I think it almost always is.
In a previous post I said that economics is a "non-linear" discipline, in the "Artsie" sense of that word. Most (all?) economic models involve simultaneous causation. They don't say that A causes B causes C causes D in a "linear" (Artsie sense) sequence like billiard balls. Instead they say that Price and Quantity are co-determined simultaneously by supply and demand. Or by Production Possibilities Frontier and Indifference curves. Or by IS and LM. Etc. There's always two (or more) curves crossing or kissing. Or always two (or more) equations being solved simultaneously for the solution.
Only in special cases, usually limiting cases or "degenerate" cases, can we sometimes avoid simultaneity. For example, if the supply curve is perfectly elastic, and the demand curve is perfectly inelastic, then everything is "linear": supply determines price, and demand determines quantity; price does not affect quantity, and quantity does not affect price. "Linear" causation is the exception. Simultaneous causation is the rule.
Economists never argue whether investment causes saving or saving causes investment. (OK, most economists don't). Most economists see this as a false dichotomy.
Economics, as we now know it, is that way. But does it have to be that way? I think it does. This post explains why I believe that.
Economics is about human interaction. Yes, it's about other things as well, but it is about human interaction. And yes, other social sciences are about human interaction too (and I would be interested to hear if sociologists and political scientists think the same way), but economics is too.
I am trying to think of the model of human interaction that is the simplest possible model, and the most fundamental possible model. What is the "Ur-model" of all models of human interaction? I can think of two, and I'm going to talk about them both. The two models are almost the same, and differ in only one respect. [I'm looking at Nash Equilibrium, comparing the "simultaneous" with the "sequential" version of the same game.]
There are two players, call them Adam and Betty. Adam and Betty have one move each, then the game ends. Adam's payoff (profit, utility, whatever) depends both on what he does (he picks a number of apples "a") and on what Betty does (she picks a number of bananas "b"). Same for Betty. Both Adam and Betty know everything about the game (it's "common knowledge").
Here's where the two models differ:
1. In the "Cournot" model, Adam makes his move before observing Betty's move; and Betty makes her move before observing Adam's move.
2. In the "Stackelberg" model, Adam makes his move before observing Betty's move; and Betty makes her move after observing Adam's move.
We sometimes say that in the Cournot game Adam and Betty have to make their moves "at the same time", or "simultaneously". But that isn't strictly accurate. Betty might choose how many bananas to pick before or after Adam has already picked his apples. But if she doesn't observe how many apples Adam has picked, until after she has already picked her bananas, it makes no difference.
Here is how economists (and game theorists) would (usually) solve those two models.
1. In the "Cournot" model, we solve for Adam's reaction function, which tells us how many apples he would pick ("a") to maximise his payoff as a function of how many bananas he expects Betty to pick ("b"). The reaction function is an equation like a=A(b). We do the same for Betty, and get an equation like b=B(a). We then solve the two reaction functions like simultaneous equations for the Nash Equilibrium. Graphically, the Nash Equilibrium is where the two curves cross.
In the Cournot model, it doesn't make sense to ask whether a determines b or b determines a. Both are co-determined simultaneously by the two player's reaction functions, which are in turn determined by the payoff matrix and the structure of the game. Only in degenerate cases, where one reaction function is vertical and the other is horizontal (so each player has a "dominant strategy" that is best for him regardless of what she picks) can we ignore simultaneity.
2. In the "Stackelberg" model, we solve for Betty's reaction function b=B(a) as before. We then find that point on Betty's reaction function that maximises the payoff to Adam. Graphically, the equilibrium is the point where Betty's reaction function is a tangent to Adam's highest Indifference Curve. It's a little bit more complicated than finding the point where two curves cross, because we need to draw lots of curves for Adam, to make sure we have found the right one for the tangency point.
In the Stackelberg model, it is very tempting to say that Adam's choice determines Betty's choice, but not vice versa. Tempting, but wrong. If Betty had different preferences, or a different productivity on growing bananas, her reaction function would be different, and Adam's choice would have been different too. Even though he moves first, and Betty gets to observe Adam's choice before making her choice, Adam's choice is determined, in part, by his knowledge of how Betty will choose, and especially, by Adam's knowledge of how Betty would choose differently if he were to choose differently.
These are the lessons I draw from these two models:
First, it doesn't matter who moves "first" in calendar time. What matters is who gets to observe the other's choice before making her choice. That's what affects the equilibrium.
Second, In both games, her expectation (or observation) of his choice will affect her choice, and his expectation of her choice will affect his choice. Both games are "simultaneous" in the sense of mutual co-determination. You cannot explain Adam's choice without explaining how Betty will choose, even if Adam chooses first.
