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Are people unreasonable in that we make bad decisions, or simply irrational in that we rarely use formal, quantitative analysis?  Are investors' profit expectations inviolable?  Are Americans playing the same hand of economic cards that we held in the mid-20th century?

These are the three "big questions" I offer in my critique of Nobel Prize-winning economist George Akerlof and co-author Robert Shiller's new book Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.  While I agree with most of their ideas, these unanswered questions weaken their argument.

More below the fold....

Animal Spirits, Part IV - Conclusion and Critique

This week, Morning Feature has explored Akerlof and Shiller's new book Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Wednesday we considered their rebuttal of the myth of the Rational Economic Actor. Thursday we examined their answers to four "big questions" of recessions, banking, unemployment, and inflation. Yesterday we looked at their other four "big questions" of savings, investment volatility, real estate cycles, and minority poverty. Today we conclude with a critique.

George Akerlof and Robert Shiller have drawn on some intriguing research in their new book.  The emerging field of neuroeconomics, which is based less on guesswork and assumptions about human behavior and more on scientific study of human decision-making, could be a real step forward in reducing the dominance of ideology in economic theory.

But the rigor and promise of empirical science is limited by the assumptions scientists' bring into their work.  If you set out to test A&B→C, you're less likely to stumble upon (A|B)&D→C, as you're not measuring and may not even have considered the relevance of D.  Akerlof and Shiller seem to bring some assumptions into their research, treating them as givens.  They don't explain why these assumptions are givens.  Some are mentioned only in passing, and others not at all.  But they are as fundamental to the authors' theory as the Rational Economic Actor and Efficient Markets are to classical and neoclassical theories.

As the meat of Akerlof and Shiller's book was their approach to their eight "big questions," I'll frame my critique in terms of my own three "big questions."  The answers to these questions matter.  Even more important, to me, is the act of considering them and challenging the assumption implicit in each.

Are we unreasonable, or simply irrational?

Unreasonable and irrational may seem like synonyms, but they're not in economic terms.  In economic theory, rational seems to have a specific meaning.  It refers to decisions reached through formal, quantitative analysis, i.e.: using precise, measured data in economic and game theory equations to calculate expectations of profit and risk.  In that sense, most of us are irrational; we use estimates and intuition rather than quantitative analysis.  But does that mean we're unreasonable?

Ironically, neuroscience suggests the answer may be yes, that we are indeed unreasonable, when we listen to experts.  That study, published in March 2009, found that the parts of the brain responsible for estimating and weighing probabilities "offloads" when we're exposed to expert advice.  Rather than estimating and weighing probabilities for ourselves, we accept experts' estimates and weightings as facts, even when they're wrong.  The authors conclude this reflects a bias in favor of conformity to an authoritative expert.

Experts are often wrong, and indeed that's the central premise of Akerlof and Shiller's theory: classical and neoclassical economics are grounded on false assumptions about human behavior.  Yet their tacit assumption is that this reflects a weakness in our decision-making.  They don't seem to consider the possibility that our intuitive reasoning might be as good as their quantitative analysis, and that the differences may reflect missing factors in their equations rather than our unreasonableness.

Are investors' profit expectations inviolable?

While Akerlof and Shiller frame their theory in terms of ensuring full efficient employment, investors' profit expectations seem to be as much a sine qua non in their theory as in classical and neoclassical theories.  They often criticize workers' wage expectations - e.g.: that we're unwilling to lower wage expectations even when prices are falling - but never question investors' profit expectations.  It may be that they have data to support their tacit assumption that investors must be able to expect at least 7% return on investment, but they don't present that data or even address the question.  That investors must be confident of a "large profit" is stated as a given.

I suggest any economic theory that holds a small group's expectations as inviolable while arguing that the mass of people must sacrifice whatever is necessary to meet that small group's expectations - without any proof that this balance is essential for a healthy economy - is a theory still mired in false assumptions.  That is especially true in light of the third unanswered question.

Are we holding the same cards we held in the 1950s?

All other things being equal, there are sound strategies for playing certain hands in poker.  Those strategies may not work every time, and exceptional conditions at the table may require variations, but they are mathematically sound strategies given those specific cards-in-hand.  The key phrase there is "those specific cards-in-hand," because of course the strategies change depending on which cards you're holding.  But in poker, unlike in economics, we know when we've been dealt a new hand.

Akerlof and Shiller seem to make the tacit assumption that Americans still hold the same economic cards we held in the 1950s.  They make no mention of changes in conditions - peak domestic oil, rising competition as Europe and Japan rebuilt after World War II - that were happening by the early 1970s, and only a passing mention of world peak oil and climate change.  They classify warnings about diminishing resources and climate change as stories, and subtly imply that because dire stories were wrong in the past we're irrational to believe them now.  Their conclusion is that government must step in to counter both optimism and pessimism - as if neither is ever really justified - to maintain stability.

