RE: [OPE] Behavioural economics: a revolution in science?

That would be michAel … J!

Let’s drop it: you can call me whatever you like.

Universal equalisation of prices and marginal costs is a characteristic of an economically efficient allocation of resources and can be supported by universal perfect competition.

No doubt because of that, it has been recommended that state intervention to correct for market failures leading to the divergence of P from MC, should be directed at equating price to MC. Apart from being impractical, the theory of the second best shows that if you cannot achieve P =MC EVERYwhere then there are no efficiency reasons for trying to achieve it ANYwhere. So the theory of second best indicates that in the presence of some de facto divergences of Ps from MCs, policy should aim to adjust other prices (say of the output of SOEs) away from MC to compensate for the de facto divergences. (Incidentally: even more impractical) The same comments would apply to any attempt to use MC pricing in a post-capitalist economy.

The theory of the second best doesn’t conclude anything about the spontaneous support of universal MC Pricing. It merely says that IF there is even a single lapse from P=MC, there are no efficiency advantages to putting P = MC elsewhere. Incidentally, general equilibrium is not able to conclude that economic efficiency, with P=MC, can be ‘reached’ by a perfectly competitive system; only that it can be ‘sustained’ by such a system. (This is the key point about GE’s neglect of market dynamics.)

So:

1) “a consistent policy of equalization of prices and marginal costs” is impractical

2) It would not suppress private property provided the datum is Long Run Marginal costs

3) This is at a very abstract level at which, as Keynes pointed out, we expect capitalists to pursue profit maximisation knowing that if they do so under perfect competition they will end up with only the normal profits included in efficient cost functions.

4) In terms of ideological deployment of perfect competition models to legitimate market capitalism, within orthodox economics we have imperfect competition models that undermine such an attempt, not to mention immense empirical evidence that concentrated industries generate super-normal profits – by, indeed, fixing prices that turn out to be > MC.

I agree that ‘behavioural economics’ is ill-defined, often subsuming institutional economics, psychological economics, etc. I guess the common element is to posit that economic behaviour is significantly and relevantly more complex than that assumed by rational choice theory. In that sense I would locate its usefulness as aiding concretisation of rational choice models.

Comradely greetings

michael

--------------------------------------------

Dr Michael Williams, BA, MSc, PhD

Mob +447906172655

Home tel +4423 80768641

P Help save paper - Do you need to print this email?

From: ope-bounces@lists.csuchico.edu [mailto:ope-bounces@lists.csuchico.edu] On Behalf Of Alejandro Agafonow
Sent: 01 October 2008 08:05
To: Outline on Political Economy mailing list
Subject: Re: [OPE] Behavioural economics: a revolution in science?

Hello Michel!

I usually use the last name of OPE’s members because some of us share the same first name. So I want to avoid confusions about who is the addressee of my e-mails.

M. Williams: “There is no formal contradiction between market failure and the equalization of price and marginal cost.”

I’m not sure what are you meaning here. Either if I suggested this contradiction or if the “theory of the second best” is compatible with the equalization of prices and marginal costs.

If it is the first case, I didn’t. I just pointed out that an original unexpected consequence of the neoclassical body of knowledge is that a consistent policy of equalization of prices and marginal costs would lead to the suppression of “private ownership”, supporting instead the public management of firms pricing good and services according to their marginal costs in the short run (Some provisos for this rule are necessary in the case of public utilities).

The justification of State intervention due to market failures is a consequence that appeared a little bit later in the history of economics thought.

If it is the second case; well the “theory of the second best” implies the recognition that the equalization of prices and marginal costs can’t be reached spontaneously. Therefore the fixation of prices above marginal costs taking possession of the proceeds is the usual way the real capitalist economy works.

It is true, as you pointed out, that in this last case the marginal cost pricing ends to be the basis of economic policy. Nevertheless, policy makers led by this theory watch instead “mean profits”, accepting the fact that prices always will be fixed above marginal costs and taking care that neither firm is obtaining extraordinary profits, which could mean a sign of monopolization according to this theory.

Of course, these considerations are taken from ideal theoretical types and some contemporary currents in economic policy introduce further shades that move them away from the strict Paretian model.

And yes, I know that today Behavioural Economics can’t be reduced to game theory, but I think that at the beginning game theory –at least as Morgenstern conceived it– was considered the spring of Behavioural Economics. Of course, at that time Austrian Economics was not considered a branch of Behavioural Economics and today it is, isn’t it? Maybe we have to identify when Behavioural Economics started to be considered a broad realm where different heterodox currents in Economics meet.

