I doubt it...but more on that in a second.
There is a fascinating argument going over at Edge.org about whether science can save the economy. The authors suggest that the scientific techniques being applied to the natural sciences should be applied to establish a new consensus about how the economy works:
In the near-term, Eric Weinstein has spoken about an "economic Manhattan project". This means getting a group of good scientists together, some who know a lot about economics and finance, and others, who have proved themselves in other areas of science but bring fresh minds and perspectives to the challenge, to focus on developing a scientific conceptualization of economic theory and modeling that is increasingly reliable.
To accomplish this, research has to be done to develop a new paradigm for economic theory and modeling markets. This research has to be carried out as the science it is, which is to say that assumptions must be tested against the real world, alternative theories must be developed and refined, and these must be compared with one another and tested again.
In all of this work economists, accountants and financial mathematicians should join forces with complexity theorists and other scientists with the goal of remaking economic theory and modeling so that it can offer reliable guidance for the organization and regulation of stable financial markets. The research has to be carried out in an interdisciplinary and open spirit.The goal of this research is a new scientific conceptualization of economics and economic modeling which can provide reliable advice in constructing, running and regulating financial institutions and markets so that they serve the purpose of growth and stability in the standard of living of all people. Financial firms and markets must innovate to serve their larger purpose in providing efficient capital flows for the growth and innovation of real goods and services as well as a safe repository for our collective savings. Innovation in methods of speculation that are unrelated to stable production of goods and services and the efficient flow of capital within the system must be recognized and discouraged.
If this research succeeds then a discussion of whether a given financial instrument should be allowed or how it should be regulated should not be a matter of opinion or ideology. It should be based on detailed modeling and data taken from real world experiment and treated with the scrutiny brought to the introduction of a new airplane.
In the longterm, there needs to be an independent, non-partisan methodology for economic and financial modeling which involves globally agreed upon standards, as in the world of climate modeling. As in that world, one can imagine an international commission of economic scientists who develop, test and benchmark economic models against each other, and against past data, so that there is a reliable understanding of what the best models are and how reliable they are for studying different kinds of problems and predicting the impacts of proposed new economic and financial regulation. This will allow new proposals for innovative financial instruments or changes in trading rules or accounting rules to be tested in an open environment using best practices to understand their results.
An economy involves finding balance between long- and short-term objectives, acceptable distributions of wealth, and rewards for innovation and risk taking. Different governments may embrace different social philosophies and may seek to establish economic and financial regulations to obtain somewhat different desired results. The role of an independent, non-partisan scientific conceptualization of economics should be to provide these policy makers with a notion as to the likelihood that new economic and financial regulations they are considering will have the results they desire and that these will not involve unintended consequences to others.
Read the whole thing.
The article also has some telling responses from people like Nassim Taleb, Wikipedia creator Larry Sanger, and Skeptic magazine editor Michael Shermer. Many of those comments take a very dim view of the suggestion, an opinion which I share. Here are some choice comments.
I spent close to 21 years in finance facing "scientists" in some field who show up in finance and economics, realize that economists and practitioners are not as smart as they are (they are not as "rigorous" and did not score as high in math), then think they can figure it all out.
Nice, commendable impulse, but I blame the banking crisis (and other blowups) on such "scientism".
We've seen them from all fields of study -- particularly that finance pays (used to pay) a multiple of what someone can earn in the more respectable sciences. We've seen people from astrophysics, statistical mechanics, mathematical biology, pure mathematics, applied mathematics, semi-applied mathematics, probability theory, engineering, solid state physics, turbulence ... literally ever single field.
Meanwhile the most robust understanding is present among practitioners who do not have the instinct to reduce ambiguity and uncertainty that scientists have. I urge you all scientists to go take your "science" where it may work -- and leave us in the real world without more problems. Please, please, enough of this "science". We have enough problems without you.
