EIPE20 Anniversary Conference, Day 2

It is a tough day, and it is not over at all. Today’s plenary session was presented by Johanna Thoma and Francois Claveau at the Pavilion of the university. This is an iconic place of the campus. Johanna talked about preference-based instrumental rationality. I have got some new insights on rational choice theory. The outlines have always been clear, but I was curious about the details… how economists use this framework in practical terms. Now I see what the problem is. This theory helps us to explain human decisions on the basis of preferences and the rationality postulate. There are some extraordinary patterns in human decisions and some extraordinary sets of preferences, so the task to complete is to give a rational account of them within this theoretical framework. How can this model be modified so that phenomena out of the ordinary can be explained or understood as well?

Francois gave a speech on an interesting topic: Central banks as experts. It is rather personal, but this guy moved and acted (and actually looked) on the stage like Mark Zuckerberg. Funny. He walked up and down in a really cool style… but for me… this is strange. It is not good or wrong… just strange. For me the great economists of the 70’s and the 80’s have always been the models. To step up the stage, to walk to the desk, to put on the glasses and to read the lecture. In a calm and elegant way. This new thing… is just a show. But admittedly, the world has really changed. If you are a scientist… you need to be a showman as well. All in all, Francois’ lecture was interesting. He talked about central bank communication in a context where central banks are surrounded by the public as an epistemic community. His theory is called applied social epistemology. His work seems to be interesting as for revealing the hidden structures of the communication between central banks and the public.

Let’s see some interesting lessons from today’s panel sessions. Michael Joffe expressed his strong interest in biology. He always turns to biology in order to find a discipline that is used for scrutinizing some complex, heterogeneous and open-ended processes of reality. For him biology is an empirically-based causal theory. This is the method of natural sciences. That is, such disciplines start from reality itself-and this is the big picture to which economics makes a difference. It was nice to hear that he referred to F53 as a meta-theory directed to highlighting false causal mechanisms… but I am still dissatisfied because Michael depicted economics (as such) as the enterprise of missing the point. Models should capture a causal mechanism-but is it serious that ALL of our models fail to capture actual-plausible mechaisms…? I don’t think so…

Actually, Michael’s account seems to be a further item in the institutionalist critique. For example, the theory of money creation should be based on real/actual behaviour of real/actual agents, according to him. But for me this is clear that we have more options than capturing all the mechanisms vs. capturing nothing. Modern economics is about highlighting only one mechanism-meaning… one at a time. So we can be realists by setting up extremely abstract models. Michael wanted to call attention to the fact that some mechanisms are left out of our models. But I think this has always been on purpose!

Virginia Ghiara talked about Process Tracing as a means of testing and creating hypotheses. Now I am under the slight impression that Process Tracing is the macro-version of experimental economics. In both cases we are interested in collecting data on elementary human actions-it is the volume that makes the only difference. But these are only impressions…

Then there came my lecture. I was shocked at the very beginning because in the first minutes of the session Mäki Uskali joined us in the room. He is the leading international figure of the realist interpretation of modern economics, so it was my great pleasure to see him in the audience. I talked about the Friedman-Lucas-RBC line, on which Lucas performed a realist break, while Friedman and RBC were instrumentalists. Actually, I could surprise the colleagues. To my shock, Lucas is often labelled as an instrumentalist or anti-realist, but this view seems to be ungrounded. It all is about the methodology of creating unrealistic assumptions in order to set a realist theory-a theory that is directed at revealing the consequences of some plausible causal mechanisms. I don’t need to be an anti-realist just because I use unrealistic assumptions. By using appropriate assumptions I can tie my models to reality, no matter how unrealistic they are, provided they are set up from real constituents of reality.

This has been the day so far. Soon I need to leave for the anniversary party at Hotel Bazar.

