Computational Economics is the Right Perspective

Here’s a vastly oversimplified picture of mainstream economics: We pick some phenomenon, assume all the context into the background, then build a model that isolates only the variables specifically relevant to that phenomenon.

Once you’ve simplified the problem that way, you can usually build a formal mathematical model, make a few more (hopefully) reasonable enough assumptions, and make some strong ceteris paribus claims about your chosen phenomena.

That’s a reasonable enough approach, but it doesn’t shed much light on big picture issues. I’m interested in root causes, and this “reduce things to their component parts” approach doesn’t give enough of a big picture to find those roots.

How do we broaden our perspective? One approach is to return to the more “literary” approach of the pre-Samuelson days. A bit of philosophy of science has me convinced that the primary flaw of such an approach is rhetorical. Written and mathematical arguments leave some assumptions in the background, but the latter is more convincing to a generation of economists trained to be distrustful of natural language (and too trusting of algebra).

As a pluralist, I think we should use as many approaches as we can. Different schools of thoughts allow you to build different imaginary worlds in your mind. But the computational approach isn’t getting enough play. I’d go so far as saying agent based modeling is the right form of mathematics for social science.

What does this mean? In a nutshell, it means modelling processes, simulating those processes, and seeing how interactions between different agents leads to different sorts of outcomes.

A common trope among Emergent Order folks is how ants are individually stupid but collectively brilliant. Neoclassical economics runs into the opposite problem: individually brilliant individuals who get trapped in Prisoners’ Dilemmas.

Computational economics starts with models that are more like ants than homo economicus. Agents are essentially bundles of heuristics/strategies in an out-of-equilibrium world. But these competing (and cooperating) strategies can interact in interesting ways. Each agent is a part of all the other agents’ environment, so the mix of strategies is a function of the success of the strategies which is a function of the mix of strategies in the environment.

In essence, computational economics starts from what the mainline economists have long recognized: human society is a complex, interwoven, recursive process. The world is, essentially, a sort of meta computer with a complex web of programs interacting and evolving. We don’t need to assume in any sort deus ex machina (that’s a bit of an overstatement, but we haven’t got time to explore it this week), we just need replicating entities that can change over time.

Such a view, to my mind, provides an end run around rationality assumptions that can explain the brilliance of entrepreneurship (without making heroes out of the merely lucky) as well as the folly unearthed by Behavioralist economics (without the smugness). We’ve always known it. It’s all just evolution. But the methodology hasn’t made its way into the main stream of economics. If there are any undergrads reading this on their way to a PhD program, let me know in the comments so I can point you in some interesting directions!

Nomic-nomics?

Perhaps the coolest thing I’ve found on the Small Internet so far is the game Nomic. From where I found it:

Nomic was invented in 1982 by philosopher Peter Suber. It’s a game that starts with a given set of rules, but the players can change the rules over the course of the game, usually using some form of democratic voting. Some online variants exist, like Agora, which has been running since 1993.

It’s a game that’s about changing the game. Besides offering a tempting recreational opportunity, I think this could be formalized in such a way to make it rival the Prisoners’ Dilemma (PD) in shedding light on the big social scientific questions.

The PD is a simple game with simple assumptions and a variable-sum outcome that lets it work for understanding coordination, competition, and cooperation. One of my favorite bits of social science is Axelrod’s Evolution of Cooperation project. It’s basically a contest between different strategies to an iterated PD (you can play a variation of it here). That the “tit for tat” strategy is so successful sheds a lot of light on what makes civilization possible–initial friendliness, willingness to punish transgressions, and willingness to return to friendliness after punishing these transgressions.

A fantastic extension is to create a co-evolutionary simulation of a repeated PD game. Rather than building strategies and pitting them against each other, we can be totally agnostic about strategies (i.e. how people behave) and simply see what strategies can survive each others’ presence.

The evolutionary iterated PD is about as parsimonious a model of conflict/cooperation as we could make. But there is still a lot of structure baked in; what few assumptions remain do a lot of heavy lifting.

But if the structure of the game is up for grabs, then maybe we’ve found a way to generalize the prisoners’ dilemma without assuming on extra layers of complexity.

Of course, the parsimony of the model adds complexity to the implementation. Formalizing Nomic presents a formidable challenge, and getting it to work would surely create a new

But even if it doesn’t lend itself to simulation, it strikes me as the sort of exercise that ought to be happening in classrooms–at least in places where people care about building capacity for self governance (I’ve heard such places exist!).

Let’s play!

A bit of stage setting, then let’s start a game in the comments section. I get the impression that this game is nerdier than Risk, so you’ve been warned (or tempted, as the case may be).

The basic premise is that are mutable rules and immutable rules (like Buchanan’s view of constitutions). Players take turns to propose rule changes (including transmuting rules from a mutable to an immutable state). As part of the process, we will almost surely redefine how the game is won, so the initial rule set starts with a pretty boring definition of winning.