The simple "linear", "A causes B causes C causes D" model of a causal chain just does not work, even for these two very simple models of human interaction (except in degenerate cases where one or both person has a dominant strategy).
There are lots of ways you could complicate those two simple models. You could introduce uncertainty by allowing "Nature" to make a move after one or both human players has made a move, so you would be talking about a "Bayes-Nash Equilibrium". You could add more players. You could add more moves, to make the game last longer. I would conjecture that all games, and all models of human interaction, however complex, are just glorified versions of my two simple models above. These two simple models are the building blocks from which all others can be constructed.
You can complicate it all you like. But economics is about human interaction, and you can't avoid simultaneity. (I don't think you can avoid simultaneity generally in non-human interaction either, but that's a different question.)
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Dan: yep. Which is why we build models, like supply and demand, which are supposed to tell us what happens to price and quantity when (say) the government puts a tax on apples in a competitive market. And why we build models like Cournot, Bertrand, and Stackelberg, which are supposed to tell us what happens if the market isn’t competitive. And have econometricians etc. who go off and try to test those predictions. And why (nearly) all of us, and not just the applied econometricians, always try to keep one eye on the world to see if our models seem to at least roughly fit with what we see and hear. And try to figure out what we need to change or add or do differently when things don’t seem to go the way we thought they would. Like, to take a recent trivial example, my post about a week back when I wondered why we didn’t get as much deflation as I would have predicted if I had known the length and depth of the recession in many countries, and wondered if financing problems might have had a supply-side effect that really needed to be included in my “model”, and wondered if that hypothesis fitted the cross country data.
The Austrians, starting with Hans Mayer, have been working out a billard ball or stream view of economic causation since the 1930s:
http://www.cgl.uwaterloo.ca/~racowan/cause.html
economics is a “non-linear” discipline, in the “Artsie” sense of that word. Most (all?) economic models involve simultaneous causation. They don’t say that A causes B causes C causes D in a “linear” (Artsie sense) sequence like billiard balls.
The beginning of wisdom here is to junk the modelers background assumption of a complete God’s eye view of what is going on in the head of every individual, ie drop the idea that you have a full survey of all knowledge and — related — that each individual has a complete model of what he thinks is in the head of everyone else.
We live in a world of billions. We don’t pretend to model all of those individual judgers and planners in our own head.
We count on some — some (not complete) — stability in the network of price relations and in the patterned doings of know, and most importantly, unknown countless others.
That is how we understand the real causal world.
What we are doing or what we can possibly gain from God’s eye view models with completely stipulated elements all in the single head of a single modeler is a different and wider issue.
Nick writes,
“If your plan and actions are different from what I expected, I will probably revise my plan. My original plan may or may not have contemplated the possibility that you could do something different. It maybe be a contingent plan. (Here I think is where the trouble starts, because if I am fully “rational” I will be aware of the possibility that my beliefs might change over time, when I observe your moves, and so I will formulate a contingent plan, depending on your and Nature’s moves. And if so, if you do something different from what I thought your most likely move would be, and implement a different contingency in my own plan, can I really be said to change my plan? Is this a “disequilibrium”, or not?”
Nick, most importantly, we don’t understand and anticipate most of the patterned behavior of others by modeling a set “given” beliefs & desires we ascribe to others.
This is one of the lessons of Wittgenstein & Ryle & Hayek on rule governed behavior.
The point is a form of the “knowing how” vs “knowing that” distinction.
We simply understand and pair ourselves with the patterned behavior of others — and this is the deep background even to language (see Searle, who partially gets it, but works his hardest to get everything back in the ‘given’ boxes of believe / desire intentions).
The belief/desire model on cognition / language is a parallel mistake to the mistake of modeling the socialist economy as a product of ‘givens” in a mathematical equilibrium construct.
Nick, I must be missing something. Earlier you said, “I am talking about multiple decisions, each one of which is influenced by the others.” But I don’t see any example in the hypothetical cases you have described of some decisions A and B where it is bot the case that A influences B and also the case that B influences A.
Dan: I meant “multiple people’s decisions”. Yes, in my toy examples each person only makes one decision, but there are multiple (OK, two) people, and hence multiple decisions in that sense.
Greg: We (I mean as people, not as economists) observe other people’s patterns/rules of behaviour without enquiring into the reasons why people do what they do? Up to a point. I think we also have a “theory of mind”, so we have some idea how others would respond differently if we were to act differently. And this is important in explaining why we don’t act differently.
