30 Sep 2011

Nick Rowe, Kung Fu Master

Economics 21 Comments

I’m not sure what to make of this guy Nick Rowe. I picture him as a veteran Kung Fu master, who declined to help when I told him my clan was going to battle the evil Keynesian duke. But then when some of the women and children in our town got ambushed, Master Rowe appeared out of the shadows to lend assistance. Yet before I could properly thank him, he disappeared once again.

Anyway check out this post, which a reader sent me. Some excerpts:

The Lucasian map is not the Hayekian territory

In defence of Lucas ’72.

Take any macroeconomic model of a market economy with inefficient aggregate fluctuations. In fact, take any economic model where something bad might happen.

Assume that model is literally true.

The people in that model are idiots.

This conclusion follows immediately. If they weren’t idiots, the people in the model would appoint the economist modelling the economy as central planner, who would tell them all what to do, and make them all better off.

The people in Lucas’ ’72 model are complete idiots for producing less because they don’t realise there’s a recession on.

The people in New Keynesian models are complete idiots for waiting for the Calvo fairy to give them permission to cut prices in a recession.

All models suffer this same problem. If the world really were as simple as the economic model of that world, people would figure it out, and wouldn’t let bad things happen.

The map is not the territory. All models are simplifications of reality. They leave masses of stuff out. That’s what makes them models. That’s what makes them (potentially) useful. But it’s also what makes any model of a market economy self-contradictory. If the economy really were that simple, people wouldn’t need markets to resolve the Hayekian problem of the coordination of the changing plans of multiple people, each with their own local knowledge.

Suppose recessions lasted 1 week. If they did, I think most economists would have a very different view of Lucas ’72. “It takes people 1 week to figure out there’s a recession on and how to react? Sounds plausible.”

Suppose recessions last 100 weeks. “It takes people 100 weeks to figure out there’s a recession on and how to react? Sounds totally implausible.”

But maybe real world markets are 100 times more complex than the simple demand and supply model. And maybe the signal-processing problem is 100 times more complex than in that simple model. And maybe it takes people 100 times longer to figure out how to react, when one person’s reaction depends on everyone else’s reaction. That sounds plausible to me.

We draw a supply and demand curve and point to where the two curves cross. We shift the supply and demand curves and point to where the two new curves cross. The only people who talk about the process of getting from the first point to the second point are: teachers of Economics 1000; Austrian economists.

Maybe it takes time to get from the first point to the second point. Not because people are idiots, in not changing their prices, or not figuring out what’s going on and how to react. But because the territory is a lot more complicated than the map.

And it’s always going to be hard to build a map of how the territory is more complicated than the map.

21 Responses to “Nick Rowe, Kung Fu Master”

  1. Peter Marwood says:

    “Its why we play the game”

  2. david stinson says:

    I follow Nick’s blog. The thing I find about Nick is that his thinking actually seems to evolve over time in response to new events and new arguments made by others. Amazing but true. He’s not a closed mind.

    • Cahal says:

      Yes there are few who do this, although the author of this blog is one of them, which is why it’s pretty much the only Austrian blog I follow (that and his sense of humour).

  3. Bob Roddis says:

    This is just the historical critique of the entire “progressive” agenda put into “economics” lingo. Nothing wrong with that. “Progressives” think average people are too stupid to run their own lives which must be run by experts who are (surprise!) the “progressives”! Of course, how can people too stupid to run their own lives be smart enough to select the overseeing experts to run their lives? I point this out to the Imperious Lord Keynes at least weekly. In fact, I said for the 458th time this morning:

    “LK believes that any and all free voluntary human behavior leads inexorably to a failure of aggregate demand and requires a regime of compulsory monopoly funny money dilution with “regulation” by people selected for that purpose by the very same people who are too dumb to avoid a lack of aggregate demand in the first place (and it’s all backed up by SWAT teams)”.


    This is the psychological reason why “progressives’” heads explode when confronted with Austrian School ideas. There is no role for them to play in the form of harassing average people (because average people must be allowed to price things on their own) and the “progressives” learn that most social, economic and political problems currently afflicting mankind are the fault of the “progressives“ themselves. Eeeeeeeek!

    This also explains why “progressives” don’t worry about the “progressive” BHO slaughtering Pakistanis and killing Americans without trial. It’s all OK so long as a wise “progressive” is in charge of bossing the rabble around.

    • MamMoTh says:

      You are dumb enough not to have tried any kind of therapy that would have prevented you from wasting your life. It’s a shame no progressive helped you.

