Modern Economics

As a math major, I find the abundant reliance on mathematical models by modern economists absurd. To me it seems that economists suffer from math/physics envy (in that a lot of the mathematical models they use are borrowed from physics with minor adjustments.)

The problem with trying to model a complex system such as the economy - which is comprised of hundreds of millions of participants, all with a mind of their own - is the enormous nonlinearities involved. The nonlinearity translates to significant sensitivity of the output of a certain model to initial inputs. In other words, a small error in the input leads to the rapid evolution towards massively erroneous results. Or in the language of differential equations & dynamical systems, there are huge bifurcations.

The adverse effect of this can generally be minimized when an individual, or even a company, attempts to make decisions based on quantitative methods, because their inputs represent data based on individuals with which they are more intimately related (themselves, their clients, or just a smaller subset of the entire population in general.) What I find troubling is that modern economists are responsible for formulating our economic policy, and they utilize the aforementioned methods by applying them to the entire population in order to maximize overall utility - ie "the greater good."

Empirically, modern economics certainly does not have a very good track record. Perhaps it's time for an evaluation of the field as a whole - a field that has become a joke, to be quite honest.

 

Try here then:

http://www.paecon.net/

Do you have evidence for this? Seems strange to refer to empirics when you present none yourself!

 

Coincidentally, I was also a math major who studied economics. I can agree, especially after having spent the last 30 years or so observing the often catastrophic applications of economic theory, many based on quite extensive mathematical modelling.

It seems to me that economists, inherently unable to grasp the concept of initial conditions as applied to non-linear systems, tried to ignore the problem completely, despite the fact that this alone made their models useless.
Their adoption of quantification was supposed to help but the exclusion of so many "externalities" which are not economically quantifiable lead to more or less the same result, a set of more statistically rigorous and mathematically intricate but ultimately useless models that only math majors are able to gain the truth of, that they are still just crap.

Some rigour has been introduced into economics over the past few decades but the severe lack of information and the problem of initial conditions has precluded any sort of even semi-accurate medium to large scale modelling. Economic modelling can be compared to modelling the weather but scales of magnitude more data points are needed before any sort of model can even be contemplated, let alone built. Since much of this necessary data is secret, has not even been identified let alone quantified, or exists as unquantifiable "externalities", economists are far behind the meteorologists and climatologists.

Unfortunately, lack of data has never stopped economists from building models and promoting them as infallible policy prescriptions which more often than not lead to economic and social disaster.

I think a fundamental question needs to be answered, and a general agreement arrived at among all people before economics can even begin to be useful.

What purpose does the economy serve?

 

Economists would at least combine quantitative and qualitative information in support of their position. Neither of you have bothered. Give me some examples of these models that have led to economic and social disaster?

 

It's not that they necessarily lead to "economic and social disaster" (although there has been absurd legislation & regulation as a result.) It's that they fail to achieve their intended purpose.

If you want a specific example, take the Stochastic Dynamic General Equilibrium model, which is widely utilized by modern economists to try to describe macroeconomic phenomena. This model failed to predict the events of 2007, meanwhile Austrian school economists gave an accurate forecast of the financial crisis based on specific factors - silly legislation such as the CRA, and the expansionary monetary policy of the Fed starting in 2001.

Something I forgot to mention in my first post, is that the underlying assumptions of most models today are based on rational expectations theory and complete markets - both of which are unrealistic. Any model, regardless of how mathematically intricate, will fail to give an acceptable description of the economy in the presence of such laughable assumptions.

 

It's not called the dismal science for nothing. One thing I've noted about every economist I interact with, is every single one is critical of the field itself. Modeling and econometrics are both valuable, but if you're not incorporating in the human part of the equation your going to make huge mistakes.

 

an economist use other than math? The problem that I have is the extreme level of simplification. For example, the common argument is that cost goes up when the supply decreases (i.e. demand increases). Why? Most factories are NOT operated at 100 % capacity. Most factories operate at between 75-90 % of capacity. Thus, how does one model human greed if the requisite assumption for the supply-demand relationship is untrue.

 

Eh? You've got that wrong!

The issue with supply/demand is the marginal cost curve. Purely hypothetical (whilst also allowing some theoretical prance with greek letters!)

 

As far as a specific examples, consider the WTO, World Bank and IMF application of open market theory to Thailand in the 1990s which eventually forced Thailand to rescind capital controls on foreign investment in its real estate market despite warnings from Thai government officials that economic disaster would be an unavoidable consequence.

