Friday, July 17, 2015

“Rationality” in the Theory of the Firm... Conclusion

Previously: Introduction; Part 1; Part 2; Part 3; Part 4; Part 5; Part 6; Part 7; Part 8

As we have seen, the response of Keen and Standish is sorely lacking. They continue to misunderstand or misrepresent textbook models, fail to recognize how competitive profit maximization lowers profits, offer no coherent theory to support their contrary arguments, and continue to insist– despite all evidence– that their simulations support their claims.

Defending this failure, the authors write
Admittedly, the agents specified in our paper are not sophisticated enough to do this, but this was a deliberate choice, since we wanted to show that agents following a simple iterative and non-collusive algorithm would choose output levels that clustered around the true profit-maximizing level of output, and not the Cournot level.
The words “not sophisticated” and “simple” are perhaps telling. Keen and Standish seem to argue that their firms are rational profit-maximizers to but insufficiently intelligent to figure out that someone else might have a better strategy. The most frustrating thing about their work is that the claim they fail to support– the existence of a competitive equilibrium at the collusive level within the infinitely-repeated Cournot-Nash game– is itself textbook. Far from debunking textbook economics, they simply do a terrible job of catching up to it.

Read my original Comment (including Technical Appendix) at World Economic Review.

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