We’ll use Peter Suber’s initial rules with some variations to suit our needs. The rules below will be (initially) immutable.

117. Each round will happen in a new comment thread. A new round cannot start until the rule change proposed in the previous round has been voted on. If technical problems result in having to start a new comment thread, that thread should include the appropriate reference number and it will be understood to be part of the same comment thread.

I will take the first move to demonstrate the format in the comments section.

118. The final vote count will be determined after 24 hours of silence. Players may discuss and cast votes, and change their votes. But after 24 hours of no new comments, the yeas and nays will be tallied and the outcome determined accordingly. In cases requiring unanimity, a single nay vote is enough to allow a player to start a new round without waiting the full 24 hours. The final vote will still occur (for purpose of calculating points) after 24 hours of silence.

Despite being numbered 118, this rule will take priority over rule 105.

119. Anyone who is eligible to comment is eligible to play. If it is possible to start a new round, anyone may start that round. In the event that two people attempt to start a round at the same time (e.g. Brandon and I post a comment within a couple minutes of each other) priority will be given to whichever was posted first and the second comment will be voided.

120. The game will continue until someone wins, or everyone forgets the game, in which case the winner will be the last person to have had their comment replied to.

A Lesson in Inventing Your Own Statistics

Nothing makes me happier than pointing out when someone is wrong.

I admit, that’s a pretty sad life. And for some unfathomable reason that doesn’t endear me to the person who uttered the incorrect statement – which it really should as I’m correcting some mistaken belief of theirs, assisting them on the path to truth.

Perhaps, as Jonathan Haidt teaches us, my endeavour is a hopeless one as approaching truth is forever clouded by confirmation bias. Polarization runs rampant and scientific disciplines are scarred by replication crises and publication bias.

I don’t take issue with any of those points: reduce my ambitions to “a little less wrong” and what follows still holds.

A few days after the Riksbank had upped its interest rate to 0% last month, Daniel Lacalle, a Spanish economist, author and fund manager – and whose musings are usually quite insightful – decided to vent his (questionable) objections to central banks and negative interest rates (NIRP) in a very strange way:

  1. Deliver a bunch of vague one-liners about monetary policy and unsustainable capital markets.
  2. Make shit up about Sweden and Swedish capital markets.

Obviously, I don’t mind too much the rhetoric of those who vehemently oppose central banks, but I do mind people pulling numbers out of their behinds and just inventing things about the world that clearly are not true.

So let’s do some fact-checking.

It’s apparently really bad for governments to have public debt – and negative interest rates allegedly work like crack-cocaine for politicians in their endless desire for more and more and more underfunded expenditures. Spend away, minister!

Except that many (non-crisis) countries such as Sweden aren’t borrowing. In fact, Sweden’s debt-to-GDP ratio is at its lowest point since 2012 and has been dropping like a stone since about the time that the Riksbank first lowered its policy rate to below 0%. In fact, as the Riksbank sits on over 35% of the outstanding government debt, there’s been quite a scramble among commercial banks to meet their capital requirements; there aren’t enough bonds to go around. The big macro debate in Sweden right now is over how much more the government ought to spend given that the debt is so small.

My favorite part is when Lacalle starts inventing numbers to support his case. Strangely enough, he’s arguing that NIRP fuels an unsustainable boom such that increasing share prices and property prices (things that most of us individually tend to think are good or at least harmless) are, in Lacalle’s mind, actually evidence of how bad life is.

Ye, I too hate it when my retirement fund or house go up in value.

  1. Sweden’s “Real estate price index has increased 50 percent (from 160 points to 240).”

The official statistics agency, Statistics Sweden, reports a +17 increase in broad real estate indices since early 2015, but they only include data until late-2018. The index is also on a completely different level, suggesting that Lacalle used some other source. 

Using numbers from Ekonomifakta we find house price increases of 9% and 19% across various regions from Q1 2015 (when the Riksbank NIRP policy began) to Q3 2019. Again, wrong index numbers so couldn’t have been Lacalle’s source.

But maybe house prices have increased some in the last few months such that Lacalle’s 50% number is correct? No, they’ve been flat, reports the realtor industry organization Svensk Mäklarstatistik.

Searching high and low for a Swedish house price index that conforms to Lacalle’s peculiar range (160 to 240), I finally found a promising one at Trading Economics:

Trading econ Sweden House Price Index.png

Interestingly enough, Lacalle seems to have misread the chart; the index value for Feb 2015 is around 190 – not 160 – producing a much more reasonable +26% increase over the last five years. Even that, as we’ve seen with the more reputable sources above, might be tad exaggerated.

2. Sweden’s stock market is up “more than 20%”

Next up: the stock market – always a grateful subject for unsubstantiated rants.