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EIPE20 Anniversary Conference, Day 1

This morning I had a very interesting conversation with Andrew Bryce from Sheffield University. We are staying at the same hotel, we are attending the same conference-so it was natural. Today’s topic was the economics of well-being, naturally expressed by the main plank of today’s sessions “The Good Economy”. Andrew is engaged in the economics of happiness and well-being (these are interrelated concepts as I realized today, but not interchangeable at all). There were loads of new things for me to learn today. Andrew explained that the economic man conceptualized as the homo oeconomicus in the neoclassical orthodoxy is not happy at all. Robinson spends his whole life consuming, he is lonely, and he is particularly unfamiliar with the the concept of altruism, for example. By the way, the concept of happiness and the measurement of that are extremely complicated, since the happiness we feel, our own, personal happiness depends on a lot of factors. Andrew’s current research is about the impact of weekend working on well-being. People who need to work at the weekends may work according to schedules very different from their family’s, relatives’ and friend’s timetable. This may raise personal problems. Another problematic area is measurement. For example, one needs to say how much happy he is on a scale from 1 to 10. If I happen to label my perceived momentary happiness as 7 while you give it a 6, is it sure that I am happier than you…?

Today’s plenary sessions was opened by Jan Peter Balkenende. He was the Prime Minister of the Netherlands from 2002 to 2010. A couple of years ago he retired from professional politics and became a partner at E&Y and a professor of Governance, Institutions and Internationalisation at the Erasmus University Rotterdam. Actually, he lost an election so he chose to quit. Very sympathetic.

His lecture was an interesting piece. He believes in freedom, not in chaos. So unbound capitalism is something to avoid. For him, social market economy is the best example, it should be the model for every nation. This is the reason why the German model is so appealing to him. But these are rather commonplaces. What is the point?

He excessively reacted to the very recent phenomenon of populism. This is an effect-the effect of nations’ not having concrete and positive visions of their future. The middle-classes failed to form such visions. Consequently, European societies cannot avoid facing the problem that nowadays Europe is mentioned rather in negative contexts. Instead, people need to restart talking about values. And this is related to European identity as well. What makes us European? What is the ultimate source of our European identity at all? The values are. Even private companies ask themselves from time to time: what and why they do? This is also a question of values. Of values, legacy and purpose. What is the conclusion? We need values and we need to talk about them.

There is an age-old manifesto in traditional money-making: the business of business is business. This manifesto is believed to be related to mainstream economics (it was Milton Friedman who kept repeating it for a while), so in some scientific circles the position of mainstream economics is not that favourable. We cannot defend mainstream economics till the end of time by saying that this is an abstract theory, so you cannot blame us for not having answers to particular questions we never ask. Yes, we don’t have answers to institutionalist issues on purpose. However, a lot of people are interested in problems which we are aware of at best, so if we cannot offer them answers, they are going to drop us. This is the reason why it is urgent to place mainstream economics in a context. In an institutionalist context.

In the afternoon Erik Angner opened the sessions with his talk on the phiosophy of happiness. Actually, his lecture can be easily put in a broader context. Why does science need philosophy…? And what does this need stand in at all? Those professionals having a sceptical attitude got a serious impression on the importance of getting involved in doing philosophy. I do believe that no professional can keep ignoring philosophy in the long-run. If he attempts, if he insists on doing no philosopy… he can only pay lip-service to his own ignorance, but at the same time he must do philosophy, even if implicitely. Not making philosophy an explicit background is a mistake, since doing so we can deprive ourselves of the possibility of addressing problems that require an explicit philosophical approach. Even my intellectual home country, the mainstream-institutionalism controversy is of philosophical character-no matter how strongly some try to deny this fact…

All in all, this is an outstanding, inspiring and thought-provoking event. And lots of interesting conversations during the coffee-breaks.

Tomorrow the program continues… and tomorrow is my day. From 13:30 I am giving my lecture on the problem of realism and instrumentalism in the context of modern macroeconomics.

EIPE20 Anniversary Conference, Day 0

Dutch people seem to love building from regular geometrical shapes. This was Day Zero of EIPE20 Anniversary Conference. My hotel is situated in the middle of everything, all the places worth visiting are within walking distance. I could find the main attraction of the city: the Erasmus Bridge. It arcs over river Rhine, where a bunch of irregular high-rise buildings await the visitor. Dutch people are enthusiastic cyclists. Anywhere you turn your head to, you cannot but see bikes and bikelanes. Or joggers. Most bikes are casual wrecks only, local people, however, are happy to push hard while having the wind in the teeth. Of course, when they get back-wind, breaking is the best option.

