Limits of Economic and Social Knowledge

264 Pages·2014·21.32 MB·English

by  Stephen J. DeCanio (auth.)

Limits of Economic and Social Knowledge
This Page Intentionally Left Blank
Limits of Economic and
Social Knowledge
Stephen J. DeCanio
Professor of Economics, Emeritus,
University of California, Santa Barbara, USA
© Stephen J. DeCanio 2014
Softcover reprint of the hardcover 1st edition 2014 978-1-137-37192-8
All rights reserved. No reproduction, copy or transmission of this
publication may be made without written permission.
No portion of this publication may be reproduced, copied or transmitted
save with written permission or in accordance with the provisions of the
Copyright, Designs and Patents Act 1988, or under the terms of any licence
permitting limited copying issued by the Copyright Licensing Agency,
Saffron House, 6–10 Kirby Street, London EC1N 8TS.
Any person who does any unauthorized act in relation to this publication may be
liable to criminal prosecution and civil claims for damages.
The author has asserted his right to be identified as the author of this work
in accordance with the Copyright, Designs and Patents Act 1988.
First published 2014 by
PALGRAVE MACMILLAN
Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills, Basingstoke,
Hampshire RG21 6XS.
Palgrave Macmillan in the US is a division of St Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries
ISBN 978-1-349-47591-9 ISBN 978-1-137-37193-5 (eBook)
DOI. 10.1057/9781137371935
This book is printed on paper suitable for recycling and made from fully
managed and sustained forest sources. Logging, pulping and manufacturing
processes are expected to conform to the environmental regulations of the
country of origin.
A catalogue record for this book is available from the British Library.
A catalog record for this book is available from the Library of Congress.
Contents
List of Tables and Figures vi
Preface v iii
Acknowledgments x ii
1 Materialism, Determinism, and Economics: An Overview 1
2 Consequences of Computational Limits 20
3 Simulating Simple Societies 33
4 Economics and Physical Science 1 03
5 Economics, Behaviorism, and Utilitarianism 1 22
6 A Case Study and Cautionary Tale: Climate Policy 1 52
7 Politics and Governance 173
8 The Gift of Freedom 196
Notes 2 09
References 2 25
Index 2 43
v
List of Tables and Figures
Tables
3.1 F requency and runs tests, Class 3 and 4 CAs 47
3.2 L ogistic regressions for dependence on random
initial condition 5 2
4.1 x = a x (1− x ), estimated by OLS regression x = β +
t +1 t t t 0
β 1 x t −1 + β 2 x t −2 + β 3 x t −3 + ε t , a = 3.8, time series starting
with 5000th value, x = 0.5, 100 observations 115
0
4.2 x = a x (1− x ), estimated by OLS regression x = β +
t +1 t t t 0
β x + β x + β x + ε , a = 3.8, time series starting
1 t −1 2 t −2 3 t −3 t
with 5000th value, x = 0.5, 1000 observations 116
0
4.3 x t +1 = x t e r (1 – x t )/2 estimated by OLS regression x t = β 0 +
β x + β x + β x + ε , r = 8, time series starting
1 t −1 2 t −2 3 t −3 t
with 5000th value, x = 0.5, 100 observations 117
0
4.4 x t +1 = x t e r (1 – xt )/2 estimated by OLS regression x t = β 0 +
β x + β x + β x + ε , r = 8, time series starting
1 t −1 2 t −2 3 t −3 t
with 5000th value, x = 0.5, 1000 observations 117
0
5.1 M arket equilibria, various endowments and
utility functions, no externalities 1 31
5.2 M arket equilibria and feasible coordination outcomes,
various endowments and utility functions,
with an externality 1 34
E6.1 How successful has the Kyoto Protocol been? 218
Figures
3.1 D efinitions of CA 30 and CA 110 36
3.2 C lass 1 CAs quickly reach a uniform state regardless
of initial condition 3 7
3.3 C lass 2 CAs reach equilibrium with simple repetitive
patterns (random initial condition) 38
3.4 S ome Class 2 CAs take longer to reach equilibrium
patterns (random initial condition) 39
3.5 C A 110 with random initial condition 40
3.6 O utput of first 10 steps, Class 3 and Class 4 CAs,
{1,0,1,0, ... ,1,0} input 4 1
vi
List of Tables and Figures vii
3.7 CA 110, initial condition the first 25 primes in unary 4 3
3.8 CA 110, initial condition the primes less than 300 in binary 4 4
3.9 First 2000 time steps of CA 60, initial condition
primes < 300 in binary 4 5
A.5 Class 3 and 4 CAs with random initial condition 71
A.6 Output of first 10 steps, Class 3 and
Class 4 CAs, {1,0,1,0, ... ,1,0} input 7 4
A.7 Class 3 and Class 4 CAs, initial condition the first 25 primes
in unary 8 7
A.8 Class 3 and 4 CAs, initial condition the primes
less than 300 in binary 1 02
4.1 100 typical values of the time series of x ,
t
from equation (4.1) 1 12
4.2 Bifurcation diagram of equation (4.1) with x = 0.5 113
0
4.3 Bifurcation diagram of equation (4.2), 0 ≤ r ≤ 10, x = 0.5 114
0
5.1 Equilibria and feasible outcomes with an externality 135
8.1 Exploitation of slave labor 1 99
Preface
Although this book is largely about the importance of human freedom
in economics and the social sciences, it grew out of a necessity – not the
necessity of physical determinism (about which more later), but an intel-
