Thursday, May 21, 2015

Don't get mathy with me, or I'll give you a good shunning.

I had heard Paul Romer is disgruntled, and now that he's written down his thoughts, we can perhaps sort this out. We'll start with his recent blog post on "Protecting the Norms of Science in Economics." Here is Paul's view of science:
My reading of the evidence convinces me that a group of scholars can make progress toward the truth only if they share a commitment to the norms of science, a set of norms that support a reputational equilibrium that encourages trust and that rewards progress toward truth.
Think of truth as existing at the top of a mountain. Once we get to the top of the mountain we'll know it, as we'll be able to see a long way, but while we're climbing the mountain we're in a fog, and we can't see the top of the mountain. But we might be able to discern whether we're moving up, down, or just sitting in one place. Paul thinks that we can't just let scientists run loose to take various paths up the mountain with different kinds of gear, and with different companions of their choosing. According to him, we have to organize this enterprise, and it's absolutely necessary that we write down a set of rules that we will abide by, come hell or high water. And when he says "reputational equilibrium" most economists will know what he has in mind - there will be punishments (imposed by the group) for deviating from the rules.

Paul isn't just throwing this out as a vague idea. He has a specific set of rules in mind. We'll go through them one by one:

1. We trust that what each person says is an honest account of what he or she thinks is true. So, that seems fine. We'll all agree that people are at least trying to be honest.

2. We all recognize that reasonable people can differ and that no one has privileged access to the truth. Sure, people are going to differ. Otherwise it would be no fun. But there's that word "truth" coming up again. I really don't know what truth in science is - if I ever find it the surprise will likely induce cardiac arrest, a stroke, or some such. To my mind, we only have a set of ideas, which we might classify as useful, not-so-useful, and useless. One person's useful idea may be another's useless idea. Particularly in economics, there are many of us who can't be convinced that our works of genius are actually not-so-useful or useless. Truth? Forget it.

3. We take seriously the claims of people who disagree with us. What if the people disagreeing with us are idiots?

4. We are ready to admit that others might be right that each of us might be wrong. At first I thought there was a typo in this one, but I think this is what Paul intended. Sure, sometimes two people are having a fight, and no one else gives a crap.

5. In our discussions, claims that are recognized by a clear plurality of members of the community by as being better supported by logic and evidence are the ones that are provisionally accepted as being true. This is absurd of course. We don't take polls to decide scientific merit. Indeed, revolutionary ideas - the ones that take the biggest steps toward Romerian truth - would be the ones that would fail, by this criterion. Scientists, particularly the older ones, become heavily invested in the status quo, and don't want to give it up. In casting their negative votes, they may even by convinced that they are adhering to (1)-(4).

6. In judging what constitutes a “clear plurality,” we put more weight on the views of people who have more status in the community and are recognized as having more expertise on the topic. The problem with (5) of course kicks in with a vengeance here. What community? Recognized how? What expertise relative to what topic? I get no weight because I work at the University of Saskatchewan and not Harvard, or what?

7. We update the status of a members of our community on the basis of his or her contribution to progress a clearer understanding of what is true, not on the basis of “unwavering conviction” or “loyalty to the team.” This I suppose is intended to answer my concerns from (6) about what "status" might mean. I guess our status is our ranking in the profession, according to goodness. Do a good thing, and you move up. Do a bad thing, and you move down. Who decides what's good and bad, and how good, and how bad? What prevents a promotion based on "loyalty to the team," disguised as a good thing?

8. We shun, or exclude from the community, someone who reveals the he or she is not committed to these working principles. Well, I would be happy to be shunned by this community - it really doesn't look like it's built for success. Faced with these rules, I'll deviate and find my own like-minded community.

