Grasping Reality on TypePad, by Brad DeLong

Moral Philosophy: Chris Bertram Makes an Elementary Mistake: Bertram:

Getting the microfoundations right: I ordered a copy of Tomasello’s Why We Cooperate in which he argues, on the basis of detailed empirical work with young children and other primates, that humans are hard-wired with certain pro-social dispositions to inform, help, share etc and to engage in norm-guided behaviour of various kinds.... [T]hat work in empirical psychology and evolutionary anthropolgy (and related fields) doesn’t – quelle surprise! – support anything like the Hobbesian picture of human nature that lurks in at the foundations of microeconomics...

Let's go to the videotape on the foundations of microeconomics: Adam Smith:

Wealth of Nations — Bk 1 Chpt 02: The division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom.... It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Whether this propensity be one of those original principles in human nature of which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to inquire. It is common to all men, and to be found in no other race of animals, which seem to know neither this nor any other species of contracts.... Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog....

When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will.

He has not time, however, to do this upon every occasion. In civilised society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons....

[M]an has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages....

As it is by treaty, by barter, and by purchase that we obtain from one another the greater part of those mutual good offices which we stand in need of, so it is this same trucking disposition which originally gives occasion to the division of labour.... The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature as from habit, custom, and education. When they came into the world, and for the first six or eight years of their existence, they were, perhaps, very much alike....

As it is this disposition [to truck, barter, and exchange] which forms that difference of talents, so remarkable among men of different professions, so it is this same disposition which renders that difference useful. Many tribes of animals acknowledged to be all of the same species derive from nature a much more remarkable distinction of genius, than what, antecedent to custom and education, appears to take place among men. By nature a philosopher is not in genius and disposition half so different from a street porter, as a mastiff is from a greyhound, or a greyhound from a spaniel, or this last from a shepherd's dog. Those different tribes of animals, however, though all of the same species, are of scarce any use to one another.... Among men, on the contrary, the most dissimilar geniuses are of use to one another; the different produces of their respective talents, by the general disposition to truck, barter, and exchange, being brought, as it were, into a common stock, where every man may purchase whatever part of the produce of other men's talents he has occasion for...

Adam Smith does not say: "the propensity to steal, pillage, rape, burn, and kill..." He says: "the propensity to truck, barter, and exchange one thing for another... to make a fair and deliberate exchange..."

The foundation of microeconomics is not the Hobbesian "this is good for me" but rather the Smithian "this trade is good for us," and on the uses and abuses of markets built on top of the "this trade is good for us" principle.

If microeconomics's foundations were as Bertram claims, Smith would not write:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest...

but would instead write:

Be wary of the butcher, and only enter his shope armed and with loyal and armed attendants at his back. For from his regard for his own self interest you cannot expect your dinner but rather that he will slaughter you and sell you to somebody else as long pig...

Cosma Shalizi: Brad DeLong Makes a Wishful Mistake:

Chris Bertram, back from a conference where he heard Michael Tomasello talk about his interesting experiments on (in Bertram's words) "young children and other primates [supporting the view] that humans are hard-wired with certain pro-social dispositions to inform, help, share etc and to engage in norm-guided behaviour of various kinds", wonders about the implications of the fact that "work in empirical psychology and evolutionary anthropolgy (and related fields) doesn't — quelle surprise! — support anything like the Hobbesian picture of human nature that lurks at the foundations of microeconomics, rational choice theory and, indeed, in much contemporary and historical political philosophy."

Brad DeLong asserts that the microfoundations of economics point not to a Hobbesian vision of the war of all against all, but rather to Adam Smith's propensities for peaceful cooperation, especially through exchange. "The foundation of microeconomics is not the Hobbesian 'this is good for me' but rather the Smithian 'this trade is good for us,' and on the uses and abuses of markets built on top of the 'this trade is good for us' principle." Bertram objects that this isn't true, and others in DeLong's comments section further object that modern economics simply does not rest on this Smithian vision. DeLong replies: "Seems to me the normal education of an economist includes an awful lot about ultimatum games and rule of law these days..."

I have to call this one against DeLong — rather to my surprise, since I usually get more out of his writing than Bertram's. The fact is that the foundations of standard microeconomic models envisage people as hedonistic sociopaths [ETA: see below], and theorists prevent mayhem from breaking out in their models by the simple expedient of ignoring the possibility.