Any scientific project to take on economics and boldly transform it into a hard science will run into that problem of a complexity that is not amenable to rigorous scientific model-building. The other trouble with an "economic Manhattan project" suggestion is the fact that work in the social sciences is inherently ideological. I suppose that the title of the article's section 4, "What is to be done?" was chosen ironically -- being the title of Lenin's most famous tract and all.
In the social sciences, methods and fundamental assumptions reflect deep ideological commitments, and any group that aspired to make a science of economics and produce a scientific solution of our economic woes would instantly run into this problem. If the group's members were ideologically diverse, they would find they could not agree on how to proceed; if they were chosen to be ideologically consistent, they would ipso facto be an ideological group, incapable of acting merely "pragmatically" and "without undue ideology." Many other economists, not in the group and not sharing their ideological assumptions, would inevitably disagree with their recommendations.
Or imagine the futility of government bureaucrats trying to find the right price for each of the approximately 170,000 different books published each year, factoring in hardback versus paperback prices, special discounts for multiple purchases of bundled books, plus shipping specials for minimum sales and factoring in, of course, the discriminatory pricing now used in the same way the airlines price their tickets, and then imagine multiplying that process by the hundreds of thousands of different markets, industries, and businesses and it becomes crashingly clear why no top-down system could ever match the real-time sensitivity to prices provided by the bottom-up complex adaptive pricing system currently in place.
Expand the problem by many orders of magnitude and we get a sense of the breathtaking inanity of trying to control an entire economy, no matter how smart the experts in our hypothetical economic Manhattan Project may be. The economy is a product of human action, not of human design. Trying to redesign something that was never designed in the first place is futile. I vote no on an economic Manhattan Project.
What do I think about the whole thing?
First, I think there is some mutual caricaturing going on about what economists and scientists do.
I disagree with Taleb's characterization of scientists as natural advocates of "scientism" using the derogatory sense of the word. There are some scientists who tend to oversimplify reality in order to build a model, and there are some who point out the serious deviations of reality from the predictions of that model. Science is a process, and there will always be a dynamic tension between the urge to simplify and the urge to make models that perfectly characterize observable evidence.
Likewise, I disagree with the characterization of economists always as inaccurate model builders. From meeting economists, I have discovered them to be equally divided between model-builders and model-testers -- often in the same person. In case of both scientists and economists, the identification of a single pernicious trait as representative of a whole swath of people is unfair and inaccurate. (It also carries the taint of petty academic in-fighting and arguing for the supremacy of your discipline. It is like when internists make fun of surgeons or vice versa. This kind of caricaturing is just childish.)
Get backing to the proposal, the article lists several deficiencies with the neoclassical model, and all of them seem to be reasonable points. The thing is though that the article lists them like it had simply never occurred to economists that, for example, markets don't always clear. Duh. They need to give economists a lot more credit. They seem to have interpreted the failure of financial markets as resulting from some deficiency in economic theory, but they have never contemplated that implementation in the form of regulatory structures may have lagged behind theory. Further, if you have heard of experimental and behavioral economics, economists seem to have internalized the scientific method. I don't think that their suggestions are novel; they are certainly being considered.
More to the point, I think an economic Manhattan project if it were ever put into practice it would be a disaster. This is not because I think what the authors are advocating is a centrally-planned economy like Shermer suggests. I don't think that is what the authors are arguing for. I just don't think it would be helpful for three reasons.
1) Most scientists I know have a shamefully limited understanding of economics. I have heard people glibly attribute our current mess to a single cause like malfeasance or deregulation, and these same individuals don't have the slightest clue how the Fed regulates the money supply. Most scientists don't know a Phillips curve from a pop tart. Yet most also feel free to spout uninformed nonsense about a subject they do not understand -- as if buying a bagel for breakfast were training enough. (What makes this trait all the more galling is that these people have predicated their professional lives on embracing complexity.)
If that statement pisses you of, take a good hard look at your behavior. Consider how tetchy we all become when someone flagrantly misrepresents the theory of evolution. We don't take kindly either when someone who knows nothing traipsing in a our garden and crushing the begonias.
