Part III will be reserved for the bit on politics - which could go forever and include references to John Rawlston Saul and a host of writers on the right and left.

There is a lot of guff written about the significance of mathematical formalism in economics. Firstly there are a host of books that focus on the question of "how economics became a mathematical science". One particular thesis notes the coincidence of the development of Maxwell's equations for electromagetism and the marginalist development (Walras et al) of economics.

This coincidence of tools however does not invalidate their utility. We can engage in an endless discussion in the philosophy of science, but it is easiest just to accept the approach of Feyerabend epitomised by (this blog's title) "anything goes". Mathematics as a study itself is a process of abstract formalism. However, mathematics in use provides some powerful tools to develop models that describe the world.

The critique of the use of mathematics in economics reaches its peak in Tony Lawson's work where he asserts that the common unifying theme of heterodox economics is its rejection of ‘mathematical-deductivist methods' (to quote Hodgson who is commenting on a related Lawson paper).

In my view the idea of the rejection of the mathematics is wrong, it is the assumptions of the mathematics that is wrong. Economists have regularly compromised their theory to enable it to fit the mathematical formalism. Hence the obserrvations of behavioural economics usually get ignored because it makes life way too hard mathematically if for example demand curves are always "kinked" at the current market price (endowment effects), or if discount rates need to change over time (valuing more now than in the future). Let alone the real difficulties of the fact that real world supply curves aren't usually monotonically increasing.

But that is not a reason to reject mathematics, it is a reason to find different mathematical tools than the very simple suite of tools from simple differential calculus. The works like that of Beinhocker with discussions of complexity rather than chaos start getting to these options. There is a wealth of mathematics now being applied in biology, as the mathematics of complexity show with simple applications like the generation of leaf and landscape formations with fractals.

The attempt to distinguish between the mathematics of complexity and that of chaos is erroneous, as chaos is only a description of the behaviour of complex systems in certain boundary conditions. The beauty of these approaches is that incredibly complex outcomes can be described in relatively simple mathematical formalisms.

I noted in my post on J.K.Galbraith's death;

*In the final analysis it is hard to disagree with the view expressed in the NY Times review (reprinted in the AFR) that "his sweeping ideas, which might have gained even greater traction had he developed disciples willing and able to prove them with mathematical models." It is not too late for this task.*

That position I think applies to all the heterodox strands, because to be useful the economic theory ultimately needs to help us mahe quantifiable predictions about the future. To do so requires a mathematics of some kind.

The second point I wanted to make was Tanner's need to deal with behavioural economics sceptics much sloser to home, in fact, in the Productivity Commission. The PC went to the effort of hosting a roundtable on behavioural economics. However, in their Appendix B ('Behavioural economics and

consumer policy") to their

*Review of Australia's Consumer Policy Framework*the Commission concluded;

*Many of these considerations evidently apply to all regulation making, indicating that designing policy responses to the issues raised by behavioural economics is not overly different from responding to more traditional problems such as externalities and the abuse of market power.*

The inclusion was interesting because at the time of the review the Deputy Chair of the ACCC was Louise Sylvan who in a speech enitled

*The Interface between Consumer Policy and Competition Policy*tried to emphasise that mere reliance on competition policy to promote consumer outcomes may be insufficient due to some of the effects noted by behavioutral economists. Perhaps the views at the PC will change now that she is a Commissioner there instead of at the ACCC.

Certainly the public service and the economics profession continues to be wedded to its simplistic model of markets and their inacurate mathematical descriptions. It will take a lot of work to shift their perceptions.

## No comments:

Post a Comment