But what if our cards have changed?  There is good science to suggest we Americans do not hold the same cards we held in the 1950s, and that all of us - including investors - need to revise our expectations in light of those changed conditions.  By ignoring those changed conditions, and by holding investors' expectations inviolate, Akerlof and Shiller risk their theory being used as a rationale to squeeze the last hopes out of workers in order to guarantee investors their last pennies of profit.

And in light of the overall tone of their theory and its recommendations, I don't think that's what Akerlof and Shiller really want.  In order to safeguard their theory from abuse, they need to answer these three "big questions."

Because at its core, their theory is all about the dangers of taking our assumptions for granted.

Happy Saturday!

Originally posted to NCrissieB on Sat Jul 11, 2009 at 04:25 AM PDT.

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Comment Preferences

  •  Tips for challenging assumptions ... :) (24+ / 0-)

    ... even the assumptions implicit in theories whose recommendations we agree with.

    As noted Monday, the resident faculty at Blogistan Polytechnic Institute will be even more vacant than usual for the next 8 days.  That is, Herself and I leave tomorrow for a much-needed vacation.  We'll be back on Monday the 20th.  In the meantime, Pootie the Precious will do the "Ask Ms. Crissie" Morning Features tomorrow and next Sunday, and LI Mike will offer a three-part series on local government next Thursday through Saturday.  We have no guests scheduled for Monday through Wednesday.

    As always, ::smoooooooooooooochies:: to Kula, wherever she is, and ::hugggggggggggggs:: to the Kula Krew.  Have a great week!

    •  I'll try to have the summer piece done for Tues. (2+ / 0-)
      Recommended by:
      BlueStateRedhead, NCrissieB

      I've got one more crazy day dragging critters around, then I can concentrate a little better.

      Hope you have a wonderful, relaxing vacation somewhere fun! You can come back and show off your tan lines, (or lack of them).  ;-)

      Good morning! :::Huuugggsss:::

      Information is abundant, wisdom is scarce. The Druid

      by FarWestGirl on Sat Jul 11, 2009 at 06:22:40 AM PDT

      [ Parent ]

      •  Ooh, that's be nice. :) (2+ / 0-)
        Recommended by:
        winterbanyan, FarWestGirl

        As for tan lines, I may get some "by accident" - just from being out and about more - but I've lived in South Blogistan long enough to know the folly of sunbathing.  I actually get a gorgeous, golden tan as a byproduct of my tawny skin (Cherokee heritage), but heat stress and skin cancer are nothing to mess with, as we long-term South Blogistanis tend to learn.

        Good morning! ::hugggggggggggs::

  •  I've been remiss again (6+ / 0-)

    and not been reading MF as I wish I had.  I've been busy with my own diaries.  So little time! So much to do!

  •  Handicapping the horses (4+ / 0-)
    Recommended by:
    Orinoco, JFinNe, winterbanyan, NCrissieB

    Anyone who bets the races regularly already knows all this stuff and can probably refine the theories considerably.

  •  good morning lovelies. i'm not awake yet. (9+ / 0-)

    thanks for the great diary crissie. i'm still asleep. need coffee really badly.

    i missed ya'll so much this week but i've been sort of taking a hiatus from too much politics and too much twitter. the health care roller coaster ride effects my outlook too much, especially since I've taken the responsibility as lead organizer in my community.  

    But now i'm back and I think i'm ready for the home stretch.  I still won't be living on the blogs in the coming weeks but I sure will make sure to come here and hang with the crew.  Its one of the oases of the blogosphere for me.

    ::::::::::hugs:::::::::::

  •  Recipes for success (7+ / 0-)

    These discussions this week have led me to using a chocolate cake as an analogy.  "...investor's profit expectations" are the cake baked and ready to frost, while wage earners are the ingredients used to make the cake.  If the baker doesn't follow the recipe and take into consideration variables such as how altitude and humidity will affect the results, the ingredients will suffer and the cakes are will be failures.  

    •  Interesting metaphor. (6+ / 0-)

      Akerlof and Shiller present their argument as if full efficient employment is the cake, but investors' profit expectations are the one ingredient in the recipe that can't be adjusted.  Absent a reason for why investors' profit expectations are inviolable, it does yield the metaphor you suggest: the investors' profit expectations are the cake, and employment is merely one of the ingredients.

      Good morning! ::huggggggggggs::

  •  One thing that's rarely, if ever, addressed in (11+ / 0-)

    this sort of research is that money is not strictly linear.  In fact, it's always assumed that it is linear, and this messes things up.

    What do I mean?

    People assume that $1 million = $1 a million times.  In some ways, of course, it does.  In other ways, not so much.  If I put $1 in a piggy bank every day, then, in a million days .... I will have been dead for more than 2,000 years.

    People sort of recognize this with income, where the median is used instead of the mean; but really, income should be measured on a log scale, and even that may not be enough.  

