The Outdated Math and Physics Behind Economics
In Who Cooked Adam Smith’s Dinner, Katrine Marçal traces the roots of mainstream economics and particularly neoliberalism. One of the strands she discusses is the the connection between economics and Newtonian physics. Newton believed that the universe was made up of fundamental particles. To understand complex physical things, you have to break them down into smaller and smaller pieces until you hit the unit of everything, the Lego blocks from which the universe is constructed: the atom and the photon (Newton thought the photon was a particle). From there you can work towards an understanding of the cosmos.
Particles are governed by forces. For Newton, the important force was gravity. The ultimate particle and the ultimate force can be used to explain a lot of the physical phenomena which we can observe with simple tools. Newton’s theory is deterministic: the future is predictable because particles only move in accordance with rigid laws.
In economics, the atom is the individual. The force that sets those atoms into motion is self-interest.
I’ve made passing reference to this before, but Marçal’s book brings it to the forefront. Most of the time when we hear about the history of economics after Smith, we hear about the math stuff, frequently starting with the idea of marginal utility generated by William Stanley Jevons around 1870. Jevons was a mathematician, who set out to create equations for the calculus of pleasure and pain as described by Jeremy Bentham. The subsequent history of economics can be read as a long math exercise using mostly calculus, and linear algebra (matrices) for modeling.
The thing is, math was just being formalized in the 1800s. Riemann completed the formalization of the calculus in 1854 (here’s an interesting history.) Other areas of math were being developed and formalized at that time, and development continues today, with, for example, fractal math. So maybe a good question is why economists stick with 19th Century math. Can’t they find something new that might work better than the obviously lousy models they use today that were incapable of predicting the Great Crash? I mean, how could anyone think it makes sense to model human beings as a large number of identical particles that only interact in monetary transactions and are otherwise unaffected by each other; and all of which are subject only the force of self-interest?
But just as math has advanced, so has physics. One of the changes is that physicists aren’t searching for ultimate particles any more; in fact as we currently understand things, we aren’t even sure the things studied are in some particular place. Physicists now study the relationships between various kinds of forces. They describe elementary particles by the forces through which they interact which in turn are defined in math terms, and terms that are a lot further from calculus than calculus is from addition. The relationships are mediated through the Schrödinger equation; It describes our observation small numbers of what we think today are elementary particles, but it is too hard to solve it for any large group of particles.
But in economics, nothing is complicated. It’s just individuals motivated by self-interest. And that’s a remarkably stupid thing. Has nothing changed in the last 150 years? Is linear algebra, which we learned in my junior year in high school, all these guys have learned from math and physics?
To put this another way, if economists were just cranking up their discipline today, with no theory of our current form of economy, they certainly would not use 19th C. math and physics as models. Would they use 18th C. markets in England and Scotland as their model? Of course not.
Fortunately I’m here to help. I’m happy to let economists continue the work of defining and collecting economic statistics, but it’s time to look for a more plausible theory. And as a starting place, I’ll put up a couple of posts with ideas for a new theory for the 21st C. No need to thank me. Which they won’t.
Wonderful concept. Time to examine the axioms, and judge their verity, before we move on to the theorems. I have no idea where that inquiry might lead, but it certainly is fascinating to start that journey!
My first question: Why does anyone think there might be some single “theory” that can explain human actions?
Off topic: I’m still stuck on physics, and if this post attracts some technically oriented folks, I’m hoping one of you can address the following question. I can see a light (for example at the top of a radio tower or on an airplane) five miles away. If I move sideways an inch or a foot or a yard or a lot, I can still see it. Anywhere, five miles away from the light source, I can see it. Now, the area of a surface of a sphere is 4 Pi r squared. So the area of a sphere that is five miles out from that light source is about 314 square miles. How can one single light bulb produce, continuously, enough waves (or particles) to illuminate an area of 314 square miles, all at the same time?
Maybe I should ask an economist?
