Sunday, January 31, 2016

What is and isn't economics?


It's probably hubris for a physicist to say what is or isn't economics, but I'll have a go anyway. My last post was about how it appears that technology and government don't have first order effects on the macroeconomy. In response, Commenter Jamie said something very interesting:
That suggests to me that there is a serious mismatch between interesting economic questions and current macroeconomic techniques.
Here is part of my reply:
Indulge me in a paraphrase: 
"That suggests to me that there is a serious mismatch between interesting scientific questions (species adaptation, life in the universe) and current physics techniques." 
At one time, some physicists did have some contributions to biology (e.g. Schrodinger's What is Life?), but really since the beginning physics techniques were never matched up with scientific questions from biology. Hence they are different fields. 
In my view, the subjective impact of technology on our lives is the domain of sociology anthropology, and history. It's economic impact can vary from nil to huge. 
Another analogy: in some cases, the biosphere has limited impact on our understanding of geology (volcanism, plate tectonics); in others it is huge (carbon and water cycles, oxygenated atmosphere). But in general, you shouldn't start to try to answer a geological question with biology. Start with plate tectonics, glaciation and sea level changes. 
Sure, it is possible that the biosphere can cause things to happen that lead to those glaciation events or global warming (I wouldn't even discount the hypothesis that biological processes could help lubricate plate tectonics). And biology may be critical to the coefficients in those effective geological processes (biology determines the composition of the atmosphere, for example). You could say: it's all atoms, so atoms have to be important. But that importance shows up as e.g. the triple point temperature of water ... once you have that (even empirically) you don't need quantum chemistry to understand geology. You don't need to know the specific ecological niche of coccolithophores (or other biological details) to understand the cliffs of Dover; you just need three: that they live in the water, their abundance and that they have shells of calcium carbonate.

One thing to keep in mind is this: If social and psychological effects (properties of agents) are integral, then we should probably give up on economics because it becomes a multi-million dimensional agent problem and therefore intractable. If you think there is a real thing called "the macroeconomy", "the market" or "social welfare" (or "representative agents" or "inequality"), then you're already headed down the path of dimensional reduction -- and it becomes only a question of how far. The macroeconomy can't simultaneously be a complex nonlinear system critically dependent on its constituent agents and something with comprehensible aggregate properties. 

With that in mind, I thought I'd make a handy list (that might grow, shrink or change) for how the information transfer framework sees the field of economics:
  • Quality of life: This is largely a question for politics, psychology, sociology and history. How we subjectively experience the world around us seems to only loosely correlate with money, and even in that case it's only poverty is the proximate cause to low quality of life. Because of our system, some people can't afford basic needs. If basic needs were directly provisioned by the government, then I suspect the correlation between quality of life and money would fall precipitously. Another way: it is a failure of the market allocation mechanism to match up the market allocation with social welfare. However, that has little bearing on how the market allocation algorithm works. Conclusion: not economics.
  • Economic growth: There are a couple of information equilibrium models where economic growth seems to flow from macro aggregates of "widgets" (labor supply or money supply), so long run economic growth seems to be about the allocation problem, not about society, history or culture. Causation might actually go the other way with economic growth (or lack of it, or lack of equal gains among segments of society) leading to political cohesion, unrest, revolution and warfare. Functioning markets that lead to economic growth need to be set up by governments (or general social trust), but once operational, these impacts likely enter though coefficients (e.g. higher information transfer indices in countries with more "trust"). Social effects are probably second order effects on the coefficients rather than terms in the model. Conclusion: economics.
  • Recessions: Not well understood. Possibly an interesting interaction between group psychology/sociology and macroeconomics via financial markets. The information transfer framework can model recessions as non-ideal information transfer (market failure), or falls in entropy (coordination of agents). It could also just be avalanches set up by a "snow pack" of macro aggregates (via the central bank) and triggered by financial crises and or the central bank. In general, recessions happen in a background of an information equilibrium solution -- you need to understand that first to know how recessions work. Conclusion: maybe economics.
  • Inflation: This doesn't appear to be independent of economic growth, but rather just another measure of the same thing. In most information equilibrium models with good empirical results we have nominal output N ~ k log X and price level P ~ (k - 1) log X where X is some macro aggregate like labor supply or money supply. So P isn't really independent of N. Hyperinflation, though it can be tackled by the information equilibrium model, is probably more a socio-political/psychological problem. In a sense, when inflation stops being well-described by an information equilibrium model, it's probably a political problem. It might be connected to pegged interest ratesConclusion: economics.
  • Technology: Some aspects of technology lead to impacts on macro aggregates (like public health on the labor supply) that leads to growth. Other technologies are nothing more than additional widgets where the identity of the widgets doesn't matter to the economic allocation problem. Communication advances probably lead to a speeding up of the exploration of the economic state space (as well as speeding up and increasing the size of deleterious coordinations like mass panics). The technologies that are just widgets are best left to sociology, anthropology and history. The measures of technology in economics might just measure economic entropyConclusion: generally not economics.
  • Government (institutions): My view is that government basically can act as a "helpful coordination", convincing people not to panic, encouraging them to not give into the paradox of thrift, or employ people directly during a recession to mitigate its effects. Central banks can help in this process, or set off deleterious coordinations. At some level government printing of money, warfare and debt can have a role. However, it appears that isn't economics per se and is politics, sociology or history (see inflation, above). And politics can be a powerful force. In the 1960s and 70s, the US allowed women and African Americans to become part of the labor force -- which may be behind the so-called "great inflation" at the timeConclusion: aggregate is economics; otherwise not economics.
  • Financial markets: The main economic effects are either as responses or triggers. The could fall in response to a macro avalanche (above) or trigger one. They could also respond to or trigger coordinated group behavior leading to a loss in economic entropy (equal to nominal output) -- or even non-ideal information transfer. Conclusion: aggregate is economics; otherwise not economics.
  • Money: Possibly just another widget, but may be a good indicator widget like the famous "Big Mac index". It could also be what allows agents to explore economic state space and therefore the source of entropy. These two views would find themselves at home in the quantity theory of labor (P : PY ⇄ CLF) and the monetary information transfer model (P : PY ⇄ M0), respectively. It does appear to be directly related to interest rates. Conclusion: economics.

