An Empirical Interrogation of Perfect Information: Toward a Sociological Economics (Part 1)

This essay will be published in five parts over the next two weeks.

In this paper I empirically interrogate the perfect information formulation of Arrow-Debreu models in economics (Arrow & Debreu 1954; Debreu 1956, 1959, 1962). The spirit of this enterprise is to bring some of the keen theoretical, methodological, and practical tools of sociology to economics in order thereby to strengthen the quality of and dialogue between each discipline. Sociology’s relentless practical engagement with real world data, and the methodological and theoretical insights that accompany this practice can help empirically ground and evaluate the analytically rigorous ideas generated by economics. In brining sociology to economics this paper shows that (perhaps) one of economics’ most cherished ideas is in fact an unrealistic assumption: concrete empirical testing finds that perfect information does not really exist for real-world actors. The implications of these findings may not provide an immediate disciplinary revolution for economics, bet they do suggest that a radical reworking may eventually be required. Again, this paper will argue that sociology can aid in this reconstruction.

Theoretical pedagogy: Contextualized in sociology vs. black-boxed in economics

Both sociology and economics usually require students to take two semesters of theory, however the contents of those theory courses are not at all parallel. In sociology the usual division is classical theory (e.g., Weber) and contemporary theory (e.g., Goffman) whereas in economics the conventional distinction is micro (e.g., price theory) and macro (e.g., gross domestic product). The contrast could not be more evident — in economics they learn decontextualized tools and concepts whereas in sociology we learn about a rich intellectual genealogy. In economics theories are black-boxed as mere causal relationships whereas in sociology we situate theory within the context of theorists and the social problems that interested them. Below I will articulate how this benefits sociology, impoverishes economics, and how an embrace of the sociological approach could reinvigorate the moribund state of economic theory.

Every sociology student, undergraduate or graduate, takes a semester in classical theory wherein they learn about Weber, Marx, Durkheim, and often a wildcard fourth founding father (nowadays usually Simmel and a generation ago usually Freud). Sociological theory comes alive to students as they see ideas in their original context as illustrated with vivid and accessible examples about quartermasters in the Prussian army, France under Napoleon III, and Australian aboriginal religion. This shared grounding in our core texts gives sociologists a common vocabulary and a common and cohesive understanding of what it means to practice sociology.

In contrast to the rich historical detail sociology students enjoy in reading a Marx or a Weber, economics indoctrinates students with stripped down “widgets” and “Robinson Crusoe economies,” completely depriving them of the opportunity to situate these concepts in such familiar contexts as the politics of Italian city-states of the Renaissance. While unfortunate for students, the deficits of economic education hobble even the “mature” economics PhD who has an impoverished professional vocabulary. Whereas sociologists can convey volumes with a few syllables like “Durkheimian,” an economist’s vocabulary tends to be made up of flaccid terms like “monopolistic competition.”

Ironically, it is not sociology but economics where the dominant paradigm is called “neoclassical” and yet the classical element is hard to see as it is disembodied from the classics. Occasionally “neoclassical” economists will toss out a reference to the Cliff Notes version of the Wealth of Nations, but that is about the extent of it, largely because economics graduate education leaves economists incapable of intelligently discussing any work predating the Austrians and most young economists can’t even really remember the recent past of Keynes (aside from salacious, albeit cryptic, gossip).

The shame of the matter is that economics has a rich history of founders upon which to draw. Imagine the possibilities of economics were it to base its first semester not on substitution, supply, and demand, but on Smith, Malthus, and Ricardo. Economists trained in such a curriculum would routinely revisit the classics and situate most new work in that context. Economics would be much enriched by a research that was not a vaguely neo-classical synthesis but based in semi-autonomous discrete streams of neo-Smithian, neo-Malthusian, and neo-Ricardian work in dialectical conversation with one another. Gregory Clark’s study of how differential fertility and mortality by social class bred a superior race of the English has recently kickstarted an exciting field of neo-Malthusian economics, but that is only one of the economic founding generation.

Economics could profit just as much from the development of a neo-Ricardian school. It is true that Ricardo’s ideas are not directly compatible with recent economic research which is why I call for a neo-Ricardian school as compared to vulgar Ricardo-ism. In such a school one would not apply Ricardo’s ideas slavishly, but find ways to argue that more sophisticated and contemporary ideas can be built up from a basis of Ricardo. For instance, Ricardo held that in the long-run the natural price of an input was its cost of production and most contemporary economists recognize this insight as applied to manufactured commodities. However they lack Ricardo’s insight that this extends also to labor — specifically in the case of a long-run prevailing wage of subsistence.

