Economic Theories

Economics has become a respectable discipline within universities and graduates in economics obtain well- paying jobs in government and commerce. The pragmatic aspect of the discipline involves accounting on a large scale, measuring, recording and analyzing financial data. Economic theories differentiate academic economists from accountants and regulators. With the collapse of the US financial system in 2008 and the negative ripple effects in most other affluent countries, economic theories looked flawed if not wrong.

Different economic systems have evolved with the expanding human populations. Different economic ideas, in the best case, compete to influence government policies. In the worst case, economic ideas conflict with disastrous consequences. The cold war between the communist Soviet Union and the capitalist USA dominated world events in the latter half of the 20th century. The soviet system collapsed, leaving the impression that capitalistic democracies are the best way to run countries, but serious problems have been apparent in capitalist economies for decades. In the US, a financial sector collapse in 2008 confirmed that capitalistic economies are beyond peak performance and may be heading for a continuing decline. While these economies have had cyclic behaviors during the 20th century and have recovered after recessions, times are changing.

Anderson summarized the analysis of several deep thinkers in his book, Democratic Capitalism and Its Discontents. He stated:" Liberal democracy had set loose an egalitarian spirit that it could never fully tame. Equality constantly finds itself undermined by the freedoms that the liberal order secures. The liberty to pursue wealth, to seek to better one's condition, to create, to strive for power or achievement-all these freedoms unceasingly generate inequality, since not all people are equally gifted, equally nurtured, equally hardworking, equally lucky. Equality works in democratic capitalist societies like an imaginary horizon, forever retreating as one approaches it." 

Different schools of economics have emerged with incompatible views. Theoretic economics develops mathematical models and computer simulations based on them. Because computer programming has distinct limitations, computer models over-simplify and attempt to make human interactions into more discrete, more rational events than they actually are. Dasgupta suggested, for example, that the multi-agent decision theory (or theory of games) merges evolutionary and economic dynamics within a common analytical framework.  The focus is a decision unit (DU) and the problem before the analyst is to predict what a DU would choose under a given set of circumstances. Squirrels collect food for winter. Because that effort requires energy, they face tradeoffs between current and future consumption. The question arises: what collection size would maximize inclusive fitness? Similarly, people save a portion of their wealth, for their own future consumption and to fund future generations. He wrote: The units that are subject to selection pressure in evolutionary biology are "strategies," which are conditional actions (for example, do P if X occurs; otherwise do Q). In contrast, the units in economics are people who select strategies from available menus so as to further their projects and purposes. If evolutionary dynamics involves mindless competition among strategies, economic dynamics involves the ways in which people revise their beliefs and strategies.

While theses assumptions sound reasonable, humans are more complex and less rational than the models.  Rather than assuming that humans are reliable decision agents who optimize outcomes in their favor, we know that humans are governed by ancient animal tendencies that are confused by the profusion of choices offered in any urban environment.  We recognize that the deepest dialectic in the mind is approach and avoidance. Humans want things. The drives that organize projects in the world are balanced between two reciprocal tendencies - to venture out and seek rewards that satisfy needs and to avoid punishment by exercising caution and retreating when necessary to avoid danger.  Higher level planning is built on a foundation of innate drives. The basic vocabulary of drives involves body needs felt as desires, rehearsed as fantasies and expressed as goal-oriented behavior.  If you are optimistic, the world out there looks promising and you head out on a search for rewards, things that will please you. Anticipatory states involve recognizing the body need and organizing a behavior sequence to satisfy that need.  Humans have a small number of essential needs and a large number of derivative, non-essential needs.

Economist, Krugman, has written an insightful commentary on the US financial crisis in his New York Times editorials. He reviewed Fox`s book, The Myth of the Rational Market.   "Instead of focusing on the errors and abuses of the bankers, Fox, tells the story of the professors who enabled those abuses under the banner of the financial theory known as the efficient-market hypothesis. Wall Street bought the ideas... professors were lavishly paid to design complex financial strategies that played a crucial role in the catastrophe that has now overtaken the world economy.  Markowitz equated the concept of risk - previously a vague term for potential losses - with the mathematical concept of variance.  Markowitz's model told investors what they should do, rather than predicting what they actually do. Other theorists ( developed) the elegant theory of stock prices - the  Capital Asset Pricing Model, or CAPM. Fox brings a real understanding of the sociology of the academic world. He understands the way in which one's career, reputation, even sense of self-worth can end up being defined by a particular intellectual approach, so that supporters of the approach start to resemble fervent political activists - or members of a cult that had an enormous impact on the business world …This may seem strange, since CAPM was based on the assumption that investors make mathematically optimal investment decisions with the information at their disposal. But if the markets are already getting it right, who needs finance professors? A counter­culture emerged in the form of "behavioral finance," which argued that investors are irrational in predictable ways. But the sheer scope and sweep of the efficient markets hypothesis - not to mention the fact that so many people devoted their careers to it - allowed it to brush off most of these challenges."

Krugman concluded by expressing doubts that the lesson has been learned that the myth of the rational market  will continue to mislead.     Later, Krugman wrote about the failure of economics as a an academic discipline, a quasi-science, and a respectable source of government policy: " Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn't sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations… ignoring all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets - especially financial markets - that can cause the economy's operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don't believe in regulation."