11 comments:

  1. "but really since the beginning physics techniques were never matched up with scientific questions from biology"

    What about some of the new origin of life research?

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    1. That is technically chemistry (even the entropy approaches). I wouldn't know the first thing about how to synthesize lysine.

      I would put the origin of life question squarely at the boundary of chemistry and biology.

      Delete
  2. I just heard Sean M. Carrol give a brief discussion of Schrodinger's "What is Life?" book, and the story of how he ended up writing it. Have you read it?

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    1. He went on to say he was lucky enough to be seated next to geo-chemist Michael Russell of JPL on an airplane. The meaning of life came up, to which Russell exclaimed "I know that: that's easy. It's to hydrogenate carbon dioxide."

      In a sense though (as often happens) I read it here first.

      He had a nice little graph of entropy of the universe going from low to high while "complexity" goes from low (simple) to high (complex) to low (simple) again. It made me think of your example of an economy growing and then cooling again as it expands and ages.

      Delete
    2. You mention the attitude you get from a graduate degree in physics... and some of the themes Carroll often covers corroborates that to an extent for a non-expert like me. He almost never fails to mention scale for example (in his lectures for laymen anyway).

      Delete
    3. Yes, I have an old edition as well as "Science and the Human Temperament". "What is Life?" Quite good for such a compact volume:

      https://en.wikipedia.org/wiki/What_Is_Life%3F

      I used to collect old science and math books.

      I wouldn't doubt it as Carroll and I are of comparable age, so would have been taught approximately the same stuff in school. Not much has changed in the general approach to physics since the 80s. I think Weinberg's Phenomenological Lagrangians [pdf] from 1979 shows the nascent modern paradigm.

      Delete
  3. Let me offer my favorite definition of economics:

    Economics is that which economists do.

    And if you're wondering about the definition of economists, that's just economics professors at respectable universities.

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    1. That's a good one. It's like my favorite definition of unemployment:

      Because--more young adults are becoming unemployed on account of they can't find work! Basically, the problem is this: if you haven't got a job, then you outta work! And that means only one thing-- unemployment!

      https://www.youtube.com/watch?v=2NEZRPzNF2Q

      Delete
  4. I’m sympathetic to what you’re saying but I’d put it differently. I don’t think that ‘economics’ is really a subject, so I don’t think that its scope is important. There are ‘economic questions’ which we want to answer but it is completely arbitrary as to which of these questions belong in ‘economics’ or require ‘economists’ to answer.