There are a lot of photons being produced by that light.
also:
http://physics.stackexchange.com/questions/16910/whats-the-difference-between-dim-and-bright-light
bloopie2,
Check Feynman et al re: photonic prescience. The explanation is, essentially, that photons “know” when an observer is going to change positions (or, in the diagramming, is going to look opposite, at the other side of the source) and precedently precedes the observer, going opposite before the observer observes, so that, to the observer, the photon is already there when he/she observes there.
Applying this explanation to your observations of a light source, when you shift your position an inch or a foot or a yard or a lot (or even if you shift metric-measures to be scientific-like), your photon from the light source, anticipating your movement and its amount, pre-anticipates and moves to be observed by you from your new observer position. Note that this scientifically correlate construction depends on particularity, specifically, photonic particularity, and on the necessity of an observer to effectuate an observed event; no observer, and so no observation, no event, and on “owned” elements, the observer’s photon being owned by the observer, or, from the photon’s perspective, the observer being the photon’s owned observer, one each for each. Note also that the particular observer’s particular photon is particulate in the observation event, while in transit from the light source is in transitive form, which is wave-form. In wave-form (transitive) existence photons travel (photon waves propagate) at what we define ‘the speed of light’ (dark waves travel at the same speed, but we, light-oriented creatures, can’t see dark and so measure light).
The reason this works like this? Relativity. All is Relative. All definitions are of relationships, photons to eyeballs, photons to observers’ relative positions, photons in transit to transition distance (and spacial orientation).
To topicalify this, to economics, the same rules of Relative and Quantum Sciences that we can use, as above, to prove photons intelligent, prescient and even magical we can also use to prove theoretical economic constructions. Making the observer a self-interest, for economic purpose, we can make photons wealth. Then we can establish that the light, our wealth-source, beams its wealth down to the interested selfs, in what we may designate trickles for economics, instead of waves as in physics.
You see? Trickle-Down economics that works like physics! All we have to do is ignore the immediately irrelevant, in physics, that large-area reflected light observations must be observations of multi-photon strikes, and that wealth trickle-down carries a self-interest component from its source, for which when it trickles to a self-interest living on earth (instead of in the clouds) the two self-interests must negotiate, the self-interest whose component of self-interest is to pay utility bills, so the family won’t freeze and the self-interest whose self-interest is to see a maximum reflection (return) trickling back up. The result is payday lending and imprisonment in debt. But, in economics, as in physics, if you lay on enough bullshit, and maybe coat the garbage with enough mathematical to-ing and fro-ing, you can sell it to the willing…
A blog post after my own dorky heart. Yes, as a working illustration of your point, perhaps we should reverse our treatment of meteorologists and economists.
In a parallel universe where no one knows Latin, I could make up ‘Latin quotations’ one after another and, scattering them everywhere in a ‘learned fashion’, in authoritative voice, might bring my ‘Latin’ constructions to common use amongst a following ‘cognoscenti’.
This is what has happened to mathematical modeling of economic constructions. Few who bother with economic theorization really know, and are able to actually translate, mathematical representations to their application contexts (the “stories” equations define the “problems” of in ratio relationships for clear ratio comparisons to define comparative relationships). The majority accept what they are told and go forward extolling as if they do, causing misconstructions to become adopted as ‘understood concepts’; in fact, economic religious beliefs.
Consider “Trickle-down”, for example, which does not occur, except in idiots’ wishes.
Wherefore, the correct question is not “Who cooked for Adam Smith?”, but “Who Cooked Adam Smith?” (His acute observations on economic interactions, not the man himselff).
“But in economics, nothing is complicated. It’s just individuals motivated by self-interest.”
This is the sort of argument that has been used by climate change denialists: climatologists want more grant money, so they hype the threat.
There is absolutely nothing wrong with the math used by economics. Economics accurately predicts many things. Yes, it has made many erroneous predictions, but compared to, say, sociology, its record is quite good. The main math limitation with economics, as with many soft sciences, is that measurement is difficult and data sets are limited. This will not be overcome by using quantum theory.