If you open up any good book on welfare economics or general equilibrium which has appeared since Debreu's Theory of Value (or indeed before), you will see a clear specification of what the economic agents care about: this is entirely a function of their own consumption of goods and services. Does any agent in any such model care at all about what any other agent gets to consume? No; it is a matter of purest indifference to them whether their fellows experience feast or famine; even whether they live or die. If one such agent has an unsatiated demand for potato chips, and the cost of one more chip will be to devastate innumerable millions, they simply are not equipped to care. (And the principle of Pareto optimality shrugs, saying "who are we to judge?") Arrow, Debreu and co. rule out by hypothesis any interaction between agents other than impersonal market exchange [ETA: or more exactly, their model does so], but the specification of the agents shows that they'd have no objection to pillage, or any preference for obtaining their consumption basket by peaceful truck, barter and commerce rather than fire, sword and fear.

Well, you might say, welfare economics and general equilibrium concern themselves with what happens once peaceful market systems have been established. Of course they don't need to put a "pillaging, not really my thing" term in the utility functions, since it would never come up. Surely things are better in game theory, which has long been seen to be the real microfoundations for economics?

In a word, no. If you ask why a von Neumann-Morgenstern agent refrains from pillaging, you get the answers that (1) the game is postulated not to have pillaging as an option, or (2) he is restrained by fear of some power stronger than himself, whether that power be an individual or an assembly. (Thus von Neumann: "It is just as foolish to complain that people are selfish and treacherous as it is to complain that the magnetic field does not increase unless the electric field has a curl.") Option (1) being obviously irrelevant to explaining why people obey the law, etc., we are left with option (2), which is the essence of all the leading attempts, within economics, to give microfoundations to such phenomena. This is very much in line with the thought of an eminent British moral philosopher — one can read the Folk Theorem as saying that Leviathan could be a distributed system — but that philosopher is not Dr. Smith.

One can defend the utility of the Hobbesian, game-theoretic vision, and though in my humble (and long-standing) opinion the empirical results on things like the ultimatum game mean that it can be no more than an approximation useful in certain circumstances, and ideas like those of Tomasello (and Smith) need to be taken very seriously. But of course those ideas are not part of the generally-accepted microfoundations of economics. This is why every graduate student in economics reads (something equivalent to) Varian's Microeconomic Analysis, but not Bowles's Microeconomics: Behavior, Institutions, and Evolution; would that they did. If you read Bowles, you will in fact learn a great deal about the ultimatum game, the rule of law, and so forth; in a standard microeconomics text you will not. I think the Hobbesian vision is wrong, but anyone who thinks that modern economics's micro-foundations aren't thoroughly Hobbesian is engaged in wishful thinking.

Update, 15 September: A reader observes, correctly, that actual sociopaths show much more other-regarding preferences than does Homo economicus (typically, forms of cruelty). I could quibble and gesture to dissocial personality disorder, but point taken.

Update, 24 December: In the comments at DeLong's, Robert Waldmann rightly chides me for conflating the actual social views of Arrow and Debreu with what they put into their model of general equilibrium. I have updated the text accordingly.

Cosma Shalizi: Pareto at Melos:

Attention conservation notice: Advertises writings of economic theorists, utterly detached from the real world, as part of a long-running argument among academic bloggers.

Because Brad DeLong wants to revive a discussion from two years ago about "Hobbesian" tendencies in economics, I am reminded of a truly excellent paper which Brendan O'Connor told me about a few months I ago:

Michele Piccione and Ariel Rubinstein, "Equilibrium in the Jungle", Economic Journal 117 (2007): 883--896 [PDF preprint]

Abstract: In the jungle, power and coercion govern the exchange of resources. We study a simple, stylized model of the jungle that mirrors an exchange economy. We define the notion of jungle equilibrium and demonstrate that a number of standard results of competitive markets hold in the jungle.

The abstract does not do this justice, so I'll quote from the introduction (their italics).

In the typical analysis of an exchange economy, agents are involved in consumption and exchange goods voluntarily when mutually beneficial. The endowments and the preferences are the primitives of the model. The distribution of consumption in society is determined endogenously through trade. This paper is motivated by a complementary perspective on human interaction. Throughout the history of mankind, it has been quite common (and we suspect that it will remain so in the future) that economic agents, individually or collectively, use power to seize control of assets held by others. The exercise of power is pervasive in every society and takes several forms. ...

We introduce and analyse an elementary model of a society, called the jungle, in which economic transactions are governed by coercion. The jungle consists of a set of individuals, who have exogenous preferences over a bounded set of consumption bundles (their capacity to consume is finite), and of an exogenous ranking of the agents according to their strength. This ranking is unambiguous and known to all. Power, in our model, has a simple and strict meaning: a stronger agent is able to take resources from a weaker agent.