So, to me those rules seem strange, particularly coming from an economist who, like the rest of us, is schooled in the role of incentives, the benefits of decentralization, and the virtues of competition. We might wish that things were more clear-cut in economics, but it's not going to happen. Our models have to be so simple that they are guaranteed to be wrong - they're always inconsistent with some phenomena, hopefully the ones we're not focused on when we construct the model. There can be radically different theories, with different implications, that are all consistent with the empirical evidence we have (which is often not so great). This just reflects the technological limitations of science - our ability to construct and analyze models, and our ability to collect data. Why not just embrace the diversity and move on?

At this point, you may be wondering what's bugging Paul. He must have something specific he's concerned about. To get some ideas about that, read Romer's recent AER Papers and Proceedings paper. This paper is in part about "mathiness." What could that mean? It certainly doesn't mean that using mathematics in economics is a bad thing. Paul seems on board with the idea that mathematical precision lends clarity to our economic ideas, while potentially keeping people honest. Once you write your economic argument down in formal mathematical terms, it's hard to cheat. Math, unlike the English language (or any other language on the planet), is unambiguous.

But, in trying to get our ideas across, math can work against us. A sophisticated mathematical argument may be impenetrable to the average reader. And a rigorous, mathematically-detailed, internally consistent model is not necessarily a good model. The model-builder may have left out details that are essential for addressing the economic problem at hand, or there may be blatant inconsistencies between the model and the empirical regularities that are germane to the problem. Even though Paul gives specific examples, however, I'm still not entirely clear on "mathiness." As far as I can tell, it's related to the impenetrability problem. A dishonest economist can construct a mathematically sophisticated model, churn out some results without being too careful, claim success, and hope no one notices the errors and inconsistencies. That would certainly be a problem, and I could imagine recommending rejection to the editor if I were asked to referee such a paper, or rejecting the paper if I were in an editorial position.

Is that what's going on in the growth papers that Paul cites in his AER P&P piece? Are the authors guilty of "mathiness," - dishonesty? I'm not convinced. What McGrattan-Prescott, Boldrin-Levine, Lucas, and Lucas-Moll appear to have in common, is that they think about the growth process in different ways than Paul does, with somewhat different models. Sometimes they come up with different policy conclusions. Paul seems to think that, after 30 years, more or less, of research on the economics of technological change, we should have arrived at some consensus as to whether, for example, Paul's view of the world, or the views of his competitors, are somehow closer to Romerian truth. His conclusion is that there is something wrong with the winnowing-out process, hence his list of rules, and the attempt to convince us that M-G, B-L, L, L-M, and Piketty-Zucman too, are doing crappy work. I'm inferring that he thinks their papers were published in good places (our usual measure of value-added science) because they are well-connected big shots. It could also be that Paul just doesn't like competition - in more ways than one.

62 comments:

  1. Apropos number 5 - "Truth never triumphs—its opponents just die out," said Max Planck, "science advances one funeral at a time."

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  2. Wow, I totally agree with a Steve Williamson post about philosophy of science.

    The world is a strange and wondrous place indeed.

    Nice one.

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    1. I can't find much to disagree with either.

      Maybe the bit about old economists having most to lose from new ideas. John Chant had a theory that seems to fit my experience: it's the young economists, fresh out of their PhDs, who are most heavily-invested in the latest theory, who have the most to lose if that theory gets replaced by an even newer one.

      But that's a minor point.

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    2. I don't think so. The young are flexible, they have energy to spare, and sometimes they get utility just from causing a disturbance. The old are old - and most often in the way.

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    3. Why is it self-undermining? I live in my own truth. You live in your own truth. I would like the world to live in my truth. But maybe that wouldn't make me happy, as then I would have no one to argue with.

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    4. It's self-undermining because it says up front, and in essence, that you're not trying to communicate, and can't be trusted in anything you say. That you're not investing in any common understanding, nor in the consensus that Romer posits science can provide. That you're a mere political opportunist in your use of language (and that you consider everyone else mere opportunists). "My truth" whether it overlaps with anyone else's or not; take it or leave it; unchangeable.

