Thursday, March 22, 2007

"Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities... We should not conclude from this that everything depends on waves of irrational psychology. On the contrary, the state of long-term expectation is often steady, and, even when it is not, the other factors exert their compensating effects. We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance." - Keynes, The General Theory


"CHOOSING A UNIQUE EXPECTED PATH

REFV models(i.e. the vast majority) would be little better than curiosa if they did not carry with them additional restrictions sufficient to define a unique solution; for they would merely assert in effect ‘anything can happen provided it is expected, but what is expected is arbitrary’. Worse still, as (2.28) illustrates, these paths for events can be unstable; in fact, our model here implies that all paths for prices except that for which p0e = mbar — y* explode monotonically. Thus our particular REFV model would assert that only by accident would an equilibrium price level be established, otherwise prices would be propelled into either ever-deepening hyperdeflation or ever-accelerating hyperinflation, even though money supply is held rigid! (Output in this model is always expected to be in equilibrium.) While such an asser tion may appeal to some, it has not impressed those who have espoused RE models; they have looked instead for additional restrictions...

THE UNIQUENESS PROBLEM

Previously we used the stability condition to choose the unique stable path. However, now all the paths in (2.28) are stable because we have rigged it so that |(1 + alpha)/alpha| < 1. The stability condition is incapable of selecting a unique solution, therefore. This problem was first pointed out by Taylor (1977); and so far as we know there is nothing to rule out the possibility that REFV macroeconomic models will have an infinity of stable paths.

There is no generally agreed procedure among those using REFV models for this problem, other than to avoid using the ones with this property."

--- Rational expectations and the new macroeconomics / Patrick Minford and David Peel.

Hurr hurr


Different disciplines have different mechanisms of exclusion and of creating perceived value. In Applied Maths and the harder Sciences, it's through mathematics*. The softer sciences do it through language, or even the concept of 'meaning'. And everyone loads up on theories. The danger is of creating perceived value not through real value, but obfuscation. If nobody can understand what you're talking about, then you're just engaging in academic masturbation in a vacuum.

* - In Applied Maths at least, the maths (besides being extremely extremely tedious rather than just hard) is often useless because you come to the same qualitative conclusions with the maths as without, except you have the illusion of precision because you have variables to play with. In reality though it's a lot like debating how many angels can dance on the head of a pin - you know pinheads exist and you 'know' angels exist, but beyond that it's just nonsense. Some models are of course tested with reality, but things like 'mutually and serially uncorrelated shocks' are implausible: they are only assumed to make the maths simpler so the model works.