“more than 20%” is cheating as technically anything above “20%” would work. Curiously enough, no index for the Swedish stock market shows those numbers between Feb 18, 2015, and today:

  • OMXS30, a commonly quoted index that does not include dividends, is up 8% since then.
  • Using indices that do account for (reinvested) dividends, OMXSPI shows 27.5% gain since NIRP was introduced;
  • OMXS30GI shows a 30.5% gain;
  • and OMXSCAPGI reports a 52% return.

Then again, if gradually increasing stock markets are a bad thing, then why didn’t Lacalle go with the highest, most inflated number he could find?

3. “Average residential index” is apparently up 27%

Not a statistics I’m familiar with, but I refer the reader to (1) above for sources on property prices.

4. “nonreplicable assets have risen between 30 and 70 percent”

First: that’s quite a range, Sir.
Second: ye, I’ve never heard that term before (let alone something to measure it) – and neither, it seems, has Google. I suspect Lacalle invented some more numbers to complement his already fake-y statistics. 

Tl;dr – don’t just make shit up, kids. Do look into your claims before you mindless utter them. You may be entitled to your own opinion (actually not really), but you can’t just believe whatever you want, making shit up along the way.

Sunday Poetry: Rüstow vs. Mises

One of the bests books I’ve read this year was Serge Audier’s & Jurgen Reinhoudt’s relatively unknown (unfortunately!) translation of the protocols of the Walter-Lippmann-Colloquium. The NOUS-Network organized a wonderful seminar in which we thoroughly discussed the book and the emergence of Neoliberalism. For the preparation of this weekend’s Hayek-Kreis seminar, I reread the book and stood once again in awe of the magnificence of the discussion during the Colloquium.

By the way: If you are an undergraduate, graduate, or PhD scholar, please consider joining the NOUS-Network for Constitutional Economics and Social Philosophy as a Young Affiliate! NOUS is an information platform and a community for interdisciplinary research. The network links all academic fields relevant for thinking about social order and liberty. It spans philosophy, politics, economics and fosters scholarly research, contact and exchange.

In the following excerpt, it becomes clear, that the participant’s opinion on the psychological and sociological causes of the decline of Liberalism differed significantly. Mr Rüstow eloquently captures the standpoints of the two opposing groups (not without bias to be fair) and even cheekily disses Ludwig von Mises.

“Mr Rüstow: ‘All things considered, it is undeniable that here, in our circle, two different points of view are represented. One group does not find anything essential to criticize or to change in traditional liberalism, such as it was and such as it is, apart from, naturally, the adjustments and the current developments that are self-evident.

In their view, the responsibility for all the misfortune falls exclusively on the opposite side, on those who, out of stupidity or out of malice, or through a mixture of both, cannot or do not want to discern and observe the salutary truths of liberalism. 

We, on the other hand, we seek the responsibility for the decline of liberalism in liberalism itself; and, therefore, we seek the solution in a fundamental renewal of liberalism. In order to justify in a positive manner this second point of view, I have to refer to what I have said and, especially, to the excellent arguments of Mr Lippmann.

Here, I would only like to draw attention to the fact that if the unwavering representatives of old liberalism were right, the practical prospects [for liberalism] would be almost hopeless. Because it does not really seem that old liberalism has gained in persuasive and in seductive force or that the arguments, no matter how shrewd they may be, of these representatives have the least possibility of bringing about a conversion movement within the realm of Bolshevism, Fascism, or of National Socialism. If they did not listen to Moses and the prophets—Adam Smith and Ricardo—how will they believe Mr. von Mises?'”

As always, I wish you all pleasant Sunday.

 

Sunday Poetry: Junger’s War Observations

Without noticing it, I heavily built my reading schedule this year around of what one might call a “post-liberal reading list”. The idea, that the demise of social institutions might be the inevitable consequence of an ongoing individualization of society struck me as initially convincing. I am currently in search of good examinations on the ultimate effect Liberalism has on the development of social institutions. Hopefully, Steven Horwitz’ “Hayek’s Modern Family” will provide me with some compelling arguments to refute the post-liberal agenda.

Not directly being post-liberal, but pointing towards the importance of “homecoming and belonging”, Sebastian Junger’s book “Tribe” has had a lasting influence on me. I found the following observations of a war refugee voluntary reentering Sarajevo during its siege both fascinating and devastating.

“What catastrophes seem to do – sometimes in the span of a few minutes – is to turn back the clock on ten thousand years of social evolution. […]

“‘I missed being that close to people. I missed being loved in that way’, she told me. ‘In Bosnia – as it is now – we don’t trust each other anymore; we became really bad people. We didn’t learn the lesson of the war, which is how important it is to share everything you have with humans being close to you. The best way to explain it is that the war makes you an animal. We were animals. It’s insane – but that’s the basic human instinct, to help another human being who is sitting or standing or lying close to you.’