The jungle model mirrors the standard model of an exchange economy. In both models, the preferences of the agents over commodity bundles and the total endowment of goods are given. The distribution of power in the jungle is the counterpart of the distribution of endowments in the market. As the incentives to produce or collect the goods are ignored in an exchange economy, so are the incentives to build strength in the jungle.

We define a jungle equilibrium as a feasible allocation of goods such that no agent would like and is able to take goods held by a weaker agent. We demonstrate several properties that equilibrium allocation of the jungle shares with the equilibrium allocation of an exchange economy. In particular, we will show that under standard assumptions a jungle equilibrium exists and is Pareto efficient. In addition, we will show that there exist prices that 'almost' support the jungle equilibrium as a competitive equilibrium.

Appreciating this requires a little background. There are multiple arguments to be made on behalf of the market system. The one which the mainstream of the discipline of economics likes to emphasize, and to teach, is the "first fundamental theorem of welfare economics". Assume some obviously false conditions about what people want, and still more obvious falsehoods about the institutions they have. (There need to be competitive markets in literally everything anyone might want, for instance.) Then let people trade with each other if they want to, and only if they want to.

The market comes to equilibrium when no one wants to trade any more. This equilibrium is a situation where nobody can be made better off (by their own lights) without someone else being made worse off. That is, the equilibrium is "Pareto optimal" or "Pareto efficient". (Actually, the theory almost never considers the actual dynamics of the exchange, for good reasons; it just shows that every equilibrium is Pareto optimal*.)

This theorem gets invoked a lot by serious members of the profession in their writings and teaching. I will leave supporting citations and quotations for this point to Mark Blaug's "The Fundamental Theorems of Modern Welfare Economics, Historically Contemplated" (History of Political Economy 39 (2007): 185--207). Suffice it to say that many, I suspect most, economists take this to be a strong argument for why market systems are better than alternatives, why market outcomes should be presumed to be good, etc.

A conventional assault on this is to argue that the result is not robust — since we know that the premises of the theorems are quite false, those theorems don't say anything about the virtues of actually-existing markets. Then one has mathematical questions about whether the results still hold if the assumptions are relaxed (generically, no), and empirical questions about processes of production, consumption and distribution.

What Piccione and Rubinstein have done is quite different. They have shown that the same optimality claims can be made on behalf of the most morally objectionable way of allocating resources. "The jungle" takes the horrible message of the Melian dialogue, that "the strong do what they can and the weak suffer what they must", and turns it into the sole basis of social intercourse**. And yet everything which general equilibrium theory says in favor of the Utopian market system is also true of the rule of force. In this hybrid of Hobbes and Leibniz, the state of nature is both just as repugnant as Hobbes said, and yet also the best of all possible worlds.

Piccione and Rubinstein's paper undermines the usual economists' argument from Pareto optimality, because it shows not just one or two horrible Pareto optima (those are very easy to come up with), but a horrible system which is nonetheless Pareto-efficient. Of course, there are other cases to make on behalf of markets and/or capitalism than the welfare theorems. (But: the jungle is fully decentralized; free from meddling bureaucrats or improving intellectuals; provides strong incentives for individual initiative, innovative thinking, and general self-improvement; and of no higher computational complexity than an Arrow-Debreu economy.) I should add that anyone who actually grasps the textbook accounts of welfare economics should certainly be able to follow this well-written paper. They will also benefit from the very sensible concluding section 5.2 about the rhetoric of economists.

Hoisted from the Archives: DeLong Smackdown Watch: Cosma Shalizi Argues That Adam Smith Is Not a Real Economist Edition: Cosma Shalizi:

Brad DeLong Makes a Wishful Mistake: Brad DeLong asserts that the microfoundations of economics point not to a Hobbesian vision of the war of all against all, but rather to Adam Smith's propensities for peaceful cooperation, especially through exchange.

The foundation of microeconomics is not the Hobbesian 'this is good for me' but rather the Smithian 'this trade is good for us,' and on the uses and abuses of markets built on top of the 'this trade is good for us' principle. Bertram objects that this isn't true, and others in DeLong's comments section further object that modern economics simply does not rest on this Smithian vision. DeLong replies: "Seems to me the normal education of an economist includes an awful lot about ultimatum games and rule of law these days..."

