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| Physicists and biologists trying to fix economics ... |
Mark Thoma linked to this article on biologists wanting to get in on redefining economics with the bold, revolutionary new ideas such as "agent based modeling", "imperfect information" and "adding human behavior". It's pretty funny and I begin to see why economics "as a whole is resistant to outside incursions". I at least took the time to read up on the use of information theory in economics (and basic economics) before jumping in.
In reading the article, it becomes clear that the biologists' ideas to fix economics are both unoriginal and doomed to failure. At least if the information transfer view is correct. Some specific comments are below. I put links the supporting/elaborating material for the specific claims below at the bottom of the page.
But [mathematical formulae come] at the price of ignoring the complexities of human beings and their interactions – the things that actually make economic systems tick.
So you know for a fact that the complexities of human decision-making matter? How? Did you already model an economic system as complex human beings and discover this? Why not just show us that research?
Snark aside, this is a fundamental assumption of economics as well, so this is not only an ad hoc assumption, but an unoriginal ad hoc assumption.
The problems start with Homo economicus, a species of fantasy beings who stand at the centre of orthodox economics. All members of H. economicus think rationally and act in their own self-interest at all times, never learning from or considering others. ... We’ve known for a while now that Homo sapiens is not like that ...
Yes, we have known that for awhile, and yet very little has come of it. It's just another unoriginal idea.
In the information transfer view, H. economicus is an effective description, like a quasi-particle in physics. Once you integrate out the degrees of freedom from the micro scale up to the macro scale, the very complicated H. sapiens at the micro scale ends up looking like H. economicus at the macro scale much like the very complicated short range interaction of quarks and gluons ends up looking like a simple charged hard sphere (proton) at long range scales.
How different is a stock price crash from a wildlife population crash?
That is a figure caption and seemingly rhetorical in the article, but they're very different in the information transfer view. A school of fish can coordinate their direction to evade a predator. If an economic system coordinates, it collapses.
Wildlife population crashes are not usually due to coordination of the wildlife itself -- although population booms may lead to crashes. But in this case it is not the coordination itself that leads to a crash. The coordination of wildlife leads to a population boom that e.g. eats all the food resources, leading to starvation. In the information transfer framework, the coordination alone is the source of the fall in economic entropy that leads to a fall in price.
Wildlife population crashes are not usually due to coordination of the wildlife itself -- although population booms may lead to crashes. But in this case it is not the coordination itself that leads to a crash. The coordination of wildlife leads to a population boom that e.g. eats all the food resources, leading to starvation. In the information transfer framework, the coordination alone is the source of the fall in economic entropy that leads to a fall in price.
Taking into account [some effects] requires economists to abandon one-size-fits-all mathematical formulae in favour of “agent-based” modelling – computer programs that give virtual economic agents differing characteristics that in turn determine interactions.
This is definitely not original.
There is also a fundamental reason agent-based modeling is unlikely to be helpful. How many input parameters and variables does your agent have? 10? 100? How many agents do you have? 1000? 1,000,000? Your system is now a 100,000,000-dimensional problem.
How many equilibria does your 100,000,000-dimensional problem have? Well, if there aren't any symmetry considerations and your agents are complex enough to capture even a small fraction of the complexity of humans, you will have no idea. But that's supposed to be the point, right? We need to do bottom up simulations of agents because top down analysis doesn't work, or so the biologists (and well before them, micro-foundation obsessed economists) have said. But any particular equilibrium you find is going to critically depend on the initial conditions of your simulation. And that choice could give you any of the equilibria -- many of which probably look enough like a real economy to declare success even though you've just reduced the problem from solving an economy to finding the initial conditions that give you the economy you want.
A good example of how wrong-headed this approach is can be illustrated with protein folding. One thing the scientists who study protein folding don't do is just throw 5000 carbon, nitrogen, oxygen etc atoms in a box and turn the crank on the Schrodinger equation. You can get pretty much any structure you want this way (critically depending on initial conditions).
What they have noticed (empirically) are effective structures (protein secondary structures) that form many of the building blocks of proteins.
That is an example of dimensional reduction; the 45,000 dimensional problem of the 3D position and orientation of 5000 atoms has been reduced to a 90 dimensional problem of the position and orientation of 10 protein secondary structures.