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    5. Well, here I am communicating, so why would you infer that I'm not trying to communicate? Can't be trusted? Why? I didn't say that my truth was unchanging. In fact, it's different now from when I woke up this morning.

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    6. Fair enough. I went somewhat overboard in trying to get the point across. I would say here WE are communicating (takes two to tango, no?), and that to the extent we ARE communicating, we have a completely shared truth, not two individual truths that happen to overlap somewhat. If I may use a metaphor, we're not two of the blind men with the elephant; we have to agree on the elephant (meanings in English) to communicate.

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  3. As I see it, Steve Williamson and Paul Romer have quite similar views. Both are very quick to charge that economists they disagree with are not doing science. For Romer, the non-scientists include Lucas, Levine, and Prescott. Just looking over some recent blog posts, I see that Williamson thinks the non-scientists are Krugman, Summers, Mankiw, Piketty, and Noah Smith.

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    1. Yes, and a potato is the same as a hockey puck, as we can play hockey with a potato.

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    2. I checked recent months of Williamson's blog. Since March, Williamson has denounced as non-scientists: Mankiw, Ball, Summers, DeLong, Noah Smith, Kahnemann, and Tversky. I believe he has criticized Krugman and Piketty for not doing science as well, but perhaps not in the last few months.

      4/13. Williamson on Mankiw and Ball: " a religious polemic", "religion, not science"

      4/3. Williamson on Summers: "Summers wasn't acting as the promoter of some well-developed research program. Indeed, the idea seems to have grown in Summers's brain and emerged from his mouth fully-formed ... Nevertheless, as good scientists, we should flesh out Summers's idea."

      3/11. Williamson on Delong and Smith "DeLong and Smith ... might be better-slotted in a third category - journalists who no longer practice economics (much)"

      3/11. Williamson approvingly repeats this quotation about Kahnemann and Tversky: "One thing economics tries to do is to make predictions about the way large groups of people, say, 280 million people are going to respond if you change something in the tax structure, something in the inflation rate, or whatever ... Kahnemann and Tversky haven’t even gotten to two people."

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    3. No, the people are not non-scientists. I was taking issue with specific pieces that these people have written, or things that were said in public. Mankiw, Ball, Summers, and DeLong have produced some good science over time. Noah has never published a paper, and is in quite a different boat. He certainly has some useful things to say, and sometimes I disagree with him, sometimes strongly. Kahnemann and Tversky I really don't think about much. We're probably better off knowing about their work than not, though I don't necessarily agree with their conclusions. The last quote you have about K/T is from Lucas I think.

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    4. Addendum: I'm really not sure what your point is. I'm not finding fault with Paul Romer for being disagreeable. It's actually interesting when people are disagreeable, which I think is why you are commenting here.

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    5. This is one of the best posts I have seen on this subject. If people are a sure that their theories are robust, they have nothing to fear. They would actually welcome having their views being challenged. It is when people know that their theories are not robust that they wish to close the doors and dictate the terms of debate and the methodology and framework used in the pursuit of knowledge.

      I do not agree with much of Friedman for example, but I do admire they way he never shirked from debate, with other economists, academics or the general public, in fact he relished the challenge.

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    6. Stephen Williamson: I am a visitor from the New Monetarism blog on WordPress. In the prior comment that you left for Ragout, were you referring to Larry Summers or Scott Summers? (Hmm, maybe it is Scott Sumner, not Summers....? If so, I'm sorry for my silly inquiry.)

      You also mentioned Noah Smith, and that he has never published a paper. That's interesting, and not entirely surprising! In his Business Week column bio, it says,
      "Noah Smith is an assistant professor of finance at Stony Brook University".
      I have mixed feelings about Noah, not entirely disagreeable, but enough so that I giggle when he is referred to as "econ TA at Upstairs Community College" by the Twitter horde. The State University of New York at Stony Brook is actually a very decent school in most fields. Does Noah Smith have a PhD and if not, how is he employed as an assistant professor, might you know? I thought a PhD and some number of scholarly journal articles would be requisite for appointment to an academic position.

