And please don't reduce the issue. I'm not talking only about the assumption of zero transaction costs. I am talking about framing the whole topic… It starts off framed in a way that makes it NOT subject to economics! Who is "liable" and who should be "allowed to harm" who are not questions for economics.

Yet again, this kind of thing just shows you don’t know what you’re talking about. Coase doesn’t mean we should do A vs B in any kind of ethical sense, such that we have some obligation to do so. It’s true you can make the argument that economic efficiency is completely irrelevant to determining how property rights should be assigned in some specific instance, and that it’s a question solely for ethics. But that would be to badly miss the point since Coase is only concerned with giving a positive or descriptive analysis of transaction costs, externalities, the assignment of liabilities, and so on in terms of economic efficiency, i.e. how these institutional details either facilitate or hinder people in coordinating their diverse and conflicting plans over time.

That’s what he’s talking about when he refers to net social product. The point is that differences in institutions, particularly in the legal system, imply differences in the structure and prevalence of transaction costs, which imply differences in total social product. That is a purely descriptive or positive conclusion w.r.t. economic efficiency, which is presumably significant for at least some normative policy conclusions, at least insofar as we think society's welfare in general is important. 

Absolutely nothing about this, though, should lead you to believe Coase thinks we can just think up models in our head to determine the efficient social outcome and, on the contrary, Coase strongly emphasizes whether or not to tax an externality, for example, is always going to be an empirical question. Coase ridiculed what he viewed as the over-emphasis on formalist models as “blackboard economics”, which he thought was only of limited use in the real world. 

In any other science, when you admit that your assumptions are "unrealistic" (more properly, absurd and insane), then whatever follows has no scientific value.

 Well, no, even in the hard sciences false assumptions are made to derive scientific conclusions. What matters is whether the assumptions enable us to build models that are useful in understanding reality. You’re always going to have to abstract from some details in concrete reality to build a model that, strictly speaking, means the model isn’t true. This is especially true of the social sciences, where the object of study is largely complex spontaneous orders that are the result of human action but not human design. If you do not abstract from some concrete details, then you’ve reduced your inquiry to pure description, and ipso facto cripple your ability to generate any robust theoretical conclusions for the purposes of (say) determining which policies are generally welfare enhancing and which are not. That's one reason approaches to economics that reject theoretical reasoning tend to have little empirical or predictive success.

As I’ve mentioned elsewhere in this thread, the rational choice postulate is a good example of this, particularly w.r.t. firm behavior. It’s true that firms do not set output where MR = MC to maximize profits. Surveys have shown businessmen in the real world sometimes do not even understand the concepts of marginal revenue or marginal cost, and rather set prices on the basis of cost plus pricing (i.e. they set an output total they believe they can sell, estimate their average or per unit cost at that level of output, and then markup the price to allow for profit margin). 

That said, because markets have institutional properties that select for those firms that more closely approximate profit maximization compared to those that do not, the falsity of the original assumption is empirically insignificant. Even though many firms will make decisions that turn out to be erroneous (which follows directly from the true assumption that they do not have perfect or complete information), the selection mechanism itself, i.e. profit and loss accounting, selects for those firms that have been comparatively "more rational" in their production decisions, for example by making comparatively more accurate estimations of future quantity and cost variables. In fact, given the difficulty of precisely determining actual marginal revenue and marginal cost curves, the benefits of finding MR = MC conditions would probably be outweighed by the information costs incurred by the firm in the process, so there's a clear sense in which firms using markup pricing cannot necessarily be said to be failing to maximize profits all things considered.

More to the point, though, the kind of rationality needed to promote market coordination, then, is fairly thin: people just need to be capable of learning from past mistakes and dealing with the uncertainty of the future to some degree, even if they’re fallible and make serious errors too. It’s true this isn’t going to lead to anything like the Pareto optimal solution of perfectly competitive general equilibrium, but economists (or at least the good ones like Coase) have understood that all along, and have never framed their understanding of political economy solely in terms of anything so formalist and removed from the real world as maximizing a social welfare function. 