I have to call this one against DeLong….

If you open up any good book on welfare economics or general equilibrium which has appeared since Debreu's Theory of Value… economic agents care about… their own consumption of goods and services. Does any agent in any such model care at all about what any other agent gets to consume? No; it is a matter of purest indifference to them whether their fellows experience feast or famine; even whether they live or die. If one such agent has an unsatiated demand for potato chips, and the cost of one more chip will be to devastate innumerable millions, they simply are not equipped to care. (And the principle of Pareto optimality shrugs, saying "who are we to judge?")….

Well, you might say, welfare economics and general equilibrium concern themselves with what happens once peaceful market systems have been established. Of course they don't need to put a "pillaging, not really my thing" term in the utility functions, since it would never come up. Surely things are better in game theory, which has long been seen to be the real microfoundations for economics?

In a word, no. If you ask why a von Neumann-Morgenstern agent refrains from pillaging, you get the answers that (1) the game is postulated not to have pillaging as an option, or (2) he is restrained by fear of some power stronger than himself, whether that power be an individual or an assembly. (Thus von Neumann: "It is just as foolish to complain that people are selfish and treacherous as it is to complain that the magnetic field does not increase unless the electric field has a curl.") Option (1) being obviously irrelevant to explaining why people obey the law, etc., we are left with option (2), which is the essence of all the leading attempts, within economics, to give microfoundations to such phenomena. This is very much in line with the thought of an eminent British moral philosopher — one can read the Folk Theorem as saying that Leviathan could be a distributed system — but that philosopher is not Dr. Smith….

[E]very graduate student in economics reads (something equivalent to) Varian's Microeconomic Analysis, but not Bowles's Microeconomics: Behavior, Institutions, and Evolution; would that they did. If you read Bowles, you will in fact learn a great deal about the ultimatum game, the rule of law, and so forth; in a standard microeconomics text you will not. I think the Hobbesian vision is wrong, but anyone who thinks that modern economics's micro-foundations aren't thoroughly Hobbesian is engaged in wishful thinking…

I kinda still think that I am right. I am, after all, an economist, and economics is, after all, what economists do. Cosma might reply that I am not an economist but rather a Berkeley economist, which is a different genus or family or order or class altogether…

Cosma Shalizi:

1. The practice of one member of the discipline isn't enough. If it was, I could point to Sam Bowles and Herb Gintis and say that being an economist means a profound engagement with traditions of social thought broadly inspired by Marx and emphasizing the contingency of social roles and institutions, but corrected by evolutionary game theory. Or I could point to Mark Blaug to say that being an economist means according basically no normative weight to the two fundamental theorems of welfare economics whatsoever. Or I could point to Edward Prescott and say that being an economist means re-inventing statistical wheels, and deciding that they should be hexagons. Or I could point to D. McCloskey and whatever it is they're into this decade.

2. I don't think "Berkeley economist" will do. There was a reason I specifically mentioned Varian's micro textbook, and Varian and Shapiro's business book about profiting by exploiting customers and manipulating standards-setting.

3. I think that, as the discipline has developed, the thought of The Theory of the Moral Sentiments and even much (most?) of The Wealth of Nations has, in fact, become profoundly alien to what most of the profession sees as the core ideas of economics. This could change; I hope it does change; if it changes, I expect that the practitioners' histories will edit out the fact that it was a change.

4. If I had to put it in a slogan, I would say that it's not so much that you're not an economist, as that you (like Sam and Herb) are a harbinger of a different and better economics.

Cosma Shalizi:

"In other words, they both have to agree that 'this trade is good for us', or the trade won't happen."

Again, this only works because of taking fork (1) of my post. Without it, the prototypical mutually beneficial exchange, under the assumptions of standard micro, goes much more like this:

MAN ON HORSEBACK: I have just killed the previous man-on-horseback of this village. Give me half of whatever you grow, or I will kill you, too.

PEASANT (wearily): Your worship is the soul of honor.

Noah Smith:

Everyone is born with an endowment of Asskickery. The state monopoly on the use of force is simply a government redistribution of Asskickery. Libertarians, of course, should realize this.

Brad DeLong Resmackdown Watch: Cosma Shalizi Argues That Brad DeLong Is an Atypical Economist: Hoisted from Comments: Cosma Shalizi:

1. The practice of one member of the discipline isn't enough. If it was, I could point to Sam Bowles and Herb Gintis and say that being an economist means a profound engagement with traditions of social thought broadly inspired by Marx and emphasizing the contingency of social roles and institutions, but corrected by evolutionary game theory. Or I could point to Mark Blaug to say that being an economist means according basically no normative weight to the two fundamental theorems of welfare economics whatsoever. Or I could point to Edward Prescott and say that being an economist means re-inventing statistical wheels, and deciding that they should be hexagons. Or I could point to D. McCloskey and whatever it is she's into this decade.

