Category: Relevance

Reacting to “Finding Equilibrium” by Till Düppe and E. Roy Weintraub

~ cogiddo ~ Leave a comment

Another title for this post could be “Why people who talk about general equilibrium theory should always mention the Arrow-Debreu-McKenzie model, without omitting McKenzie”.

Prompted by a post by Joshua Gans, which I saw first on Google+, I recently bought the book Finding Equilibrium, as on the title of this post. The book contains an insightful discussion of the problem of assigning scientific credit in economics, as the book’s subtitle makes clear: Arrow, Debreu, McKenzie and the Problem of Scientific Credit. I finished the book today. It was published by Princeton University Press very recently, in 2014.

The authors continue an old project of the more senior of the two, Weintraub, that dates from the early 1980s. It has to do with why the Arrow-Debreu paper on the existence of general equilibrium gets more airtime in economic theory circles than McKenzie’s paper, even though the latter was submitted to Econometrica and published a bit earlier than the former.

I must disclose here that Lionel McKenzie was a member of my doctoral dissertation committee. I defended my dissertation at the University of Rochester in 1988 to earn my Ph.D. Furthermore, the professor responsible for my applying (and being accepted, I am sure) to the graduate program in economics at Rochester, Emmanuel Drandakis, was the second person to receive a Rochester Ph.D. in economics after McKenzie created the economics department and graduate program there in the late 1950s. Thus, I was immersed in the story of McKenzie’s unfair treatment in not receiving a Nobel Prize, unlike Arrow and Debreu. The story was “in the air” at Rochester, but I did not hear McKenzie himself talk about it, to the best of my recollection. This accords with my memory of McKenzie as a perfect gentleman; in the book I am talking about here, he is described as “classy” by one of the economists quoted there.

I enjoyed the book and read it in a couple of days, even as it came in the middle of a week that started with some worries in my personal life. It gave me the idea of writing a paper about the now ignored general equilibrium approach as it, I think, should be revived in conjunction with extensions to make it properly include collective goods and externalities (an approach that should proceed with techniques not only limited to the axiom-and-proof ones that were the hallmark of the emergence of general equilibrium in the 1950s). I have worked in this area before, myself, so I may have something new of interest to say by revisiting it. However, I did not want to wait to post here until I wrote a paper; that would mean quite a long wait!

Apart from the inclusion of some jargon from the sociology of science and (naturally) from economics, the book is very well written for a general audience. It flows well and is very instructive. The authors make the best of the fact that their topic allows them, by its very nature, to tell it as a story of people and their interactions. Readers always want stories (as we must remember every time we have to teach abstract ideas in the classroom).

As someone who is well versed in general equilibrium theory (although I’ve been neglecting it lately), I found the exposition of the theory’s inception in the book well done. Furthermore, it gave me a few perspectives and some context I did not already have. If I were to teach general equilibrium again, I would be sure to assign parts of this book to complement the rather dry and scary (for students) mathematics that dominate the theory.

Gans’s post that led me to this book concluded that, of the three main protagonists, Debreu emerges in the most unfavorable light. That is indeed my impression and it comes from documentary evidence of his behavior as a referee of McKenzie’s paper for Econometrica and also vis-a-vis his own co-author, Kenneth Arrow, from whom he kept secret his knowledge that McKenzie was already working on his own paper on pretty much the same topic. By contrast, McKenzie emerges clearly as the wronged party and Arrow as quite generous in giving credit to scholars who preceded him.

So, for the very few of you who say “Arrow-Debreu”, please do remember to say “Arrow-Debreu-McKenzie” when talking about general equilibrium theory.

[Edited 2014-09-29 to correct some infelicities in my use of English.]

Brad DeLong Says Economic Theory Does Not Exist

~ cogiddo ~ 1 Comment

In a column that ran today in the Project Syndicate, Brad DeLong said this:

One of the dirty secrets of economics is that there is no such thing as “economic theory.” There is simply no set of bedrock principles on which one can base calculations that illuminate real-world economic outcomes. We should bear in mind this constraint on economic knowledge as the global drive for fiscal austerity shifts into top gear.

Unlike economists, biologists, for example, know that every cell functions according to instructions for protein synthesis encoded in its DNA. Chemists begin with what the Heisenberg and Pauli principles, plus the three-dimensionality of space, tell us about stable electron configurations. Physicists start with the four fundamental forces of nature.

Economists have none of that. The “economic principles” underpinning their theories are a fraud – not fundamental truths but mere knobs that are twiddled and tuned so that the “right” conclusions come out of the analysis.

I am of two minds about this. I certainly feel that the beautiful economic theories that have been created with the help of some serious mathematics in the last few decades have yielded valuable insights. Yet on the other hand, these insights are far from telling us unambiguously important things about economic reality and from giving us good recipes for economic policy. I don’t even feel we understand, as economists, how such a basic thing such as economic trade can emerge, based on trust among people. So we have ended up with “theory” as a plaything of political interests. For such reasons, I share DeLong’s frustration. Yes, Paul Seabright has written the wonderful book The Company of Strangers, but still we don’t have a good grasp of the fundamentals of economic trade at the level of really basic theory! Naturally, I am trying to do something about this in ongoing research with my long-time collaborator, Rob Gilles, or I would not be justified in airing my complaints on this theoretical lacuna.

But is it really beauty and some insights of doubtful empirical relevance versus abandoning all hope of having an economic theory? I sincerely hope not. We have, in game theory, the mathematical theory of networks, and in the technology of simulation, some tools that should allow us to build a better theory. One that, although it will always be subject to criticism and will always create the longing for something better, will not be so easily dismissed as nonexistent by a leading economist.

I understand that DeLong is concerned about macroeconomics and one can read his nonexistence claim in terms of macroeconomic theory. But that is a cop-out. If we had a good theory of economic fundamentals, we would be able to build an, at least existent, theory of macroeconomics, by DeLong’s standards. So I addressed my remark here to basic economic theory, not its macroeconomic special case.