    The linear scale is totally wrong:  Offer someone making minimum wage an extra dollar an hour and it's a big deal.  Offer me a dollar an hour raise, and I'll like it, but not a big deal.  In fact, I might be insulted by such a raise, depending on circumstances.  Offer a rich person a dollar an hour raise and he'll wonder what you mean, because he doesn't get paid by the hour.  Offer him $2,000 extra per year and he'll not care.

    But even the log scale is not completely right, doubling the salary of a poor person matters more than for a middle class person; and for a rich person, it may matter even less.

    Looked at this way, some classically "wrong" or irrational decisions make sense: Playing the lottery, for instance.

    •  All Money Is Imaginary (6+ / 0-)

      except the kind that can be spent.

      A basic element of the current Wall Street ripoff is that the high rollers are converting bits 'n' bytes into actual spendable money when they pay it to themselves in salaries and bonuses.

      Until then it's just electronic impulses, no matter who it "belongs to." Think of markers in a board game. Houses on Boardwalk and Park Place are useless until somebody lands on them.

      We are all Jose Padilla.

      by JG in MD on Sat Jul 11, 2009 at 04:48:55 AM PDT

      [ Parent ]

    •  That is addressed, but very indirectly. (8+ / 0-)

      In economics that relationship is measured in terms of elasticity and risk tolerance.  If there is a inelastic minimum cost for subsistence - and there is - those whose incomes are nearest that minimum have the least risk tolerance; any downward income shift (or emergency expense) puts them below subsistence level.  So economics doesn't quite treat every dollar as equal.

      But even Akerlof and Shiller seem to treat investors' profit expectations as inviolable.  They argue that workers must sometimes lower wage expectations in order to achieve full efficient employment, but never do they question investors' profit expectations.  It may be simply that workers who are dissatisfied with wages have few real options; if they don't work, they quickly face total ruin.  In contrast, investors who are dissatisfied with profits have a larger cushion.  They can simply hoard, live on accumulated wealth, and the unemployed workers will always have to "break" first.

      But they don't make that argument, or even address the question.

      Good morning! ::huggggggggggs::

      •  Egggzackly! (6+ / 0-)

        ::Jill waves, blows kisses at NCB::

          Me --> | IRA | Bling | --> Total Ruin

        My clients drop my work hours. The subsistence line, even with Social Security, is immutable and I can drop below it. My tiny IRA and my family jewelry are my only two hedges. This makes me better off than 99% of the world's poor.

        Does anybody know the tax consequences of selling Gramma's brooch?

        We are all Jose Padilla.

        by JG in MD on Sat Jul 11, 2009 at 05:10:08 AM PDT

        [ Parent ]

        •  The underground economy (7+ / 0-)

          I often hear about one plumber person exchanging his expertise for that of an electrician's with the result being they each get services done for free and unreportable tax wise.  Unfortunately, Gramma's brooch and an B.A., M.A., or PhD are usually not 'barterable' but you might look around for a good 'fence.'  

        •  There are lots of ads now ... (7+ / 0-)

          ... offering cash for "unwanted gold jewelry," which is to say ... asking people to cash in the bling you mentioned.  The ads often include someone (probably an actor) saying "I was able to pay my mortgage with my unwanted jewelry!"  The part they leave out is ...

          ... well yeah, for one month.  Now it's 30 days later, the next mortgage payment is due, and your jewelry is gone.

          Good morning! ::hugggggggggs::

          •  I Often Think Of (4+ / 0-)

            refugees sewing their family valuables into their clothing before they flee.

            The thought that these things are exchanged for fleeting needs like food and shelter breaks my heart. I'm a sucker for belongings that connect a person with their past.

            But it can be time to let go of things, even valuable and beloved things. The trick is to exchange for long-term benefits that at least resemble investments.

            Suirreling away the cash to parcel out over the long term can only be done if the value is high. And when there are a lot of "refugees" the value drops like a stone, so to speak.

            We are all Jose Padilla.

            by JG in MD on Sat Jul 11, 2009 at 06:17:45 AM PDT

            [ Parent ]

          •  Insult to injury they also gouged you on the (2+ / 0-)
            Recommended by:
            winterbanyan, NCrissieB

            exchange. Better rate from a real jewler or an auction house that handles estate pieces. But still an extinction of a valuable object that can't be replaced and loss of associated memories.

            Pitchforks. We need pitchforks. And torches.

            Information is abundant, wisdom is scarce. The Druid

            by FarWestGirl on Sat Jul 11, 2009 at 06:48:45 AM PDT

            [ Parent ]

      •  Investors who are dissatisfied (6+ / 0-)

        have an easier option - invest elsewhere.

        I think the issue MAY be (and I haven't read all your diaries, so maybe I'm way off) that investments, by and large, are much more liquid than work is.

        In general, if I own stock in XXX company, I can sell it and put my money in any of innumerable other places.  Not just other stocks, but all sorts of things.

        The analogy in work is to quit and work elsewhere.  But this is a lot harder to do, even in good economic times.