And then there’s the other problem with economics: how it is used. The classic example is using GDP as a proxy for social utility (utility, it turns out, is not measurable). If we are richer as a society, are we happier? For individuals, it is true that wealth correlates with happiness. This is, one imagines, because greater wealth means better medical care, more vacations, greater variety in recreation, and greater control over work. But societies are collections of individuals. One person earning 15 Trillion dollars and 300 million people earning $1000 does not add up to a happy society. So GDP is not a very good measure of national happiness.
Economics is an excellent tool for policy makers. Our real problem seems to be our policy makers. They don’t believe that Keynesianism works generally, only when it’s applied to enriching the rich. They believe in all sorts of crank theories, such as what Herb Stein called “punk supply side economics.” And they use economic jargon to justify all sorts of really bad actions.
You can’t fix evil with math.
It’s completely erroneous to say that Physicists are not looking for “ultimate particles” anymore. The two giant discoveries of the last 50 years are the Higgs field and the detection of gravity waves. The search for, and the validation of Higgs took place becasue of the unceasing efforts, against long odds, to look for new particles at the LHC at Cern. This work continues, and this work is at the forefront of research in Physics.
Furthermore, the ongoing search for smaller and smaller particles is fundamental to the Standard Model. The Standard Model is one of the greatest accomplishments in the history of physics.
In addition, it is misleading to suggest that the field of economics relies on linear algebra. Although some economists dispute the role of mathematics in their field, there is no question that game theory, as well as agent-based computational economics, are advanced developments in the field of mathematical economics–the latter having nothing to do with Newton.
1. The Higgs particle/field/force is a perfect illustration of my point. So are gravity waves. They have real effects in the real world, but neither is a particle comparable to an atom or a molecule. Neither are quarks, for that matter, or many of the other entries in the standard model. That was my point.
2. There are many particles identified as fundamental in the standard model, assuming they are properly characterized as particles in the sense of atoms or razors. Economics in this model considers only one unchanging particle, the individual. Again, this is my point.
3. See my comment to Crust below.
Economics is little more than numerology – a mythology which uses numbers and math. It has been incorporated into the general social myth of capitalism and is useful to the ruling class as it is designed to justify the accumulation of great wealth by a very few. Economics has no basis in science or rigorous dispassionate endeavor to gain knowledge, it uses math to add needless layers of complexity and obfuscate not to enlighten – of which it is incapable.
One other thing, the little atoms of self interest postulated in these “models” also never die.
Natural individuals die, corporations don’t, necessarily.
/analogy abuse
That’s not really true.
Economists use plenty of 20th century math, for example stochastic calculus (which roughly means calculus on fractal paths; this comes up a lot in e.g. option pricing), an area which really dates from the 50’s. I was a graduate student in math at University of Chicago and I remember talking to grad students in economics who liked to boast about how much fancy math they used. From the point of view of someone in math, that didn’t seem true, but I think compared to most other social science disciplines it probably is true (though not necessarily something to brag about; honestly, a focus on fancy math can obscure the underlying issues and assumptions).
(I’m just addressing this narrow point. Not trying to defend economics wholesale by any means!)
I was a math major at Notre Dame, but my talents, such as they are, lay elsewhere. Even so, I can follow the math in most econ papers, and do so from time to time. I agree with your general assessment.
It’s true that specific kinds of math are used from time to time in economics. As you may know, the Gaussian Copula was used to justify the claim that the individual mortgages in RMBS were not correlated, and we know how that worked out. I don’t think your example of the use of stochastic calculus in options pricing is a good counterexample. Options pricing is a tiny area of applied economics and math, and lends itself to rational calculation pretty well.