The conference starts tomorrow at 9 A.M. Just to keep at cycling, I am the only Hungarian guy in the peloton.

 

Mini-Conference on the Nobel-Laureates of 2016 – A Short Summary

On 9th March the Economic Committee of the Hungarian Academy of Sciences organized a mini-conference on the Nobel-laureates of 2016 in economics. The event proved to be successful, the invited professionals could give lectures for a mixed but interested audience.

Dr. Edina Berlinger (Corvinus University of Budapest) talked about liquidity and contract theory and some applications of the theory. She started out with the short definitions of the different types of liquidity, then she tried to clarify why people need contarcts at all. Dr. Berlinger highlighted the fact that for Holmström and Hart it is not the commonly suggested set of causes that seem to have triggered the crisis. Some interesting conclusions emerged. First, financial markets collapsed due to adverse selection. And second, if the market agents cannot get the credits they need, it may be necessary to save them rather than the financial institutions in bankruptcy. In such a case all the markets may be paralysed, so careful actions are needed.

Daniel Horn’s (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Eötvös Loránd University) topic was incentive systems in public education. He started out with the standard agency models, then he gave a short summary on the issue of multi-tasking, some intertemporal problems (e.g. ratchet effect), followed by intrinsic motivation and some adverse effects. The whole lecture was devoted to the clarification of how to apply the theoretical background to the case of education.

Balázs Muraközy (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences) talked about the relationship between contracts and globalisation. Globalisation raises a lot of questions as for contracts, because there are serious information deficiencies or asymetries . He mentioned the problem of modelling incomplete contracts in foreign trade, then concluded by some empirical results.

Kriszta Kovács (Eötvös Loránd University) summarized some views on contracts in general. She called attention to the fact that all contracts are general, so they always need to be interpreted. This is the reason why courts play so essential a role in modern societies.

All in all, the event was a real eye-opener for the audience. We could have some basic ideas on the importance of the research activity lying far away from the realm of neoclassical orthodoxy.

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New Books in Economics (March 2017)

Among the recently published books in economics one title deserves further attention. This is Henry Kaufman’s Tectonic Shifts in Financial Markets.

Dr. Kaufman is a living legend. He worked in the commercial bank sector and later as an economist at the Federal Reserve Bank of New York. After this stage of his life, he spent 26 years at Salomon Brothers as a top leader. He also worked as a director of Lehman Brothers Holdings Inc. and as chairman of the Lehman board’s finance and risk committee.

In 1982, Henry Kaufman received an honorary Doctor of Laws degree from New York University; some years later an honorary Doctor of Humane Letters degree from Yeshiva University (1986), and one from Trinity College in 2005.

In 2001, the National Association of Business Economics conferred on him its prestigious Adam Smith Award

In his recent publication Dr. Kaufman gives a comprehensive picture on the catastrophic meltdown that led to the great financial crisis in 2008. The explicit and well-elaborated historical context is one of the main advantages of the book: the author brings his readers back to post-war Wall Street. From this far end of the story he reaches the other end-point, going over major national and global trends and the future of credit markets, financial institutions, and leading economies. His main conclusion is alarming: in his view, our financial world is still overheated and fragile.

Even as far as the title and the subtitle are considered, this book seems to a must to both mainstream and institutionalist audience.

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EIPE20 Anniversary Conference Program

The detailed program of EIPE20 anniversary connference has just been announced: EIPE_Programme. According to the heavy schedule I am going to give my lecture on Thursday afternoon. Now I need to go over the program in order to prepare my own schedule on what to see. Lots of  interesting presentations to pay attention to and lots of interesting people to meet.

As far as I can see now, my panel consists of three presentations which are worked out on closely related topics. It is worthwhile to focus on the colleagues here so as to get new insights and inspirations on my topic. To be perfectly honest, I can hardly wait to arrive.

