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game theory debate

October 12, 2005

A mini-debate has ensued, starting with Michael Mandel weighing in on the chief methodological problem with game theory — its presupposition of the adoption of perfectly mutually-adjusted strategies by actors. Tyler Cowen ignores this critique by taking the somewhat dialectical position of saying that if it improves our ability to think through economic problems, then it's useful.

Russell Roberts seems to agree, but notes that the argument cuts both ways: "The problem is that game theory can organize your thinking the wrong way because it tends to cause its users to underestimate the power of competition. I assume this is a result of taking payoffs as given when in fact they are often endogenous and affected by market forces."

All of this brings to mind the fact that long before I took a single course in economics, I had taken a course in Control Systems theory, using this book. It could be argued, as Cowen seems to suggest, that the mathematics of transfer functions could also be fruitfully applied in enhancing understanding of economic phenomena. In some ways, I think my knowledge of transfer functions has improved my understanding of economic phenomena in ways that other mathematical constructs cannot, since a fundamental property of transfer functions is that their response to a given input varies over time. But, like virtually-useless indifference curves, I have to wonder about the opportunity cost of learning and expressing economic thoughts in game theory or any other sort of mathematics.

Roberts's anecdote certainly shows that there are some graduate student economists that have not absorbed the basic lessons that the vast literature of economics offers. If Cowen's defense of game theory were valid, then it would be reasonable for me to say "the strongest argument for including the mathematics of transfer functions (and the attendant mathematics of differential equations, LaPlace transforms, and Heaviside's operational calculus) into an education in economics is simply to chat with someone who doesn't know any".

Bad logic. Bad economist, bad! Oh, for you non-engineers — when I say transfer functions, I mean this kind, not the econometric kind.

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