Home > Uncategorized > Economics — an empty and inexact science

Economics — an empty and inexact science

from Lars Syll

Of course economics involves cases where economists appear too reluctant to give up their favoured models. You can find similar stories in the hard sciences. There will be more such stories in economics because the inexact nature of economics makes it easier to discount any single piece of evidence. What I cannot understand is what leads someone … to argue against the use of evidence, and instead that “economics is primarily a way of organizing one’s thinking”. Astrology is also a way of organising one’s thinking, but it fails because evidence does not back it up.

ct7x3eovmaa25klThat comparison is slightly unfair, because while the theory behind astrology is obviously implausible, the basic principles of microeconomics are not. In a class on economic methodology I once drew a huge tree that showed how most of economics could be derived from principles of rational choice. But go beyond the basics, and add in complications involving information and transactions costs (to name but two) and you very quickly derive competing models. There is no single model that comes from thinking like an economist, so for that reason alone we need data to tell us which models are more applicable.

Simon Wren-Lewis

It’s hard not to agree that economics is a very inexact science. But — that’s actually not at all the way its mainstream überpriests present it. Especially not in their textbooks. There economics — the queen of social sciences — is portrayed as a rock-solid science on a par with physics.  

Reading those textbooks and the heaps of models and forecasts that people like Wren-Lewis produce, it’s hard to really see any difference between mainstream economics and astrology. They are both based on ‘basic principles’ that are ‘obviously implausible.’ We can always derive what ever we want by setting up a suitable set of axioms (‘principles of rational choice’). But as Wren-Lewis himself notices, confronting the theories and models built on those axioms (think of the four pillars of microeconomics — completeness, transitivity, non-satiation, and (when allowing for risk-reducible uncertainty) expected utility maximization) with reality immediately exposes the emptiness of the foundation and the need to ‘derive competing models’. 861cf344575acd50ed67b35d88615f2318610d8148e8c471ad10ca0132cda91eSince the ‘thinness’ of the basic axiom system always forces the economist to supply very ‘thick’ stories to save the model, one really has to wonder: what’s the point? The way the axioms and theorems are formulated standardly leaves their specification without almost any restrictions whatsoever, safely making every imaginable evidence compatible with the all-embracing ‘theory’ — and a theory without informational content never risks being empirically tested and found falsified. Used in mainstream economics ‘thought experimental’ activities, it may of course be very ‘handy’, but totally void of any empirical value.

In physics models are constructed and compared with observations to check if they provide precise explanations and successful predictions. But the miles that the laws of physics take us doesn’t have any equivalent in economics. There the non-existent ‘laws’ don’t move us one single millimeter.

Looking at what mainstream economists have come up with, there is no indication at all they produce rigorous and successful explanations or predictions of real-world phenomena. In physics it’s all different. There one has often been able to produce both rigorous and successful explanations and predictions. But then, of course, the material world is something quite different from the social world …

Mainstream economics is in the story-telling business whereby economic theorists create make-believe analogue models of the real economic system. This modeling activity is considered useful and essential. Since fully-fledged experiments on a societal scale as a rule are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

Some people find this ‘the model is the message’ business very impressive and convincing. But in the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of reality. It is certainly not enough for a relevant social science to prove things about thought up worlds

Without strong evidence all kinds of absurd claims and nonsense may pretend to be science.  We have to demand more of a justification than rather watered-down versions of “anything goes” when it comes to the main postulates on which mainstream economics is founded. If one proposes ‘efficient markets’ or ‘rational expectations’ one also has to support their underlying assumptions. As a rule none is given, which makes it rather puzzling how things like ‘representative agents,’ ‘efficient markets,’ and ‘rational expectations’ have become the standard modeling assumption made in much of modern macroeconomics.

Models may be beautiful. But it’s — as empty an inexact economics shows — dangerous to mistake beauty for truth.

9d5daba794123273e77fca0cb640aa7c_welcome-to-macroeconomics-macroeconomics-meme_430-300Macroeconomists got comfortable with the idea that fluctuations in macroeconomic aggregates are caused by imaginary shocks, instead of actions that people take … In response to the observation that the shocks are imaginary, a standard defence invokes Milton Friedman’s (1953) methodological assertion from unnamed authority that “the more significant the theory, the more unrealistic the assumptions.” More recently, “all models are false” seems to have become the universal hand-wave for dismissing any fact that does not conform to the model that is the current favourite.

