Thursday 18 May 2017

Going To The Market

Now that the parties have found their manifestos at the bottom of their gardens or in the outside facilities we are being treated to media analysis and comment. Which does not tell us much more. At present there is a hue and cry about those of the Left.

This article in Naked Capitalism is an attempt to persuade the Left to address itself to the modern theory of markets as it has evolved in recent years as opposed to those of long past. The title is "Hayek And Neoclassicals Meet Information Theory And Fail".

It is a long article, mathematical in parts, which I suspect will mean that it is beyond the understanding of almost all the politicians and all the civil servants of today.

This quote is the easy bit at the end:

An Interpretation of Economics for the Left. So again, Hayek had a fine intuition: prices and information have some relationship. But he didn’t have the conceptual or mathematical tools of information theory to understand the mechanisms of that relationship — tools that emerged with Shannon’s key paper in 1948, and that continue to be elaborated to this day to produce algorithms like generative adversarial networks.

The understanding of prices and supply and demand provided by information theory and machine learning algorithms is better equipped to explain markets than arguments reducing complex distributions of possibilities to a single dimension, and hence, necessarily, requiring assumptions like rational agents and perfect foresight.

Ideas that were posited as articles of faith or created through incomplete arguments by Hayek are not even close to the whole story, and leave you with no knowledge of the ways the price mechanism, marginalism, or supply and demand can go wrong.

Those arguments assume and (hence) conclude market optimality. Leaving out the failure modes effectively declares many social concerns of the left moot by fiat. The potential and actual failures of markets are a major concern of the left, and are frequently part of discussions of inequality and social justice.
The left doesn’t need to follow Chris Hayes’ advice and engage with Hayek, Friedman, and neoclassical economics. The left instead needs to engage with a real world vision of economics that recognizes the limited scope of ideal markets and begins with imperfection as the more useful default scenario.
The real world is a funny old place.

1 comment:

  1. If they can reduce human economic behaviour to a collection of equations then a Nobel Prize would follow. Somehow I don't see that happening.