I asked Ahmetašević if people had ultimately been happier during the war. 
‘We were the happiest,’ Ahmetašević said. Then she added: “And we laughed more.'”

I wish you all a pleasant Sunday.

Psychedelics versus modern philosophy

Anyone who studies philosophy has run into the assumption that psychoactive drugs and philosophy go hand-in-hand. Really, after analytic and continental, and whatever other traditions people come up with, there could be another sect, that of “stoner philosophy,” which is something like Mister Rogers, Alan Watts and Bob Ross thrown into a peaceful blender. This is when you’re sitting around getting high, wondering if aliens exist, instead of sitting in a classroom, wondering if other people’s minds exist.

A historical study of this connection, from East to West, would probably scandalize a lot of “serious” philosophers, and show some regular inebriation, but in general, I think the two are opposed (tragically or not). Particularly, the institutionalization of philosophy, when “natural philosophy” and “moral philosophy” etc all became separated some time after Hobbes, is opposed to what it sees as a lay way of thinking about the world. As my philosophy of science professor told me – you become a philosopher when you have your doctorate.

Professional philosophers and “psychonauts” are in opposition to each other. The analytics and continentals have spent centuries building elaborate systems – developing monstrous levels of specificity, so as to make their work completely incomprehensible to the rest of the world – and earning credentials to close the gates of access. Meanwhile, the casual or professional tripper is able to buy a tab for less than $10 and experience, or imagine they experience, market-price existentialism without reading a page of Camus.

The professional philosopher sneers in bad faith at psychedelic profundity because it makes them seem irrelevant.

On the other hand, the inarticulate tripper is not in such a great place. The psychonaut rests on intuition, and is probably not equipt with the critical thinking and logical itinerary to make sense of the journey on the comedown. A trip promises insight but also promises that neither your epistemic priors nor a rational reconstruction will be enough to establish its validity – by its very nature. (Psychedelic knowledge is “revealed,” not “discovered,” right?) You might get an insight that looks good, but is bad, without you knowing it. (I wrote about this in college. Holy shit my writing was bad.)

What happens when you irrationally, psychonautically attach to an idea that’s immune to logical tinkering? If you believe something for irrational reasons you’ll hang on to it for even longer than something that you believed for rational reasons, because new rational reasons can talk you out of a logogenetic idea, but not an irrationally-formed one. Depending on the centrality of the belief, of course.

The psychonaut claims easy knowledge, but could have trouble organizing it in the other, orderly web of belief of his coldly-discovered priors. However, this kind of knowledge has taken a high prestige today, with help from accredited social figures like Steve Jobs dosing LSD. In a way, the win of casual inebriated profundity is a “people’s victory” over the esoteric, pretentious toils of the professional philosophers. If you can figure out Truth by serotonin-fucking yourself on any day of the week then there’s no need to study Heidegger… and there’s even less reason to get a PhD in phenomenology, making institutional philosophy obsolete.

So, philosophers will be opposed to the psychonauts because it trivializes their hard-earned degrees (bad faith), and trivializes all their carefully crafted logic (slightly less bad faith). Psychonauts will be opposed to the philosophers for their specialized field which must explicitly reject such spontaneous routes to knowledge. The people taking psychedelics find themselves fighting some sort of anti-scientific elitism war, doing Feyerabend’s work. The tension is worse with the professional, modern philosophical class, but still exists in general.

A survey of history would show a lot of intertwining, but ultimately, I think the newer age of philosophy has a lot more overlap with others drugs than psychedelics – which is its own interesting question.

Sunday Poetry: Camus about Europe

Albert Camus is the most influential writers to me (See here why). This passage is from his third “Letter to a German Friend” (1944), depicting his unbroken love for European culture in the dark times of the second world war.

“Sometimes on a street corner, in the brief intervals of the long struggle that involves us all, I happen to think of all those places in Europe I know well. It is a magnificent land moulded by suffering and history. I relive those pilgrimages I once made with all the men of the West: the roses in the cloisters of Florence, the gilded bulbous domes of Krakow, the Hradschin and its dead palaces, the contorted statues of the Charles Bridge over the Vltava, the delicate gardens of Salzburg. All those flowers and stones, those hills and those landscapes where men’s time and the world’s time have mingled old trees and monuments! My memories have fused together such superimposed images to make a single face, which is the face of my true native land. … It never occurred to me that someday we should have to liberate them from you. And even now, at certain moments of rage and despair, I am occasionally sorry that the roses continue to grow in the cloister of San Marco and the pigeons drop clusters from the Cathedral of Salzburg, and the red geraniums grow tirelessly in the little cemeteries of Silesia.”

I wish you all a pleasant Sunday.