        So, investors desires are more inviolable, not necessarily out of some abstract argument, but because they can shift them easily.

        In recessions, and, even more, in depressions, that changes somewhat, but not as much as it does for work.  You can always buy and sell things - although you may take a loss; but you can't always find work, even if you are willing to take a cut in pay.

        •  That's the pattern of "globalization." (7+ / 0-)

          When investors sensed they couldn't make enough profit on Americans' labor, they simply pulled out and invested in others' labor instead.  The conventional argument - Akerlof and Shiller seem to generally agree - is that American workers must be willing to work for less in order to compete with foreign labor.

          Without limits, that produces the "race to the bottom," where eventually workers around the world live at barely subsistence level, so investors are guaranteed their desired profits.  But at some point we stop being efficient workers, and productivity drops off dramatically.  Whence come the investors' profits then?  Mandatory labor backed by the police power as has been common too often in history, even recent U.S. history?

          That's the problem when a theory assumes investors' profit expectations are inviolable.  If we can never say "No, you simply can't make that much return on your investment in a humane society," then it's just a matter of which path we take to eventual slavery.

  •  Generally speaking... (5+ / 0-)

    at least where I've been, the neoclassical paradigm describes humans a "rational" in that they will always seek out their own self interest, and it incorporates neuroeconomics by using it to describe how people fail to properly estimate the results that various choices will have on their self interest.

    •  Burp... Gag... Spit... Eeewww! (3+ / 0-)
      Recommended by:
      Orinoco, winterbanyan, NCrissieB

      Tell that to the mother counting her cash or food stamps during the last week of the month. When there were only a few of those mothers, they were ignored. There are so many now that ... oh wait. They're still assumed out of existence by that "rational actor" meme.

      We are all Jose Padilla.

      by JG in MD on Sat Jul 11, 2009 at 05:43:24 AM PDT

      [ Parent ]

      •  I guess the question I have is what the fuck? (2+ / 0-)
        Recommended by:
        Orinoco, NCrissieB

        How is that even vaguely related to my comment?

        •  As moms ... (3+ / 0-)
          Recommended by:
          Orinoco, winterbanyan, FarWestGirl

          ... we do lots of things that are not in our individual self-interest.  We do them because we value our children's interests, sometimes more highly than our own.  If economic theory can't recognize that basic reality of human existence, it's more religion than science.

          •  That's the thing, though. (2+ / 0-)
            Recommended by:
            Orinoco, DBunn

            Your happiness depends in part on your children's well being, your own self perception as being a good mother, your desire to receive societies approval for being a good mother, so on and so forth.....  

            As a father I do the same thing.  But caring for my children is in my own self interest because I love them.  This is a philisophical frame of reference going back to Aristotle.

            •  Philosophical (2+ / 0-)
              Recommended by:
              Orinoco, NCrissieB

              Oh, I see. You're talking about beliefs, not money.

              We are all Jose Padilla.

              by JG in MD on Sat Jul 11, 2009 at 06:12:43 AM PDT

              [ Parent ]

              •  I am talking about people make decisions. (0+ / 0-)

                Which can include everything, including money.

                •  Actually ... (1+ / 0-)
                  Recommended by:
                  FarWestGirl

                  ... you're talking about (false) assumptions on how people make decisions.  The problem, as Akerlof and Shiller show in their book, is that human beings do not make decisions rationally (in economic terms).  While they sometimes imply that's unreasonable, that is debatable.  What's not debatable is the fact that Homo economicus is a myth, and a "science" based on that assumption is simply a religion.

                  •  You mixing peoples defintions of what "rational" (0+ / 0-)

                    means.  In economics terms, rational only means what they believe is in their own self interests.  You redefined rational in your diary, creating the argument here.  At least in terms of what the neoclassical guys (the ones fixated on rational actors) believe.  They do not disagree human biology, poor logic informational costs, gaps in human knowledge, etc. make people make errors in their calculations.

                    •  Anytime they give a proof ... (1+ / 0-)
                      Recommended by:
                      winterbanyan

                      ... they present a formal, quantitative analysis of the "rational" choice and show that we "make errors" in not reaching that choice.  If they're proving a "correct" choice based on formal, quantitative analysis, then by definition that process must be essential to "rational" decision-making.

                      •  Economist don't give proofs (0+ / 0-)

                        they try to describe behavior.  They will, from time to time, talk about efficiency and utility maximization, especially from a micro perspective, but that's not a proof.  And when asked or interested, they will describe how to reach other outcomes than that, though they will let you know what the costs of the various actions you could take are.  The process economist use to describe behavior and what they label as "rational" are hardly the same thing.

                        •  You're equivocating again (or still). (1+ / 0-)
                          Recommended by:
                          JG in MD

                          If people are "irrational" because they don't reach the decisions economists prescribe based on formal, quantitative analysis, then that analysis is itself the standard for decision-making.  Economists love to equivocate between positive and normative definitions - see my reply below - claiming merely to "describe" (positive) until their description doesn't fit how people really behave, then "prescribing" (normative) what we should have done had we been "rational," then if challenged claiming they're simply "describing."