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Axioms and the Protective Belt: the Case of Economics

Axioms and hypotheses make up a two-layer system, in which the axioms are situated in the core, surrounded by the testable hypotheses (theories) as a protective belt. When comparing our theories to reality, it is the hypotheses that we test, not the axioms. In case we cannot find a considerable concordance between the outcomes we generate and reality, we can only reject the hypotheses, not the axioms. Axioms cannot be refuted within the system. Whilst it is true that axioms cannot be traced back to anything in the system, they are not based on anything, they still have a source outside the theory. Axioms do not turn up by deus ex machina, but they directly rise from the interest of the scientist. Axioms can only be analysed on the basis of the purposes underlying a theory. In other words, the only question that makes sense is whether the axioms are appropriate as for achieving the purposes. All this calls attention to the fact that the ultimate grounds of any theory lie concealed in the scientist himself. It is us who create the theory.

Axioms make up the inner protected core not because of us having chosen them for this role. The reason is that testing axioms directly, i.e. without any theory is unattainable. Through a theory that is directly confronted with reality an axiom that bears indirect relation through the theory itself to reality cannot be tested. Naturally, it does not rule out the possibility of treating an axiom of a theory as a testable hypothesis in another system. It was exactly the case with rational expectations hypothesis suggested by Muth (1961). As the econometric tests had considerably confirmed the hypothesis, Lucas (1973) could apply that as an axiom. However, as soon as a hypothesis is put amongst the axioms, it loses its testability. It is in complete consonance with the results of Carnap (1939: 59). It is the same process as what was described by Lakatos (1968) analysing the evolution of modern natural science at multiple places. On account of the positive heuristics and negative heuristics, the testable protective belt built around the hard core prevents the most characteristic and most stable system of theories and assumptions from the critique and from any modifying efforts. The neutrality of the main stream against the institutionalist critique is not only the result of an instinctively followed scientific strategy. We should not forget about that fact that modern macroeconomics after Keynes have never made efforts to set up general theories.[1] It is exceptionally true of Friedman having worked along an eclectic methodology, who was not even worried about the occasional inconsistency between his particular theories. However, it is also true of the subsequent Lucas–RBC-line that has always been directed at analysing only certain individual mechanisms of the complex causal structure.

[1] Keynes was far from the level of complexity that is the ideal for institutional economics. De Vroey (2016: 74) quotes a passage where Friedman writes that his esteem to Keynes was raised by the fact that Keynes could focus his attention to a small number of key variables.

References

Carnap, Rudolf (1939): Foundations of Logic and Mathematics. Chicago: The University of Chicago Press.

De Vroey, Michel (2016): A History of Macroeconomics from Keynes to Lucas and beyond. Cambridge: Cambridge University Press.

Lakatos, Imre (1968): Criticism and the Methodology of Scientific Research Programmes. London: Aristotelian Society.

Lucas, Robert E. (1973): Some International Evidence on Output-Inflation Tradeoffs. The American Economic Review, 63(3): 326–334.

Muth, John F. (1961): Rational Expectations and the Theory of Price Movements. Econometrica, 29(3): 315–335.

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Imre Lakatos (1922 – 1974)