And the conclusion he attributes to those "most economists" (or to Pigou, if you insist) is so absurd that I emphatically refuse to believe he is doing justice to the "traditional approach". He is not giving a direct quote or reference, so preliminarily I suspect that he is simply making it up.

DK effect strong.

Ok, well, nothing in your latest post raises any substantive points that I haven't already addressed elsewhere in this topic, so unless you have anything you'd like to add I think I'm done wasting my time here.

UGADawg wrote:

Very briefly, here are a few points to consider:

--- I just disagree that unrealistic assumptions entails one cannot draw anything useful from a model.

​I agree, but it depends on the kind of assumptions. Musgrave divided assumptions into three categories:

​Negligibility assumptions: These are those assumptions that remove (hopefully) irrelevant aspects of a situation so we can focus on what matters for our analysis. Any scientific analysis will have to do this, hence when studying gravity, for example, physicists can abstract away air resistance. These negligible factors are outside the domain of the theory. These kind of unrealistic assumptions are necessary in economics, as long as we are careful.

​Heuristic assumptions: are unrealistic assumptions and models that are bridging point for more realistic theories. Newton's model of a single planet solar system is a famous example. These are kind of factors are in the domain of the theory - in Newton's case the gravitational effect of other planets, which is abstracted from in this model, is not unrelated and unimportant in trying to understand the movements of the planets, but he wished to do without it first. but they may be excluded at first so that the theorist can build a clearer understanding of all the important aspects involved.

​Domain assumptions: These are assumptions about the very applicability of a theory to a particular domain - for example, assuming perfect competition limits a theory to that domain.

​The problem with the unrealistic assumptions of economics is that, for a start, its most cherished theories are often limited to grossly unrealistic domains, domains with perfect competition, standard rational choice assumptions, a Walrasian auctioneer, etc. And these assumptions are not heuristic. There are attempts to develop more realistic theories, but it isn't like physics, where, hopefully, we then drop the less realistic models. It is the grossly unrealistic economic models that still dominate neoclassical economics. They are taught to undergraduates, and all the other models are just special conditions (when, at best, it should be the other way around) that look back to the central, unrealistic models to give them their proper meaning and place. 

​More than this, though, many of the unrealistic assumptions don't just narrow the theory's applicability to an unrealistic domain, they often undermine a proper understanding of that very domain. Take perfect competition. This assumption holds that in a perfectly competitive market, all firms would be price takers, passively adjusting themselves to changes in price, cost, and demand that they do not influence. But this is illogical. It butchers the whole idea of competition, which is that firms do everything they can to outmaneuver their rivals. So this unrealistic assumptions not only creates an unrealistic domain, but it constantly refers back more realistic model to a model whose understanding of competition obviates the entire concept.

The MR = MC condition you mention is illustrative in this regard. PKs will say the fact that firms do not set prices this way means the model is useless, but they just miss the point that market institutions themselves act as filters that select those firms that more closely approximate conditions for profit maximization, so the firm's specific approach is irrelevant. And importantly this is robust in the face of imperfect knowledge, transaction costs, etc. absent in standard perfectly competitive models. Unless individuals are assumed to be completely incapable of learning from mistakes or adapting to uncertainty, you can still draw reliable empirically significant conclusions.

​But this doesn't help save the model, although it might prove the general conclusion of the model, though even there is depends on how exactly one defines profit maximisation (the neoclassical model is static and assumes that firms do this in every time period). 

--- You say individualism implies a regress problem, but this just seems to miss the point, as nothing about taking a methodologically individualist approach entails questions not analyzed in that framework aren't worthwhile. Rather, since the focus in economics is and should be one of understanding how exchange and production are coordinated through time, the economist has to focus on the issues I mentioned above re: institutional features affecting the structure of incentives and the quality and flow of information, which requires putting the focus on individuals. This is one reason policy proposals from schools of thought that do not emphasize that aspect tend to look hopelessly naive in hindsight.