      • Bob Murphy says:

        Hey guys: Can you flip a coin and have your constant fight on only 1/2 of the posts, starting now?

        • MamMoTh says:

          A funny money coin?

          • Tel says:

            No, a gold coin.

            • MamMoTh says:

              Then I’d rather have Murphy write twice as many posts.

            • yahya says:

              how about a coin with two heads

    • Bob Roddis says:

      Hayek says similar things, but in a nice way.

      Will: “Dr. von Hayek, capitalism and particularly American capitalism would seem to have a good record at giving people a rising standard of living. Why are so many intellectuals, and particularly so many economists, skeptical about and even hostile to capitalism?”

      Hayek: “Well, I’ve been puzzling about it for a long time, particularly about the economists who ought to understand better. It’s very difficult to know why they don’t. I think it’s the intellectual attraction of a system you can deliberately control, which is fascinating to the intellectual.”


  4. Seth says:

    As Sagan said, “If you wish to make an apple pie from scratch, you must first create the universe.”

  5. Tel says:

    We draw a supply and demand curve and point to where the two curves cross. We shift the supply and demand curves and point to where the two new curves cross. The only people who talk about the process of getting from the first point to the second point are: teachers of Economics 1000; Austrian economists.

    This is totally unfair, and untrue. The progression from one point to another is known as “market dynamics” and if you go a bit of a google search you will see that it is a well established concept, lots of people study it, lots of different approaches have been attempted. True, we don’t actually have any good explanation of how market dynamics works… but that’s not for lack of attempts.

    • Bob Murphy says:

      Tel, I googled it and (admittedly) only looked at the first two main results. From what I could see, they were studying how the supply and demand curves change over time. That’s not what Rowe is talking about. He’s saying have the supply and demand curves move JUST ONCE, and then talk about how the economy actually goes from the original to the new equilibrium.

      I’m not saying Rowe’s right and you’re wrong, just saying that so far I see no evidence that Rowe is wrong. For example, when I was in grad school we would study a “dynamic” economy, where the capital stock changed over time etc. But even here, in every moment you were in equilibrium. It’s just that as time passed, the fundamentals would change, so you had a succession of different equilibria states.

      • Tel says:

        Bob, time must pass for any movement to occur. Classical economic analysis is focused on finding the equilibrium point and thus it completely ignores time as a variable. The classical economic gives “the long run” solution. It says nothing about how long, “the long run” really is (maybe days, maybe years, maybe much longer).

        Rowe describes one case of the supply and demand curves moving just once THIS TIME. Until next time when they inevitably move again, as we know they will do. The point about market dynamics is that they move ALL THE TIME, but the speed and size of fluctuation is not constant either.

        When Rowe makes comments like “Maybe it takes time to get from the first point to the second point” he is talking about market dynamics right there (maybe he doesn’t know it by that name).

        By the way, Keynes also moaned about the incompleteness of the classical economic model with comments like, “In the long run we are all dead.”

        • Bob Murphy says:

          Tel, I’m not trying to be a jerk here, but you are completely ignoring what I said and acting like Rowe is still being obtuse.

          My hunch was–and you are here confirming it–that “market dynamics” looks at what happens as supply and demand curves bounce around over time. This to me sounds like it is a study of a succession of equilibria positions. There is equilibrium at t1, which differs from the new equilibrium at t2, etc.

          That’s not what Rowe is talking about. He is saying that only the Austrians discuss how you actually get from one equilibrium to another.

          • Tel says:

            This is the sort of book I’m talking about:


            I haven’t read past the first couple of chapters, and I can’t help thinking that such an amazingly complex approach probably doesn’t yield useful results in proportion with the effort involved. This particular guy is Keynesian, BTW, but there are heaps of similar efforts out there, and they are genuine attempts to go beyond the classical equilibrium model.

            You will see the use of differential equations, state space trajectories, and most commonly the equations they come up with have no analytic solution so they use computer simulation instead.

            Note: I’m not saying this approach is the great holy grail or anything, I think it’s still early days. But the point is, lots of folks are making the attempt, not just Austrians.

            It’s entirely likely that the Austrian approach is more useful on a practical basis (I hang around here don’t I?) but the other guys do deserve credit for a serious attempt to cover that territory.

          • Tel says:

            Now that I’ve gone for a rummage on the topic I pulled up one of Steve Waldman’s posts that is sort-of related, but it’s a year old so apologies in advance anyone who has already seen it.