    In the previous post, an underlying question was ‘what impact is technology making on the economy’? I would argue that the people best placed to answer that question are people who understand business, people who understand technology and, best of all, people who understand how technology is actually used in business to develop new products, improve existing products and improve business processes. There are many such people.

    It’s not clear that someone who is an ‘economist’ has any value to add to answering this question unless they also understand business and technology, particularly if they are unable to imagine any benefits other than an increase in GDP. That’s also true if you replace ‘economist’ with ‘sociologist’ or any other generalist.

    When I started researching economic questions I asked specific questions e.g. ‘how does the banking system work’? I don’t care whether anyone else thinks these questions belong in ‘economics’ or not.

    I quickly found that most economists couldn’t answer this type of specific question. However, I did find that many specialists, e.g. in finance and banking, could provide answers. I eventually found that a few economists on the outskirts of the economics profession could answer specific questions but it was easier to find answers from subject matter experts outside the profession.

    This seems to be a general pattern for many economic questions. My feeling is that the internet is in the process of disintermediating much of the economics profession. Disintermediation removes middle men who add little value to a process. As an example, in another field, expensive stockbrokers have been removed from the process of buying /selling shares as they were mostly just a bottleneck. In macroeconomic forecasting, you are attempting to disintermediate professional economists. You have the same data as them and, from your perspective, a better forecasting algorithm, so what value do they add?

    Economists are mostly very intelligent people – but so were expensive stockbrokers. However, economists know less than bankers about money and banking; less than business people about business; less than technologists about the potential of technology; less than psychologists about human decision making; less than mathematicians about mathematical models. What unique value do they add when it is easy to find subject matter experts on many specific economic questions?

    Which are the questions where economists still have a comparative advantage? What is that advantage? Why do economists not collaborate with subject matter experts and people like yourself with innovative ideas? Why do we need academic economists who cannot communicate economic ideas to policy makers or educate the general public? I’m not saying that there are no answers to these questions but economists need to recognise that they don’t have a monopoly on many economic insights, particularly when the insights they do have are not expressed in plain English. Perhaps someone could advise them on how to thrive in a competitive market of ideas!

    A few of the smartest economists seem to understand this but they are a small minority. Here’s Brad DeLong.

    ‘Problems like these will require a very different type of economics from the one championed by Adam Smith’

    ‘To be sure, it is not clear that economists will have a comparative advantage in addressing these problems’

    https://www.project-syndicate.org/commentary/economic-problems-age-of-abundance-by-j--bradford-delong-2016-01

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    1. Hi Jamie,

      You said:

      When I started researching economic questions I asked specific questions e.g. ‘how does the banking system work’? I don’t care whether anyone else thinks these questions belong in ‘economics’ or not. ... I quickly found that most economists couldn’t answer this type of specific question.

      You seem to have already made up your mind that the details of how the banking system works is critical to understanding macroeconomic questions. In physics terminology, you are saying there is no effective theory without banks. You are saying there is no dimensional reduction from the (for argument sake) 100,000-dimensional banking system problem to the macroeconomic system -- macro is still 100,000-dimensional.

      This is problematic in my view for a couple of reasons:

      1. Why does the (e.g.) 1,000,000,000-dimensional individual agent problem dimensionally reduce to a 100,000-dimensional understanding of the banking system, but not reduce further?

      2. What is the evidence that the 100,000-dimensional understanding of the banking system doesn't further reduce to (e.g.) a 100-dimensional understanding of the macroeconomy?

      3. If you are comfortable with an effective theory with banks as a degree of freedom, what is the objection to an effective theory with economic sectors as degrees of freedom?

      I'd be fine with it if there was evidence. In physics, thermodynamics doesn't really become an accurate effective theory until you get to 10^23 atoms. Maybe 10^5 banks are not enough for an accurate description in terms of an effective theory using sectors? It is possible, but that proposition needs evidence, not assertions.

      And the current lack of an empirically accurate 100-dimensional effective theory of the macroeconomy is not evidence it doesn't exist. There was a time when humans didn't know quantum mechanics, but that didn't mean quantum mechanics didn't exist.

      PS If you have an issue with this "mathematical" description in terms of dimensions, just think of them as page counts.

      e.g. There is a 100,000 page book that describes the macroeconomy including details about the banking sector.

      e.g. Why does the 10^9 page book about every person summarize to a 100,000 page book, but not summarize to a 100 page book?

      If there is a finite (potentially comprehensible) amount of information about a subject, then it can be represented in a book with a finite number of pages.

      Delete

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