​I don't deny that you can use such an approach for some questions. The problem with neoclassical economics is that it is the only one used, and there is often an implication that economics is to be applied. Even you do this here, when you seem to say that things like the structure of incentives and the quality and flow of information need to be studied through a methodological individualist approach alone. And I don't think neoclassical economics has anything to boast about in terms of naivety, or at least usefulness. It is marketing specialists - who in turn make use of sociologists, psychologists, and heterodox (especially behaviourial) econnomists, not neoclassical economists - in far greater demand.

--- "Left-heterodox economists" and "economists that reject choice theory broadly construed" might differ in sense but I'm not sure they differ in reference. After all, do you ever see free market PKs? Methodology has a significant influence on that, e.g. because ironically the command-and-control or man-of-system views criticized long ago by Adam Smith yet still common in left-heterodox circles are only plausible if one fails to take seriously how institutions determine the circumstances in which individual choices are made.

​I'm not sure who it is who is rejecting choice theory broadly construed, depending on what you mean by that. It is the standard rational choice theory that is rejected by many heterodox economists, the one with the assumptions I quoted earlier. Post-Keynesians tend to lean left social democratic, but they actually generally tend to keep their politics separate from their economics. They do quite a successful job of this, and if they aren't free marketeers I would suggest this is much more a matter of them following their analysis than ideology. I'm not sure what you mean by command-and-control views or what they specifically have to do with Post-Keynesianism. You seem to have a slightly strange picture of Post-Keynesians and heterodox economists in general (for example, you stated Keen was a neo-chartalist, whereas, as far as I know, he has stated he isn't and has criticised it - I'm assuming he hasn't changed his mind in the last few years). It is certainly true that methodological collectivism has sometimes been common in sociological, if this is what you are referring to. And, as I said myself earlier, it does actually prevent a proper understanding of how social forces affect individuals, if that is what you mean - both exclusive allegiance to methodological individual and  to methodological collectivism need to be avoided. But the direct relevance here, I'm not sure of.

​

​Neoclassical econ if anything seems much more neutral w.r.t. ideology, and your assertion that it's mostly used in defense of capitalism is just wrong. Some Chicago school types do argue that way, but if anything, the easiest way to get published in top level mainstream micro journals the past few decades has been to show there is some market inefficiency relative to perfect competition if the standard unrealistic assumptions are replaced with more realistic ones, and that the only way to fix this is by using some kind of government intervention. See also how the most famous model of socialism, Lange's, is grounded in standard neoclassical theory (and, arguably, cannot be refuted from within that framework).

​I didn't mean to suggest that neoclassical economists defend their school primarily from ideology. I don't think this is the case. Usually, it is more a matter of professional allegiance. I was just suggesting that neoclassical economists can be as much accused of harbouring ideological baggage as heterodox economists. The rise of marginalism (and to some degree classical economics) was out of an attempt to prove the efficiency of the market as a means of resource allocation. And neoclassical economists have often been motivated at least in part by this assumption, to the point where they have been involved in social and political attempts and movements - like neoliberalism - aimed at creating freer markets. But I don't think that it is particularly useful to bring up ideology, in this case or in terms of heterodox economists, which was my original point. Firstly, because it is fallacious to dismiss theories and claims due to supposed ideological motivation, and secondly because it is often hard to distinguish the influence of the theories from ideology, on things like policy proposals - was it ideology that prompted neoclassical economists to embrace neoliberalism and make sure their economic analysis gave tools to support this movement, or was it the economic analysis that led them to the neoliberal ideological position? I suspect it is a blend, and that it also depends on the economist in question. 
 