One would presume that the participants of such a Manattan project would either know more than the average scientists or would acquire that knowledge quickly. However, they might come to realize -- having acquired this knowledge -- that economic problems are tough, perhaps insoluble, and dissimilar to problems in science. Economics does not suffers from an absence of good intentions or intelligence. Bernanke and Paulson are neither dumb nor unfeeling. Economic situations are complex enough to baffle even the brightest of us. So the addition of some more brains may not make a lick of difference.
2) What exactly is the goal of this project?
If it is to end the business cycle and stabilize the markets, I have to warn you that many economists consider this problem insoluble. It is insoluble much for the same reason that centrally-planned economies fail: information about supply and demand for goods cannot be distributed quickly enough by any other means besides the price system. If instead it is to come up with sensible regulations that balance the need for growth with market stability, I don't think anyone except the most vociferous free-marketeers has a problem with that. But I also don't see how a project such as this would be more effective than the political process. In the end, regulations are only effective insofar as they can be enforced, and enforcement requires politics and consensus. Politics cannot be cheated by declarations from on high no matter how austere and respected the committee issuing them.
But whatever the goal, the result of this project may be an accurate description of the behavior of markets in hindsight, but absolutely no power to predict or change their direction. The theory of evolution very accurately describes changes in species over time, but it isn't much help in trying to predict what will happen to species far in the future. There are simply too many unpredictable changes to the adaptive landscape that could influence the outcome. I assert that the economy is similar. We could describe it quite precisely, but we may still lack the ability to anticipate bubbles and end the business cycle.
3) I think it is bizarre that the authors believe that a group of "independent, non-partisan" scientists or economics could be assembled for a project of this nature. Everyone is biased. Everyone is partisan.
Science is successfully non-partisan only insofar as we all police each other for bias. Science creates institutions to identify and evaluate statements to see whether they are corroborated by the facts. We are constantly weeding out personal bias. But scientists themselves are no less partisan or ideological than anybody else in this blasted world.
And, frankly, I think I could make a solid argument that scientists are more ideological and partisan about economics issues than the general population. Scientists in my experience are nearly uniformly liberal in their politics. (This is not a criticism. Though I am not a liberal, I agree with them on a wide variety of issues.) However, if the authors wanted to sample a population not prone to partisanship, they picked the wrong one.
In short, I think the suggestion, while well-meaning, is misguided. If all that would happen in this project was that more brains would be applied to the problem, I would support it. It would probably be harmless even if it was ineffective. However, I think it may be worse than that. Given the dismissiveness bordering on contempt with which most scientists hold economic problems, I think their participation would be actively unhelpful. What would result is a lot of acrimony and very little progress.
The pretension exemplified by articles like this are the problem, not the solution. Why do we assume that scientists riding in like the cavalry will save the day? Scientists need to get some humility and some goddamn'd respect in dealing with economic issues. The economy is no less difficult than the subjects we are studying, and we all know how long progress can take.
Further, the defining feature about all recessions and booms is that they end. This is something that neoclassical economics got right. The Great Depression and the Japanese recession during the 90s did end eventually. The long-term may take a long time in coming, but eventually it does arrive.
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The main problem with modern economics is one of the assumptions made in the "perfect market" approximation: perfect information. This is the equivalent of assuming a spherical cube, first from the standpoint of thermodynamics, and with further second order effects from algorithmic complexity theory.
Sanger's correct, insofar that the problem of a model including this is highly nonlinear and perhaps algorithmically intractable. However, if Economists paid more attention to this limit, it might allow for having a better idea of where resultant models will break down... prior to empirical discovery via abrupt collapse.
Of course, I'm just another bloody amateur with an opinion....