The noncommittal relationship with the truth revealed by these methodological evasions and the “less than totally convinced …” dismissal of fact goes so far beyond post-modern irony that it deserves its own label. I suggest “post-real.”

Paul Romer

  1. April 17, 2017 at 3:29 am

    ‘in physics models are constructed and compared with observation… to see if they provide… successful prediction’
    Thats not my impression.

    eg look at https://arxiv.org especially math-ph , nonlienar science, condensed matter-statistical mechanics (not to mention gr-qc general relativity quantum cosmology , qunatum physics, physics and general physics)

    i’d say the vast majority of the theoretical papers are not applied to observations, data etc.
    Most are refinements or more elegant formulations of existing theories (or developments of a particular author’s theories. Some eventually may be applied to make predictions but many are not in a form to make predictions.
    Often other physicists do that part, if they think the theory is even worth (the trouble) of testing . Some theories sit around collecting dust until someone decides they have something in them which can be tested for in the lab.
    Other theories are developed to try to explain something which has been observed (eg relativity and parts of quantum theory–photoelectric effect–and of course preddict unobserved things too. ).

    Very current theories which also have a large number of researchers like superstring theory are criticized because some say they make no testable predictions (which so far seems to be true–the things they can predict are way beyond the ability of experimentalists to observe. That may be also true of string theories majair competitor LQG.
    Also my impression is some major things predicted by current physics (eg dark matter, dark mattter, supersymmetry , and possibly to some even black holes have proven either impossible to detect or the observable evidence for them have been interpreted using other theories.

    The area of physic s I know more about—so-called complexity theory— i’d say is the same but often its more of a descriptive and qualitative theory (or patterns) and not really geared towards quantitative predictions though it can be adapted to them if needed and data exist). often predictions and data are statistical.
    (Many standard physicists considered complexity theory borderline b.s. for a long time because of this but it has been gradually accepted.)
    . I dont thin k the situation in physics is all that different from econ except in terms of ‘time scale’ or ‘era’ (same as biologists).
    Also a fair number of physicists up till early 1920’s and even later disliked the heavly matheamatical turn physics took after einstein’s general relativity, planck’s statistical mechanics, and quantum theory (even bohr of early QT disliked it. And some current physicists think string theory and other popular/,ajor fields really are now just a branch of math or philosophy because either they can’t predict anything or anything that can be tessted. )

  2. Jorge Buzaglo
    April 17, 2017 at 1:14 pm

    “Physics envy” is caused by physics ignorance.

  3. April 17, 2017 at 5:38 pm

    p.s. I just noticed that Romer quote comes from his article ‘the trouble with economics’—the first sentence of that article quotes L Smolin on ‘the trouble with physics’ which discusses some of the things i mentioned in my previous comment—that alot of people think current physics also doesn’t predict anything.

    ( Smolin still does physics nonetheless, and also some economics on the side.

    (And actually that stuff is the future of economics–basically intuitive except the formalism is ‘daunting’ —you’d have to basically know quantum field theory and formalism of general relativity (differential geometry).

    (I even entered a writing contest sponsored by his Perimeter institute (for the money) recently on the topic ‘how goals and intentions emerge from meaningless mathematical laws’ (i.e. mind from matter/logic/physics)
    Wrote it in 2 days, and it was in wrong format and i missed the deadline so it wasn’t judged. My ideas overlap with most of the other essays—which are highly redundant, recycle alot of ideas that have been around for years and centuries, but occassionaly add something in that they reformulate them using some more recent mathematical vocabulary/formalism.
    Thats a sort of joke topic anyway–schrodinger had pretty much the best discussion back in the 40’s though since then people like Mishra, Tegmark and Rovelli (in the current contest—i imagine he might win—and he’s worked with Smolin) add a few refinements which also do not solve that unsolvable problem.