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    7. Formal science typically can't be done in a blog post. What I do here, and what other bloggers do, is commentary, which can be useful in its own way. Scientists disagree, and they fight. Bloggers disagree and fight too. If there were no disagreement and fighting, things would be boring, and we wouldn't be accomplishing anything. At times I've taken issue with Larry Summers and with Scott Sumner too. Some of the people I take issue with have indeed done serious science, and work I respect. Romer has certainly done some fine work, and I've taught his papers to graduate students. Noah, who I know well, indeed has a PhD (U. Michigan) and an academic job. He's a very unusual case though, as he started blogging - heavily - while still a graduate student. Now he gets paid by Bloomberg to do that. But I haven't yet seen anyone do both - full time commentary and full-time science - so sometime Noah will have to decide whether he wants an academic career, or a media career (whatever that means with current technology). Though I don't always agree with him, he's very good - certainly head and shoulders above Binyamin Applebaum. Thus, it's not a criticism to say that Noah has never published a paper - he's just chosen to do other things, which few other people can do as well.

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    8. Thank you for providing some background about Noah.

      I think of Binyamin Appelbaum as more of a Washington D.C. bureau reporter for the New York Times, rather as a source for commentary and detailed analysis. Also, B. Appelbaum only has a bachelor's degree from University of Pennsylvania, no graduate or terminal degrees like Noah :)

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    9. Oops, I'm sorry! That should have been,
      "I think of Binyamin Appelbaum as a Washington D.C. bureau reporter for the New York Times, not as a source for commentary and detailed analysis."

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    10. That's exactly the point. People like Noah are a useful bridge to the academic community, in ways that Appelbuam could never be.

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    11. A very useful bridge. He's got the training to understand what is going on in macro, but has also clearly has an interest in the philosophy of science and other areas - that gives him the ability to stand back and see the entire subject as a whole and its problems from a distance and from another perspective, rather than from within it. It's and efficient allocation of resources having him where he his. (Although he would probably like the privileges of being able to call for more flexibility in labour markets and say all unemployment is voluntary as many economists do from their tenured positions.) Also unlike certain other economists turned columnists he has a lot of modesty.

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    12. Noah doesn't appear to understand the frontier of academic work, or he deliberately misrepresents it. Calling him useful may be an overstatement -- just because he is less destructive than people like Matt Yglesias does not make his visibility a good thing.

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    13. Agreed. But, as you say, it could be worse.

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  4. Nice post Steve
    I agree with all of this.
    Roger

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  5. You do not specify why you are not convinced that the papers Romer talks about are guilty of mathiness. It would be good if you were more specific..

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    1. I'm just evaluating what Romer says in his AER P&P paper. I don't think he makes the case. Seems to me that he couldn't criticize them on the usual grounds, so he made up some vague concept - "mathiness" - and tried to get them on that.

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  6. New monetarist post-modernism, I like it.

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    1. Exactly. Who would have thought that was possible! And its brilliant. All this talk about the monopolisation of knowledge could have come straight out of Gramsci or Robert Cox.

      Paul Krugman, apparently according to his latest blog is going to the Hay Festival, where there will be a session discussing Derrida and "After the End of Truth". If he attends that session, I wonder if he will still keep banging on about ISLM ? Although, of course, all models are wrong - who needs to worry about the truth?

      https://howthelightgetsin.iai.tv/events/after-the-end-of-truth

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    2. Speaking of impenetrability. I once tried to read Derrida, and found him as impenetrable as the proof of Fermat's last theorem.

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    3. I think Steve's views are consistent with Kuhn's or even Lakatos'. Certainly within the mainstream, and not post-modernist.