lectual necessity. In 1986–87, I had the privilege to serve as a senior staff
economist at the President’s Council of Economic Advisers (CEA). It was
during my one-year term at CEA that the critical negotiations leading to
the Montreal Protocol on Substances that Deplete the Ozone Layer were
taking place. This was a major foreign policy and economic issue, and
CEA was involved in the inter-agency deliberations that eventually led
to President Reagan’s support for the Montreal Protocol. In the course
of CEA’s internal discussions, we realized that there were serious gaps
in the conventional tools of cost-benefit analysis. Preservation of the
ozone layer was an issue with consequences spanning multiple genera-
tions. Neither ordinary economics nor ordinary interest-group politics
could provide guidance – multi-generation economic models were based
on artificial constructs such as infinitely-lived agents, a benign social
planner with a time horizon spanning many generations, or fixed and
unchanging implicit contracts between successive generations. There is
not, nor can there be, any multi-generational political process to resolve
potential conflicts between generations because future generations do
not vote and have no voice in present-day government.
It soon became clear to us at CEA that, although economic consid-
erations could inform the policy decision (whether or not to support
coordinated global action to phase out a class of otherwise useful chemi-
cals that had the unintended side-effect of damaging the ozone layer),
the decision rested essentially on the ethical stance taken regarding
the duties of the present generation to future generations. If we of the
present generation have real obligations to the future, the choices we
make will be different from our simply promoting our own welfare and
allowing future generations to fend for themselves.
The experience of working on this issue was career-changing for me.
I had not always been interested in policy-related economic problems,
and had shared the unexamined assumption of most of my fellow
economists that our discipline could be separated into ‘positive’ and
‘normative’ components, with the positive elements akin to everyday
practice in the natural sciences and the normative elements depending
viii
Preface ix
on arbitrary personal preferences. It was only when confronted with the
necessity for combining the two elements in order to give advice on the
Montreal Protocol that I began to question the premises that underlie
conventional economic analysis.
After I returned to academia, I continued to work on ozone layer
protection, and began also to do research on the economics of climate
change, a field that was at that time (the late 1980s and early 1990s)
coming into prominence. The same kinds of intergenerational prob-
lems that had been intrinsic to the ozone layer analysis surfaced just
as strongly in the climate debate. Is it possible to ‘value’ the well-being
of people who do not yet exist? Is there any way of comparing ‘utility’
across generations? What about the fact that the economic development
of the poorer nations is dependent on expansion of the global supply of
primary energy? Do non-human species (and biodiversity more gener-
ally) have intrinsic worth? None of these questions could be answered
by economic analysis alone.
The common thread running through all of them is that they require
making moral choices . Economics is often touted as the science of choice
in the face of scarcity, but it is clear to any beginning economics student
that the ‘choices’ considered within ordinary economic models are not
really choices at all; the standard approach is to presume that the agent(s)
maximize well-defined objective functions subject to equally well-
defined constraints. This is less a matter of real choice than of solving an
operations research problem. The underlying paradigm is that the ‘laws
of behavior’ that put restrictions on what can happen arise from the
particular mathematical technique of optimization.
If, on the other hand, people really are free to make choices that matter,
the kind of social ‘science’ that emerges is quite different. While there
still may be regularities in aggregate (and individual) behavior, these are
not law-like in the same way as the regularities of the natural sciences.
The possibility that different choices can be made at every crucial point
emphasizes the dilemmas we face, the imperfection of our informa-
tion and cognitive processes, the inescapability of collective action that
relies on coercion, and the human capacity for both good and evil. The
conventional economics of supply and demand illuminates ordinary
market interactions and offers a helpful guide to many problems of prac-
tical policy. However, given the moral dimension of human action, it is
an illusion to think that economics should play more than a subsidiary
role in the truly momentous decisions individuals and societies face.
The point of this book, then, is to show how genuine human freedom
is intrinsic to any fully developed economics (and to social theory more