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Tuesday, January 22, 2008

"Art is making something out of nothing and selling it." - Frank Zappa

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"Our task now is to indicate briefly the serious limitations of the previous kind of analysis, which almost certainly vitiate it even from a theoretical point of view. In the first place, it is completely arbitrary to assume that the individual behaves so as to maximise an integral of the form envisaged in (2). This involves the assumption that at every instant of time the individual's satisfaction depends only upon the consumption at that time, and that, furthermore, the individual tries to maximise the sum of instantaneous satisfactions reduced to some comparable base by time discount...

Moreover, in the analysis of the supply of savings, it is extremely doubtful whether we can learn much from considering such an economic man, whose tastes remain unchanged, who seeks to maximise some functional of consumption alone, in a perfect world, where all things are certain and synchronised. For in any case such a functional would have to be dependent upon certain parameters which are socially determined ; " effective " desire for social prestige, length of human life, life cycle of individual economic activity, corporate structure, institutional banking and investment structure, etc. In general, there is strong reason to believe that changes in such parameters are not of an equilibrating nature. Even to generalise concerning these can only be done in terms of a theory of " history " (in itself almost a contradiction in terms). In any case, this would seem to lie in the region which Marshall termed Economic Biology, where the powerful tools of mathematical abstraction will little serve our turn, and direct study of such institutional data would seem in order...

In conclusion, any connection between utility as discussed here and any welfare concept is disavowed"

--- A Note on Measurement of Utility, Paul A. Samuelson, The Review of Economic Studies, Vol. 4, No. 2. (Feb., 1937) [Ed: The article which outlines the Discounted Utility Model]


"In our reading. economists have accorded the assumption of rational, self-interested behavior unwarranted ritual purity, while alternative assumptions-that agents follow rules of thumb, that psychological or sociological considerations matter, or that, heaven forbid, they act downright irrationally at times-have been accorded corresponding ritual impurity. This association between "impure" assumptions and ritual pollution has had the ill effect of confusing the esthetic task of economics-which is to provide clear logic for analyzing economic phenomenawith the agenda of economics-whch is to explain the economic events of the real world. Keynesian theory, with its partial reliance on psychological, sociological, and rule-ofthumb behavior to derive departures from full employment and Pareto optimality, is the worst casualty of this failure to dissociate esthetic from agenda. If agents really behave according to impure assumptions, is it not likely that the best models to fulfill the agenda will mirror that behavior?...

During the past two decades Keynesian theorists- have- struggled to formulate a "sensible" microeconomic foundation for Keynesian economics based on individualistic optimizing behavior, by relaxing the assumptions of the perfectly competitive Walrasian model and introducing instead a dizzying array of market imperfections: asymmetric information, incomplete contingent claims markets, staggered contracts, transactions costs, imperfect competition, specific human capital, efficiency wages, etc. Have these efforts been successful? Not entirely. While each of these innovations has enriched economics by modeling important aspects of reality, the introduction of these imperfections has still not provided a total rationalization of Keynesian economics when judged according to the rule that the proposed theory be fully consistent with rational optimizing behavior and the absence of any unexploited gains from trade. In the end, it invariably turns out either that there is an unrealistic assumption or that some clever, complicated neoclassical contract will eliminate involuntary unemployment...

Importantly for Keynesian economics the Kahneman-Knetsch-Thaler experiments indicated the presence of anchoring based on current money wages. Respondents felt it fair for a company whose business was bad to raise wages by only 7 percent when there was 12 percent inflation, but unfair to cut wages by 5 percent if there was no inflation. These findings are consistent with the standard sociological theory of fairness known as equity theory...

Even if supervision and monitoring are feasible at low cost, it may not pay firms to monitor their employees too closely. A recent study by Edward Deci, James Connell, and Richard Ryan (1985) has shown that workers who are given more detailed rules and are more closely monitored experience less job satisfaction, are less motivated, and place more importance on such external rewards as compensation; in contrast, those who are less controlled achieve greater satisfaction in mastering their jobs. If firms are to take advantage of the self-motivation that comes with on-the-job autonomy, then they must ensure that workers perceive themselves to be fairly treated. The cost can easily involve paying wages in excess of market clearing. Accordingly, we would expect perceptions of fairness to play a role in determining wage contracts and anchoring to cause money wages to be sticky."

--- Rational Models of Irrational Behavior, George A. Akerlof; Janet L. Yellen, AER, 1987


"There are several aspects of the quantitative approach to economics, and no single one of these aspects taken by itself, should be confounded with econometrics. Thus, econometrics is by no mean the same as economic statistics, Nor is it identical with what we call general economic theory, although a considerable portion of this theory has a definitely quantitative character. Nor should econometrics be taken as synonymous with the application of mathematics to economics. Experience has shown that each of these three viewpoints, that of statistics, economic theory, and mathematics, is a necessary, but no by itself a sufficient, condition for a real understanding of the quantitative relations in modern economic life. It is the unification of all three that is powerful. And it is this unification that constitutes econometrics." - Frisch, Econometrica, 1933

The difference between Econometrics and Statistics is that statistics is used in the Natural Sciences, so there aren't issues that econometricians hav eto deal with, like serial correlation, seriously flawed data and the inability to do controlled experiments. To think that it took till my 4th econometrics module (taught by a Visiting Lecturer, at that) to learn that (too bad I've since dropped it, despite all that).
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