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    4. Oh no: Derrida and Foucault! I don't like them either. I find post-modernism to be quite frightening. My Twitter friend, @FriedrichHayek was talking a lot about Romer, Kuhn and Lakatos today. I don't especially care for Thomas Kuhn (Fred Hayek said that Romer probably had never even heard of Kuhn. I'm not so sure of that.)

      Part of my problem with Kuhn's "The Structure of Scientific Revolutions" might be that I always end up reading it on the marxists dot org website, so I associate it with Vladimir Lenin and the Russian Revolution. I don't see a lot of difference between Clay Christensen (Christensen's website says that he is the world's foremost authority on disruptive innovation) and Kuhn. Well, Kuhn's ideas about epistemological rupture preceded Christensen by decades. Christensen's disruption is perhaps an applied Kuhn for management consultants... maybe? At least Christensen has a PhD in economics :o)

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    5. Ellie, fair enough, you know more about PM than I do. But I do know it is nothing to be frightened of. In fact it is a very good way of cleaning up a discipline, as international relations theory, for example has discovered. (Before PM IR went through went through a rational choice fad where they were using things like game theory to understand geopolitical stability.)

      Where do basic economic conceptualisations come from (eg. limited resources and unlimited wants - ie budget lines and indifference curves). Why were they conceived where they were conceived (ie Britain at the beginnings of the Industrial Revolution)? What would be the logical result of not having this assumption, but say something else; ie unlimited resources and limited wants? It forces people to think fundamentally about what they are doing. A lot can be revealed. It can be a very powerful methodological device.

      I think working definitions of capital and inflation are two things that could do with a PM onslaught.

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  7. P. Romer's seminal 1990 article and his 1994 JEP article were crucial in my decision to pursue a Ph.D. with a focus on growth theory. Having said that, I find his "mathiness" article a bit disingenuous. First, several of the ideas used in his 1990 paper to generate increasing returns were not novel. They can be found in earlier writings of economic historians like Joel Mokyr and Chris Freeman, among others. I think much of the success of his paper lies in Paul's ability to formalize these ideas so elegantly, unfortunately without citing the historians, so there is something to be said about mathiness.

    Second, Paul seems to think that his case is so self-evident that those who disagree with him are guilty of "bad science". I don't think so. In the eloquent math of his 1990 model lies the idea that knowledge that enters the public domain becomes an input in the production of new knowledge. But, as I have argued in a 2008 article, this premise is not at all self-evident. I am sure that there are many ideas in physics books that could potentially be useful to medical researchers, but that many researchers are unaware of them or lack the training to grasp them fully. So in my model, public knowledge needs to be transformed into private knowledge before it can become useful to a researcher, and R&D is one process through which this happens because of its learning-by-doing effects. Accounting for this is one way to explain why despite the large increase, over the past half century, in the number of researchers there has been no acceleration in the rate of growth, but then Paul's R&D-driven growth model degenerates to something similar to Lucas's human capital-driven 1988 growth model.

    So no, I don't think it is bad science, I think that there are still some unresolved issues in growth theory!!

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    1. I think Acemoglu may be guilty of this to some extent as well. Colonial and institutional weaknesses in explaining disparities in development is very old, and was developed to a high level of understanding by British developments economists, sociologists and historians in the 1950s and 1960s. However if you gut this out (and by no means doing justice to the richness of the work) and present it as model or gadgetry device that pleases power hierarchies, is is considered a major leap forward in the pursuit of knowledge.

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  8. "Paul seems to think that, after 30 years, more or less, of research on the economics of technological change..."

    It must be at least five times older than that!

    It would appear that not only has that knowledge been forgotten, people don't know it exists.

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    1. Sure, I know that research on technological change predates Paul Romer. To be more precise, I meant the thread of research starting with Romer's 1986 JPE paper. But when I say the "economics" of technological change, that does not include the Solow model, for example, which takes technological change as exogenous.