                          Pick one.  Either "describe" and admit the description is flawed if it doesn't fit how we do behave, or "prescribe" how we should behave and own the responsibilities of normative discourse.  That includes a duty to prove why we should behave to that standard.

                          But you only get to pick one side of that coin.

                          •  No, not at all. (0+ / 0-)

                            If people are "irrational" because they don't reach the decisions economists prescribe based on formal, quantitative analysis, then that analysis is itself the standard for decision-making.  Economists love to equivocate between positive and normative definitions - see my reply below - claiming merely to "describe" (positive) until their description doesn't fit how people really behave, then "prescribing" (normative) what we should have done had we been "rational," then if challenged claiming they're simply "describing."

                             Economist wouldn't say anyone is irrational.  They can't be, definitionally.  That's why the rational man is a controversial position.  The idea is that there are information failures(availability, cost, or processing), perverse incentives, or other problems not a lack of rationality.  If people behave in a way that does not fit this, usually what an economist will do is try to figure out why, admittedly within the framework of the idea that the person is still rational and something outside them, or inside them mechanically in the case of neuroeconomics, is the problem, rather than their rationality.  Again, that is the controversy.

                            Pick one.  Either "describe" and admit the description is flawed if it doesn't fit how we do behave, or "prescribe" how we should behave and own the responsibilities of normative discourse.  That includes a duty to prove why we should behave to that standard.

                            But you only get to pick one side of that coin.

                            I think you are misunderstanding the rationality debate, at least as it is usually had and how I am refering to it here.

            •  Self-interest as the touchstone of philosophy ... (3+ / 0-)
              Recommended by:
              hannah, Orinoco, FarWestGirl

              ... is simply inconsistent with our biology.  It's a lie that people believe because it justifies their selfishness.

              The firefighter who sacrifices his life to save someone else probably doesn't experience any added "happiness."  He might well think, in the moment, "Oh shit, this was stupid."  But we still laud that as a species, because at some level most of us recognize that we are a social species and that our survival as a species is more important than any individual's own survival.

              •  "Self-interest as the touchstone of philosophy (2+ / 0-)
                Recommended by:
                Orinoco, DBunn

                ... is simply inconsistent with our biology.  It's a lie that people believe because it justifies their selfishness."  Why?  I agree there are reflexive, biologically deterministic behaviors that don't really fall into this in a meaningful way, but why is this just a justification for selfishness?  The people who formulate it don't ignore love, or altruism, or any other non-selfish human emotion. It seems to me your objection needs more support.
                "
                The firefighter who sacrifices his life to save someone else probably doesn't experience any added "happiness."  He might well think, in the moment, "Oh shit, this was stupid."  But we still laud that as a species, because at some level most of us recognize that we are a social species and that our survival as a species is more important than any individual's own survival."  True, but the firefighter could just as easily have calculated going into the burning building and risking his life was better than the alternative, given neither would make him happy.  He could value the child's life more than his own  fear of death, making the cost of NOT rescuing to high.  He could be worried about shaming himself in front of his friends and family, or himself.  Its not really something you can "disprove" Chrissie, though you are free to disagree.

                •  Standards of evidence. (2+ / 0-)
                  Recommended by:
                  Orinoco, winterbanyan

                  I don't have to disprove that we're all selfish.  Examples of self-sacrificing behavior are so common - and more importantly, so readily observable - that the burden of proof falls on those who claim self-interest as the exclusive human motivator.

                  You're claiming human motivation is not as it appears, that observable self-sacrificing behavior is "really" self-interest.  I don't have to prove the behavior is what it appears to be; you have to prove it's not, because yours is the more incredible claim.

                  By way of metaphor, if I say the bottom disk on a traffic light is green, while you say it's "really" some other color that only appears green because of some conditions of light, optics, etc., the burden of proof is on you ... not on me.

                  •  OK (0+ / 0-)

                    I don't have to disprove that we're all selfish.  Examples of self-sacrificing behavior are so common - and more importantly, so readily observable - that the burden of proof falls on those who claim self-interest as the exclusive human motivator.

                    Ok, but I have described how people can be altruistic while still be rational in an economic sense.  They are not selfish, they personally value the well being of others and therefore act self interestedly to benefit others.

                    You're claiming human motivation is not as it appears, that observable self-sacrificing behavior is "really" self-interest.  I don't have to prove the behavior is what it appears to be; you have to prove it's not, because yours is the more incredible claim.

                     What I am saying people act out of self interest.  People care about other people.  Therefore, people act to help others.  Its not an incredible or particularly rare claim, it has been around for a long time.

                    By way of metaphor, if I say the bottom disk on a traffic light is green, while you say it's "really" some other color that only appears green because of some conditions of light, optics, etc., the burden of proof is on you ... not on me.