At the Center for the Advancement of the Steady State Economy, we think there is little hope for stabilizing economies and financial institutions without the incorporation of ecological sciences into economic dialogue and policy making. One of the most troubling oversights in conventional economics is the ignoring of the ecological foundations of the economy, which leads in turn to the inability to recognize economic growth for what it has become: uneconomic growth, conflicting with environmental protection, economic sustainability, national security, and international stability. Please see our position on economic growth (http://www.steadystate.org/CASSEPositionOnEG.html) and thumb through the list of signatories, many of which are leading sustainability scientists, ecological economists, and even some neoclassical economists that have taken the time to familiarize themselves with ecological economics.
Brian Czech, Ph.D., President
Center for the Advancement of the Steady State Economy
www.steadystate.org
A good post. Thinking that just having a bunch of really smart, scientifically trained individuals show up and "solve some problems" is a little bit misguided. For example, look at the Long Term Capital Management debacle. What looked like a winning formula (Nobel laureates on staff, strong underlying principles), actually ended very badly. One should not forget that humans and human societies are inherently complicated things.
The suggestion is mind-bogglingly inept. There seems to be a massive unawareness that large chunks of economics do follow the standard scientific paradigms, and that a good number of economists were predicting disaster long before it happened. Most notably, Paul Krugman in his NYT op-ed columns.
No, the only problem is the entrenchment of the ideological spinmeisters with failed track records. They keep making the same noises, and otherwise intelligent people actually believe there is some kind of controversy going on as a result. There isn't. It's pretty much the same twaddle as claiming there's this deep controversy and debate about Darwin and evolution, just because the creationist losers keep inventing controversy.
Meanwhile, the Santa Fe Institute since the 80s has been sponsoring research on economics and complexity theory, and have published several collections of research papers. And we now have people coming in saying, boy, these economists are so stupid, haven't they heard of complexity theory? Sheesh, what arrogant know-nothings.
American capitalist economics (and it throws its weight around all over the world) is as bad as basing biology on Intelligent Design.
http://www.paecon.net is a good start at figuring out why.
Interesting post.
Commentary at:
http://darwiniana.com/2008/12/19/economic-science-2/
From Darwiniana:
"The simple reason why economics ends up short is that economic agents are not, strictly speaking, open to modeling by differential equations..."
As an economist, I am pleased that many non-economists see that the proposal being discussed at Edge.org doesn't make much sense. There are many issues with the neo-classical economics model. Many of these issues have been and are being discussed by economists. See, for example, Nobel Prize winner Paul Krugman's recent revised book on "Depression Economics". And much of Nobel Prize winner Joe Stiglitz's research over the years has dealt with the implications of imperfect markets and imperfect information in insurance and financial markets. Those are just two prominent examples. There are many other economists also looking at issues that are pertinent to the current economic crisis.
It may be the case that economics can usefully borrow some ideas and techniques from other disciplines. However, I doubt whether the Edge proposal -- which seems to amount to a proposal for a hostile takeover of economics by physicists interested in complexity theory -- is the best way of doing so.
Economics is a curious discipline. To do it well requires some of the skills of a natural scientist. But it also requires the skills of a historian, and of a psychologist, and an ability to tolerate enormously imperfect data and to somehow surmount the great difficulty (in most cases) of doing true experiments on economic issues, particularly issues involving economic systems. Therefore, it seems unlikely that trying to make economics more "scientific", after the model of physics, even unorthodox physics, is the right approach.
John Maynard Keynes had an interesting quote on what is required to be a good economist:
"The study of economics does not seem to require any specialized gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy or pure science? An easy subject, at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher --in some degree. he must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man's nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician."
If anything, some of the problems in today's economic theory stems from trying too hard to model economics after physics. A more eclectic economics might be more successful.
I think the proposal at Edge.org makes as much sense as proposing that a group of econometricians be constituted to advise physicists on how to make string theory testable.