Yes, in my toy examples each person only makes one decision, but there are multiple (OK, two) people, and hence multiple decisions in that sense.
I understand that. But in the Cournot model, neither decision depends causally on the other decision. They are causally independent.
Nick: Regarding simultaneity, the Nash equilibrium is a red herring. The key point is that whatever simplification you use for the infinite recursion, real people use a simplification – if they actually did an infinite recursion they’d never act. As such, the simultaneity requirement is not meaningful regarding the causality of their decision making.
And this is the actual case in bigger examples. What people do is they take a point in time, assemble some form of assumption about the state of the system at that moment and make a choice/decision. The outcome of large systems is governed by simultaneity, but that’s different to saying that the actors decisions are.
Now we may or may not be in agreement, I can’t really get precision out of your terminology so far.
I’m talking about humans learning & adjusting their judgments in the context of the relative prices of the multi-billion person market economy.
It’s simply empirically not reality to claim that people are observing & modeling all these billions of minds.
Lets move to language and such things as background, unspoken negative rules of behavior.
The extent that we are modeling “beetles in the head” of other people, as Wittgenstein describes the Russell / atomistic model of “meanings in the head” is a scratch of the surface of what is going on — this is the point of all of the work of the later Wittgenstein.
See also Hayek’s papers in his Studies in Philosophy on unarticulated imitated ways of going on together or patterns of doings that constitute the practices and codes of behavior of groups of people.
The atomistic elements of meanings strung together in explicitly articulated codes are only the surface phenomena of a background of shared and unarticulated practices and ‘expectations’ of shared shared ways of going on together.
Bottom line — the lesson of Wittgenstein & Hayek is that the degree to which we build “theories of other minds” in terms of atomic beliefs & desires made possible by a much deeper, non-articulated shared structure of practices and mind that cannot be limned in terms of “given” atomic elements of “meaning” and relations between them.
If you read the literature of the philosophy of language and mind you will see nothing but failure and intractable pathology in the program which seeks to vindicate the “given” meanings & logical relations picture of language and the “given” beliefs & desires model of mind.
See, for example, the work of top philosopher of economics Alex Rosenberg on this topic, which has direct relevance as he shows to economic choice theory as imagined by main stream economists.
“Greg: We (I mean as people, not as economists) observe other people’s patterns/rules of behaviour without enquiring into the reasons why people do what they do? Up to a point. I think we also have a “theory of mind”, so we have some idea how others would respond differently if we were to act differently. And this is important in explaining why we don’t act differently.
Hayek’s argument against the “God’s eye view” of using economic math constructs to ‘imagine’ the economy or imagine socialist planning directly parallel’s Wittgenstein’s “private language argument” against using what Wittgenstein calls “a bird’s eye view” of language or ‘meanings’, and Hayek’s rejection of and then attack upon the “war economics” & math socialism of Rathenau/ Neurath / Lange / Lerner is paralleled by Wittgenstein’s attack on Russell’s & his own Tractarian atomistic/associationist/phenomenological & formal logical construct “cashing out” of language.
Here’s how.
Both reject the idea that the “givens” and given formal relations of the math / logical construct is a thing which captures the significance of the social human world of the economy or of language.
On the contrary.
Whatever significance we can give these elements from a “God’s eye view” as a formal stipulator of a construction made up of “given” elements & relations is made possible by our prior situated goings on in the real world of shared practices having a great deal of overlapping shared significance, i.e. the world of shared language practices and shared judgments within the net of moving signals of the relative price structure.
This is a “flip”, a turning of the picture on its head, you can see both men doing.
And Hayek does it twice, first in his understanding of the economic world, then in his understanding of the ethical and legal and shared practices realm. Hayek even seems in the end seems to be moving toward doing it with his global brain science, going the Wittgenstein practices route in langauge, which had already already been “flipped” from Machian atomic phenomenalism to a structured brain network theory (the famous Hayek/Hebb synaptical learning model of memory, mind, learning and categorization).
As someone with a bit of background in the practical applications of figuring out what others are going to do, I’d support the contentions in Nick’s post – human interaction is an affair of multiple causation, multiply interacting. Where the humanities differ is that they mostly refuse to formalise the possibilities. Because the essential point is that Adam and Bettie are human – they arrive with whole universes of understandings in their heads, many of them shared, most of them invisible even to themselves, some open to conscious manipulation. So the first rule is to understand what the participants think the rules are, who they think makes the rules, what freedom they think they have to bend or break the rules, who they think are the participants and so on. Example from travels in Asia in the 70s – when bargaining, in Indonesia high status people paid more, so the question is what status do you want to claim? In India, goods were bargainable or non-bargainable, and there were upper limits to asking prices – so you had to sort those categories first. In Iran, bargaining too hard was vulgar, and the transgressor had to pay to avoid shame. In Afghanistan, it seemed to depend on perceptions of how much firepower you had (I was too nervous to test this too hard). As Nick says, institutions matter, but that’s only the start. The conditions that make for equilibria are narrow, socially constructed and maintained, and subject to change without notice.
