth function reflects the
"wealth" state of the economic agent (individual or firm) as
self-evaluated. It represents the
potential use (including, but not limited to possible current or future
consumption), as opposed to the utility function which shows the level of satisfaction from that consumption. In some senses the notion of utility is
retrospective (and applies only to individuals), whereas the notion of wealth
is prospective and applies equally to firms.
The characterization of all agents by a non-decreasing function
parallels the traditional treatment of individuals in economics. However, previously firms have never been
treated in this manner. The wealth
function of a firm means that the firm also evaluates commodities (in terms
of it’s business and technological possibilities) as do individual
consumers. The evaluation of stocks of commodities means that the firm is
capable of anticipating the possible changes in future wealth that a set of
existing stocks affords. The most important properties of the wealth function
are: [8]. (i) Since wealth is a positive
attribute (in the absence of the possibility of net debt), a function that
measures wealth must be non-negative. Normally Z > 0. (ii) Wealth comprises all goods and money, or
money-equivalents (like receivables) that are owned outright (net of
mortgages, debts or other encumbrances). The terms "own",
"owned", "ownership" etc. are shorthand for a more
cumbersome phrase, such as "to which the economic agent has enforceable
exclusive access". (iii) An increase in the agent's ownership of stocks
of beneficial goods or money results, ceteris paribus, in an increase
in the agent's wealth. In case of an incremental increase in the stock of a
beneficial good (as opposed to a waste) we can assert dX
> 0, and dZ
> 0. Similarly if dM > 0, dZ
> 0. (iv) An economic agent's wealth can only increase or stay
constant (but never decrease) as a consequence of voluntary actions
consistent with the no-loss rule. The payment of taxes (for example) is
considered to be involuntary and unavoidable. (v) The wealth function may have the property of
homogeneity in the first degree. (Doubling all stocks will double wealth.)
This is a useful property when the time comes to select representative
mathematical forms. The no-loss rule defines the direction of economic
processes. An agent agrees to a
process only if it leads to dZ > 0. A force law of economic processes is
introduced. The magnitude of actions
is proportional to the anticipated
wealth increase. The result is
a non-linear non-equilibrium dynamic equation system. Computer simulations of a market economy
through the history of the individual economic actors can be performed. These simulations provide tools to investigate
the effect of different economic policies, institutions, environmental impacts
on the economic system. In [10] we have shown how to integrate firms in this
model. We have found that the usual general
equilibrium solution is only a special case. Description of economic phenomena with help from the no-loss rule is
promising for at least three reasons. Firstly, the no-loss rule has long been
a premise for economists. Secondly,
the no-loss rule can handle straightforwardly the main elements of economic
models -- consumers, producers, commodities, trade and production. Finally,
it is a non-equilibrium approach. References: [1] Edward Fullbrook (2001) "Real Science Is Pluralist", post-autistic
economics newsletter : issue no. 5, March, article 5. http://www.btinternet.com/~pae_news/review/issue5 [2] Gustav Cassel, Theory of Social Economy, 1918, p.81. [3] Jack J. Vromen, Economic Evolution, Routledge,
London, 1995. [4] M. C. Jensen and
W. H. Meckling, 1994 “The Nature of
Man”, Journal of Applied Corporate Finance, Summer 1994, V. 7,
No. 2, pp. 4 – 19. [5] Scitovsky, T., The
Joyless Economy. Oxford University Press, New York, 1965. [6] Menger, Carl, Principles of Economics, 1871
(translated by J. Dingwall and B.H.
Hoselitz, Glencoe, IL; The Free Press, 1950, cited
by: Raphael Sassower, Philosophy of Economics,
UPA, NY, 1985. [7] Bródy, Andrs, Katalin Martinás, Konstantin Sajó, Essay on
Macroeconomics, Acta Oec.
36, December, 1985 :305. Reprinted in Thermodynamics
and Economics, ed. Burley, Kluwer, 1994. [8] Ayres, Robert U.
& Katalin Martinás,
Wealth accumulation and economic progress, Journal of Evolutionary
Economics, December, 1996. [9] Katalin Martinás,
“Irreversible Microeconomics”,
Complex Systems in Natural and Economic Sciences, eds: K. Martinás, M. Moreau, ELFT, Budapest, 1996, p. 114. [10] Gilányi Zsolt, Katalin Martinás: An Irreversible Economic Approach to the
Theory of Production, Open Systems and Information Dynamics. 7, 2000,
pp. 1-15.