As a result there was a huge real estate bubble in Thailand which, when it burst in 1997 spread economic calamity across Asia, caused Russia to default, and spread the debt crises as far as Brazil and Mexico which resulted in massive currency devaluations and economic recession.

Since then almost all of the nations effected by this crises and many others have reinstituted currency controls despite WTO rules and pressure from the IMF and others. In other words, they have deemed these free market economists experiments an abject failure.

As investors fled they poured their money into the US and EU which fueled a short speculative boom in tech stocks and then a longer unsustainable boom in the housing markets of the US, UK, Ireland, Spain and elsewhere.

You need more examples of economic disaster caused by failed policy driven by inconsiderate economic theorizing, try Argentina, or Greece, or Ireland, or Iceland, or the US housing market in the 2000s.

 

Numerous political economic schools of thought predicted the crisis. Neo-liberalism is in itself characterised by greater instability. Seems like you've really just got a problem with neoclassical economics. I wouldn't call that 'modern economics' as economics has shifted towards a more pluralist approach.

No, only aspects of the models utilise rational expectations (such as the new classicals versus the new keynesians). This isn't a hard-hitting critique. Its purely a "there are some aspects within specific economic models that I don't like".

 

You haven't actually said provided any examples of these models that have led to economic and social disaster. We can of course complain about aspects within supported economic approaches. I'd certainly attack the Washington Consensus when it comes to the impact of the WTO/IMF/World Bank. However, those attacks are themselves economic in nature. Your whinge is therefore essentially "there isn't a consensus in economics, but I can refer to policies that didn't work". Woo bleedin woo!

 

I don't like them because they are bad theoretical assumptions. The only reason rational expectation theory, for example, became widely used was because economists wanted the linear models they used to produce unique solutions (without suffering from systematic errors). It is in no way based on reality.

Any undergraduate math major knows how much chaos can be produced by a single nonlinear difference equation (let alone systems of nonlinear equations.) There's a reason mathematicians and physicists look down on economics (or other social sciences) that misuse mathematics. Unlike hard sciences, where one first makes an observation, then states a hypothesis and associates a model with it, and then rigorously testing that hypothesis through repeated sampling, in social science one makes proclomations of observed behavior and then makes a model that attempts to describe it.

 

But you don't have a point! Can I refer to numerous economic models that I don't support? Yes. Can I refer to either theoretical or empirical evidence to critique individual model? Yes. But so what? Economics is not the study of rational expectations, rational expectations is but one of thousands of concepts used in a vibrant discipline composed of multiple political economic schools of thought

This is nonsense. The hard sciences will regularly utilise the techniques mastered in the social sciences. Econometrics is a powerful tool after all. Sounds like your argument is actually based on a level of innocence of Economics output

 

Since 2008 the Federal Reserve has manipulated the interest rates in the United States by reducing them to well below the historical "value of money" which has resulted in lower than market value return on investment for tens of millions of retirees in the United States that have their retirement assets in US Treasury notes. This has had a disasterous impact on their lifestyles by reducing their annual income. The cummulative effect is in the hundreds of billions of dollars in lost income to those least able to replace that income. Not only has it reduced their standard of living but has also adversely impacted the US economy because this money would have been used for consumption by these individuals.

 

You've made an opinion comment. You haven't referred to any economic model, nor have you presented a compelling case that combines quantitative or qualitative information. In a nutshell, your comment wasn't economic!

 

Wasn't the science that economics was trying to emulate, the field of thermodynamics - ? That is, a domain in which it is neither possible, nor necessary, to chart out all the variables contributing to a certain empirical state of affairs...? Instead, we can make certain - presumably valid - simplifying assumptions, in order to effectively model the behavior of systems at the 'dry - goods' level.

Economics can be said to be much akin to ethics - a discourse in which the subject matter cannot, at least not completely, yield to strict, formal-logical rigor. Instead, inquiry into the subject matter of the "moral sciences" calls for a particular set of methods, methods which do not (and cannot) involve anything like 'hypothesis testing' (though I suppose game theory might provide some exceptions to this).

The methodology of moral inquiry, in contrast to that of physics, say, will explicitly resort to historical modes of reasoning. The emphasis will be on description and historical retrodiction, rather than on explanation and (thence) prediction (viz., prediction of the outcomes of replicable experiments).