Just to add that Ronald Coase for one seems to have also arrived at the conclusion that formalising the matter does not add much:
http://coase.org/coaseinterview.htm
Academics attempting to make sense of the significance of words & logical implication had a framework for doing so exactly parallel to that of economists attempting to make sense of the significance of prices & the implication of prices for distribution.
In fact, both modern programs in their mature form came out the the same city — Vienna. In the word & logic domain the key figures were Wittgenstein and Carnap. And you can connect a direct line from Wittgenstein & Carnap to Abraham Wald’s formal existence proof of equilibrium.
BOTH of these programs sought to limn words & logic (language) and prices & distribution (the economy) by mapping these into formal models.
In the first case, by stipulating a mapping of semantics to particular meaning entities & then mapping the formal relation of these in propositional logic, a system of axioms.
In the second case, by stipulating a mapping of values to particular price entities & then mapping the formal value relations of these into an axiomatic system.
These are the “God’s eye view” constructs pretending to limn language and the economy that Wittgenstein & Hayek rejected — rejected because they actually deceive us into misapprehending where the significance we acribe as the modeler “God” to the elements of our constructs actually derive their purchase and significance — from the social phenomena in which we move and are embedded. We are embodied within language and within a social pricing system and we never have a synoptic God’s eye or bird’s eye purchase on semantic or price “entities” connected in formal relations — THE WORLD DOES NOT COME THAT WAY.
Prices are signals, imperfectly perceived and imperfect as instruments for orienting ourselves in coordination with others.
Language, ditto, although much more tightly bound in shared practices and successful common ways of going on together (read some Wittgenstein).
Nick Rowe: “Most (all?) economic models involve simultaneous causation. . . .
“Economics is about human interaction.”
I have a little trouble reconciling those two statements. Human interaction takes place over time. (OC, it may yield a system of simultaneous equations, but that is using “simultaneous” in a different sense.)
Nick Rowe: “I am trying to think of the model of human interaction that is the simplest possible model, and the most fundamental possible model.”
Mother-infant symbiosis comes to mind. 🙂
Nick Rowe: “I’m looking at Nash Equilibrium, comparing the “simultaneous” with the “sequential” version of the same game.”
By sequential version I suppose that you mean one in which the players use behavioral strategies. We know that behavioral strategies are potentially inferior, but easier to process cognitively. People tend to use behavioral strategies, possibly because they are easier to process. 🙂
Nick Rowe: “1. In the “Cournot” model, Adam makes his move before observing Betty’s move; and Betty makes her move before observing Adam’s move.
“2. In the “Stackelberg” model, Adam makes his move before observing Betty’s move; and Betty makes her move after observing Adam’s move.
“We sometimes say that in the Cournot game Adam and Betty have to make their moves “at the same time”, or “simultaneously”. But that isn’t strictly accurate. Betty might choose how many bananas to pick before or after Adam has already picked his apples. But if she doesn’t observe how many apples Adam has picked, until after she has already picked her bananas, it makes no difference.”
Addressing the latter point first, you are right. Simultaneity in this context is not about time per se, but about knowledge. We consider the moves to be simultaneous if the players do not know what the other’s move is before making their move.
As for the first point, these are not, repeat, not the same game. Knowledge states are part of the game.
Nick Rowe: “In the Stackelberg model, it is very tempting to say that Adam’s choice determines Betty’s choice, but not vice versa. Tempting, but wrong. If Betty had different preferences, or a different productivity on growing bananas, her reaction function would be different, and Adam’s choice would have been different too.”
If Betty’s reaction function were different, we would have a different game. In the game we actually have, it is OK to say that Adam’s choice determines Betty’s (in part, OC). Otherwise we end up with a very strange notion of causality. To repeat, knowledge states are part of the game.
Nick Rowe: “The simple “linear”, “A causes B causes C causes D” model of a causal chain just does not work, even for these two very simple models of human interaction (except in degenerate cases where one or both person has a dominant strategy).”
By “work” I suppose you mean that it will converge to an equilibrium. That is true. However, if what we are interested in is human interaction, if it does not converge, doesn’t that say a lot?