SUGGESTED
CITATION: Quo Vadis Behavioral Finance? In the science-fiction television and film series Star Trek: The Next Generation, there
is a species called the Borg, a collective of techno-organic drones acting in
concert as a single organism. In their
pursuit of perfection, they roam the galaxy in search of other species, whose
capabilities they acquire through a process of assimilation -- turning their
captives into Borg and effectively absorbing their knowledge into the
hive’s mind. The first line of
every encounter with the Borg is familiar to Star Trek aficionados: “Resistance is futile. Prepare to be assimilated.” It seems that this sci-fi dream world is worryingly more
than apropos to describe the state of affairs of the field of finance, both
as a scientific endeavor and a subdiscipline
of economics. Academic finance has
been an outgrowth of neoclassical economics, Friedmanian
instrumentalism (Friedman, 1953), and Fama’s
efficient markets hypothesis [EMH] (Fama, 1965, 1970).
It is an autistic world, in which there exists this mythical economic
individual, the homo economicus (or as our
European colleagues correctly spell it: oeconomicus). This world is called financial economics,
or modern finance. Financial economics
is an orthodox world where the leaders of the church are vigilant to nip in
the bud any criticism, or questioning of this world’s methodology. The only serious challenge to the modern finance dogma
over its fifty-year existence has been the appearance of behavioral
finance. Behavioral
finance got its start with the importation of prospect theory (Tversky and Kahneman, 1974, and
Kahneman and Tversky,
1979), a challenge to the axioms of Von Neuman and
Morgenstern (1967) on which the psychological makeup of the homo economicus is built.
At first, De Bondt and Thaler
(1985, 1987) showed that contrary to the predictions of the EMH, markets overreact.
Many followers also showed under reaction. Both these “reactions” were
translated to a real-world strategy referred to as contrarian1
(See: Dreman, 1998). Concurrently, others too numerous to mention questioned the empirical proxy of the EMH, the capital asset pricing model [CAPM]. These works showed the presence of statistically significant “effects” that the CAPM could not account for. Discoveries of these effects were lumped under the rubric of anomalies. In an interview with Fama,
appearing on the CAPITALIDEASONLINE.COM website,2 Fama expands his views on behavioral
finance. “Well, my good friend,
Dick Thaylor [sic., the reference is to Richard Thaler who moved a few years ago from Cornell to Chicago
in the latter university’s attempt to cover all the bases] is kind of
the guru of behavioral finance and every time he
walks down the corridor, I ask him a question. The question isn’t a complete
question, but a person on the street wouldn’t know what was going on. My question is always the same: Now what
is it? He knows what it refers to.
It’s behavioral finance, and the
reality is they haven’t defined the top. They haven’t defined the
area. What it is at this point is
unkindly speakings, just dredging for anomalous
looking things in the data. But the fact is that even in a perfectly
efficient market, every data set would be on the foremost phenomenon just on
a strictly random basis. So that’s not evidence for or against
anything. If you don’t have a specific view of what behavioral
finance is in the way it manifests itself in the behavior
of prices and returns, you don’t really have anything to work with
because everything you observe really can be rationalized in the context of
an efficient market. For example, all of these studies on behavioral
finance basically look at how prices react to different kinds of
announcements. So sometimes, it seems
to be the case that prices under react, sometimes it seems to be the case
that prices overreact, but that’s exactly what you predict in an
efficient market. You’re going to see drift one way or the other, but
it will be random. So if you don’t have a theory that predicts when
it’s going to under react and when it’s going to overreact, you
don’t have anything. It looks to
me like an efficient market, just a random price behavior.
" Professor Fama
has a paper coming out soon on the subject,
Market Efficiency Long Term Returns on Behavioral
Finance. For Fama, the number one count
on the list of indictments of behavioral finance is
it’s less than perfect prediction power. Now, let that paradigm cast the first stone
that either established a perfect record of predictions or didn’t
suffer from the discovery of anomalies.
