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Flimflam Chicago economics

from Lars Syll

flimflamThe people inside the model have much more knowledge about the system they are operating in than is available to the economist or econometrician who is using the model to try to understand their behavior. In particular, an econometrician faces the problem of estimating probability distributions and laws of motion that the agents in the model are assumed to know. Further the formal estimation and inference procedures of rational expectations econometricians assumes that the agents in the model already know many of the objects the econometrician is estimating.

Thomas Sargent

Making utterly ridiculous restrictive model assumptions on rationality, information, and cognition, makes it possible for Chicago economists to describe the world as an instantiation of a FORTRAN program.

Yes, indeed. And at asylums there are people who think they are Napoleon and that the moon is made of green cheese …

  1. June 10, 2016 at 1:01 pm

    Exactly. Fortran is so intoxicating that the Chicago school backs up their theories with the CIA and the Pentagon.

  2. June 10, 2016 at 7:35 pm

    This whole situation is more complex than any economist or economic model can capture. Ask commodity traders about their jobs, what they’re doing and why, or to explain why commodity trading is needed and important and you will get answers. Most will hide some parts of the job, to keep their advantages, out of embarrassment, or perhaps to screw with the the questioner. But they will answer. The job of the social scientist (i.e., economist) is to create as best she/he can a picture of the actions of the traders, their meaning, and how they fit within other areas of societal life. To achieve this goal the social scientist may consider such sources, other than interviewing the trader as trading statistics, official accounting and marketing rules, legal cases, regulatory actions, news stories (print and video), etc. After all this the social scientist may want to develop some sort of overview of the whole society and trading’s role within it (generally referred to as a theory) and then test that with new observations. An iterative process then happens. Some of this might be mathematical, if it fits the observations but mathematics just for the sake of being mathematical is both a waste of time and often leads to false views of what’s happening. This process is not difficult to grasp, doesn’t seem so. Why economists have such trouble with it baffles me. But the construction work of traders and others to build the ways of life they inhabit is complex. Compared to this the work of the social scientist is less complex but still hard work.

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