Sunday, September 4, 2016

A random physicist takes on economics: the first draft



The first draft of my e-book is at least in a state where it starts to read like a book. It's currently at about 24,000 words -- right in the middle of my target range for a Kindle Single. I am grateful to Brennan Peterson (twitter) for agreeing to take a critical look at it.

Update 6 September 2016: Thanks to Cameron Murray for agreeing to take a critical look as well!

Here's the draft chapter listing (with draft chapter titles)

A random physicist takes on economics

  1. Introduction. I finally tell the whole story of how I ended up doing this stuff.
  2. The critique. I lay out my critique of economics.
  3. Physicists. This is where I address economists' weird relationship with physics.
  4. Random people. Basically Gary Becker's 1962 irrational behavior paper explained with grade school math and blueberries.
  5. Another dimension. Saturating the budget constraint in a large number of dimensions explained with grade school math.
  6. Advantage: E. coli. Comparative advantage and economic behavior in biological systems.
  7. Great expectations. How expectations in economics let you get any result you want (explained with dice).
  8. Rigid like elastic. Entropic forces and sticky prices.
  9. SMDH. The SMD theorem in terms of blueberries and blueberry smoothies.
  10. The economic problem. Information equilibrium and the price mechanism.
  11. Economics versus sociology. When is the economy amenable to economics and when is it amenable to sociology?
  12. Are we not agents? Causal entropic forces and intelligence.
  13. Conclusions. Going forward, what are the recommendations for a research program and for policy?

And speaking of critiques, here is the list of critiques from chapter 2 as a sample excerpt ... 

*  *  *

So what is my critique?

I will question the use of math in economics. There are serious problems with the formalization and disconnection from physical reality to such a degree that I am not convinced economists think the math they use is supposed to have a connection to physical reality.

I will question the role of human decisions in economics. I am asking economics to question a principle it has held onto for literally hundreds of years. The people involved in buying and selling may not be as important as the shape of the realm of possibilities of that buying and selling. Economic agents – firms, households, individuals – might just be a one way to explore that realm. However, a drop of cream in coffee also explores its realm of possibilities. If something in economics arises from simply the ability to explore the opportunity set, it becomes a fair question as to whether that result is due to the agents or the opportunity set.

I will question the role of expectations in economics. If you have ever read, listened to or watched business news, you will be familiar with market expectations. Company ABC's stock can tumble if their earnings don't meet “the Street's” expectations. In the hands of economists, these expectations become a way for changes in the future to impact the present and allow them to explain literally any possible result.

I will question the understanding of so-called sticky prices in economics. This may seem like a small technical issue, but in macroeconomics, one way to get monetary policy (the decisions of the Federal Reserve, or “the Fed”) to have any effect on the economy is through sticky (i.e. hard to budge, also called “rigid”) prices. Wages are frequently considered just another price (the price of labor). Therefore sticky prices are a linchpin for much of the modern macroeconomic framework – pull it out, and the edifice might come down. The problem is that individual prices do not appear to actually be sticky.

I will question how agents are combined into an economy. Economists have brushed aside a significant result in their field since the 1970s called the Sonnenschein-Mantel-Debreu (SMD) theorem. The work-around that there is just one person, one representative agent, cannot begin to capture major impacts of coordination among different agents or their differing forecasts of the future.

I will question the interpretation of the price mechanism. One modern view is that a price represents an aggregation of economic agents' knowledge about a subject. That is the key to prediction markets: they are an implementation of the idea that everyone has a little piece of information about the real state of the world, and if you make it possible to trade on that information, all the information becomes available to everybody through the price. You probably find it hard to believe you can gather up all the different kinds of knowledge about blueberry yields, rainfall, the number of farmers, their experience at blueberry farming, and so on, and represent it as a single number in a useful way. I do, too.