                    A better metaphor would be for you to see it as green, and for me to agree but say that green is in reality the way your eyes interprets the wavelength of light that reflect off the glass.

                    Aside from which, this is not a formal debate, but a discussion.  If you think I'm wrong, not just unsure I'm right, say why!

                    •  Argument by equivocation. (0+ / 0-)

                      Your argument is a logical fallacy, and thus it's false on its face.  It switches from a positivist (describing what is) to a normative (describing what should be) definition of "self-interest."  Changing the definition of a key term in an argument is the logical fallacy of equivocation.

                      That is, in order to justify assessing behavior in terms of "self-interest," your positivist (what is) definition includes a desire to sacrifice for others.  But if you include that, you've defined "self-interest" as "any motivation a human being might have."  By that definition, and if "rational" means "acting in self-interest," it's impossible for anyone to be "irrational" unless they're acting with no motivation whatever.

                      But economists critique motivated behavior as "irrational" based on a far narrower, normative definition of "self-interest" - motivations they think we should have.  Those critiques normalize individualistic "self-interest" as the standard of "rational" behavior.

                      If challenged on "self-interest" as the standard of human behavior, economists fall revert to the all-encompassing definition and the claim of positivism: they're not prescribing what should be, but simply describing what is.  And once anyone agrees to that all-encompassing definition for positivist purposes, it's back to critiques of based on the narrower, normative definition.

                      Flip. Flop.

                      I don't "think you're wrong," nor am I "just unsure if you're right."  Your argument is false on its face, because it's grounded on the logical fallacy of equivocation.

                      •  I am neither flipping nor flopping. (0+ / 0-)

                        Your argument is a logical fallacy, and thus it's false on its face.  It switches from a positivist (describing what is) to a normative (describing what should be) definition of "self-interest."  Changing the definition of a key term in an argument is the logical fallacy of equivocation.

                        You've confused equivocation with the use of technical jargon.  When economist talk about rationality that is what they are referring to.  No more, no less.  This isn't a change, its not new, they have never meant more or less than that in the context we are using it.

                        That is, in order to justify assessing behavior in terms of "self-interest," your positivist (what is) definition includes a desire to sacrifice for others.  But if you include that, you've defined "self-interest" as "any motivation a human being might have."  By that definition, and if "rational" means "acting in self-interest," it's impossible for anyone to be "irrational" unless they're acting with no motivation whatever.

                        Pretty much.  The point of the assumption of rationality(i.e. self interest) is that it discounts motiveless behavior and behavior explicitly designed to harm oneself.  To not assume those things makes the kind of analysis economist do pretty hard, and can break down the entire process.  

                        If challenged on "self-interest" as the standard of human behavior, economists fall revert to the all-encompassing definition and the claim of positivism: they're not prescribing what should be, but simply describing what is.  And once anyone agrees to that all-encompassing definition for positivist purposes, it's back to critiques of based on the narrower, normative definition.

                        No, what happens is they say "Economics is still a psuedo science, not a full science for this reason, and we assume it because it makes your work possible"  At least the ones interested in the philosophy of science, or had a prof who did.  Most would think about it that much, and its hard to speak for a group of people.

                        I don't "think you're wrong," nor am I "just unsure if you're right."  Your argument is false on its face, because it's grounded on the logical fallacy of equivocation.

                        The arguement you think I am making may be, but not the one I am actually making.

          •  The male does not recognize an (3+ / 0-)
            Recommended by:
            Orinoco, DBunn, NCrissieB

            interest in his off-spring because he can't identify his off-spring by himself, much less as an extension of himself.  He's got to rely on someone else telling him he's a dad.  Consequently, off-spring are considered in light of their utility, rather than their essence.  Caring for children is not a matter of male self-interest; it needs to be socially promoted.

            How do you tell a predator from a protector? The predator will eat you sooner rather than later.

            by hannah on Sat Jul 11, 2009 at 06:15:53 AM PDT

            [ Parent ]

            •  Not at all sure I agree. Resemblance, scent, (2+ / 0-)
              Recommended by:
              Orinoco, NCrissieB

              there are ways in which relatedness is recognised, even though we don't credit them with much weight these days. You also seem to say that men wouldn't have parental instincts or inclinations unless they were externally applied and reinforced. With that I profoundly disagree, I've known many men with really great parenting instincts. And in the old societies where maternal line was counted as heritage, men were intrinsic to their sister's kids' care. So not their own issue, but their sisters' children.

              Information is abundant, wisdom is scarce. The Druid

              by FarWestGirl on Sat Jul 11, 2009 at 07:09:41 AM PDT

              [ Parent ]

    •  Two problems with that take: (5+ / 0-)

      First, most of us are not exclusively self-interested.  We're a social species, after all.

      Second, the "fail to properly estimate" is often a function of experts grading us by false standards.  Their quantitative analyses leave out factors that are relevant and that we incorporate intuitively, even if we can't articulate doing so.