The contemporary economist educated in the traditional disembodied version of “theory” might argue that Ricardo was simply wrong as living standards in industrialized countries are several orders of magnitude greater than those enjoyed in the late 18th century. Such a “refutation” not only shows a lack of respect for their ancestor, but a poverty of imagination about the meaning of “subsistence,” as can be seen by synthesizing several recent findings in economics. Sociologically minded economists like Robert Franks have recently noted the importance of relative deprivation where we assess our prosperity not absolutely but relative to the consumption of our peers. This includes not only obvious Veblen goods like $5000 watches and $200,000 cars, but also such things as housing and can potentially be extended to include nearly all goods. This line of research shows that even if we have an ever increasing level of goods, we still have a flat level of utility and it is bunkum to say that we have achieved a standard of living exceeding subsistence. This is reflected in “Baumol’s disease” or the tendency of so-called “real” wages to continue to rise even in industries with stagnating productivity — a phenomenon best explained by the need to provide subsistence level wages to labor along with a changing “real” definition of subsistence. Furthermore, an ever increasing proportion of American total compensation is devoted to health care, which quite literally is the cost of keeping labor in production. Viewed in this light a neo-Ricardian approach to economics can prove that in terms of utility, if not in terms of goods and services purchasing parity, wages have in fact tended to subsistence in the long run. This is only an example of the kind of devastating insight that economists could reach if they would only approach problems by viewing findings through the lens of foundational theory. While economists are able to measure things like rising health care costs and relative deprivation, their ahistorical vulgar empiricism prevents them from understanding what they mean. In contrast thanks to our educations in classical theory, sociologists can see the big picture by situating any finding within a Durkheimian, Weberian, or Marxist paradigm.

My advice to a really ambitious young economics grad student is to leapfrog the field by going past the classical economists of the Scottish enlightenment altogether and read the true founder of the field, the Athenian philosopher Xenophon. It is no accident that the field of economics is named after his Oikonomikos. While many economists probably suspect that their founder was a mercenary, it may surprise them to learn that his founding work was titled “estate management” not “of markets” (which would be Agoranomikos). Thus in Xenophon we have the insight that markets are ultimately comprised of command units, an insight that predates Coase’s Nobel-winning theory of the firm by twenty-three hundred years. (Perhaps if the rules allowed for posthumous awards the Bank of Sweden would have allocated credit correctly). Likewise, in Book II, Chapter 9 of Memorabilia, Xenophon describes embedded ties with a parable about Crito engaging the services of Archedemus to defend him against lawsuits not on a spot market basis of fee for service but through gift exchange to build trust and loyalty, a mechanism largely neglected by recent economics but which Xenophon demonstrates to be at the core of exchange in professional services. For the more conventionally-minded economist, Anabasis (Book 2 Chapter 6) also documents the birth of rational choice theory through Xenophon’s obituary for the original homo economicus, Menon the Thessalian, who “sought insatiably after wealth” and “natural affection he clearly entertained for nobody.” These are the kind of insights that economics loses by treating theory as though it consisted of black-boxed theories rather than following sociology’s model of treating theory as intellectual history.

The problem with literature reviews in economics

One of the problems with economics articles is that they are essentially just reports of new findings with only minimal references to relevant literature. Not only do economics articles fail to draw connections between the new findings and foundational literature, but they don’t even provide a thorough survey of literature from the last forty years! Rather the typical economics article cites about a dozen articles, most of them closely related findings from the ten years preceding the article’s publication. Obviously this constrains the development of theory-building to a cohesive paradigm and the average economist has no sense whatsoever of how any particular finding speaks to a general theory of market activity or human action. As a consequence economics as a whole is hopelessly fuzzy and muddled.

Sociology has a far superior system in which every single article is prefaced by an exhaustive review of the relevant literature, plus as many tangentially related literatures as possible. Not surprisingly, sociologists therefore have a very strong sense of how any particular finding fits into sociology as a whole and have developed a robust understanding not only of a general theory of human interaction but of how each aspect of sociology fits into that theory and where the boundaries of the field are to be found. Whereas economists spend endless hours debating whether a piece of research “is economics” the parallel question is rarely heard about sociology. This is entirely attributable to sociology’s convention of demanding that work be thoroughly situated within the literature, rather than merely bouncing around untethered to anything. In addition to theory-building, extensive lit reviews have several advantages over the economic system: convenience to the reader, facilitating peer review, reducing the volume of research, and benefits to incumbent researchers.

