SOUND ECONOMICS. Jane Galt makes a peace offering to her critics. The opportunity remains, however, to offer a few observations on the methods of economics. Consider, first, a Semi-Daily Journal item attempting to link Robert Barro to a quote, "Isn't there an existence theorem proving that there is a second best argument for any policy?" The problem of second best presents a tempting, but not justified, refuge for sloppy policy-wonkery. Put simply, the argument runs this way: if not all resources are being allocated efficiently, a partial-equilibrium policy intervention that addresses the inefficiency in one market does not imply a more efficient allocation of resources generally. The temptation policy-wonk types sometimes fall victim to is to respond to a criticism of inefficiencies remaining under their policy with an appeal to a second-best argument, which is dangerous, because as Whinston et. al note, "the conceptual distinction between first-best and second-best problems is not sharp," to which I would add, the ability of a policy wonk to identify an inefficiency that contracting agents hadn't already identified and attempted to rectify is likely limited. General equilibrium thinking has its uses.

That's also true of game theory. Professor Farrell is less than impressed: "Game theory - don't start me on game theory. A notorious little result called 'the folk theorem' means that pretty well everything goes in the infinitely iterated games that are needed to model moderately complex social interactions - the best that economists and game theoretic social scientists can do is to show that whatever particular constellation of strategies that they're interested in is an equilibrium, happily ignoring the fact that there are umpteen billion other possible equilibria out there which are equally plausible from a game theoretical point of view."

It's not that ambiguous. The first statements of the Folk Theorem appear circa 1959 -- scroll down. At the risk of oversimplifying a bit, the folk theorem gives any equilibrium with average payoffs to each player that exceed the iterated Nash equilibrium as a perfect equilibrium with sufficiently patient players (see Theory of Industrial Organization 268 for a more precise, if full of linear algebra, presentation.) Sounds to me like a result that would be of great use in understanding the evolution of cooperation, including but not limited to social norms and governments. The onus is on the researcher to think carefully about the objectives of the agents and how they interact. It is bad form to set up problems in such a way as to force the results. So much for "anything goes."

There are other reasons for people in different disciplines to talk with each other. Another Farrell Blog post, referenced here, addresses some of the same manifestations of repeated contract, hierarchy, and concentration that Bennett Harrison noted nearly ten years ago. Alas, the state of understanding in economics hasn't progressed much since then. There has to be a better way of thinking about the evolution of concentration than as the equilibrium of a Markov process.