UGADawg wrote:

@ JT

False assumptions are perfectly innocuous insofar as they are not ‘critical’ assumptions, i.e. an assumption that would substantially change the implications of the model w.r.t. whatever it is we’re investigating if the assumption were altered in the direction of 'greater realism'. To give you an example, with some fairly basic maths you can show under plausible conditions demand curves would be downward sloping for both households and firms even if the decision rule is randomized for each unit (see Becker, Irrational Behavior and Economic Theory). The assumption that decision makers are hyper rational utility or profit maximizers, then, cannot be said to be a critical assumption for certain purposes (e.g. much of basic supply and demand analysis), and so need not limit the applicability of the model to scenarios where all exchange participants are perfectly rational. Mutatis mutandis for different modeling purposes, like the assumption of price taking behavior you mention. When price taking behavior is a critical assumption (e.g. when considering the effects of price controls) we just alter the model to take that into account. In short, we have a basket of models that we can select from to apply to different situations. Sometimes a standard neoclassical model will be sufficient, sometimes it won’t be, e.g. when considerations from behavioral economics become empirically significant. Examples could easily be multiplied.

You might object that neoclassical economists don’t actually do this, and instead claim that they make ideological pronouncements (such as advocacy of neoliberalism or whatever other boogeyman you’d like to conjure up) on the basis of simplistic models such as perfect competition, all the while ignoring, and perhaps even worse, not caring, that the purposes for which the model is being used (e.g. demonstrating real world free markets are Pareto optimal) now rest on false critical assumptions like perfect information or homogeneous products. In fact it seems this has been one of your main points, i.e. modeling isn’t problematic per se, it’s just that neoclassicals happen to use over-simplified models stretched far beyond the domains where they are plausibly applicable, whereas the marginalized PKs have (somehow) been relegated to obscurity by the mainstream despite possessing more realistic models with wider applicability and making more accurate empirical claims (though, if you’re correct, at least they’re able to use their skills to acquire lucrative jobs in marketing after being unjustly ousted from academia!). 

But this just isn’t right. The neoclassical case for market institutions does not (and really never did) rest on the assumption that perfectly competitive general equilibrium is a close approximation of reality. There is no kind of ‘motte-and-bailey’ tactic going on here, as you seem to be suggesting. If you look at papers published in top mainstream journals, perfect competition just isn’t the modeling workhorse you seem to think it is; in applied microeconomics (and even in macroeconomics) it’s much more common to see monopolistic competition or game theoretic models of oligopolistic competition. This isn’t something that’s confined to neoclassicals of the center-left sort (e.g. Krugman) either. Demsetz (see Information and Efficiency: Another Viewpoint), a blue blood Chicago school type, was arguing back in the 1960s that models that assume perfect information and so forth were useless for drawing any kind of robust welfare conclusions. Today prominent center-right neoclassicals like Sumner or Cowen have emphasized the same point numerous times in public comments.

As I’ve tried to point out, the argument is ultimately comparative, i.e. for all the inefficiencies arising from imperfect information and self-interested behaviors and so on in real world market institutions, the inefficiencies resulting from those problems are (by and large, with notable exceptions, etc.) even more pronounced in the real world political institutions that actually implement policy designed to correct market failures.

​I think we fundamentally disagree here. You are mounting something like the famous/notorious "what about game theory" defence of Neoclassical economics, albeit a much more informed one than usual. I just don't think that the models you talk about play the roles you think they do. It is the standard models that dominate undergraduate economics - beyond which most people who take economics courses do not progress. And, they dominate policy, it seems to me, and other non-specialist applications of mainstream economics. They even have come to dominate macroeconomics, with woeful attempts (like the representative agent) to give it so called microeconomic foundations. And I do think that there is far too much looking back to the largely useless models, like general equilibrium theory or standard rational choice theory - the models you are talking about are still very much taken as special conditions. Paul Omerod sums up my view of the role of models of special conditions in Neoclassical economics:

Even small deviations from the full panoply of postulates required by conventional theory often lead to outcomes which are quite different from those of textbooks. It is very encouraging that this work takes place. But many of those carrying it out seem to be unable to shake off completely the deadweight of the past, and still look to the orthodox model as the Platonic ideal to which we should aspire. The world may have properties far removed from those of conventional economics, yet orthodox models remain the benchmark against which many of these more realistic models are compared.