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    2. I would say one of the major ones was Das Kapital. It was interesting how the economics profession had a debate in the 1990s about whether globalisation (international capitalism) or technological change was behind falling real wages for unskilled labour. Marx said the two are linked, which I think is the better explanation. Globalisation drives technological change, and technological change drives globalisation. The two are linked and cannot be isolated. And these two things are part of a bigger story on how the Industrial Revolution and the development of international capitalism took place. This is another example of people approaching causation in social systems where there are complex interrelated linkages the wrong way by forcing an ontologically dubious and historically ill-informed framework from the beginning on analysis and attempting to control and suppress inter-linked factors. Similarly one should not approach something like the causes of WWI or a major financial crisis in such a way.

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    3. The blog and discussion talks about the use of maths in quite an effective way. As does this and its links

      https://larspsyll.wordpress.com/2015/05/20/consistency-and-validity-is-not-enough/

      I would add two more things. There are some things which cannot be well handled by maths in the first place. But if we are to get to 'the truth' we need to properly consider them and not just contain them to a residual and have the focus of the discussion that aspect of what is knowable that which can be mathematicised or forced into a model.

      The second point is we are arguably interested in something even more important than 'the truth'. We want good policy. Kocherlakota, Carney and many before him have pointed out recently the limitations of relying on models in real world policy making and how much of how the world operates cannot be quantified. The failure of central banks to pick up major developments in the world economy leading up to 2008 is evidence of this. We used a theory that essentially came from. and was also effective in, the 1930s to deal with a crisis. But ideally, we don't want the crisis in the first place.

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  9. "So, to me those rules seem strange, particularly coming from an economist who, like the rest of us, is schooled in the role of incentives, the benefits of decentralization, and the virtues of competition."

    That's how markets work but not how a company works. Here cooperation and centralization are virtues.

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    1. Take IBM for example. Do you think it would be a good idea in that company to centralize all decision-making with the CEO and a group of his/her nearest colleagues? They alone should decide which ideas are good and bad, who should be fired, who should be hired, at all levels of the company? And everyone in IBM should cooperate with that and be extremely happy to work there?

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  10. I made a descriptive and not a normative statement. Whether you like it or not, the CEO of a company has far more power than a worker.

    Back to the issue. Cooperation and competition are everywhere. In biology there is e.g. sexual competition and competition for food but there is also in-group cooperation and mammals are obviously lifeforms which include a lot of cooperative subsystems. The same is true for social life, including economics. Of course there is the ordinary market competition ... but corporations, as the name already implies, are large cooperative islands in this sea of competition.

    So your notion is simply wrong. Economics is not just about competition but also about cooperation. Norms are a part of every social institution and all that Romer is arguing for are particular norms for the economic science. To claim that economics or in general any social institution needs no norms at all is frankly speaking a radical Randish fantasy and has little to do with how a social body actually works.

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    1. What's "cooperation" about? In an organization, sometimes you will do something for someone else that is not in your own interest, narrowly defined. But, economists have approaches to thinking about arrangements like that. Maybe I'm willing to do something for you today because I expect you, or someone else, to do something for me in the future. Within the organization, we're keeping track of who is doing what, and everyone understands that, if he or she stops doing things for the organization, people within the organization will stop doing things for him/her, and may even throw him/her into the street. Arrangements like that can even work outside of the organization, in society at large, and even in circumstances where the people you are doing favors for - in a "cooperative" way - aren't the people who are doing you favors in the future. This is basically how dynamic game theory works.

      The "cooperative arrangements" or implicit social norms that get supported, through the implicit threat of exclusion from an organization, or punishments and rewards imposed within the organization, depend on how good the incentives are. Basically, what I'm saying here is that Romer has proposed a set of norms that won't work - the incentives are not set up in a way that would be sustainable, and the outcome will be bad.

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    2. Sure, game theory can explain cooperative behaviour but your putting of quotation marks around "cooperative" is ridiculous. I have no idea about how cooperative the work of a university professor is but in the private sector productivity depends quite a lot upon the willingness of workers to do more than their narrow duty and work together with their colleagues.