2. I don't think "Berkeley economist" will do. There was a reason I specifically mentioned Varian's micro textbook, and Varian and Shapiro's business book about profiting by exploiting customers and manipulating standards-setting.

3. I think that, as the discipline has developed, the thought of The Theory of the Moral Sentiments and even much (most?) of The Wealth of Nations has, in fact, become profoundly alien to what most of the profession sees as the core ideas of economics. This could change; I hope it does change; if it changes, I expect that the practitioners' histories will edit out the fact that it was a change.

4. If I had to put it in a slogan, I would say that it's not so much that you're not an economist, as that you (like Sam and Herb) are a harbinger of a different and better economics.

I think my response has to follow three tracks: what your standard economist does, what I do, and what the canonical political scientist does.

First, your standard economist is not "Hobbesian"--does not enter a butcher's shop only armed cap-a-pie and only with guards, fearing, as a Hobbesian would, that the butcher will not sell him meat for money but rather knock him unconscious, take his money, slaughter him, smoke him, and sell him as long pig. A Hobbesian does not buy and sell goods and services in mutually-beneficial Pareto-improving exchange relationships. A Hobbesian finds the biggest bad-ass in the neighborhood, and swears liege homage to that bad-ass in return for that bad-ass's promising not to kill him. Your standard economist is, rather, a "Lockeian"--presumes that there is an underlying order of property and ownership that is largely self-enforcing, that requires only a "night watchman" to keep it stable and secure.

Now it is true that your standard economist is a largely-unreflective Lockeian: does not inquire why one trades rather than takes, affects the tough-guy pose that it is only the repeated-game nature of economic interactions that keep us from always winding up in the bad cell of the prisoner's dilemma, and adopts the reductio that humans are narrowly self-interested only in material acquisition (in order to strengthen the case that the social apparatus of voluntary market exchange produces good outcomes--to make the point that even private vices produce public benefits if they are constrained by the market). But that the standard economist is a largely-unreflective Lockeian does not mean that they are a Hobbesian.

When it comes to what the standard economist thinks, I think that the example of Hal Varian cuts the other way than Cosma thinks it does--or at least cuts ambiguously. Varian's graduate micro textbook is the formalism: people don't just take stuff because taking stuff is not in the strategy space. Varian's lectures and seminars are considerably more nuanced. Varian and Shapiro's Information Rules is intended for a business-school audience, and the object is to create barriers to entry so that your firm can profit. When he teaches not in the business school but in the economics department, Hal says, he still assigns Information Rules in his antitrust, regulation, and industrial organization courses, but--in the immortal words of Frederick von Frankenstein, he "changes plus to minus, and minus to plus": not the creation but the destruction of barriers to entry (as long as appropriate incentives are left for innovation) is the object.

Second, I do agree that I do--and other economic historians do, and Bowles and Gintis do, and McCloskey and Blaug do, and a bunch of the rest of us do--something somewhat different than what your standard economist does. But I view what I do as making the preconscious or the unconscious in "standard economics" conscious. And I would appeal not to the formal theory of the graduate textbooks, but to the actual practice of the economists I know as the test of what "standard economics" is.

It is true that back in my senior year of college it seemed to me that I was too shy to be anything other than a professor and should become one. I looked around, and discovered that the people applying for jobs as assistant professors of history and social studies were 40-year-olds who had written two books while the people applying for jobs as assistant professors of economics and social studies were 26-year-olds who had one half-written article. So it seemed a no-brainer to me to go for a Ph.D. in economics. But the fact that I made that decision demonstrates that I am a real economist after all: I regarded (and regard) responsiveness to market forces as a moral virtue, while if I were really a historian in disguise I would regard responsiveness to market forces as a moral vice.

Third, it seems to me that your standard political scientist's conception of the standard economist as "Hobbesian" is an exercise not in interpretive understanding but rather in disciplinary line-drawing--and, perhaps, attempted disciplinary imperialism: if the core of economics can be defined to be as small as possible, that leaves more space for political scientists to play.

Remember: there are real Hobbesians about. They are the international-relations realists in political science departments--not the economists in economics departments.