Brooks commented on the emerging crisis in the US economy and the fallacy rational markets. He identified Taleb as a prophet who saw it coming. In The Black Swan, Taleb wrote: "The government-sponsored institution Fannie Mae  seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. Globalization creates interlocking fragility." Taleb warned that giant banks give the appearance of stability, but  in reality, they  produced an economic crisis  - when one fails, they all fail." Taleb recognized that our brains evolved in a  simpler world than the one we now face.     After reading about Taleb in Brook's article, I found him online and enjoyed his notes. He had given a name, the triplet of opacity, to three features of cognition that generate nonsense:  

1. An illusion of understanding of current events
2. A retrospective distortion of historical events
3. An overestimation of factual information, combined with an overvalue of the intellectual elite

Taleb described reading and dismissing several books on economics except for Clark's Farewell to Alms, Table stated:" Clark has an original mind, impressive for an economist. He makes the Industrial Revolution more of a random event than we would like to, more opaque to us than we can admit. Because we analyze economic history in an analeptic way ( backwards), scholars and economic historians did not notice that the traits that we think caused the industrial revolution have existed in many places, including 14th Century England, without leading to anything. Also many of the IMF/World bank dogmas and recommendations seem to correspond to a misunderstanding of a trivial causal mechanism: incentives, low taxation, stable institutions   may be just necessary, but not sufficient to generate economic growth.  It is easy for scholars to confuse necessary and causal. We impart skills to businessmen without considering that they could have been lucky --we are prone to make the mistake of skills attribution more readily than the reverse. Common understanding in history of science is that engineering leads to mathematics which in turn leads to better engineering. I showed with my investigation of the history of the Black-Scholes formula that mathematics is often there to "lecture birds how to fly", fit backwards to justify the use of a technology, often in a lame way. Builders needed the original engineers to make things work. Theory came later, in a lame way, to satisfy the intellectual bureaucrats. But that's not what you tend to read in standard histories of technology -I am convinced that, when writing history, we project our mental biases in a way to produce agency and increase the role of theory. "  

Noting the inadequacies of existing economic models, Farmer and Foley described agent-based modeling that attempts to represent some of the real world dynamics of large systems. These computer simulations involve agents who make decisions and institutions, which interact through rules. They advocated agent based simulations to better represent economies, stating: "The agents can be as diverse as needed - from consumers to policy-makers and Wall Street professionals - and the institutional structure can include everything from banks to the government. Such models do not rely on the assumption that the economy will move towards a predetermined equilibrium state, as other models do. Instead, at any given time, each agent acts according to its current situation, the state of the world around it and the rules governing its behavior. An individual consumer, for example, might decide whether to save or spend based on the rate of inflation, his or her current optimism about the future, and behavioral rules deduced from psychology experiments. The computer keeps track of the many agent interactions, to see what happens over time. Agent-based simulations can handle a far wider range of nonlinear behavior than conventional equilibrium models. Policy-makers can thus simulate an artificial economy under different policy scenarios and quantitatively explore their consequences." 

Even the most sophisticated models running on supercomputers are no match for the complexity of the real world. Simulations of human behavior are the least adequate, partly because human interactions always involve unpredictable irrationalities that cannot be modeled and emergent properties that change with contexts and agent qualifications that are always changing. The problem with the results of simulations cannot be quantified by, for example, a margin of error. The problem is that simulations may be totally wrong - irrelevant. Farmer and Foley admit the limitations of agent-based models. They stated: "An attempt to model a realistic problem can lead to a complicated simulation where it is difficult to determine what causes what. To make agent-based modeling useful we must proceed systematically, avoiding arbitrary assumptions, carefully grounding and testing each piece of the model against reality and introducing additional complexity only when it is needed."

Persona Digital Books

Human Nature & Group Dynamics is a 21st century description of anthropology,  sociology and psychology - disciplines that need to be integrated as they are in this book. The topics are essential to understanding human nature, its origins and its problems.  You could treat each topic as module of a larger system that develops emergent properties as the modules interact. Each reader discovers the features of human nature in himself or herself and then discovers similar features in others. After you understand more about the dynamics of close relationships, you can look at  larger groups. You can continue by applying your insights into human dynamics to governments, countries and international affairs. Other Persona Digital books  describe the same dynamics but emphasize different vantage points and concerns.

Click the  download button on the right to download PDF files from this website (Persona Digital)
Persona Digital offers downloads of eBooks, music and other digital documents available to customers all over the world. 

Printed book orders are submitted to Alpha Online, a companion website with separate accounts.
Physical shipments are limited to destinations in Canada, and the USA. Click the Add To Cart buttons on the left to order print books for mail delivery from Alpha Online.

Print Books	More Information	Download
	Human Nature & Group Dynamics
	The Good Person
	Pieces of the Puzzle
	The Sound of Music
	Language and Thinking
	I and Thou
	Emotions and Feelings
	Neuroscience Notes
	Children and Family
	Intelligence and Learning
	Religion for 21st Century

Human Nature & Group Dynamics is one volume in the  Psychology & Philosophy series, developed by Persona Digital Books. We encourage readers to quote and paraphrase topics from Group Dynamics published online and expect proper citations to accompany all derivative writings. The author is Stephen Gislason and the publisher is Persona Digital Books. The most recent date of publication is 2011 rev 4/10/2011. The URL to the book description is http://www.personadigital.net/Persona/groupdynamics/