The most important virtue of exhaustive lit reviews is the convenience it provides to the reader who may be coming to a piece of research completely ignorant of the theoretical context in which the research was done. If someone was raised by wolves and upon reaching human civilization were given a copy of American Sociological Review, that person would have a thorough understanding of how each article addresses a body of literature. This writing style acknowledges that scientific articles should not be so presumptuous as to assume that the readers are competent scholars already understanding the theoretical and substantive issues involved. At present an ignorant person wanting to understand an issue of Quarterly Journal of Economics would probably have to first read several issue of Journal of Economic Perspectives, which, needless to say, is an inconvenience. Why not effectively build JEP into every journal?

Exhaustive lit reviews not only benefit the reader, but also the writer. Since peer review is double-blind, one can not know in advance who will be selected as peer reviewers. The prudent course of action is therefore to work in citations to every person who has ever addressed your subject matter. This avoids both the embarrassment of failing to acknowledge reviewer X’s contribution to the area and the publication lag incumbent in having to work in citations to X in the R&R process.

Furthermore, the fact that econ articles essentially lack literature reviews means that the articles are so short that the journals can publish them by the bushel. The typical issue of QJE publishes eleven papers and AER has about fifteen papers and eight research notes. Pity the poor economist who has to keep up with the approximately hundred and fifteen articles published annually between these two journals. In contrast, because sociology articles are so long, ASR usually publishes only about eight papers per issue and AJS about six papers per issue, for a total of less than eighty article a year between them. While eighty long articles might seem more taxing to read than a hundred and fifteen short articles, in fact most sociologists find this quite manageable because the articles don’t take very long to read if you skip the lit reviews and go straight to the findings. Thus if only economists were to make extensive literature reviews like sociologists, economists would have to devote less time to the tedium of reviewing literature.

Finally, building up a robust understanding of an area of literature takes much more time commitment than creating an original empirical contribution. Furthermore whereas one can only milk a single empirical finding for, at most, four or five articles, one can build a career using the same literature review. To put it in terms economists can understand, empirical research is best conceived of as a “variable cost” and learning the literature as a “fixed cost.” In any industry, including academia, large fixed costs serve as a barrier to entry which in turn constrict supply and raise prices. Thus incumbent economists have a tremendous rent-seeking opportunity available to them by demanding more extensive literature reviews which will restrict the entry of younger economists (who may be able to analyze data but can scarcely learn hundreds of citations) and this restricted entry will make for a seller’s labor market in economics. The implications of such a rent-seeking strategy can be easily seen by contrasting the penury typical of economists to the opulent compensation enjoyed by sociologists.

Thus part of the explanation for the wretched state of economics as a discipline is the failure to acknowledge that they stand on the shoulders of giants — usually at least sixty or seventy giants.

ark building and economic development: bringing the flood by back in

Homer Conomicus

University of Nancago 

Abstract: Recent scholarship by economists draws attention to the link between population movement and development. As Acemogulo and others have argued, economic growth is strongly correlated with the colonization of the new world by European settlers. This paper offers an alternative explanation based on recent scholarship in historical sociology. The pattern of economic development seen in the present day global economy is not due to patterns of colonization and transmission of state institutions. Rather, we argue that economic development should be attributed to massive reconstruction efforts occuring in the pre-delguian period. After situating our argument in the literature on divinic isomorphism theory, we argue that economic development is most likely to occur in places that are the nexus of transnational capital flows that bolstered the pre-delugian naval industry. Using recently discovered data from the Dead Sea Scrolls and the Encyclopedia Brittanica, we show that GDP is highly correlated with being centrally located in international ship building networks that arose as the population needed to create vessels for themselves and the local fauna for the Great Evacuation effort.

This theory explains a series of stylized facts about global patterns of development. First, the civilizations with the highest level of development are those with great sailing traditions, such as the British Isles and the Maldives Islands. Second, the most economically developed nations often have the cutest animals, such as Chinese pandas. Cute national symbols indicate superior ark building capacity that allowed the most charismatic megafauna to be saved for posterity. Third, it explains the somewhat puzzling slapfest between development theorists Gregory Clark and Giovanni Arrighi. It’s clearly the case that Clark’s theory of the rise of capitalism ignores the need for ark industry leaders to double up on zebras and geckos, while Arrighi has not considered the application of world system theory to the exploitative relationship between ark owners and ship builders, most of whom were not granted space on the arks they built.

In conclusion, we argue that development theory needs to “bring the flood back in.” Only by understanding how post-lapsarian societies responded to the oncoming deluge can we fully understand the dispersion of the human population and its subsequent economic development. Future research can explore unanswered issues in biblical historical econo-sociology such as the declining price of wine, bread and fish in Galilee during the ministry of Jesus and the abrupt end of the illicit urban sex industry in the cities of Sodom and Gomorrah.