If the information transfer model turns out to be correct, then a macroeconomy can be reduced from that 100,000,000-dimensional problem to a 20-dimensional problem (give or take). The agents -- and the extra 99,999,980 dimensions they contribute -- don't matter.
... economies are like slime moulds, collections of single-celled organisms that move as a single body, constantly reorganising themselves to slide in directions that are neither understood nor necessarily desired by their component parts
This biologist thinks economic systems are an analog of biological system. Physicists (including myself) tend to think economics reduces to statistical mechanics. Some engineers think in terms of fluid flows. I imagine a geologist would think of economics with a plate tectonics metaphor. Politicians probably think economics is all about the coordinated desires of people. Remarkable how people in a given field tend to think in terms of their field.
It would be amazing if economics just happened to reduce to an analog of a system in your field, wouldn't it?
In my defense, in the information transfer approach (if valid) it's the difference between thermodynamics (where there is a second law) and economics (where there isn't) that is the new idea. It is this difference -- that economic entropy can decrease spontaneously due to coordinated agent behavior -- that comes into play in showing the slime mold analogy is misguided. Whenever the slime mold moves as a single body you'd get recessions; whenever the individual cells do their own thing you'd get economic growth. Coordination, even emergent coordination, is economic death.
Continued reading ...
Econophysics for fun and profit [about taking on economics as an outsider]
Information theory and economics, a primer [on 'effective' H. economicus]
Coordination costs money, causes recessions
What if money was made of vinegar? [Dimensional reduction]
Against human centric macroeconomics [is human behavior relevant?]
Is the demand curve shaped by human behavior? How can we tell?
Normally I am open to fringe economics theories, but this post is a muddled.
ReplyDeleteFirst of all, you did not come up with the idea of applying the second law to economics, this is not a new idea. It was developed by Myron Tribus in the 1960s and has had it's own following ever since.
Agent based models are common across other social sciences, which need not run into the computation problems discussed. They are slowly being adapted to be more useful to economists. In which there has been a recent breakthrough http://s120.ul.ie/drupal/node/86
Furthermore, if Coordination Problems are economic death, I think we should ought to tell Hayek, Keynes, large swathes of game theory, Romer, Mankiw ect. ect..
Now I genuinely think there's more scope for cross overs between physics and economics, and you've got a good thing going here. But maybe you should read up a little more than basic economics before making broad claims without addendum, on what is and what is not economic death.
Hi Benjamin,
DeleteI agree that the post is a bit muddled -- it was written in bits and pieces as a series of stochastic thoughts (with credit to Robert Waldmann).
I made no claim to being the one who came up with using entropy in economics -- my claim, and it may not be original (but it seems to be),is to the idea that the economic second law can be violated and that violations are related to recessions.
My complaint about biologists pushing agent based models was not that they wouldn't work, but that they are 1) not the only way to solve complex systems, 2) are likely an inefficient way to solve macroeconomic systems and 3) economists have been using agent based models for decades now. Here is Krussel and Smith on heterogeneous agents, for example:
Per Krusell and Anthony A. Smith, Jr., (1998), 'Income and wealth heterogeneity in the macroeconomy'. Journal of Political Economy 106 (5), pp. 867-96
I thought it was silly for biologists in 2015 to say that economists should use agent based models. They have been. In my opinion, it hasn't really gone anywhere, but that's just my opinion.
And yes! We should tell Romer, Mankiw (and I guess dig up Keynes and Hayek) that coordination is economic death! That's part of the point of this blog! It's a completely non-intuitive and counter-mainstream claim of the information transfer approach.
But I think I should be clearer about what I mean be "coordination". I don't mean "coordination" in the sense of solving the economic allocation problem. In that case, people aren't coordinated in the sense of doing the same thing, they are coordinated in the sense of buyers and sellers coming together. But some people are buyers and some are sellers and there's a 'detailed balance' of goods and money.
The coordination I am talking about is that a distribution of agents will occasionally change to one of lower entropy (violating the second law as mentioned above) ... due to panics or other irrational behavior. This appears to be the source of recessions (if the information transfer view is correct).