      For example, the studies show that we "wrongly" discount long-term prospects (profits and risks) in favor of short-term prospects.  Well yes, we do weigh short-term prospects over long-term prospects, but is that "wrong?"

      I suggest we're intuitively weighing the far greater uncertainty of those long-term prospects.  Contingent events may not happen, even if they seem likely.  And while we often talk as if we think we'll never die, at some level we all know we will die, and may before those long-term prospects can materialize.

      Weighing the imminent over the distant is not unreasonable, even if it's irrational as judged by equations that ignore uncertainty and mortality.  Add to that the sociality of our species, and thus that many of us recognize it's less important whether we survive (we won't) than whether our species survives ... and you can account for almost all of the "failure to properly estimate" our interests.

      Good morning! ::huggggggggs::

  •  What's really strange is that economists (6+ / 0-)

    keep extolling risk and praising the risk-takers, yet all their prescriptions are aimed to create stability.  So, the investor's argument that because I was willing to take a risk, I deserve a guaranteed profit strikes them as entirely reasonable.

    My attitude towards investment starts from a different point.  Assume that someone has a surplus (more than he can use himself at the moment) and consider his alternatives.  In my book, he can either lend the surplus to someone else to use or let it go to waste.  (Or, if its a consumable, he can gorge himself and get sick).  Those are the logical alternatives.  Now, lending that surplus to someone else is obviously better than letting it go to waste and there's a risk that the borrower won't make good use of it.  On the other hand, the borrower may produce an even greater surplus, enabling him to return what he borrowed plus a fair share of his surplus--both borrower and lender come out ahead.  But, even if the borrower only returns the loan, the lender comes out better than if his surplus had gone to waste.  So, by what logic can he claim a guaranteed profit on his loan/investment?  Other than that it's become a convention in the West.

    The role of waste as an alternative to production, consumption, investment and savings (under the mattress) has been entirely ignored in economic calculations.   Even now, waste only shows up when disposal options are turned into a profit center and "one man's waste is (again) another's treasure."  On its own it doesn't count; it has to be transformed into something else.  Almost like the labor/reproductive effort of women.

    Perhaps it's just a matter of what man doesn't want not being taken into account.  Is economics a male-centric science?  Is that where it founders?
    If economics is concerned with the management of the household, is the householder presumed to be male and is that why "work moved out of the house" when men took factory jobs, but not when young women did so before them?  (We forget that the industrialization of American enterprise got its start in the spinning and weaving mills of Massachusetts where, for the most part, women went to work.  Then, when the machinery got more sophisticated and easier to manage, men took over).

    How do you tell a predator from a protector? The predator will eat you sooner rather than later.

    by hannah on Sat Jul 11, 2009 at 05:47:55 AM PDT

    •  Something that just is what it is and is valuable (2+ / 0-)
      Recommended by:
      Orinoco, winterbanyan

      is an asset.  Its not thought to be valueless by economist, it just isn't counted by measure that measure production.

      Economics ISN'T interested in the management of the household, it is interested in how society organizes scarce resources.  
      The rest of your post I didn't really understand.

      •  Economy comes from the Greek for (4+ / 0-)
        Recommended by:
        bink, Orinoco, DBunn, NCrissieB

        household management.  It may well be that the modern economist's disregard for the household accounts for most of economic predictions turning out to be wrong.

        Households deal with material quantities, so it should be possible to come up with accurate measures, even when they're translated into ones and zeros.  That they don't suggests that they're measuring the wrong stuff.

        Like measuring the unemployed as a sub-set of the formerly employed and leaving out the never employed.  

        How do you tell a predator from a protector? The predator will eat you sooner rather than later.

        by hannah on Sat Jul 11, 2009 at 06:22:39 AM PDT

        [ Parent ]

    •  Very insightful post. (6+ / 0-)

      By ignoring the possibility of capital (resource) wastage, a profit on capital becomes the baseline for analysis.  That was essentially plf515's point in his comment above: if investors can't get a profit in one place, they'll get it somewhere else, so if we want them to invest in us we must make it profitable.  The argument ignores the possibility of wastage, assuming there is some profit to be made, somewhere, somehow, always.

      Good morning! ::hugggggggggs::

  •  My animal spirits tell me (6+ / 0-)

    that we are screwed. I see our business leaders and politicans incapable of understanding the dilemmas we face. If any number of problems go unmitigated: global warming (our heads are in the sand), reserve currency status (on what day will we wake up to learn that other countries want a basket of currencies for international trasde), at what point does our imperialistic policies become unsustainable?

    Anyway, something for me to ponder as I head out for a local campaign meeting.

    Good morning everyone.

  •  Crissie (5+ / 0-)

    Maybe - if I'm up to it - I'll venture forth with a 4th essay on Wednesday.

    My last act as a gainfully employed person was to implement the inpt pharmacy component of our electronic medical record.

    I've noticed that many Kosssacks are opposed to an EMR, I'll argue the good points and mentions some underappreciated aspects.

