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Problem analysis vs. Problem solutions January 26, 2009

Posted by larry (Hobbes) in economics, Logic.
Tags: , , ,

Unfortunately, there is no necessary logical connection between the analysis of a problem and its solution. The two are essentially independent. So, someone could analyze a problem correctly but provide incorrect proposals for solving said problem. In accepting Roubini’s assessment of the problem, we do not need to accept his ideas on how it can be solved or what he thinks might be poor solutions, as his philosophical/theoretical stance will largely determine what he believes to be viable.

This is a problem with a lot of discussions in economics. Lots of assumptions not made either explicit enough or at all. Others introduce ideas that they think are new but have actually been around for years. For example, Soros’s introduction of the notion of reflexivity (a kind of feedback loop in economic behavior) has been a known problem in philosophy and parts of social science for over 50 years. Yet most economists fail to acknowledge this except for Soros and a few others. Neoclassical economists like Stigler and Friedman ignored it completely and possibly weren’t even aware of the issue. Keynes was aware of this problem though he didn’t discuss it in these terms.

Since a solution of a serious economic problem invariably involves a political (policy) dimension, economists aren’t very good at incorporating socio-political policy considerations into their analyses, hence their solutions should be inspected closely.


1. Ruth - January 31, 2009

What is a unique solution?

thedukeofurl - March 26, 2009


Whether there can be a unique solution depends on the theoretical context. For example, in game theory, a unique solution is a point of equilibrium, a saddle point. It is the one and only strategy a player should choose. The Prisoner’s Dilemma is a game that has NO solution. There is no sinlge strategy that is the best out of all possible strategies.

Most situations do not admit of unique solutions and many theories do not allow for them either.

2. thedukeofurl - January 27, 2009

Hi Ruth, DRAFT

The first thing I would say is that, generally, inaccurate analysis can not generate a solution. There are historical exceptions to this rule, but they are exceptions, such as Planck’s incorrect calculation of his constant. Now, the question becomes whether an accurate analysis can generate a unique solution. I would argue that this can be shown in general to not be the case, that is, that other than in exceptional cases, no analysis guarantees a unique solution. (There are examples of both uniqueness and non-uniqueness in arithmetic.)

I think this also shows that this issue has nothing to do with differences in disciplines. Hence, the second thing I would say is that, contrary to the view of some economists, economics is a social science. Thus, any “technical” solution that ignores the socio-cultural context in which the solution is being implemented becomes otiose. It has a fiscal “technology”, but this can not be fruitfully implemented or understood outside the broader socio-cultural context in which fiscally oriented behavior takes place.

Such issues arise in engineering in respect of lo-tech vs. hi-tech solutions and which might be more appropriate in a given economic, social, and cultural context. For example, an engineer may wish to implement a hi-tech solution when a lo-tech solution might be more appropriate. I guess what I would argue is that there is no such thing as socio-culturally free technical solutions to economic problems. This is in addition to there being no unique solutions to a given problem.

In the context of economics and the current financial crisis, a few financial economists are interested in bringing psychological considerations to bear on their analyses of financial behavior. But one thing that seems to be missing is a decent theoretical assessment of the influence of the situation on economic behavior.

All behavior I would argue can be shown to be situationally influenced if not “determined”. The Stanford Prison experiment and the various Milgram experiments show, relatively conclusively I think, that most people behave in more or less direct response to the situations in which they find themselves. And this includes the economic behavior of banking executives.

Some lament that bankers are failing to act in the national interest. What such analysts fail to appreciate is that the bankers are reacting to the specific situation in which they are personally embedded and in which they are acting and that their personal situations do not coincide with what might be best for the system as a whole.

Others have noticed that what might be “rational” for an individual banker may not be so for the banking system as a whole. But this is because the situation individual bankers are in is not identical to that in which the system as a whole resides and to which it is “responding”.

A number of economists and psychologists have contended that there is a self-selective process in operation, for example, that risk takers gravitate toward situations in which risk taking is the norm and expected. But there is risk taking and there is *extreme* risk taking. Without denying that such a selective process takes place, what evidence there is indicates that situational factors may well override individual psychological traits, perhaps enhancing them.

The “moral” to draw from this is that “moral hazard” appears to be primarily situationally determined. Hence, it is completely unrealistic to expect most people to act altruistically in situations where greed is being rewarded and, indeed, where non-greedy behavior may be punished. Just as in the Milgram experiments, there have been banks and their executives who have refused to feed the bubble, such as J.P. Morgan and the Bank of America (the fiscal problems of the BoA are due to it being forced by the government to buy the bankrupt Morgan Stanley investment bank). The term “herd behavior”, though graphic, is a misleading term, as human situationally based behavior is not like that of a herd of cows. Even Keynes almost fell into this trap, though his interpretation of such behavior was reasonably sophisticated – he claimed that people appealed to general conventions when how to behave became unclear.

One approach to this particular difficulty is to not focus on individual psychology, such as greed, as an explanation of the bad behavior of bankers, but on the nature of situations and the rewards inherent in them. Having said that, individuals must be held responsible for their actions. Hence, especially egregious behavior should be punished, in this case perhaps by jail terms but certainly fines.

3. Ruth Wilson - January 27, 2009

Hi Larry
I think the phenomenon of ‘specialists’ being unaware of long-standing insights in related disciplines that are highly relevant occurs not just in economics. So you should write somewhere appropriate about the feedback loop – it may help!

Does accurate analysis help determine solutions? Are you pitting one kind of analysis (eg technical) against a different kind of solution (eg political)? In which case, it is an unfair contest.

It seems to me that inaccurate analysis or incomprehension is unlikely to be helpful. Sometimes ignorance is bliss – there must be instances where a positive outcome has been achieved that would never have occurred if the people involved ‘had known better’. On the other hand, it seems to render futile all our efforts to understand if they are of no help in guiding us forward.

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