And I did have an addendum -- I linked to this post above that describes what I mean by coordination is economic death:
http://informationtransfereconomics.blogspot.com/2014/10/coordination-costs-money-causes.html
"The coordination I am talking about is that a distribution of agents will occasionally change to one of lower entropy"
DeleteIf gas molecules in a container behaved like these agents, then occasionally all the gas would shift to one side of the container, correct? Which might actually happen with some frequency (on the order of a human life span or less) if you had about a dozen gas molecules or fewer I suppose.
Yes, that's the analogy. All the molecules "panic" and move to one side of the container.
DeleteGiven one of these 100,000,000-dimensional agent based problems, do you think the ITM can predict something about the result prior to the agent based model being run? (I'm imagining these agent based models are basically simulations).
ReplyDelete... simulations similar to dropping a multitude of wind up toys in an arena and seeing what they do as they bounce around and interact with one another.
DeleteYes, that is the computational efficiency I discuss in the "vinegar" post linked above.
DeleteAnd yes, that is a good analogy. And what happens tends to depend on where the toys are dropped in the first place.
I wonder if it's possible to design "interesting" toys that are insensitive to where they are dropped? ... or do the qualities of being "interesting" (realistic?) and being insensitivity to initial conditions tend to be mutually exclusive for some reason?
DeleteIf the "toys" (agents) were actual gas molecules in a container, they would tend to be insensitive to where they were initially dropped wouldn't they? At least in the very long term?
That is the point of symmetry principles that effectively tell you what the equivalence classes of equilibria are (in an ideal gas e.g. all rotations of the particle states are another equilibrium that form the maximum entropy equilibrium).
DeleteThe sensitivity to initial conditions is based on a landscape of different equilibria in that 10^8-dimensional space. Symmetry principles tell you that many of them are actually the same. If you start near eq1 and end up there, it's not a different equilibrium if you start near eq2 and end up there ... because a symmetry principle tells you eq1 and eq2 are the same.
The reason the equilibria found by gas molecules are insensitive to initial conditions is because there are a large number of symmetries in the gas system that say all equilibria are the same -- all maximum entropy distributions of particles are equivalent. Reversing the direction of momentum of each particle randomly is another equilibrium, but it's in the same equivalence class as the original. It's effectively the same equilibrium because of symmetry.
What you are saying is that there exist symmetry principles that make the equilibria the toys find part of an equivalence class.
Symmetry principles are also the reason behind dimensional reduction. A model of the gravity field of a stationary symmetric sphere isn't 10 dimensional (3 space, 3 rotation and 1 time), it's one dimensional and the potential depends on one variable ~ 1/r.
... BTW I heard an interesting one today on the radio: two (same sized?) pendulums mounted on the same wall will tend to sync up with one another (180 deg out of phase). The story mentioned that a mathematician had recently "solved" the mystery of why this happens.
DeleteNow I'll do some googling and see how far off I am... ...not too bad I guess.
I don't know I might be convinced...economies are like slime moulds...
ReplyDeleteI think slime molds are more rational than markets ...
Delete:)
Having just watched the ECB Press Conference how should one view the Central Bank in this. As someone doing Coordination (perhaps leading to recessions) or as someone doing unCoordination by driving people away from there coordinated view of expected low inflation?
ReplyDeletetks for a great blog!
Thanks.
DeleteI'd agree with the central bank acting as a coordinator -- it looks like the US Fed acted to coordinate people into a panic (e.g. by letting Lehman go bankrupt, or by not lowering interest rates in 2008). However, I also think business news (e.g. 24-hour cable channels), or bank failures -- or even statistical fluctuations in the stock market (a 3-sigma event in trading) -- can also trigger a coordination among agents.
It is possible that central banks can act to mollify a panic as well -- if everyone thinks things are going to be fine, they'll go back to their original (uncoordinated) plans. For example, the QE in the US might have acted to mitigate the size of the shock.
This may seem like answering "yes" when it's not a yes or no question, but it can be viewed as the central bank can either restore the status quo, or have a negative effect.
So it seems to go both ways for CB's. Taking this post http://informationtransfereconomics.blogspot.com/2016/01/is-cpi-information-theoretic-measure-of.html icto account it would seem the only way for a CB to create growth nowadays would be for them to get more workers back from the sofa, i.e. increasing CLF, barring they would do some QE where they pay people money outright for having babys.
ReplyDelete