      Back to game theory. Agent A can give agent B an fraction of an amount of something and then agent B can decide whether he agrees with the proposed share or he can disagree and nobody gets anything. Game theory implies that a 99-1 share will be accepted whereas empirical studies have shown that the fraction is around 0.3 - 0.4 (one shot games, i.e. there was no direct possibility of meeting the other guy again!)
      Why? Because there are norms and human beings are willing to forgo their narrow self-interest in order to punish somebody who violates these norms ... even when you do not directly benefit from the maintenance of these norms. As you pointed out, in a working environment one often does.

      But I don't wanna delve too far into this. Suffice to say that economic theory which disavows empirics and the fact that econ is a social science is virtually useless.

      About Romer, I don't disagree that some of his suggestion are dubious or outright dumb.

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    3. "...econ is (as?) a social science is virtually useless."

      Well, if you would think and read a bit instead of getting excited and using words like "ridiculous" and "useless," we might get somewhere. Your prejudices about what "university professors" might have practical knowledge of is a bit tiresome too. I'm trying to show you how incentives, which I mentioned in the post, are compatible with your ideas about what cooperation is about. You're mentioning some results about one-shot games, and of course that's not the issue here. In an organization, we're playing a dynamic game. Where do the norms come from? In an organization, those can be explicit rules, or they can be implicit - sometimes you don't even have to execute the punishments, as the mere threat will give good behavior. There are areas of economics where we study these things, and can come up with some insight as to where norms come from - not from thin air. Norms can also be hard-wired - that's part of what evolutionary biology can teach us.

      So, I'm not disagreeing with you. But apparently you have some hostility about economics that you need to work out.

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  11. I have no hostitlity to economics as I am one myself. But unlike you I do not hesitate to call theory that does not match the facts useless. Gee, that science 101, discard the theory if it is at odds with the facts.

    I totally agree that cooperative behaviour can result as a simple result of a dynamic game in which everybody is better off if they play the cooperative part. We all learned this on our basic micro courses, usually via an example of two price-setting companies that might maintain a collusive equilibrium.

    The point you missed is that in this famous sharing game I mentioned people are ready to punish others even if they will not meet them again. In other words, people spend something to maintain norms even if they do not immediately gain anything from this. So your notion that people only behave cooperatively if they can directly gain something from it is wrong.

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    1. "The point you missed..."

      Try to be nice, if that's possible. Let's get straight what we're discussing. This will be something like the ultimatum game, but not exactly the same thing. There is a very large population of people - a continuum if you like. Every period, half of the population can produce an indivisible object, at a cost, and half the population wants to consume that thing. The people who can produce don't want the thing they produce. These people are randomly matched, pairwise, each period, with each pair consisting of a would-be producer and a would-be consumer. Everyone lives forever. In a given match, every person knows the complete trading history of his or her would-be trading partner. Then, so long as people don't discount the future too much, there is an equilibrium in which, in every match, the producer produces for the consumer - the producer conforms to a social norm. Why? Because the producer understands that, if he or she does not produce, everyone he or she meets in the future will know it, and will refuse to produce for him/her. Everyone behaves cooperatively, because they all have something to lose from not doing so.

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    2. (Different anonymous here.)

      "Everyone behaves cooperatively, because they all have something to lose from not doing so."

      This is a very cynical view of humanity which is most likely not well backed up by psychological or other such evidence, and at the very least would be considered controversial.

      Nash games should not be the basis of building up a scientific discipline with a view to implementing informed policy. Empirical evidence should be.

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    3. I'm not saying people can't be altruistic. But people can also be opportunistic, lazy, and strategic. Empirical evidence is of course important, but there is good empirical work and bad empirical work, and it's impossible to get anything out of empirical work unless we have theory to organize our thinking about what we're seeing. And I've found game theory useful for thinking about actual behavior - in credit markets for example. You're willing to grant that bankers are opportunistic, lazy, and strategic, maybe?

