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Axioms — things to be suspicious of
from Lars Syll
To me, the crucial difference between modelling in physics and in economics lies in how the fields treat the relative role of concepts, equations and empirical data …
An economist once told me, to my bewilderment: “These concepts are so strong that they supersede any empirical observation” …
Physicists, on the other hand, have learned to be suspicious of axioms. If empirical observation is incompatible with a model, the model must be trashed or amended, even if it is conceptually beautiful or mathematically convenient.
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Real-World Economics Review Blog 
Unfortunately the site for the remainder of the paper is blocked to me, but I would like to comment on the snippet that is here. I looked at the risk model for a large part of the portfolio of a financial institution. It was designed by a group of physicists and the write-up went on at length about the monte carlo simulations, correlations between assets, estimation of the variances and all sorts of interesting things. However, buried in one paragraph it stated in the documentation that they have no idea where interest rates will go so they are just assuming interest rates in one year will be where they are today. Note that this is the tail wagging the dog because the expected yield curve is the most important starting point for those simulations and additionally shows an appalling lack of awareness that the Federal Reserve keeps saying they will increase short term rates.
Now, if an economist had been assigned to this instead of the physicists, he likely would have put up front what his yield curve forecast was even if he were using exactly the same technology of monte carlo simulations. It is all in the delivery, where the physicists buried the idea of unchanging interest rates behind a bunch of math and programming, while the economist would have highlighted whatever his forecast was at the start. And likely with the future yield curve being the most important factor, if an economist had predicted an unchanging yield curve his model, the project would have been dismissed as unrealistic.
Click to access presidential-obstruction-of-justice-the-case-of-donald-j-trump-final.pdf
That’s unfortunate, not because the accusations are true but just that it represents the “resistance” movement to attack someone on any and all fronts regardless of issues. Despite the whining, we would be worse off under Hillary. She was not a friend to the progressive movement, but rather wanted to install herself as Boss Tweed in a Tammany Hall pay-to-play Washington. The damage to this country of an institutionalized kleptocracy would be far worse than whatever ill might result from aspects of Trump’s economic and social agenda. You might instead want to focus on the democratic machine as evidenced yesterday by Donna Brazile being nominated by Perez to be a DNC delegate. How is that for an “in your face” to those upset with its leaders.
The point is not the question of a particular model. A model with defects should be trashed. You should present a better model and prove it is better than the one you attack. The biggest trouble with economics is that some hypotheses are deified in the name of axioms.
This is an anecdote Bouchaud cites. I have a similar experience. When I was discussing a problem (I have forgotten what we were talking about) in a small group, a colleague of mine said, “if the economy does not behave as the theory describes, it is the economy which is wrong.” I know that this is a kind of joke, and yet this expresses the atmosphere of economists.
In arguments on economic philosophy and methodology, we often read that economics imitated natural sciences, physics in particular, and this is the deep reason why economics went wrong. I do not deny that this well applies to the history of economics. There was a strong envy for physics. However, after 1950’s, the situation changed substantially. Economists became arrogant and ceased to learn from physics, and from natural sciences in general. Physicists conserved a much healthier spirit than economists and are humble to the facts. If an observation or experiment shows that a hypothesis, a model or a theory is not congruent with the observed facts, physicists start to search a new hypothesis, model or theory.
Mainstream economists are now trapped in the system of axioms that they have once build up. They are now slaves of their framework of thinking. This is the most serious question.
Your final paragraphs state the real problem, but how can one expect change until the mindset you describe is changed.
If the ‘invisible hand’ is a universal axiom then unconditional convergence would be an empirical fact. Rodrik (2013) showed that unconditional convergence is only to be found in manufacturing industries. Their major contribution to the economy suggests the reason for this confusion. Possibly if the refinement to the actual nature of the ‘invisible hand’ were to be made, in the same spirit as that found in the physical sciences, then economics would progress towards realism.
However, attempts to introduce mathematical models with simple idealisations divorces the analysis from both economic fact and the laws of physics. The major reason this is the failure to grasp the nettle and deal with time as a physical reality. Inappropriate mathematical formulations arise in an effort to avoid introducing time appropriately – viz. general equilibrium theory.
Rodrik, D. (2013). ‘Unconditional convergence in manufacturing’. The Quarterly
Journal of Economics 128(1), pp.165–204.
Yoshinori, while I see your point and agree with the conclusion about evading the complication of time Frank draws from this, I think you are about a hundred years too late when you cite 1950 as the time the rot started. By the 1850’s the mathematics of the physics of electric circuits, magnetic induction and electromagnetic radiation had already been established, but the empiricist philosophy of economists being “what you see is all you’ve got”, physics-envious economists latched onto the broadcasting of wealth and not the “invisible hand” channelling money into their sponsor’s pockets. Even the profound revolution around 1900 in the understanding of atomic structure, which had to invert the assumption that electrons (as countable things) had positive polarity, failed to arouse their curiosity about whether a similar inversion was necessary with money produced as debt rather than wealth. Again, if they took on OR mathematics in the 1950s, nevetheless they didn’t take on board the mathematics of the post-war physics of multi-channel radio communication, which is an obvious way of modelling the timing aspects and diversity of economic activity. Not even their “philosophy of science” friends noticed that the new information science enabled physics to advance by correcting errors and thereby making possible the emergence of new capabilities. What economist reading this can honestly deny it?