For me the problem is deeper. I have written several posts about the development of economics, including several on Jevons, himself a mathematician. This is the math that underlies the theories taught in Econ 101 and 102, and which makes up the language of the textbooks used in those courses, of which the two most common were written by N. Gregory Mankiw, and Samuelson and Nordhaus. If you check my archives, you will find a number of posts addressing these books. I used Kuhn’s The Structure of Scientific Revolutions, particularly the chapters on textbooks, in writing those posts.
In a nutshell, I don’t think economists know enough with enough certainty to assert anything as a fixed and solid idea. People study the intro courses and think they know something, when in fact the advanced courses teach all the problems with the introductory theories. Anyone who has studied market failure, assyetric information, barriers to entry, the evisceration of antitrust law, the impact of democracy, the actual nature of markets in the real world (See, e.g. The Illusion of Free Markets by Bernard Harcourt), or read Foucault, will have a hard time squaring the certainties of intro economics with their later reading.
I do not think that economists could take real world statistics and turn them into a coherent theory of the economy that would look anything at all like Mankiw’s textbook description. They reply that you can’t replace something with nothing. Notwithstanding Charles’ comment above, I do not think that economists get enough right to make up for all the damage they have done. In particular, look at the advice given by the majority of mainstream economists in the aftermath of the Great Crash. How much of that made any sense?
If you don’t like option pricing as an example, what about using fixed point theorems (Brouwer FPT, Kakutani FPT) to prove the existence of general equilibria in various models? (Admittedly, the Brouwer FPT barely qualifies as 20th century.) Or applications of game theory to economics? I’ve never actually formally studied economics, but just picked up enough along the way to be dangerous. For Econ 101 or 102 specifically (and it sounds like maybe that’s your point?), my sense is you don’t really need math past calculus (call it 1700) or maybe even just completing the square (so the time of the Ancient Greeks or maybe the Medieval Arabs).
I agree with you that a lot of havoc was wreaked with the Gaussian copula in the financial crisis, e.g. by rating agencies to justify inappropriate ratings. But I think of it as being more a problem of incentives than of mathematical sophistication.
And I agree with you about the problematic limitations of Econ 101 thinking (which way too many people are in the thrall of), ignoring transaction costs, asymmetric information, externalities, behavioral aspects, etc. And I think that’s your underlying point. I guess what I’m disputing is the secondary point that that is well characterized as a point about how sophisticated the math is. In some cases — e.g. the relatively slow adoption of behavioral economics — I’d argue the problem is closer to the opposite of that: one reason most economists long resisted behavioral finance (not necessarily the main reason, but an important reason) is that it doesn’t have much fancy math at all.
This is exactly right. A good book about this topic is “Economism: Bad Economics and the Rise of Inequality” by James Kwak (https://economism.net). Economism is Kwak’s word for the misplaced belief in basic economics. Chapter two gives the reader the basics of Econ 101 supply-and-demand curves. The remaining chapters pick up various issues and explain how the model fails.
Economism has been pushed by billionaire-funded, conservative think tanks for so long that way too many people automatically accept the nonsense as settled truth. There’s a lot of bad work to be undone.
I hope you’re serious, and that’s not an April Fool’s joke.
You know the dialog is thoroughly screwed up when, during the recession, Republicans could continue to push for trickle-down, supply side economics and not be called out by the media. It should have been pretty clear that people were not spending money because they didn’t have any and not because they had nothing to buy. The problem was too little demand and not a shortage of supply. It was time to put more money in the hands of the 99% instead of pushing for tax breaks for the “job creators.”
A basic problem is that economists, suffering from physics envy (when the physics of bombs and rockets – the symbolism of Freud and Kubrick is inescapable – attracted the best brains and most public and private money), attempted to make physics into a physical science. They attempted the impossible, to divorce economics from politics, to separate people from their choices, and from their political consequences. They saw the math and its supposedly inescapable conclusions. Economists were following a culture-wide trend adopted post-WWII by business, academia, the military, government. People became statistics, “human capital” to be manipulated by “human resource” gurus into being good students, good soldiers, good workers, devoid of political knowledge, political yearnings, and political agency. It’s past time that people pick up their brushes and paint themselves back onto the canvases of their own lives.