After all, as complicated as the events are that we are aiming to make an account of, we can in most cases reasonably derive a posthumous explanation (or 'retrodiction') of "how we got to our current situation," even if it is far beyond our ken to use our analytical tools to predict in any detail what is going to happen next.

We enlist the economists in soothsaying, because all societies need people serving in this role, and they appear to be the best qualified for the job, even if "best" here has to be understood advisedly. They will continue to make many errors (and I think it makes sense to say that the different schools of economic thought are not all of equal merit, especially when it comes to trying to make forecasts); but it must be folly to try the social sciences by the standards of the exact calculation possible in physics (i.e., possible where the subject-matter calls for an inquiry at a fundamentally different level of analysis)...

 

The problem is economists have been agenda driven, and they teach that same philosophy to their students.

Hey Rev, I'd love to see an economical theory on how much money the US needs to print and not implode the dollar in order to get out of this mess. Since inflation is of no concern, we might as well print 15 trillion dollars and be squared away and then take away taxes and just continue to print money as needed.

 

Economics is called a social science. That is a strange connection for two words if there ever was one. Mathematics is a true science. It is no wonder that mathematics in a social science makes no sense to you. It makes no sense to me either.

 

Mathematics is no science, it is simply a (very useful) tool used by the sciences.

 

What agenda is that then? You need more content in the conspiracy theory!

 

"techniques mastered in the social sciences"???

Econometrics is nothing more than the application of statistical analysis to solve problems in economics. It utilizes statistical methods that have long been used in hard science (where they actually work.)

 

You haven't actually said anything here. Econometrics has been advanced, as a tool for anyalsis, substantially by economists. However, to suggest that its economics specific would just show an innocence of how academic reearch has evolved (and the importance of modern economics for the research in other disciplines)

To summarisea, your argument has so far boiled down to 'not sure about how rational expectations are employed in a handfull of macro modeils'. That isn't particularly hardcore. Perhaps criquing skiils are more tuned in the social sciences?

 

That was in response to your absurd claim that natural scientists borrow the methods utilized in econometrics (when in reality, it is econometricians who borrow methods utilized in the natural sciences.) Even methods which are "developed" by econometricians for use in their field (such as dealing with simultaneous equation models, for example) are just analogies of methods used in other fields - in this specific example, the method of dealing with simultaneous equation models is analogous to system identification in control engineering.

The underlying method is the application of statistical analysis to data. That econometricians may have come up with new ways to analyze large sets of data is irrelevant to the discussion. No one is denying that they are using cutting edge mathematics & statistics. In fact, that's the problem. The issue with utilizing such methods in economics is the quality of the data available. The data is not generated under optimal experimental conditions, it can't be replicated, and is measured with tremendous error. Not to mention that in a lot of cases, the data cannot be directly observed/measured and so you have to rely on proxies.

Even well-renowned economists doubt the usefulness of these methods applied to economic data.

 

That is just factual. Econometrics has evolved substantially, mainly through staff within economics departments. It doesn't matter if you like that fact or don't.

Again, sounds like you've been let down by maths. They haven't given you the critiquing powers common amongst the social scientists.

 

No, you just don't have the capacity to understand what I am saying. I've even made it simple so that you could, yet you still have failed. Just ask questions if you need clarification - don't respond to things you think I said based on your inability to comprehend my posts. You chose to respond to only a single sentence of my previous post, and you couldn't even do that right.

For the millionth time, I am not denying that the models used in economics, or econometrics, are not sophisticated or that they have not evolved. That isn't the point of this thread. Many people here have grasped the central theme of my original post - clearly you are not one of those people.

As has been stated before numerous times, the real issue is whether or not sophisticated mathematical and statistical models can give us any insight into human behavior and whether or not we can use them to make predictions in economics. I don't know if you've ever dealt with economic time series, but from my experience (and from an abundance of research papers on the topic) there are huge nonlinearities present. Also, unbalanced frequencies/amplitudes of fluctuations in the data are very common and there is no sign of convergence or steady oscillations. Most economic models that aim to predict things like inflation rates, GDP, etc., make use of systems of nonlinear difference equations, which are chaotic. Thus, they are incredibly sensitive to initial conditions. And this is where the problem of the quality (or lack thereof) data available to economists comes into play - as has already been explained to you in my previous post. The lack of proper data to plug into such models leads to the lack of convergence to any acceptable solution.