    The essays which are posted on fqxi.org are like a zoo or menagerie —in one cage you have a noble prize winner and in the next one you have someone who just escaped from a mental insitution, each giving a lecture, and you are asked to guess which is which –so you make a rational choice, as predicted by econ, and flip a coin..)

    Romer ridicules ‘imaginary shocks’ since when he asked about them he didnt get an answer he liked. i alsoways view tghem as ‘acts of nature’, discoveries, heart attacks, etc. Kekule discvoered the chemical structure of the ‘benzene’ ring in a dream under the influnence of opium in 1800’s—that led to organic chemistry, plastic, nylon…

    People discovered gold and that chan ged the world. RF Haber discovered nitrogen fixation, which supoposedly is reponsible for half the food people eat now , and it also was used to make ‘nerve gas’ used in WW2 by germans. His discovery was also used to make Zyklon B used in the holocaust (eg by a famous UK punk song) . Haber was jewish and felt he was a loyal german good citizen, but hitler decided he couldn’t be so i think he fled. (His wife divorced him because she didnt like the fact he was making nerve gas in ww2.). (There’s alot of interesting german history.)

    I view these as ‘shocks’.

    In stuff i sortuh study ‘shocks’ are used all the time–stochastic processes. They can be all kinds —usually one just looks in a math book and choose one which appeals to you–it was ‘gaussian or white noise’ from about 1880 to 1950, and then gradually they introduced red, greym, colored, 1/f (fractal), levy, and ballistic noise (now a sortuh hot topic in the ‘underground’ or ignored / undiscussed fringe) because they claim by using it you can basically disprove or replace quantum theory (eg all that spooky at a distance stuff, EPR paradox, etc. )

    Sometimes the ‘shocks ‘ are com data—eg they measure radio wave frequencies/spectra, or fluctuations in electrical power, or water flows, or rainfall –and use that pattern as a shock.
    Sometimes shocks are not real numbers–but imaginary ones. Typically if i recall if your noise is imaginary that is the way you get ‘stochastic resonance’ (eg the patterns observed if kids jump, on a trampoline and bed and get in a synchronized pattern).

    Romer doesn’t like imaginary forces or things like phlogiston added to a theory to make it work. Thats all physicists basically use—ethers, ‘quintessence’ (a kind of particle oyu can buy at the store and add to your theory so it sticks together sort lime that stuff they add to flour to make bread so it doesnt fall apart), etc.

    Maybe economics should just say they are doing physics since in one view both are or can be made empty. Alot of physics theories bassically reduce ‘matter’ to space (time) or the vaccum (Tryon had his 70’s theories that the unvierse is a ffluctutation of the vaccum–made from nothing–and the current ‘infaltionary universe’ i think is basically a version of that with more detail and some predictions —one was confirmed not long ago, but people were skeptical, and it was withdrawn when analyses showed it was probably based on incorrect data analyses.
    So inflation may still be a ‘religion’.
    The great book ‘the big bang never happenenned’ by a ‘crackpot physicist’ from 89’s argue big bang theory was actually a response to economic inflation of the 70’s due to the oil crissis or something. I think Vocker was invovled in fixing that or something—voker’s rule—romer discusses that in his paper. I actually have almost know idea what they are talking about –something about fed and uinterest rates etc. In standard english we use
    exchange forces, reaction rates, bosons, fermions, …

    • Ctesias62
      April 18, 2017 at 8:35 am

      Fritz Haber’s wife actually shot herself (with her husband’s service pistol), after his WWI gas deployment.

      • April 19, 2017 at 12:28 am

        Perhaps that’s an example of nonviolent conflict resoultion. ‘Problem solved’. I tends towards a bit of cynicism or ‘dark humor’ so i might suggest as hypothesis thats why Haber did nerve gas—knew what she’d do, he’d get out of an unhappy marriage, not any loyalty to germany.

        there is a huge ‘march for science’ coming up aroun d here (i’m semi-associated with like 10 groups who are going—i may join the ‘freaks for science’ one (people who do science in day and then punk/goth clubs at night though i basically do little of that ay more–it gets boring).