I will question the place economics has relative to the social sciences. From the previous questions, you can probably see a trend towards removing a lot of human agency from economics. After looking at this problem for several years, I find that most of the things that economics is successful at describing have little to do with human agency. And the things it is terrible at describing (there is no agreed on idea of what a recession is in economics) may be the result of our human qualities (a tendency to panic together) that have nothing to do with money. In that sense, economics may be simply the study of functioning markets, while the study of recessions and market failures may be the domain of psychology, sociology and neuroscience. In A Tract on Monetary Reform, John Maynard Keynes famously said:
In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.

Maybe that “too easy, too useless” task is all that the current approach to economics can tackle?

6 comments:

  1. I will question the role of expectations in economics. If you have ever read, listened to or watched business news, you will be familiar with market expectations. Company ABC's stock can tumble if their earnings don't meet “the Street's” expectations. In the hands of economists, these expectations become a way for changes in the future to impact the present and allow them to explain literally any possible result.

    Amen.

    That's what makes of expectations, uncertainties, animal spirits, confidence fairies a favorite of economists (particularly those working for the government): an ideal scapegoat when things go wrong.

    http://www.rba.gov.au/speeches/2014/sp-gov-200814.html

    But you don't see those economists speaking of expectations, uncertainties, animal spirits, and confidence fairies when things actually work out the right way.

    And they say that I am the deceiver.

    B.L. Zebub

    ReplyDelete
    Replies
    1. Cheers, Mr. Zebub.

      RE: But you don't see those economists speaking of expectations ...

      To me at least it seems you do see economists explaining successes with expectations (nearly all of macro is about expectations, so any success there would be a success of expectations) -- however many times it appears (in my mind) as a just-so story.

      Delete
  2. I'll look forward to reading it but one comment on your brief point about maths. My view is that my colleagues and I use the maths as a notation of logic & it isn't as different as it looks from, say, historians modelling the causes of the 1st world war, except with symbols. The advantages are: brevity; clarity about where logic takes you; ability to bring data to the model with statistical tests.

    ReplyDelete
    Replies
    1. What about the reality depleted assumptions you use?

      Delete
    2. Diane,

      Thank you for the encouragement!

      Regarding the math, I should probably edit the specific wording I used above if it makes you think of defending its clarifying aspects. I have no problem (and have frequently endorsed) the idea of using math to be precise and logical.

      My critique is about the treatment of scales (mostly time scales), limits (how to take time scales which have units to infinity which has no units), and scopes (the limits, scales, and assumptions that define the realm of validity of the theory). In a sense my critique is about being sloppy with mathematical logic when it comes to real-life systems. However, it isn't Paul Romer's "mathiness" critique -- I criticize both sides of his argument with Robert Lucas. No economic argument should ever refer to uniform convergence of a limit. Uniform convergence issues don't crop up in real life and the situations where the math says it does are a sign one has taken the theory out of scope.

      ...

      Anonymous,

      I am neither sure if you are addressing me or Diane, nor whether the set of "reality depleted assumptions" has the same definition among the three of us (and therefore exactly which assumptions you are challenging).

      Delete
  3. @Jason (September 7, 2016 at 12:37 PM).


    To me at least it seems you do see economists explaining successes with expectations.

    Not at all. Quite to the contrary and that's precisely my point.

    Think of it this way.

    Let's call "expectations, uncertainties, animal spirits, and confidence fairies" EUASCF (for convenience).

    Now, let's play this little game of chance: you and I throw a coin; if it's heads, I win; if it's tails, you lose. You see the trick, right?

    The same thing happens with EUASCF and economists: just replace me and you in the game of chance, with "economists" and "EUASCF".

    Things aren't okay? It's not the economists' fault, they say and pull the EUASCF card. EUASCF lose.

    Things are okay? Economists claim the credit for that: Economists win.

    ----------

    Or, in other words, if they explain failure with EUASCF, then consistency would demand they explained success with EUASCF.

    But they don't.

    That's my point.

    B.L. Zebub

    ReplyDelete