Frank, you can see from this how I’m agreeing with your conclusion about time, but I see the problem being in the mindset of “what you see is all you’ve got”, which excludes evidence on different – much faster or slower (e.g. historical) – timescales from those humans can see. A better (pluralistic rather than democratic) maxim might be “What I could see is all we have seen”.
All scientific work takes place in communities of scientists. All scientific work leans toward empiricism. All scientific communities seek consensus among members about empirical findings. Such consensus is never complete. The major concern of scientists in how and when to conclude the consensus on empirical results, and then publish results as those of the community. This process is long and difficult for each area of scientific investigation. Except economics. A large part of the economics community seems to know the answers to the research questions they ask before the research has even begun. In short, most economic research is pointless and useless, which means there is no scientific community of economists. Therefore, no economic science. John Kenneth Galbraith was correct. There is virtually nothing useful in economics that cannot be stated in plain English. Galbraith also quipped that “God invented economists to make astrologers look good.” Korean economist Ha-Joon Chang just recently commented: “95 percent of economics is commonsense made complicated. And even for the remaining the 5 percent, the essential reasoning, if not all the technical details, can be explained in plain terms.” All science, fake or otherwise mystifies to some degree, hiding commonsense behind thick walls of mathematics and protocols. Only physics is more mystifying than economics, but unlike physics can demonstrate few achievements to justify it.
Yet with no real achievements to its credit and a dismal forecasting record, economists’ salaries on average are 30% higher than other social scientists, with “star” economists paid up to 300% to 800% more than other social scientists. And as universities shut down majors and even whole departments in the face of reduced funding, economics departments aren’t touched. A 2015 survey reveals that economists see their discipline as the most scientific of the social sciences. What is the basis of this collective faith, shared by universities, presidents, and billionaires? Shouldn’t successful and powerful people be the first to spot the exaggerated worth of a discipline, and the least likely to pay for it? In the hypothetical worlds of rational markets, where much of economic theory is set, perhaps. But actual history tells a different story — of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy. Romer calls economists’ dazzlement by mathematics, mathiness. Economists hide behind mathematics, thus obscuring their work from many and playing on the illusions of mathematics’ inscrutability and infallibility created by popular writers and some scientists over the last 300 years. Mathematics is not mysterious and certainly is fallible. Mathematics is just one more tool invented by humans. But like many tools sometimes frightening and confusing if one is not schooled in it. No clearer or more terrifying proof of economists’ worship of mathematics is this from the Nobel speech of Robert Lucas, “Economic theory is mathematical analysis. Everything else is just pictures and talk.” Such adoration for mathematics is a subversion of empirical science. When mathematical theory is the ultimate arbiter of truth, it becomes difficult to see the difference between science and pseudoscience. Attention shifts to the mathematical exactitude of theories and away from the performance of the theories – mathematics is substituted for science. And we all suffer as a result. And thinking in terms of ‘sunk” costs, the more economists are subservient to mathematics the more helpless they become to change direction, or even perceive the problem.
But it gets worse. The greatest damage inflicted on the rest of us by economics and economists is to convince everyday citizens and especially political leaders that Polanyi was incorrect. That the economy is not just autonomous but controls the subordinate parts of our lives – politics, religion, everyday relations. This is the opposite of the historical norm from the earliest human communities where the economy is merely one element of society and is never the dominant element. In large part we have economists to thank for this screw up. And worse still the goal is a fool’s errand. A dismembered, self-regulating, market economy is, per Polanyi, “a utopian project; it is something that cannot exist.” Yet, almost every day on some TV talk show or political fundraiser some economist shouts to the world that it is possible, and economists are the ones who’ve achieved it.
Here’s Ken the legal word-monger mystifying us with fine-sounding rhetoric about scientists mystifying the public by trying to be succinct and internationally intelligible. The fact is, logical errors can be induced and lies told in both verbal and symbolic languages.
Dave, I did not invent scientific mystification. It’s a very old topic in the history of science and sociology of science. When scholars (or swindlers, if you dislike science) create a community of study for some topic with specialized vocabulary and protocols, it would be surprising if this did not cut off their study from the public, at least to some extent. Thereby making it mysterious. With time the specialized vocabulary grows thicker and the protocols more elaborate and detailed. And the divide with the public grows bigger. In his “ABCs of Relativity” published in the late 1950’s Bertrand Russell claimed that only a handful of people understood the theory of relativity, and he was one of these. Considering the mathematics and multiple what ifs involved in this theory and Russell’s book it doesn’t seem surprising that the theory remains a mystery to most people even today. It isn’t that scientists are lying. It’s that they are telling complex stories based on research protocols and vocabularies difficult to enter if one is not a member of the community.
Economics as constituted is not a cock-up – not even white coats can fool all the people for 200 years and counting…ergo (latin makes me ‘look’ smart – just like simultaneous equations used in a time dependent field where outputs occur after inputs)
Economics as constituted must be a conspiracy.
Economics is pre-copernican, engaged in ptolomaic ‘wheels within wheels’ to save the theory and not the phenomena – the theory that God sits on his thrown at the centre of the universe (and therefore Pope and Emperor are justified – and all the Lands that flow are justified…)
Abandon the fantasy of the autonomy of economics…