Amanojack comments on Open Thread, May 1-15, 2012 - Less Wrong
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An economics question:
Which economic school of thought most resembles "the standard picture" of cogsci rationality? In other words, which economists understand probability theory, heuristics & biases, reductionism, evolutionary psychology, etc. and properly incorporate it into their work? If these economists aren't of the neo-classical school, how closely does neo-classical economics resemble the standard picture, if at all?
Unnecessary Background Information:
Feel free to not read this. It's just an explanation of why I'm asking these questions.
I'm somewhat at a loss when it comes to economics. When I was younger (maybe 15 or so?) I began reading Austrian economics. The works of Murray Rothbard, Ludwig von Mises, etc., served as my first rigorous introduction to economics. I self-identified as an Austrian for several years, up until a few months ago.
For the past year, I have learned a lot about cognsci rationality through LW sequences and related works. I think I have a decent grasp of what cognsci rationality is, why it is correct, and how to conflicts with the method of the Austrian school. (For those who aren't aware, Austrians use an apriori method and claim absolute/infinite certainty, among other things.) The final straw came when I read Bryan Caplan's "Why I am not an Austrian Economist" and his debate with Austrian economist Walter Block. Caplan ably defended BayesCraft. I - with emotional difficulty - consciously updated my belief in Austrianism to below 0.5. I knew I could no longer be an Austrian, nor did I want to be.
Caplan is an neo-classical economist, and neo-classical seems to be the dominant school of modern economic thought. So I'm reading my way through introductory neo-classical economics textbooks. (Specifically, Principles of Macreconomics and Principles of Microeconomics by Mankiw.) I am also looking to take some economics courses when I start university in the fall. My primary major will likely be mathematics, but I am considering double majoring in economics. Maybe get a graduate degree in economics? I don't know yet.
But I'm apprehensive about reading bad economics textbooks because I don't know enough good economics to sort out the bunk. And the reason I want to read economics textbooks in the first place is to learn more good economics. So I'm in a catch 22. I think I'm safe enough reading a standard intro to micro/marco book. But when it comes to finance? Banking? Monetary theory? I haven't a clue who to trust.
So I'm looking to take what I do know (cogsci rationality) and see where it is utilized in economics. If there is a school of economic thought that uses it as their methodology, I think that serves as very strong evidence I can likely trust what they say.
Block and Rothbard do not understand Austrian economics and are incapable of defending it against serious rationalist criticism. Ludwig von Mises is the only rigorous rationalist in the "school". His works make mincemeat of Caplan's arguments decades before Caplan even makes them. But don't take my word for it - go back and reread Mises directly.
You will see that the "rationalist" objections Caplan raises are not new. They are simply born out of a misunderstanding of a complex topic. Rothbard, Block, and most of the other "Austrian" economists that followed merely added another layer of confusion because they weren't careful enough thinkers to understand Mises.
ETA: Speaking of Bayesianism, it was also rejected for centuries as being unscientific, for many of the same reasons that Mises's observations have been. In fact, Mises explains exactly why probability is in the mind in his works almost a century ago, and he's not even a mathematician. It is a straightforward application of his Austrian epistemology. I hope that doesn't cause anyone's head to explode.
This intrigues me, could you elaborate?
Sure. He wrote about it a lot. Here is a concise quote:
Also:
Claiming Ludwig in the Bayesian camp is really strange and wrong. His mathematician brother Richard, from whom he takes his philosophy of probability, is literally the arch-frequentist of the 20th century.
And your quote has him taking Richard's exact position:
When he says "class probability" he is specifically talking about this. ...
Which is the the precise opposite of the position of the subjectivist.
And Ludwig and Richard themselves were arch enemies. Well only sort of, but they certainly didn't agree on everything, and the idea that Ludwig simply took his philosophy of probability from his brother couldn't be further from the truth. Ludwig devoted an entire chapter in his Magnum Opus to uncertainty and probability theory, and I've seen it mentioned many times that this chapter could be seen as his response to his brother's philosophy of probability.
I see what you're saying in your post, but the confusion stems from the fact that Ludwig did in fact believe that frequency probability, logical positivism, etc., were useful epistemologies in the natural sciences, and led to plenty of advancements etc., but that they were strictly incorrect when extended to "the sciences of human action" (economics and others). "Class probability" is what he called the instances where frequency worked, and "case probability" where it didn't.
The most concise quote I could find to make my position seem much more plausible:
And here's a dump of all the quotes I could find on the topic, reading all of which will make it utterly clear that Ludwig understood the subjectivist nature of probability (emphasis mine, and don't worry about reading much more than just the emphasized portions unless you want to).
First:
Second:
Third:
Fourth:
Fifth:
Sixth:
Etc. Probability is in the mind. It is subjective, and dependent upon the current state of knowledge of the observer in question. He seems very clear on this matter.
Back to you:
Is it? Let's analyze the full quote:
All he's saying is that taking one's knowledge of the behavior of a class of events the behavior of the individuals of which one knows nothing, and putting it into mathematical notation, does not magically reveal anything about those individual components.
For example (taken from that Mises Wiki link), if you know approximately how many houses will catch fire per year in a neighborhood, but you don't know which ones they will be, transforming this knowledge into mathematical probability theory is no more than a potentially more concise way of describing one's current state of knowledge. It of course cannot add anything to what you already knew.
In fact, this isn't even relevant to the topic at hand. Believe it or not, some people thought probability theory was magical and could help them win at games of chance. This was him responding to that mysticism. I certainly don't see how it makes him not a subjectivist on probability theory, especially when the whole analysis is about states of knowledge etc.
I didn't say he was in the Bayesian camp, I said he had the Bayesian insight that probability is in the mind.
In the final quote he is simply saying that mathematical statements of probability merely summarize our state of knowledge; they do not add anything to it other than putting it in a more useful form. I don't see how this would be interpreted as going against subjectivism, especially when he clearly refers to probabilities being expressions of our ignorance.
It's been a while since I read Man, Economy, and State, but it seemed to me that Rothbard (and therefore possibly von Mises) anticipated chaos theory. There was a description of economies chasing perfectly stable supply and demand, but never getting there because circumstances keep changing.
Double post