You might want to see what China’s economists are up to. They’re the only ones I’m aware of who practice economics as a science. In their hands, economics has real predictive value.
The problem is that calculus is useless when applied to nominal scale data like utility, value, wealth, and the like.
Jevons tries hard to deal with this; see the link in my post.
I like Michael Hudson, Prof. Richard Wolff, and the philosophy of Michael Parenti.
https://www.youtube.com/watch?v=HfRNXNVABwc
Hudson, tells why Greenspan mucked up the WORLD!
[Note having trouble posting original comment. When I click Post Comment it comes up with a page not found error.]
Some notes on Smith, who was a moral philosopher who wrote on a variety of topics and was not an “economist”. Smith was an admirer of Newton and quite a competent mathematician but in Wealth of Nations he writes:
If you look at what he writes about notions of system in The Theory of Moral Sentiments (Glasgow Ed. p. 234), it is implicit that he considers the study of society and social relationships to be different from the study of inanimate objects. What Smith undertakes is a humanistic, historical understanding that makes sense of the (his) present and is not intended to be predictive and deterministic. The sort of analysis he’s doing has much more in common with what we would now understand as social history, social anthropology or qualitative sociology than it does with the Benthamite disciple of neoclassical economics.
*
It is often the case that the much quoted “butcher, the brewer, the baker” passage in Wealth that is referenced in the title of Marçal’s book is selectively quoted. There are key parts of this passage that are often skipped over. E.g.
What you have in Wealth of Nations and Theory of Moral Sentiments taken together is actually a proto-social theory that’s akin to the theory you’ll find articulated in modern anthropology (e.g. see typology in chapter 4 of Sahlins’ Stone Age Economics, which builds on Polanyi). That is a theory of social relationships tied to social distance. Like any modern anthropologist, Smith knows full well, as he writes extensively about it, that a lot of human interaction isn’t of the self-interested type of market exchange that is the focus in Wealth of Nations. So it is hard to think that Adam Smith, if he were around, would disagree with the statement in your review of Marçal (economics here being understood as neoclassical economics):
The emphasis didn’t come through: It was for “it is in vain for him to expect it from their benevolence only”.
This is an important point. Smith shouldn’t be blamed for what others did with his ideas. In fact, I’m not inclined to blame Jevons either, though it may seem that way. The problem with most theories is that less skilled people picked up on a few phrases and ideas in the earlier works, removed all the context, and pushed them far past their original meaning. I’ve been thinking about this as I write about other books; I don’t want to fall into that error.
@Ed
Yes, this was a revelation for me. Smith is quoted or cited as an authority all the time by politicians, economists, and journalists and nearly all of what they claim is nonsense and obviously so if one consults the texts. I was trained in anthropology, in which issues of exchange are a central concern, but my training involved very little reference to Smith and what little reference there was was almost entirely negative as anthropologists tend to take a dim view of the modern discipline of economics. But few read any Smith. It was just assumed that neoclassical economists’ version of Smith was true. You’d think anthropologists would have recognized an origin myth when they encountered one.
Economics may be an important data set for an individual business (although its basic assumptions, starting with supply and demand curves, are questionable). But neoliberal fantasies aside, economics is wholly inadequate as the foundation for organizing a society.
We do not need and would be significantly harmed by a government that uses the standards, priorities or practices of a private, for-profit business. I am always amazed, for example, at the public libraries that model themselves after Borders. Their boards and executive directors never seem to contemplate that their model managed itself into dissolution and bankruptcy, nor do they stop to think about the fundamental differences between a not-for-profit public service and a for-profit business. The dominant neoliberal culture, of course, wins when it so corrupts the culture that doing so, let alone championing those differences, is beyond the pale.
No better place to start than here.
https://www.youtube.com/watch?v=xfbVPDNl7V4
Professor Mirowksi is an historian of Economics.