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    4. Also, in the example, note that what we would observe is everyone cooperating. So, you might do your "empirical work" in that world and conclude that people are just fundamentally cooperative. But the people in the model would in fact cheat if you gave them the opportunity. We observe that most people are law-abiding citizens. What would you predict if we gave the police force a week-long vacation?

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    5. "and it's impossible to get anything out of empirical work unless we have theory to organize our thinking about what we're seeing. "

      A post-modernist would have a lot of fun with that!

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    6. Here's an empirical observation: economists are paid much more than post-modernists.

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    7. "Here's an empirical observation: economists are paid much more than post-modernists."

      Yeah no doubt in accordance with their marginal social product. How efficient the price mechanism is!
      Goldman Sachs partners are paid more than social workers and brain surgeons.

      Perhaps the answer is the return to a Command Economy. Mao's policy also included "re-education" where to reestablish contact with the proletariat and the real world, people like bankers and economists were sent out to villages to work on the land. Now that would provide some empirical evidence.

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    8. Or you could have a program where post-modernists are sent back to school to learn some economics, and then sent for advanced re-education in economics departments and central banks. That would be far more efficient.

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  12. Still missing my point. Your game is dynamic, people have a reputation to lose. In the EMPIRICAL results of the game I mentioned people behave cooperatively even when they have nnothing to gain from it. They are willing to forgo something in order to punish unfair behaviour. And this should not be surprising as punishing unfair behaviour is fairly normal human behaviour.

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    1. The empirical results you're referring to are what happens in experiments. We bring some people into the lab, for example, some students who we're going to pay to show up on a Saturday. We explain to them what game they are going to play, hope they understand, then they play, and we report the results and interpret them. The question would be whether this is good empirical work. Does this somehow inform us about how people actually behave in related "real world" situations. Do the experimental subjects understand the game they are playing. Maybe they bring a lot of baggage into the experiment with them. You're interpreting them as punishing "unfair" behavior. How do you know that's what they're doing? Sure, I know that when I honk at someone misbehaving on the highway, that I have nothing to gain personally. I'll tip the waiter even if I'm not coming back to the restaurant. On the other hand, people aren't necessarily going to pay back a loan because they think it's fair. My mortgage lender wants collateral. When I take out an auto loan the lender wants the car posted as collateral. Do the results of those ultimatum game experiments tell me anything that's at all useful about behavior in large markets, or they do they just provide some fun conversation?

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    2. To add to this: I think these things are interesting, but I think if you are working on Wall Street as a bond trader that you would get your ass kicked if you're expecting cooperative behavior and fairness.

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    3. Wow, is Anonymous stubborn and confused. If people punish "bad behavior" they do so because it is in their own best interest. That is, the game people are playing is not the one the experimenter laid out. Why is this so hard for people to understand, that preferences are whatever they are and cannot always be imposed on the participants? Oh, right, because Anonymous above doesn't get the answer he wants out of the models, so he asserts they are useless. Go sit somewhere until the adults are done, little boy.

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    4. "Wow, is Anonymous stubborn and confused. If people punish "bad behavior" they do so because it is in their own best interest."

      Nope. People do things that are not in their narrow self-interest, especially when they punish other for misbehaving. This is something must of us realize at kindergarden age. So much about little boys.

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    5. "Doesn't get the answer he wants out of the models, so he asserts they are useless."

      Scientists trash models which are falsified by data. Shlock economists like you do ignore empirics.

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    6. Well, it looks like that thread has degenerated. I suggest everyone stop now.

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  13. Just trying to facilitate the conversation without taking sides, I think the anonymous has this by Herb Gintis in mind.
    http://www.umass.edu/preferen/gintis/puzzle.pdf

    Of course, I don't know what this has to do with Romer's suggestion.

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