The Main Stream vs. Institutionalism: A “Différance” at the Methodological Level

Today the dialogue between the main stream and institutionalism is an exception rather than a rule. Any exchange of views is further hindered by the fact that for institutionalists questioning the scientific status of mainstream economics seems to be a compulsory item. A thunderous proclamation to announce in order to declare one’s affiliation.[1] Manoeuvring at a lower level of generalization, old institutional economics did not establish a coherent and well-formalized theoretical system, which has been a standard for neoclassical orthodoxy from the very beginning. This is not a failure, of course, only a peculiarity that stems from a unique interest and some methodological decisions. It is undoubted that institutionalism applies more de-idealized concepts—notions that are created at a lower level of abstraction, so they can have a higher degree of direct descriptive relevance. However, the difference is more fundamental. Upon its birth, institutional economics did not show any interest in abstract deductive systems. Instead, institutionalists try to capture the historical trends experienced in real societies and the country-specific social phenomena emerging under the influence of complex causal structures (Veblen 1898). It is much more than an interest in social determinants[2] (i.e. the institutions) that are well beyond the scope of mainstream models.[3] Members of the old institutionalist camp positioned their interest to another area. For them individual and social behaviour was not controlled by timeless economic laws, so they did not need formalism which proved to be very effective in discovering the consequences of premises and axioms. Even though these effects can hardly be approached through less formalized methods, institutionalists categorically rejected formalism (Rutherford 1994: 9). On the basis of their concepts they made efforts to understand the particularities rather than the general features. The ultimate purpose was to understand historically and socially determined constellations and evolutionary processes tied to unique places and periods. Such an ambition evidently requires a methodology other than mainstream formalism.

[1] At the same time mainstream economics tends to apply passive resistance. In his famous Economics, Paul Samuelson did not even devote a single word to institutionalist achievements (Tsuru 1993: 59). As it is highlighted below, we can easily find examples for an open attitude towards institutionalism.

[2] Habits, norms, rules and their evolution, and the like. These factors jointly control human behaviour, the functioning and the evolution of real societies and economic sub-systems. By today, new institutional economics has arranged these social institutions into a complex, multi-level hierarchy (Williamson 2000).

[3] Mainstream economics put these factors under the care of sociology and psychology or even social psychology (Keizer 2007: 10). Consequently, interdisciplinarity has different meanings for both of the streams. Mainstream economics expects related branches of knowledge to succeed in exploring their own territories, so answering certain questions is transferred to these disciplines. The institutionalist purpose is an active utilisation of the achievements of the related fields (Brousseau – Glachant 2003: 5).

References

Brousseau, Éric – Glachant, Jean Michel (eds.) (2008): New Institutional Economics. A Guidebook. Cambridge: Cambridge University Press.

Keizer, Piet (2007): The Concept of Institution in Economics and Sociology, a Methodological Exposition. Tjalling C. Koopmans Research Institute Discussion Paper Series No. 07-25. Utrecht: Utrecht School of Economics.

Rutherford, Malcolm (1994): Institutions in Economics. The Old and the New Institutionalism. Cambridge: Cambridge University Press.

Tsuru, Shigeto (1993): Institutional Economics Revisited. Cambridge: Cambridge University Press.

Veblen, Thornstein (1898): Why Is Economics Not an Evolutionary Science? The Quarterly Journal of Economics, 12(4): 373–397.

Williamson, Oliver E. (2000): The New Institutional Economics—Taking Stock, Looking Ahead. Journal of Economic Literature, 38(3): 595–613.

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New Draft Available

After a long period of selince I am here again. The result of the heavy workload on me in the last few weeks is the very first Hungarian draft for my paper intended to be the contribution to EBR’s special issue on the methodology of modern macroeconomics, entitled ‘Some Methodological Aspects of the Controversy between the Main Stream and Institutional Economics’.

The text written in Hungarian can be found here.

Session at Academia.edu is here. Joining the debate and any comments are warmly welcome.

The English version is going to be available in few weeks’ time.

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Mini-Conference on the Nobel-Laureates of 2016

Economic Committee of the Hungarian Academy of Sciences led by Prof. Laszlo Muraközy are organizing a mini-conference in honour of the Nobel-laureates of 2016, Prof. Oliver Hart and Prof. Bengt Holmström. Since insitutional economics is a particularly strong movement in Hungary, presentations are going to be full of laudatory remarks and give a supportive account of the developments in contract theory. Special attention is going to be paid to the broader context, i.e. the interplay between contract theory and other currents in the institutional movement on the one hand and to the relationship between the main stream and institutional economics on the other hand. Because of the latter I am keenly interested in the event. I will get back with a short summary in time.

Here is the Facebook event.

Here is some additional information about the Nobel-prize in economics, 2016.

To my students attending the event is warmly recommended.

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