Note he says economics is using the wrong math.
Excellent link, thank you.
A more recent Mirowski lecture here: Hell is Truth Seen Too Late. As in Never Let a Serious Crisis Go To Waste, one of the important aspects of his critique of Neoliberalism is his parallel critique of the Left and how it “gets rolled”. On the relationship of Economics and Physics see More Heat than Light: Economics as Social Physics, Physics as Nature’s Economics.
Ed, many thanks.
FWIW from p. 252 of economics professor L. Randall Wray’s “The Rise and Fall of Money Manager Capitalism.”
“Moreover, a major problem from the point of view of economic stability was that the sheer volume of financial wealth under management outstripped socially useful investments. To keep returns high, money managers and bankers had to turn to increasingly esoteric financial speculation— in areas that not only failed to serve the public purpose but also actively subverted it. An example would be the rise of index speculation in commodities markets, which drives up global energy and food prices and ultimately leads to hunger and even starvation around the world. The dot-com bubble is another example: here, speculators drove up the stock prices of Internet companies with no business model or prospective profits. The inevitable crash wiped out hundreds of billions of dollars in wealth. What was really important was the dynamic created by the shift of power away from banks and toward the very lightly regulated “money managers” at the “shadow banks.” To compete, banks needed to subvert regulations through innovations and then to have regulations legislatively eliminated. This allowed banks to increase leverage ratios, and thus risk, in order to keep pace with shadow banking practices. There was a “Gresham’s law” in operation: those institutions that could reduce capital ratios and loss reserves the most quickly were able to increase net earnings and thus rewards to management and investors.”
snip
p. 253 “At the same time, the structure of incentives and rewards was changed such that risky bets, high leverage ratios, and short-term profits were promoted over long-term firm survival and returns to investors.”
Tymoigne, Eric; Wray, L. Randall. The Rise and Fall of Money Manager Capitalism: Minsky’s half century from world war two to the great recession (Routledge Critical Studies in Finance and Stability) (p. 253). Taylor and Francis. Kindle Edition.
Pretty sure Prof. Wray’s considering removing tax exempt status from retirement savings. That would stimulate spending into the real economy–the part that makes stuff, the part that matters. It would shrink the monster that’s sucking wages out of the real economy.
As you know, he’s MMT, finance is supposed to be at the service of the real economy.
John Casper: “Pretty sure Prof. Wray’s considering removing tax exempt status from retirement savings. That would stimulate spending into the real economy–the part that makes stuff, the part that matters. It would shrink the monster that’s sucking wages out of the real economy.”
Really? Most retirement savings are taxed, they are not “tax exempt”. FICA contributions are post tax income when they are made and up to 85% taxable again when paid. 401k and 403b retirement plans that make up the bulk of retirement savings have FICA withheld when they are made. They are “Tax Deferred”, not “tax exempt”. Income taxes are paid when retirement savings are paid out. The difference between marginal income tax rates when contributions are made and the usually lower marginal rates when paid out is an incentive to save for the future. They are not “tax exempt”.
Municipal bonds (Munis) are Federal income tax exempt to provide municipalities dependable funding at low interest rates. Health Savings Accounts (HSAs) can be income tax free too as incentive to save for future health costs. Taxing Munis would make raising funds for municipal projects more expensive as would taxing HSAs make health care for retirees more expensive. Neither of those things would “stimulate spending into the real economy.” In fact, both would take current money out of cities (higher interest rates lower cash proceeds from sale of bonds) and people’s pockets (higher tax rates mean more must be saved to provide the same net retirement income) thus reducing “spending in the real economy- the part that makes stuff”.
That higher taxes on retirement savings would “would shrink the monster that’s sucking wages out of the real economy.” is equally nonsensical. Off shoring, trade agreements, immigrant labor and greedy vacuuming up of money by the .1% are not sensitive to the tax rates us geezers pay on retirement income. Nor is there any reason to believe higher tax rates on retirement savings would cause the elites to change their spending patterns, immigrant labor to go home, or manufacturers (the part that makes stuff) to return to the US.