Kind regards,

A. Agafonow

----- Mensaje original ----
De: Michael Williams <michael.williams.j@googlemail.com>
Para: Outline on Political Economy mailing list <ope@lists.csuchico.edu>
Enviado: martes, 30 de septiembre, 2008 10:58:46
Asunto: RE: [OPE] Behavioural economics: a revolution in science?

1. There is no formal contradiction between market failure and the equalization of price and marginal cost. That universal equalization marks an economically efficient allocation of resources, and a universally perfectly competitive market system will sustain such a universal equalisation of price and marginal costs. The most telling formal critique of the competitive perfect equilibrium abstract once we take the smallest concretising step by acknowledging that any (significant) market is not perfectly competitive is provided by the general theory of the second best that shows that once we lose perfect competition anywhere it is no longer necessarily more economically efficient to move towards perfect competition elsewhere. This of course, also undermines ‘marginal cost pricing’ as the basis of policy to correct specific market failures.

2. I do not think it is useful to reduce behavioural economics (not even in its ‘institutional economics’ guise) to game theory. Game theory does provide guidance on concretising the competitive equilibrium models. But note that its most basic insight – that competition may not lead to a ‘socially’ efficient outcome, even when that is characterised only in terms of being the best available for all players – is an elaboration of the market failure that arises from less than perfect competition.

(Alejandro – if I may call you that – I don’t want to be a precious old man over what is probably a minor cross-cultural glitch, but if you must address me formally, I would prefer you to call me ‘Dr’ Williams; but what I would really like you to do is to call me:

michael J)

--------------------------------------------

Mob +447906172655

Home tel +4423 80768641

P Help save paper - Do you need to print this email?

From: ope-bounces@lists.csuchico.edu [mailto:ope-bounces@lists.csuchico.edu] On Behalf Of Alejandro Agafonow
Sent: 30 September 2008 08:35
To: Outline on Political Economy mailing list
Subject: Re: [OPE] Behavioural economics: a revolution in science?

1) Ekeland: “That the neo-classical economists are unable to prove mathematically convergence to such an equilibrium even in the most perfect models undermines the whole project too.”

Ekeland is right and his observation finds its roots in Morgenstern, who was concerned about the determination of an optimal game strategy, which he understood that it was radically different from the determination of “general equilibrium” that requires too demanding conditions. So, Morgenstern wondered how the neoclassical economists were so bold to postulate a stable economic system if the stability of another much simpler system, that one of the orbit of the moon around the earth, still could not be proved.

2) Williams: “Then, the most substantial criticisms of static equilibrium models come not from Marxists but from the Austrian School. Who amongst other things, rejected neoclassical equilibrium models because they seemed to justify (through their market failure theories) large amounts of state intervention in markets.”

I agree with Williams. But in addition to the market failure another key aspect that justifies State intervention, is the fact that the goal of many economists from Adam Smith to Vilfredo Pareto has been the equalization of “selling prices” to “marginal costs”, pricing process that in real capitalist economies takes place fixing prices above marginal costs and taking possession of the proceeds. Even Vilfredo Pareto recognized that this only could be achieved in a Socialist economy.

But the handicaps of Behavioural Economics, understood as “game theory”, to understand the phenomena of institutional real world, manifested in Morgenstern when he noted that the neoclassical assumption of “perfect foresight” of the agents would be replaced in his theory by the assumption of “perfect and complete information” as these concepts are used in game theory –according to Morgenstern– in a specific way and without contradiction.

This led to the development of the “theory of expected utility” and thus, investment and consumption decisions allegedly could be treated successfully from the likelihood that an individual faces when making decisions in an environment of rivalry.

Kind regards,

A. Agafonow

----- Mensaje original ----
De: Michael Williams <michael.williams.j@googlemail.com>
Para: Outline on Political Economy mailing list <ope@lists.csuchico.edu>
Enviado: domingo, 28 de septiembre, 2008 13:55:32
Asunto: RE: [OPE] Behavioural economics: a revolution in science?

Maybe static equilibrium models are an abstraction that behavioural economics can play some small part in concretising? Then, all abstractions are, in a naïve sense 'unrealistic'. To move beyond that would involve criticising the usefulness, relevance, ideological partiality, etc. of this as opposed to some other abstraction. (I have a feeling that Marx writes somewhere something along the lines of 'To think is to abstract', but I have never managed to find a source. Can anyone help?) An abstraction that can be successfully concretised does then not rely for its validity on mathematical proofs of convergence.

Then, the most substantial criticisms of static equilibrium models come not from Marxists but from the Austrian School. Who amongst other things, rejected neoclassical equilibrium models because they seemed to justify (through their market failure theories) large amounts of state intervention in markets.

