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Nicola Giocoli. Modeling Rational Agents. From Interwar Economics to Early Modern Game Theory.

Nicola Giocoli. Modeling Rational Agents. From Interwar Economics to Early Modern Game Theory. Cheltenham, UK, and Northampton, MA, USA: Edward Elgar. 2003. ISBN 1 84064 868 6. Pp. 480. 79.95 [pounds sterling].

Nicola Giocoli's book is a long and detailed account of the formalist transformation of neoclassical theory during the twentieth century. Not all the currents in this change are dealt with, on the ground that it is an alteration in the concept of rationality, from a psychological-behavioural idea to a requirement of logical consistency, that is at the heart of the transformation. The end result is represented best by the idea of a Nash equilibrium, although other embodiments, such as modern Walrasianism, expected utility theory and rational expectations theory, are also discussed. Throughout, the history of economic thought is dealt with as intellectual history, with different systems of concepts and understandings being modified, jettisoned and elevated without reference to those external events that might illuminate why the changes occurred as they did. (The Great Depression and the Cold War are mentioned as important, but only in passing and with no elaboration as to how and why they were important.) And few concessions are made to the reader's possibly imperfect knowledge of modern axiomatised economic theory or the mathematical theories from which it arose. The author knows the material very well, and is also well-versed in the history of neoclassical thought, but his exposition is often quite heavy going.

The transformation in the concept of rationality is characterised in three different but related ways. First, as a move from concerns of a social science with intentional and reasoned choice on the basis of agents' self-interest to that of the purely logical consistency of choice. Second, as a shift in perspective from what Giocoli calls a 'system of forces' image of knowledge to a 'system of relations' image, in which the focus switches from specific types of human decision makers in historical time to relations of consistency between more abstractly defined entities. (And Giocoli makes it very clear that he favours a reswitching.) Third, as a result of attempts by economists in the twentieth century to 'escape from psychology' and to 'escape from perfect foresight'. Analysing these two streams of thought dominates the first part of the book, which is followed in the second by an analysis of the rise to dominance of modern game theory.

The 'escape from psychology' concerns the attempts to free choice theory from any reference to psychological variables, and especially those variables whose existence and operation were deemed to be scientifically unverifiable. The crucial steps here were made by Hicks and Allen in the formulation of ordinal utility theory, by Samuelson's invention of revealed preference analysis, by Debreu reformulating Walrasian economics, and by Nash in providing a game-theoretic representation of strategic rationality. But there are also many secondary figures, including Pareto, Fisher, Slutsky and Savage, and Giocoli analyses them all with great insight. Underpinning the process, and driving it forward, is the attempt to make rational choice fully scientific, with particular notions of mathematical formalism seen to be integral to that endeavour.

The 'escape from perfect foresight' ran in a contrary direction because it concentrated on the unreasonable assumptions that neoclassical economists made about the information agents had, as well as their information-processing capabilities. The debate was concentrated in the 1930s and the upshot was to elevate the importance of understanding those learning processes involved in the attainment, or non-attainment, of equilibrium. John Hicks's Value and Capital is a high point, but Giocoli gives more attention to the contributions of Hayek, and particularly his reformulation of the very demanding properties required of equilibria.

According to Giocoli, the confluence of these two attempted 'escapes' created a stalemate in postwar economics. One path sought to release economics from those variables and processes that the other path propelled to the forefront of analytic concern. And Giocoli makes a convincing case for believing that it was this, and not any limitation in the mathematical abilities of leading economists, which explains why game theory took so long to attain its present exalted position. Strategic analysis simply did not address the question of 'how and why' equilibrium was attained, and its depiction of equilibria in terms of agents' common knowledge of rationality of each other and their consistently aligned beliefs assumed exactly those knowledges and competences that most postwar economists believed to be the chief problem with their subject. Thus the culture of economics had to undergo a fundamental change before the axiomatic treatments of Walrasian theory and game theory could be widely embraced. Giocoli treats this in the second half of the book, again with great insight. Inevitably, whatever was gained came at a very high price as the problems of learning and equilibration ceased to be concerns for most neoclassical theorists.

Many developments in neoclassical economics are ignored by Nicola Giocoli in the belief that they are peripheral. Thus, while Gary Becker's economics is mentioned as running against the grain of the move from the 'system of forces' image of knowledge to the 'systems of relations' image, there is no similar recognition extended to the work of other contrarian notables, such as Ronald Coase, Douglass North, Mancur Olson and Joseph Stiglitz. Thus it is suggested that Becker is more of a maverick than he actually is, and that there is more homogeneity in neoclassical economics than there actually is. Nonetheless, Giocoli cannot really be faulted here. While neoclassical economics is not a hierarchic unity, but rather a set of interrelated projects having strong family resemblances, insofar as there is a common keystone it is most certainly the concept of rational choice. Any alteration in the notion of rationality is much more significant than change elsewhere because it will reverberate throughout most of the subject. Thus the focus of Giocoli's book is wholly appropriate.

This said, though, there are two genuine criticisms that can be made. First, Giocoli makes no mention of Arrow's social choice theory, perhaps the first genuinely axiomatic formulation of economic theory in which a consistency notion of rationality is clearly present. This work set the standard of rigour in terms of which later neoclassical theorists would measure themselves, and it is this, rather than any novelty in his substantive conclusion as to the impossibility of democratic social choice, that constitutes the real significance of Arrow's work. Thus, one would have thought it to be important for the story that Giocoli tells, and it is surprising that it is left out. Second, only fleeting reference is made to a standard justification employed by neoclassicals to the charge of Giocoli that rigour has displaced realism in their discipline. This is the appeal to Friedman's 'as if' economics, in which a correspondence criterion of truth is replaced by an instrumentalist criterion of predictive accuracy. Such a methodology is a natural complement to fully axiomatised choice theory precisely because the concepts of such a theory are so abstract and therefore capable of many concrete applications. An extended discussion of this 'defence' could therefore have been reasonably expected from an author who is so critical of modern neoclassical theory.

However, these criticisms should not be given undue weight. Even if the omissions were repaired, Nicola Giocoli's thesis would, most likely, still stand firm. At the centre of the formalist revolution in economics is exactly that change in the concept of rationality on which the book focuses, and it treats many crucial steps in the process of change very well. Moreover, even if modern axiomatic economics were to validate itself along Friedmanite lines (which it so far has not done) the doubts and dissatisfactions expressed by Giocoli could still be given a rational voice.

M.C. Howard, Department of Economics, University of Waterloo, Ontario, Canada N2L 3G1. Email:
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Author:Howard, M.C.
Publication:History of Economics Review
Article Type:Book review
Date:Jan 1, 2004
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