    If I can get to it.

  •  I'm going to make a general hug here :) (5+ / 0-)

    Since I took a pain pill this morning, not even coffee would help with cogency.

    Reading along, but other than recs it's all I can offer.

    Consider me interested but thought-less.

    Huggs and good morning to all!

    "No man is my enemy, my own hands imprison me, love rescue me." -- Love Rescue Me/U2

    by winterbanyan on Sat Jul 11, 2009 at 05:55:04 AM PDT

  •  No, we aren't in Kansas anymore (5+ / 0-)

    And we definitely aren't in the '50s. Today's landscape is far more complex and we have new currencies in addition to the old. Leverage and reputation are tools we employ at multiple levels, both financial and socially to realize capital - net worth.

    I was going to say these are new tools but they are actually classical ways of operating as economic actors, and gaining a fresh look thanks to our novel technologies. Well as usual, Crissie, you've penned a diary too difficult to respond to coherently.

    Every day's another chance to stick it to The Man. - dls.

    by The Raven on Sat Jul 11, 2009 at 05:58:21 AM PDT

  •  Late and very least. But not w/o love (3+ / 0-)
    Recommended by:
    Orinoco, DBunn, NCrissieB

    Arriving waaaaaaaaaay after a rec and a tip can do any good for reasons beyond my control--a misbehaving fire alarm system that emptyed the building two times in one night brought on late sleeping.

    As an instinctive early wakeruper late sleeping registers as a hangover.

    and hung over people are good at spending money but not analyzing the spending thereof.

    Should be around to hang wiht Pootie tmr.

    Enjoy your vacation, NCB and herself. And my it be lovely and productive.

  •  Terrific series, Crissie (2+ / 0-)
    Recommended by:
    winterbanyan, NCrissieB

    I haven't been able to participate much, but I've been following along as best I can :) And now I'm suffering computer problems that are driving me absolutely nuts :(

    I've got about a million things I want to say, and of course I can't get to them all, nor would you want me to. But here's one:

    As to your three "Big Questions": They're all good questions IMHO. Also, they're quite obvious, one would think, which leads to another Big Question-- why is it left to YOU to ask them, instead of the authors bringing them up and answering them themselves? I can only presume that the answer is to be found in the sociology of the economics profession, or to be even more crude about it, the economics of economics. Within the Guild of Serious Economists, it seems to be permissible to suggest tweaks and adjustments to the edifice of established neo-classical wisdom, but not to point out that the whole thing is built on a flood plain and oh by the way, the levees are breaking. To do otherwise would be to risk guarantee being labeled as a crackpot, and get yourself dis-invited from the dinner party. "Looks like old Akerlof has finally gone 'round the bend. Such a pity, he was brilliant at one time. Say, will we be seeing you in Davos again next year?"

    That said, it is not like there's no value to this book, frustrating half-step though it may seem. Akerlof & Shiller may not have thrown wide the doors of the sanctum, but they have nudged open a largish crack. The clear implication, for other guild members, is that there's a whole world out there, and perhaps careers to be made by exploring it. Will the Guild care or dare to notice? Here's hoping.

    •  Challenging conventional wisdom ... (1+ / 0-)
      Recommended by:
      DBunn

      ... is always radical, even when conventional wisdom is patently at odds with observable experience absent the cognitive blinders of ... conventional wisdom.

      Classical economics emerged during a period when the conventional wisdom - in Britain and elsewhere - was that noble birth brought with it essential superiority.  The high born weren't ordinary human beings who won the Ovarian Lottery, thus born into landed wealth.  They were essentially superior: more intelligent, more moral, more All That Was Good About Humankind.

      The conventional wisdom about American culture is that our Framers rejected that idea.  Some may have but not all did.  We largely adopted British class structures, but replaced the privileges of titles with the privileges of wealth.  The phrase "wealth has its privileges" is usually shrugged off as mere recognition that the wealthy can afford things that others cannot.

      But privilege comes from Latin roots meaning "private law," and implies an immunity from duties or responsibilities, all the way up to the duty to risk one's life in defense of our nation.  (Wealthy Americans have usually been able to dictate the terms of their military service, or avoid it altogether.)  That's how ubiquitous the notion of "wealth has its privilege" has been in American history.

      The most obvious privilege of wealth has been as a substitute for the duty to labor.  Most of us work under penalty of economic privation.  "If you don't work, you don't eat."  Unless you're wealthy.  Then your invested wealth substitutes for your duty to work, and you get to eat ... and eat well indeed.

      In the Guild of Serious Economists (lovely turn of phrase!) the privileges of wealth - rooted in the monarchist notion of the essential superiority of the well-born - are taken for granted, assumed as facts without any real study or question, so far as I have learned in my readings.  Like the nobility of old, the wealthy are entitled to those privileges.  They call social safety net programs "entitlements" because they see such programs as usurping for commoners what they are entitled to by their wealth.

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