As to that hoary old chestnut under which soi-disant revolutionary socialist save their most vicious attacks for those they label 'reformist' ... well I can think of a few reforms that would benefit the deprived of this world while we all wait for the second coming of 'the revolution', and that could be implemented in a way that would move us along the road to the revolutionary transformations that I would guess all OPE'ers are working for.

comradely

michael
--------------------------------------------
Dr Michael Williams, BA, MSc, PhD

Mob +447906172655
Home tel +4423 80768641
 Help save paper - Do you need to print this email?P

-----Original Message-----
From: ope-bounces@lists.csuchico.edu [mailto:ope-bounces@lists.csuchico.edu] On Behalf Of Anders Ekeland
Sent: 28 September 2008 09:28
To: Outline on Political Economy mailing list
Subject: Re: [OPE] Behavioural economics: a revolution in science?

Hi,
maybe the behaviuoural economics will be the
main-streams way out of the *static* equilibrium
straight jacket - especially since it does not
mean that you have to say to heterodox critics:
"You were right" and do not have openly to take
on board the mostly left wing implications of rejecting static models.

The totally unrealistic character of static
equilibrium theory was not wanted, it is just
necessary if you want the political, neo-liberal
"results" (no role for government, unions etc.
etc.). That the neo-classical economists are
unable to prove mathematically convergence to
such an equilibrium even in the most perfect
models undermines the whole project too.

But what behavioural economics (and "information
economics", "institutional economics") introduces
is precisely *dynamics", i.e. learning,
path-dependency etc. etc. Akerlof and "The market
for lemons" has kicked in this (for heterodox
economists) open door already. But that was when
the "cold war" still was going on. The elites has
all the time had the choice between static theory
being ideologically strong but empirically
useless, and dynamic theory (institutional,
behavioural, Schumpeterian) much more realistic,
but less ideologically dominant.

These guys are indeed going to be "soft" and
"reformist", here is their evaluation of main stream economics:

"Orthodox economic models are not wrong as such,
but rather sloppy, biased approximations of how
our economy works. They present a cartoon
characterisation of economic life, greatly
exaggerating one side of our nature at the
expense of others. Behavioural economics has
started to paint a more realistic picture."

"... not wrong as such ..." - rather feeble start of a revolution!

Regards
Anders

At 19:14 27.09.2008, you wrote:
>... a revolution is under way in economic
>thought. Behavioural economics is no bell or
>whistle on the contraption of traditional
>economics; it is a big departure which will
>deliver a revolutionary new way of understanding
>the world. The founding assumptions of orthodox,
>neoclassical economics—that people can be
>thought of as rational, selfish and
>independent—are collapsing under the weight of
>empirical refutations. Here is one example: the
>“ultimatum game,” which typifies the story of
>behavioural economics with a curious yet simple
>experiment. As you know, in this two-player
>game, the “proposer” is given a sum (say £10) on
>condition that he or she offers a proportion to
>the “responder.” If the responder accepts the
>offer, each player gets the amounts agreed. If
>he or she rejects it, both get nothing. Orthodox
>economics says players are selfish, and so
>predicts that the proposer will offer just a
>penny and the responder, preferring a penny to
>nothing, will accept. But this is not what
>happens. The most common offer is half the total
>sum, and offers of less than 30 per cent are
>almost always rejected. If the proposer’s offer
>is seen as unfair, the responder will decline
>free money.
><http://www.prospect-magazine.co.uk/article_details.php?id=10359>http://www.prospect-magazine.co.uk/article_details.php?id=10359
>
>
>_______________________________________________
>ope mailing list
>ope@lists.csuchico.edu
>https://lists.csuchico.edu/mailman/listinfo/ope

_______________________________________________
ope mailing list
ope@lists.csuchico.edu
https://lists.csuchico.edu/mailman/listinfo/ope
No virus found in this incoming message.
Checked by AVG - http://www.avg.com <http://www.avg.com/>
Version: 8.0.169 / Virus Database: 270.7.4/1695 - Release Date: 27/09/2008 13:11

_______________________________________________
ope mailing list
ope@lists.csuchico.edu
https://lists.csuchico.edu/mailman/listinfo/ope

No virus found in this incoming message.
Checked by AVG - http://www.avg.com
Version: 8.0.169 / Virus Database: 270.7.5/1697 - Release Date: 29/09/2008 07:40

No virus found in this incoming message.
Checked by AVG - http://www.avg.com
Version: 8.0.173 / Virus Database: 270.7.5/1701 - Release Date: 30/09/2008 19:08

_______________________________________________
ope mailing list
ope@lists.csuchico.edu
https://lists.csuchico.edu/mailman/listinfo/ope
Received on Wed Oct 1 05:13:07 2008