In fact, as far as predictions go, Fama’s
own research concluded that the CAPM’s has no
predictive power (Fama and French, 1992). Then what makes the EMH
something above doubt and behavioral finance
“just dredging for anomalous looking things?” In the
same swoop Fama also promotes a colleague to the
dubious rank of “the guru of behavioral
finance.” This is not only an
ill-concealed insult, but also an insinuation that Professor Thaler somehow stumbled into a major university straight
from the ashram of behavioral finance (perhaps a
Hindu cult?). We are also doubtful
that Dick Thaler cannot answer Fama’s
question, because this is the same Thaler who in a
recent article in the Financial Analysts Journal (Thaler,
1999, p. 16) had this to say: “I
predict that in the not-too-distant future, the term “behavioral finance” will be correctly viewed as a
redundant phrase. What other kind of
finance is there?” In the
paper the interview refers to, Fama (1998) artfully
reduces behavioral finance to the “anomalies
literature.” What Fama conveniently forgets is that behavioral
finance is not just the anomalies literature, or even over-/underreaction, but the realization that the axioms and
assumptions of modern finance/financial economics on which his EMH is built is an autistic world. Or does he forget? Being conspiracy theorists, it is our belief that the label “the anomalies literature” is a carefully chosen signifier that necessarily puts behavioral finance at a level below the EMH. This is so because one may deal with anomalies as puzzles that eventually must be solved. One may make a note of anomalies for further reference. Or one may just forget about them. The last choice is the one researchers in financial economics seem to select. We conjecture that this choice is influenced by the sociology of the field; that is, the totalitarian control of the orthodoxy over the nobility press on which promotion and tenure depend. In an
almost unique move in the financial economics literature,3 Fama (1998) also cleverly uses the arguments of both Kuhn
(1970) and Lakatos (1970) that once a paradigm has
been established only a new and more powerful paradigm can replace the old
one. What Fama
doesn’t mention is that the EMH/CAPM is an
arriviste paradigm. It is one that, we
suspect, is promoted for ideological reasons (the market knows best, keep
government out, etc.), and in fact has been often found to be invalid. Because it cannot be falsified, Fama ought to have argued that it should never have been
put on the pedestal of a paradigm. Unfortunately
for behavioral finance, its practitioners are drawn
like a doomed species into the tractor beam of financial economics, and their
work is concentrating on proofs of market efficiency, or lack thereof, using
the same statistical methods (and methodology) the proponents of the EMH have been using from time immemorial. An alternative and more promising avenue
would be to define behavioral finance’s
methodology without paying any attention to the vapid issue of whether
markets are efficient or not. This is
no small task, because the methodology of a science is a complex and
multileveled ziggurat (Frankfurter, 2001).
However, this is the only way behavioral
finance can survive before it is totally assimilated by the Borg. Behavioral
finance, therefore, is on the road to Damascus. This is why we are asking the
question: Quo vadis
behavioral finance? Notes
[1] The word
contrarian was coined to signify a strategy contrary to the teachings of the EMH. 2 Or go straight to link: http://www.ifa.tv/Library/Support/Articles/Scholarly/TextInterviewEugeneFama.htm 3 Unique in the sense that it
invokes the philosophy of science to bolster an argument. References
DeBondt, Werner, and Thaler Richard. 1985. “Does the Stock Market
Overreact? Journal of Finance 40:793-805. _______.
1987. “Further Evidence on Investors' Overreaction and Stock Market
Seasonality.” Journal of Finance 42:557-581. Dreman, David. 1998. Contrarian Investment Strategies: The Next
Generation. New York: Simon and Schuster. Fama, Eugene F. 1965. “The Behavior
of Stock Market Prices.” Journal of Business. 38: 34-105. _______.
1970. “Efficient Capital Markets: A Review of Theory and Empirical
Work.” Journal of Finance 25: 383-417. _______.
1998. “Market Efficiency, Long-Term Returns, and Behavioral
Finance.” Journal of Financial Economics 49: 283-306. Fama, Eugene F., and Kenneth R. French. 1992.
“The Cross-Section of Expected Stock Returns.” Journal of
Finance 47: 427-465. Frankfurter,
George M. 2001. “Method and Methodology.” Homo Oeconomicus 18: 465-491. Friedman,
Milton M. 1953. “The Methodology of Positive Economics.” In
Friedman Milton M. ed. Essays in Positive Economics. Chicago:
University of Chicago Press. Kahneman, Daniel, and Amos Tversky. 1979. “Prospect Theory: An Analysis of
Decisions Under Risk.” Econometrica
47: 263-291. Kuhn,
Thomas S. 1970. The Structure of
Scientific Revolutions. Chicago:
The University of Chicago Press. Lakatos, Imre.
1970. “Falsification and the Methodology of Scientific Research
Programmes.” In Lakatos, I., and G. Musgrave,
Eds. Criticism and the Growth of Knowledge. Cambridge, UK: Cambridge University Press. Tversky, Amos, and Daniel Kahneman. 1974. “Judgment under Uncertainty:
Heuristics and Biases.” Science 185: Von Neuman, John, and Oskar
Morgenstern. 1967. Theory of Games and Economic Behavior. Princeton, NJ: SUGGESTED CITATION: ____________________________ George
M. Frankfurter and Elton G. McGoun
are the authors of From Individualism to the
Individual: Ideology and Inquiry in Financial Economics (May
2002). ______________________________________________________________________________________________ Japan: Susumu Takenaga;
Spain: Jorge Fabra; United Kingdom: Nitasha Kaul, Michael Murphy;
United States:
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