Today marks the 100th anniversary of the birth of Julia Child, and surprisingly, it was a blog post on economic theorizing reminded me of the famous cookbook author this morning. I’m sure it wasn’t quite the metaphor Rajiv Sethi had in mind when he posted “On Prices, Narratives, and Market Efficiency,” but the article suggested to me that just maybe economic theories are a bit like recipes.
Sethi’s article reacts to John Kay’s response to Robert Lucas’s article addressing the Queen of England’s question: Why had economists failed to predict the financial crisis? More directly, Sethi explores the issue of how economists should change the way they work in order to better understand economic fluctuations. Sethi likes Kay’s formulation, of prices as the “product of a clash between competing narratives,” and he ties it usefully to some existing theorizing by Michael Harrison and David Kreps on speculators with heterogeneous beliefs.
The idea [from Harrison and Kreps] that prices are “obtained through market aggregation of diverse investor assessments” is not too far from Kay’s more rhetorically powerful claim that they are “the product of a clash between competing narratives”. What Harrison and Kreps do not consider is how diverse investor assessments change over time, since beliefs about transition probabilities are exogenously given in their analysis. But Kay’s formulation suggests how progress on this front might be made.
Kay suggests that more than just deductive logic will be needed to understand the variety of conflicting narratives and how they change; Sethi, while agreeing, adds that deductive reasoning could be pushed still further.
The economic theories as recipes metaphor suggests that economics is just a way to get from a bundle of raw elements, different kinds of data and interpretations, to a more useful product. Unsettling in such a metaphor is that recipes are many and diverse, and unifying principles appear to be hard to find. There is no general theory of cooking that will tell us the one best way to combine a given set of raw materials into the perfect finished product. It depends on what you want to produce, and what the tools are at hand.
Perhaps too there is no one best way to analyze a given set of observations into the perfect slice of economic understanding; perhaps there is no general theory of economics. This is not Sethi’s argument, and it is not even my own settled view. Yet if the economy itself is always open to entrepreneurial insight, which is one way to say we are never at a point in the economy where improvement is impossible, then economics itself is similarly always open to insight and improvement.