Thursday, May 25, 2006

Things You Don't Learn if You Don't Go to Eton

According to Keynes, in the General Theory, classical general equilibrium theory is proleptic.


n. pl. pro·lep·ses
adj. pro·leptic or pro·lepti·cal

1. The anachronistic representation of something as existing before its proper or historical time, as in the precolonial United States.
a. The assignment of something, such as an event or name, to a time that precedes it, as in If you tell the cops, you're a dead man.
b. The use of a descriptive word in anticipation of the act or circumstances that would make it applicable, as dry in They drained the lake dry.
3. The anticipation and answering of an objection or argument before one's opponent has put it forward.

The problem is thus:

Individual knowledge and perceptions of time are essential concepts for any micro-behavioral theory, and yet knowledge is limited and perceptions of time and knowledge are socially constructed by macro-level social processes. Economic processes occur in real time, with frequently substantial time lapsing between economic decisions and the realization and evaluation of the outcomes of such decisions. This problem is particularly salient for the question of savings and investment, wherein economic agents defer present consumption with the expectations of increased future consumption/returns. Herein lies the paradox:
a) the future state of the economy which will reify individual expectations is determined by the aggregate of individual choices made at present (and some random chance).
b) The simple act of individuals choosing changes the future on which they base decisions at present.
c) At present, the information sufficient for individuals to make optimal decisions does not exist.

Classical (and neoclassical) economic theory pretends this problem doesn't exist by assuming things like rational expectations, and that individuals can make very sophisticated, perfectly accurate forecasts and solve very complicated multivariate intertemporal optimization problems. But even if people had such knowledge and cognitive processing capacity (by the way, clinical experiments suggest this is not how people behave, duh), it is epistemologically impossible to make such optimizing choices.

Hence, proleptic. American public schools let me down again.


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