        Alot of scientists while countering various anti-science types sometimes dont look much at their own issues. Nowadays, faced with such criticism, occassionally they’ll hire besides 100 scientists on a project a ‘bioethicist’ or something (sometimes with a religious degree rather than science) to pass on whether the research is ‘ok’ and not ‘mengelian science’. .

        (This march is vs creationists, climate skeptics, anti-GMO people, etc. (though i sort of fall in that last camp via the ‘precautionary principle’. Its argued we need GMOs for a huge population, but to me this means they want to feed a growing population so they are like many in the USA-half their diet is GMO-corn syrup and they all have heart disease and diabetes.
        Obesity is a pretty big research topic in this area–and some of the science is interesting to me because its mathematical biology. But they are looking for genes and chemical cures.
        Tobacco companies used to fund alot of researhc similar to that to see if they could keep selling their stuff, and maybe sell a cure along with it.
        Alot of this research has little to do with the obesity epidemic (any more than drug research has to do much with our current opiate epidemic —50,000 deaths a year—more than homicides and car accidents). If they want to see where the obesity epidemic and drug problem originates they can walk 2 blocks from my place—see alot of people who are unemployed or underemployed and can’t find anything to do or buy except junk food food and dope, or work selling it.

        Meanwhile scientists are making 100,000$ year plus free perks like conference travel, etc. saying they are working on the problem . Some do care but many basically don’t if their stuff is relevant—their view is they can’t change the world and they can’t bite the hand that feeds.
        Thy hope at least it may ‘trickle down’—alot of people around basically ‘benefit’ from science since they have smartphone and internet (and one can see who they call and what they watch with this). .

        I worked on 2 math bio projects once—both times to sort of justify this stuff we had to write in the introduction and at the end somethin g like ‘this may lead, with more research to some biochemical cures’. (and its actually true—some stuff i was into actually has been developed further and is being used for real things—though tis not the approach i was dojng, which was pretty abstract.
        last project i was on i was under pressure to get a result useful to the company who my prof had a grant fund–something useful for making drugs. i was using an approach following the logic of the problem to show that it was ‘undecidable’ in a general sense (a sort of impossibility theorem). Of course there ways of solving these ‘effectively’ .
        Thats what i suggested –but they wanted answers ‘now’ not in 10 years. They are more like engineers.
        (Wright brothers could build a plane with little theory; modern ones need alot of theory).

        Feynman sort of got his noble prize for one of these undecidable problems—he was sort of fixing up quantum theory of the electron, and quantum theory was invented partly to fix the newtonian theory of the electron (the fact that in newtonian electromagnetism atoms are unstable so they should all collapse into points in short order —electrons fall like planes fall to earth). Quantum theory fixed that, but then in that it was found the mass of an electron was a sum of terms, which equaled infinity. Feynman found a way to dom the sum som later terms were subtracted from earlier ones and it end up finite—you really only need 1 or a few terms since the rest cancel. 2 other people –one usa, one japan , also found this. For many years people did not like that solution since it didnt seem to make sense, but now its sort of accepted and based on other stuff).


      • April 19, 2017 at 12:42 am

        p.s. since i’m producing ‘excess verbiage’ as a way of avoiding certain responsibilities i’d add if i didnt mention it i think there are more nalaogies between science and economics like this—economists say they are studying and solving the world’s problems though they know they can’t do much –they only have a little data about the world, and even that leads to math problems they can barely solve, and even if they find a solution the problem is mostly political.

        also, as an aside, one reason i sortuh understand Feynman’s QED (quantum electrodynamics) and renormalization group theory (both sort of as far from mathematical biology as mars is to moon is to me ) is because one actually ends up with similar math in both cases (it was even invented in simple form in the area is studied —‘mayer’s cluster expansions, integrals, and diagrams’–similar in appearence to feynman diagrams but conceptually simpler–just graphs. ) Alot of peopkle dislike abstract models—not me. I prefer them. Its much easier to think of a simple system of ‘coins’ or ‘urns with marbles in them’ or a random walk on a line than something which loks more like reality. often you can find a logically equivalent problem. Its like the difference between memorizing the bible so you can come up with the golden rule, versus finding a 2 person one (or n shot) shot game which can be solved in one page to find equivalent tit for tat solution. One has all these people who are committed to teaching the golden rule but you have to get all the theology with it, plus all the problems that come with theology.