John, in short you are as ignorant of retirement tax policy and economics as you are of politics. Got your application in for the twit race yet?
lefty665, I’ll call “Really” your first sentence.
Regarding sentence 2. If there’s no advantage, why do earners put their money there?
Even I, who am no expert, noticed your sentences 3-8 ignore, IRA’s, “the Reagan Cap,” the employer side of FICA, and corporate taxes. Please integrate those implications and any others you want to add into your incomplete claims.
This http://www.benefitspro.com/2015/06/30/total-retirement-assets-near-25-trillion-mark contradicts your “bulk” claims in sentence four.
Regarding sentences 9-13, why aren’t “Munis” and “HSA’s” working?
Regarding sentences 14 and 15, do you accept that total U.S. retirement assets are about $7 trillion more than annual U.S. GDP–around $18 trillion? http://www.benefitspro.com/2015/06/30/total-retirement-assets-near-25-trillion-mark
Please provide links to your estimates of the alternatives you offered, “off shoring, trade agreements, immigrant labor and greedy vacuuming up of money by the .1% ….”
Regarding sentence 16, could you explain the leap from “retirement savings” to elite “spending patterns?”
lefty665, “in short you are as ignorant of retirement tax policy and economics as you are of politics. Got your application in for the twit race yet?”
. The Higgs particle/field/force is a perfect illustration of my point. So are gravity waves. They have real effects in the real world, but neither is a particle comparable to an atom or a molecule. Neither are quarks, for that matter, or many of the other entries in the standard model. That was my point.
2. There are many particles identified as fundamental in the standard model, assuming they are properly characterized as particles in the sense of atoms or razors. Economics in this model considers only one unchanging particle, the individual. Again, this is my point.
1. Respectfully, it doesn’t matter what your point is, what matters is what the basic facts are. You are simply redefining these terms to fit the parameters of your argument; this is circular reasoning. The plains facts are that that physicists are still looking for elementary particles, and economists are not relying on 19th c. maths. It simply cannot be otherwise unless you redefine the terms to make it appear that this is not so. Even if you choose to focus on the “ur” particle, this is, again, simply not the case, and it has not been the case for decades. Particle physicists are simply looking for particles, if there is an ultimate particle, a group of a few ultimate particles, or even a myriad, no one is closing the door on any of these solutions.
2. Clearly, the proper analogy here would be interactions.
@DrDave at 12:28am
How did the vast majority of economists miss the 2008 GFC?
Principles of economics, translated.
https://www.youtube.com/watch?v=VVp8UGjECt4
Metaphors are the bane of history, they are a greater bane for economics and politics. The “invisible hand” is a poor metaphor for the concurrent action of innumerable actors engaged in buying and selling with people they don’t know and to whom they owe no obligations.
People are not “fundamental particles”. Humans are social, a herd species. Individuals may act alone, but they are lost without their social group: the couple, family, clan, religion, workplace, club. Their herd proclivities, cooperation and selflessness among them, are what make them, and what make predation by their own species possible. Mr. Trump, for example, prides himself on being a top predator, but he would be lost without his family and courtiers. “It takes a village to support a man-child.”
The family checkbook is a folksy metaphor for governmental economics; it is wholly inaccurate. “Shareholder value” as a metaphor for determining management priorities is wrong as a matter of law, it is wrong as a matter of economics. If ceo’s believed in it, the first salaries they would cut would be their own, the first people to be tossed out in a bankruptcy would be the team that managed their way into it.
Mathematics has a place in economics. Economics has a place in understanding making, buying and selling. Neither are properly the basis, let alone the primary basis for understanding people, their society or their governance.
That’s very well said, Earlofhuntingdon.