            (much more informal and approachable than the above book link)

        • Tel says:

          I’ll give up with the references now, I promise 🙂

          Barkley Rosser has a knack for writing dry but readable review articles in this general sphere. This one is titled EMERGENCE AND COMPLEXITY IN AUSTRIAN ECONOMICS so it might be of some interest to regular readers here (finally someone who has bothered to pay a bit of attention to Austrian theory)


          Dynamic complexity has been defined by Rosser (1999) following Day (1994) as occurring in dynamical systems that do not converge to a point, a limit cycle, or a smooth expansion or contraction endogenously.
          Dhamaraj and Velupillai (2010) refer this as “Day-Rosser complexity.” This is generally broken down into the “four C’s” of cybernetics, catastrophe theory, chaos theory, and agent-based complexity.

          … and in conclusion …

          However, the idea of complex emergence involving the development at higher levels of entities that are somehow more than or at least different from the “sum of their parts” was strongly pursued by F.A. Hayek, especially later in his life. It drew on both his work in psychology to study the emergence of mind from neurological processes and structures and rules, with some of his work on this linking to ideas from computational complexity, while his studies of the emergence of market structures and broader social structures such as systems of law draws more specifically on evolutionary processes that operate interactively between the lower and higher levels in both upward and downward causation in a balancing of strong and weak emergence. In this effort, Hayek’s work foreshadows more recent work by such figures as Langton, Wolfram, Kaufmann, and Mirowski who all see complex emergence as profoundly linked to evolutionary processes.

          Oh yeah, this is coming from an evolutionist viewpoint (same as Kaufmann) and kind of leads into agent-based simulation, and the persistent question of whether there really is a macro.

  6. marris says:

    Rowe’s post is excellent.

    @Tel Does it really matter whether we use a more complicated “market dynamics” model? Of course we _could_ define a “demand surface” with a time dimension. Or a demand curve stochastic process.

    Rowe’s point is that people would need to be “idiots” to blindly act out the model, no matter how complex. They would more likely to incorporate it into their plans, and try to do better than the model suggests. I think *that* is the point of Rowe’s interest rate example.

    The Hayek stuff is very interesting. Thanks for the link.

    • Tel says:

      Look, I’m not advocating overly complex models, I fully understand they are a PITA to work with and don’t seem to deliver significantly better predictive power than tossing straws. I’m not in any way disagreeing with Rowe’s thesis here. Yes, I get it, that the model is not equivalent to reality. I understand that the map is not the territory, the finger pointing at the moon, everything Zen, yadda, yadda.

      All I’m saying is that other non-Austrian schools have also realized this and are taking genuine steps to search for a way forward. They may not find anything useful, but making models is fundamental to the human way of thinking about the world. Thus, when Rowe goes a step further and says:

      The only people who talk about the process of getting from the first point to the second point are: teachers of Economics 1000; Austrian economists.

      What he is saying is that the other schools of economics are stuck in the timeless paradigm of classical economics. It ain’t true, they also “get it” that the model is not the territory, they recognize the weakness in their models, and they are making an effort to do something with that. It may well be also true that their efforts are ultimately doomed… but that’s another story. I’ll go back to quote Barkley Rosser talking in 2009 about Hayek:

      Another argument stressed by Koppl, but by few other Austrians, involves the idea of computational limits to knowledge, implying bounds to rationality and the need for policy makers to be humble and proceed with caution. This idea links to ideas of computational complexity, and Koppl (2008, 2009), along with Koppl and Rosser (2002) see this ultimately inspired by his work on psychology (Hayek, 1952, pp. 185-190), and expressed again strongly in his essay on complex phenomena (1964). The mind operates as a rule-following classifier system. However, as such it is subject to the laws of logic, and among those laws are the theorems of Kurt Gödel that imply incompleteness of logical systems. This incompleteness is deeply tied to self-referencing by systems, and Hayek in particular cited the diagonal proof method to argue that the mind cannot know itself, which can be extended to the idea that no agent or model of the economy can fully know the economy (Koppl and Rosser, 2002). This then provides a computational foundation for bounds on rationality.

      J. Barkley Rosser, Jr. is not your average Keynesian by any means, but as I linked above, the New-Keynesians are exploring similar territory in their own way. It’s unfair to dismiss their efforts as if they are not even trying. They may be wrong, it may be hopeless, but you can’t just wave hands and make them go away, you have to actually deal with why their approach is wrong.