Wednesday, 24 July 2013

What happens when you try the Prisoners Dilemma on actual prisoners?

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So much of modern mainstream microeconomics is built on mathematical reasoning based on the so-called Prisoner’s Dilemma.

But, as if to demonstrate the distance from the real world of the reasoning of mainstream economics, no-one had ever tested the Prisoner’s Dilemma on real prisoners.

And when two Hamburg researchers did, what they found confounded the elegant mathematical reasoning relied on by economists.

Not only did the prisoners cooperate far more than the alleged economists’ models say they would, they cooperated far more than students, on whom, to date, the only testing of the models has been done.

Now, in the real world when theories are found wanting they are abandoned for something better. Not so however in mainstream economics. 

Irving Fisher, for example, wrote the policy of price stabilisation that helped trigger the Great Depression in which he lost his shirt. Yet Fisher is praised to the skies by today’s leading alleged economists, and his policy of “price stabilisation” has been adopted by virtually every central bank in the world, and is promoted in every mainstream textbook in every one of the world’s macroeconomics classrooms.

Further, the graduates of those modern mainstream macroeconomics classrooms famously failed to see the Global Financial Crisis before it happened, and even months before were talking bollocks bout the “permanent prosperity” their policies had produced—yet today’s textbooks still continue to spout the macroeconomic nonsense of self-induced blindness.

So now that the basis of so much modern mainstream microeconomics is revealed as patent bollocks, do you think any modern mainstream micro-economists will begin re-examining the mistaken foundations of their discipline?

What do you think?

And if they don’t, is there any reason any of them should ever be taken seriously—rather than being taken out and shot for frauds?

16 comments:

  1. "Now, in the real world when theories are found wanting they are abandoned for something better."

    Like how Austrians changed their worldview when inflation utterly failed to materialise after the US almost tripled their monetary base.

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  2. Well to be fair, if you wish to be fair, that's not Austrian theory, that's some Austrians. Like Bob Murphy.

    Other Austrians argued for deflation, and still are.

    Other Austrians point out that the linear Quantity Theory of Money, which the predictions were based, is neither reliable, nor Austrian.

    And other Austrians are arguing that price inflation predictions failed to materialise simply because Keynesian policy prescriptions like bailouts, stimulus packages, and massive monetary inflation have failed to work and have indeed helped wreck the economy.

    So the Austrians are at least arguing on the basis of what they see in front of them, and going back to check the theory of they're proven wrong.

    Mainstream economists however just keep throwing good money after bad theory.

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  3. Worth pointing out too that not everyone buys the official figures for price inflation, especially when they ignore price inflation in the very things (houses, bonds, shares, commodities etc.) that so much of the money borrowed into existence has purchased.

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  4. My apologies, I took this to be the Austrian view because Mises wrote:

    "Inflation ... means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term "inflation" to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise."

    and

    "Those who pretend to fight inflation ... try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar"

    You can't blame him, this was an exceptionally common view at the time (and indeed still is).

    As for the second article, where the author made the claim that while the expected inflation isn't present in the CPI, it can be seen in oil and gold prices and the PPI - allow me to include those prices too. I guess you could make the argument that almost all of the extra money went into gold, but I think it's more likely that investors nervous about defaults and (although incorrectly) inflation moved their money into a "safe" asset.

    Correct me if I'm wrong, but it seems like you (and Thornton) are arguing that unprecedented fiscal stimulus has been deflationary, and has managed to offset unprecedented monetary stimulus?

    PS: You are aware that Shadowstats just adds an arbitrary constant to the CPI, right? And that MIT's estimate of inflation using millions of online retail prices pretty accurately tracks the CPI?

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  5. This is worth a look, coming from a guy who's worked for Ron Paul, George H W Bush and Reagan.

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  6. Hi Sam,

    You're aware that "Inflation and deflation can occur just as well behind a stable price level as when the price level is rising and falling..." - M.A. Abrams ?

    And you're aware too that Mises wasn't arguing for the linear quantity theory of money?

    As regards the question of whether unprecedented fiscal stimulus has been "deflationary" or not, it's certainly true that post crash we should have seen prices falling--which would have been a spur to recovery.

    It's impossible to say for sure (see that point by Abrams above) but that we haven't seen falling prices is probably at least partially due to the Fed's monetary stimulus.

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  7. Verging on non-falsifiable nonsense there Peter. Doesn't matter what the observed outcome is you can come up with a magical excuse. A common and yet perplexing tendency in people who supposedly hold to the primacy of reason.

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  8. Asking an economist to explain society is like asking a fish to explain wind.

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  9. Nice post thanks for sharing with me.

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  10. That is hilarious.

    On US inflation the increase in the money supply (inflation) has shown up in the stock market, the failure of house prices to fall to market rates, and in the decline in the average families income. Also note that the inflation number are highly manipulated. See Shadow Statistics, which shows that if inflation was measured the same way as it was in 1970s inflation would be in the upper single digits. So I think it is a mistake to say that no price inflation has occurred when the US tripled their monetary base.

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  11. Peter -

    I'm happy to concede you know more about Mises than I do; I was just quoting him.

    As for beneficial deflation, Reisman is correct in his "6th grader" example - when prices and wages fall simultaneously, the purchasing power of income is unchanged. However, this benefits savers at the expense of debtors. The many households in debt struggle more, and those doing ok choose to save more. All this further decreases demand, so the deflation spiral deepens. That's why governments and central banks are so desperate to stave off deflation.

    Dale - on the "stock bubble" the Fed is supposedly creating: if it's so obviously driven by easy money, which everyone knows will come to an end when the economy improves, why doesn't the bubble pop? You seem to have remarkably little faith in markets all of a sudden!

    I'd suggest stock prices are rising because corporate profits are through the roof.

    And we've been over "manipulated" inflation stats.

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  12. Sam, "beneficial deflation" is simply a phrase describing prosperity. (Consider what happens to prices when more goods are produced than money. Or just look at what happened to prices in the 'golden age' that was the second half of the nineteenth century. Hint: money became more valuable as prices gently declined.)

    You appear to think, along with Keynes, that aggregate demand is what drives economies; and that saving should be discouraged. Yet it it the opposite that is the case.

    Saving Not Consumption is the Main Source of Spending - George Reisman

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  13. "That's why governments and central banks are so desperate to stave off deflation."

    No. They are keen to say their actions stave off what they say is the disaster of deflation because saying that is such a handly excuse.

    Amit

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  14. The criteria of the prisoners dilemma and other similar games can be altered to get any result you want and so it proves nothing in terms of economic or human behavior other than within the confines of those criteria. Some kind of unearned value is doled out on the whim of a game controller? Who then twiddles the dials to increase or decrease the prize or punishment to observe the lab rats? No wonder its inevitably control freaks and closet control freaks that resort to 'game theory' to prove their argument.

    Bugs

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  15. I don't think any sane person has argued that the PD will model every human interaction. But it does apply to some, in particular to market competition, since the same structure of incentives works to set prices efficiently. I can think of countless other examples of human behaviour where it applies, and countless examples where it doesn't.

    So what?

    L

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  16. So what? Well, try to write this phrase in plain English -- "...since the same structure of incentives works to set prices efficiently" --- and see.

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