I know nothing about physics or math but I would question whether the root problem lies in the theories and tools economists use or in the economists themselves and the goals set by US economic policy. Above, Ron B. mentioned James Kwak who, in “Cultural Capture and the Financial Crisis” uses the label “cultural capture” to describe the social forces (“group identification, status, and relationship networks”) that influence policy makers. http://www.tobinproject.org/sites/tobinproject.org/files/assets/Kwak%20-%20Cultural%20Capture%20and%20the%20Financial%20Crisis.pdf
Economics has to add time between cause and effect, and not assume case and effect are simultaneous. Then the concepts of resonance and oscillation are added to the predictions.
Add chaos theory to the mix, and Economics belief in equilibrium is removed.
That’s a nice point. I wonder how it relates to the comment of Crust above at 9:57 on fixed=point theorems.
“to prove the existence of general equilibria in various models”
It seems feedback – especially non linear feedback, in this case Human Behavior as a reaction to an action – makes the whole system chaotic.
That and time based feedback – the markets tomorrow – reacting to an announcement today illustrate the un-analysed delays in the system, contributing further to its chaotic nature.
My son is studying economics and I’m amazed at the lack of feedback equations, strange attractors and the apparently fractal nature of market pricing.
I write apparent, because pricing is directed, not a random walk and a reaction or feedback to events.
All these things are a part of engineering large computer systems, where I’ve spent my working life, but apparently ignored in economics.
I’d call their use of classical linear math poor practice at best, and negligent at worst, completely lacking in any trace of scientific rigor, because they deliberately assume away human irrationality.
They’d be just as effective by examining entrails.
Higher math or not, economics such as the Chicago school is detached from reality and is used to propagate political beliefs. It’s time to revise an old phrase:
Lies, damned lies, statistics, and economics
The level of the maths isn’t the problem. Calculus is fine. The problem with economics is its inability — I do not say “refusal”, I say inability — to deal with emotional motivation, which outweighs rational motivation in nearly every case of individual or collective decision-making. More complicated maths isn’t going to help there either; definitionally, none of the apparatus of the scientific method is going to help.
Ed–
thanks for the thought provoking post. the thing that i like about your idea is that it focuses on the mathematics side of the problem. this makes intuitive sense because Newtonian physics developed in conjunction with Calculus (which i thought was made rigorous by Cauchy, Weierstrass and Bolzano’s epsilon-delta approach).
from my understanding macroeconomics is what most needs to be grapple when trying to model and predict financial and economic crises.
one of the great challenges, and tremdendous obstacles of developing a rigorous macroeconomics however, is the tremendous politicization that engulfs the field of economics. the 1968 creation of the fraudulent Nobel Memorial Prize in Economic Sciences, for example, is a case in point–in which the field of economics was politicized by the Bank of Sweden (Pers Asbrink)
however, if economists could consistently predict future expansions and contractions (or booms and busts), the swiftness and extraordinary degree with which the lizards would game the system for their group’s financial gain would trigger the mother of all crashes.
it would be nice to have a moderately well behaved toy model of a relatively realistic macroeconomic system based on a reasonable number of economic variables, realistic assumptions and parameters.
but this would require high quality economic data needed to verify the results. trying to use distorted, corrupted, incomplete or misleading data would not work.
thus, not only might we need new mathematics, new macroeconomic concepts that somehow take into account the true complexity of the human decision-making process, but also a way to obtain quality controlled economic data, which is treated and thought of as sacrosanct.
unfortunately, even if we could effectively model real macroeconomic systems, that same human nature–which is constantly under evolutionary forces–would need to show more restraint than the present ill-bred strain of political economic morons that presently inhabit the corridor of power.
even then, assuming that all of these amazing changes have taken place, as a result of the quintessential role that perception plays in determining the price and value of commodities, products and assets, the slightest change of perception in such a psychologically imbued field could easily perturb this fantastically complex international adaptive system to fail catastrophically for no other reason than that an imperceptible fluctuation occurred.