  4. April 17, 2017 at 5:59 pm

    PS2. More evidence or proof for existance of ‘imaginary forces’ (and shocks) exist is a sotry I’m listening to on radio about a local situation. A guy is set to be executed today (probably by electroshock) for a murder he supposedly didnt do personally but ordered to be dopne while he was in jail by an associate. His legal defender says that didn’t haoppen, and not only that, when they looked for details of the murder, they couldnt find any evidence there was a murder. So this suggests hidden , unobservable imaginary foces exist, and maybe imaginary shocks (since maybe one can argue that wont happen either). (The lawyer is attemopting to stop the execution based on the fact that police authorities refuse to open the records on this case and show any evidence).
    I hear in Turkey Ergodan says he won, and so join the civilized world like USA and Texit NATO and reinstitute the death penatly.)

  5. Risk Analyst
    April 17, 2017 at 9:13 pm

    I think economics is far more difficult than physics. If anything, physicists should have economics envy. Forget the trendy references to string theory. I believe there is general agreement on such basic things as the force to be applied to move objects like pushing a wheel barrow up a hill. Economics can’t even agree on the basics. See for example Janet Yellen’s Oct 14, 2016 speech in which she said, “For all of these reasons, I hope that researchers will strive to improve our understanding of inflation dynamics and its interactions with monetary policy.” What a remarkable thing to say for a Federal Reserve chairperson. Would you open a physics journal and see writers lamenting they don’t understand wheel barrows? I know physics has all sorts of complicated equations and appears intimidating and leads to difficult final exams for high school and college kids. But at that level, the understanding can be achieved by spending a couple of more hours with a cup of coffee and a book. The difficulty of understanding in economics is qualitatively different, and cannot be achieved just by spending more time with a book and another cup of coffee. Economics is a different kind of difficult.

  6. Craig
    April 17, 2017 at 10:39 pm

    Fix the monetary dominance of private Finance’s distributive paradigms of Debt, Loan and For Production Only…..and all of the confused and confusing figure-figure-figure of macro-economics will finally fall back into its otherwise obvious perspective. This is perceiving the actual problem….and Wisdom.

  7. April 18, 2017 at 7:27 am

    Observation, evidence, and truth are among the most abused terms in the English language. Lars, unfortunately your comments here participate in that abuse. Observing is not simple thing. How is it done, who does it, when was it done, what is looked at, what is not looked at, etc. Evidence is even more unclear, since it involves more uncertainty in its identification. And truth is still more difficult to deal with. That’s why scientists have never attempted to establish truth in any area or in any form. Science deals with temporary, transitory findings. in the words of one scientist, “I always expect my findings to be overturned next year.”

    Now what does this mean in relation to your contentions about economics and modeling? For example, you say, “Mainstream economics is in the story-telling business whereby economic theorists create make believe analogue models of the real economic system.” Problem is that all sciences create “make believe” stories. First exercise I undertook in mathematical physics was what we called “assume a universe.” We could assume any sort of universe we wanted. Then we tried to do what you suggest, compare the make believe with evidence. But this never resulted in the comparison of make believe with reality. And it never resulted in the immediate exposure of the emptiness of the make believe compared to reality. Science, in fact humans do not have this capability. All we can do is compare one assumed version of what’s real with another. Then using our most inventive and original insights through iteration we gradually look for things that’s don’t fit or are out of place. That are not fully addressed or explained by one model vs. the other. In this way, we arrive at the tentative and transitory findings of science. Those looking for a firm and unshakable foundation for life and love should not look to science. So, where does economics fall-down in these efforts? Economics falls-down on all accounts. Economists never even attempt the iterative process of comparing models to search for what doesn’t seem to fit or work. Economists assume all this away. Therefore, economists do not behave like scientists because, I suggest they do not consider themselves scientists. This is the reason in my view economists present their work as “the queen of social sciences” and portray it “as a rock-solid science on a par with physics.” When you do the work, there’s no need to advertise. When you don’t do the work, all you have is the advertising.

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