If the picture you paint is correct, then, except I don't think the standard models are very useful at all except in very narrow and special conditions (if that), I would actually agree neoclassical economics has gone a long way to reforming itself. I think heterodox insights and models could be added to its range, but it wouldn't be in as dire state as I thought. I'm just sceptical it is correct, from everything I have seen. 

​Note: I didn't say Post-Keynesians economics was of particular interest to marketing departments and specialists, I said Behavioural economics was. These are different heterodox schools (although not necessarily mutually exclusive - there tends to be a lot of cross-fertilisation amongst heterodox economists). Post-Keynesian economics most certainly isn't another name for heterodox economics in general (even leaving aside the Austrians and the Marxists). Again, I'm not sure that you have a proper picture of heterodox economics.

​It isn't particularly suprising to me that a viewpoint or approach can be sidelined by an academic field because it doesn't fit their methods or their general belief system. In psychology and medicine, the study of anything that is thought to habour dualism, a devil term in these fields today, is highy suspect. This has led to well-documented pheneomena, from placebo to psychophysical effects of hypnotic suggestion to NDEs, being ignored, dismissed, and even deried, until a putative (usually incomplete or dubious) physiological explanation can be given for them. T. X. Barber's work on hypnotic suggestion and its psychophyiscal effects is a good case in point. He did a lot of research in an attempt to explain the phenomena away as a matter of hypnotic subjects trying to please their hypnotists through compliance, and, although some of his expriments seem almost designed to minimise its occurence, when it did still occur, and couldn't be plausibly assigned to compliance, he tried to dismiss it. He only accepted the existence of such phenomena when he thought (wrongly) he had a good, complete physiological explanation for them.

And I didn't suggest, simpliciter, that neoclassical economic pronouncements are driven by ideology, not political ideology (being path dependent and wedded to their own framework and methodology is different). It was you (after Seigneur) who first brought up ideology with, what I felt was the unnecessary and misleading, pairing of heterodox with left. My point about ideology was that one can make just as good claims about Neoclassical economics, not that it is useful to do at this stage. I went to some pains to say it wasn't, repeatedly.

No, I do not think incentives and information “need to be studied through a methodological individualist approach alone.” Feel free to study them from any perspective you like. That said, my point is that approaches that don’t take into consideration how incentives, information, and so forth affect individual choice systematically ignore certain issues that are of the utmost importance if efficient resource allocation, sustainable economic progress, and all those other niceties we presumably care about determine (at least to some extent) the set of economic, political, and social institutions that are broadly desirable.  That is the sense in which I mean heterodox approaches that abandon choice theory are naive.

I would agree with this. At the very least, we need the sorts of models you are talking about alongside other ones. I'm just wondering which heterodox economists you are referring to. Post-Keynesian economists tend to focus on macroeconomics, and don't consider microeconomics. They tend to think, to some degree sharing the view of the classical economists and even early Marginalists like Marshall, that the most important  economics issues are macroeconomic ones like employment, inflation, growth, etc., and that we should sort out our understanding of these before we worry about microeconomics. They don't reject notions of choice (except the absurd standard model), they just don't think it worth the time to build a bottom-up model for the study of macroeconomics. I don't think you can be describing Post-Keynesians, at least any broad range of them. And, as far as I know, Institutionalist/Evolutionary and Behavioural economists, the heterodox economics more interested in microeconomic analysis, wouldn't reject choice or analysis of individual behaviour.

The issue is not that non-choice-theoretic perspectives have nothing of value to contribute (on the contrary I think they can be extremely valuable for certain purposes, especially for understanding cultural institutions), but rather that they’re oftentimes strictly inconsistent with the teachings of mainline choice-theoretic economics, particularly w.r.t. policy implications. And when they’re inconsistent evidence must be used to adjudicate between alternatives. To me (and virtually every other trained economist), the empirical evidence is fairly uncontroversial, even one-sided, in showing the kinds of questions economists are interested in asking and answering are better situated within a neoclassical choice-theoretic framework than otherwise (the progression of research in economic development since roughly the 50s is a perfect illustration of crucial importance for human well-being). To put it a bit differently, I’d say the real world looks a lot more like the neoclassical world than the PK / heterodox world: if PKs were right, the astonishing degree of market coordination prevalent in the real world would be a miracle. But no miracles, therefore, etc. Those kinds of basic theoretical and empirical mishaps are ultimately why the next big paradigm shift in economics, whenever it occurs, is not likely to be in the PK direction. 

​This seems extraordinary to me. Leaving aside that I'm not sure who you have in mind when you talk about Post-Keynesians and heterodox economists (it doesn't look like most of those I'm aware of - it seems perilously close to a strawman at times), the standard, core theories of Neoclassical economics don't tend to be empirically well-supported, as far as I know. Again and again, the empirical evidence (like on transitivity for rational choice theory or how firms make pricing decisions) tends to contradict the Neoclassical claims, unless perhaps you don't mean such standard models, and so then we're back at the issue of the place of the models of special conditions. Again, it is telling that marketing specialists, in demand amongst firms, don't go to Neoclassical economists to understand pricing and the like; rather, they go to Behavioural economists, sociologists, psychologists, etc. As for understanding market coordination, I'm unsure which Neoclassical theories you think are indispensable to do this. The standard models hardly seem necessary to do this, as far as I can see. One could start with other models or understandings and still understand market coordination. And a good case can be made that, although the market coordination of contemporary capitalism is considerable, it is also far from flawless (leaving aside the fact that actually existing capitalism is, and has always been, a long way from what could plausibly be called a true free market). Arguably the Post-Keynesians and other heterodox economists capture this picture (the simultaneous efficiencies and inefficiencies of our economies) better than the more one-sided (not to mention static and unrealistic) Neoclassical vision. Indeed, most heterodox schools (leaving aside the Marxists and some other radical ones) are founded precisely on attempts to give a more realistic vision of the economy. Most of them have a much better track record, in my opinion, of starting with realistic models of reality and trying to maintain realism than Neoclassical economics. If you compare the best Post-Keynesian thought with something like the Representative Agent theories of macroeconomics, I think you'd have to be blinded by methodolatry not to think that the former far, far more useful, realistic, and empirically well-supported than the latter.
 

To be fair, Tyler is correct there are more realistic Neoclassical models and theories, outside the core ones. The main issues, apart from the worth of the core theories themselves, are how important these more realistic approaches are to the overall Neoclassical project, and what is (and should be) their relationship to the core theories and models (general equilibrium theory, standard rational choice theory, etc.). Tyler clearly thinks the more realistic models are at the forefront of the Neoclassical project, and show it's viable and vibrant, whereas I'm weary of such claims - the "what about game theory" defence, and variations, are not new to critics of mainstream economics.

I think you are correct that Tyler does need to do more to differentiate different kinds of assumptions. I also think there is some obscurity in just what he is defending in Neoclassical economics and how. He has spoken of non-standard models of choice as useful, but then he has attacked heterodox economists for abandoning choice theory, which is ambiguous. Few heterodox economists would dismiss choice theory in the broad sense. It is only the hyer-rationalist, standard model they would reject. So it is hard to see what these heterodox economists have done wrong, especially without a clear explanation of the place of standard and non-standard choice theories.

For what it's worth, I don't dispute the importance of studying individual choices, of choice theory. And I don't think most heterodox economists from the Institutionalist, Behavioural, Complexity, or even Post-Keynesian schools would either (the Post-Keynesians tend to think it most important to start with macroeconomics, but this isn't because they don't think studying individual choice is worthwhile - Steve Keen, for example, is enthusiastic about the attempts of the other three tendencies mentioned to study individual economic behaviour). But it seems to me that, at best, the standard model only has applicability to very narrow circumstances; for example, where there are very narrow choices; and where there is a very narrow timeframe and plausible independence of relevant factors. It has been suggested the standard choice theory reflects its roots in the latter half of the nineteenth, in the kind of choices the average worker or peasant might face in shopping for necessities, before the rise of marketing and consumer society. I think even its worth in such a situation is questionable, but it does hint at the possible domain, if any, where the standard model might be useful.