It seems to me that a model for the economy is a model for everything that people do with each other as well as their beliefs about it and their beliefs about what will happen in the future. This includes people acting on behalf of institutions, though the institutions are accounted for as "persons." At a certain point along the line, my brain just can't take in the immensity of it. I don't know whether scientists &/or economists are better able to take in that immensity or whether they just believe that their models can or do. I think that the benefit of a scientific approach, if there is any use at all to any model, is that it is tested by whether, as time goes by, reality is accurately described by the model or not. If not, it's wrong or partly wrong. So much of what I read about economics is based on looking backward, ie assuming that the future will be like the past. That in itself is a bit touch and go, but besides that, looking backward depends on where you put your brackets, ie what point in time you start and what point in time you stop. Perhaps it might be wise to look at the situation more simply. We've got a bunch of people, a planet, resources, plants & animals, all with needs for oxygen, water, food, shelter, and the human desire for entertainment and comfort. Who is making what for who?
Great post.
The Santa Fe Institute has been place where for 20 years "economists, accountants and financial mathematicians should join forces with complexity theorists" They have produced some interesting work, but from what I have read of it, it supports neoclassical models as a first order approximation and goes on to give some quantitative insight on the abuse of neoclassical models (such as Long Term Capital Management).
it supports neoclassical models as a first order approximation and goes on to give some quantitative insight on the abuse of neoclassical models
bingo. just as neutrality is a fruitful null, so rationality is as well. the problem is when scholars confuse the null or the totality of reality.
Yeah, that shit is totally wackaloon. It's not as if there haven't already been a fucktillion really smart people trying to figure out economics since infinity. The fact is that economies are really hard to understand, and may simply be intractably unpredictable.
Taleb can shove his apparent postmodernism up his ass.
In addition, I think the problem with economics is that it's tied too closely to political ideology. If you look at both parties' positions, you'll notice they're very tied to the economy. Democrats are vociferously pro-regulation, pro-union, et cetera, and Republicans are vociferously anti-regulation, anti-union, et cetera. (I can't claim to know much about economics, but the current system isn't working.) To me, economics can be mathematically modeled; at the same time, you have to consider that humans are driving the economy, and you have to factor in the fact that people are not so rational and always predictable and in fact are generally not too bright. There are psychological aspects to economics that most people don't consider. There's a whole field of neuroeconomics that tries to figure out how people think when making decisions about their money resources.
There's a reason economics is 'the dismal science'.
There are serious problems with economics as a field of study.
Firstly, too much academic work is controlled by mathematically-oriented theorists who seem to regard it as a fault in reality when their theories and reality don't match. That's not scientific hypothesis testing! That obsession with equations and idealised markets and agents led a resistance movement called Post-Autistic Economics (www.paecon.net) - unfortunately, I have no idea what the PAE guys really want because after knocking down the old guard's framework, they offer only clouds of fluffy blah as a substitute.
Secondly, as other posters point out, economics is an inherently ideological and political field. Natural sciences occasionally have outburts of ideology (cladism versus naturalistic classification in taxonomy, for example), but those arguments sort themselves out with time. Either one theory fits reality better than another, or one set of techniques proves more powerful than another. It's not so with economics, where someone who likes free markets would never going to become a convert to state control regardless of any demonstration of its superiority (huh! not likely I guess!).
Thirdly, the fact that some economists make some accurate predictions sometimes is less useful than one might think. In any horse race, a substantial number of people will place bets on the winning horse - that doesn't necessarily mean those collecting their winnings are any better at prediction, they might well just be lucky. Or they might have made the right prediction for the wrong reasons (such as the horse having a name they like).
I remember hearing Alan Budd talk about economics in the Thatcher era in the U.K. - his guys at the London Business School had The Iron Lady's ear. At the end of a long discussion, he mused ruefully that maybe they were being listened to and quoted approvingly by government ministres not because they had the best theories, but because the actions inspired by their theories were what the government planned to do anyway!
Tricky stuff!
Economic modeling is not restricted to differential equations.
Input to help understand the characteristics of the economy and limitations of particular (or proposed) regulations should not be restricted to academic economists. Many other individuals should be able to make constructive comments.
I think one of the features of our economy which needs to be investigated thoroughly is the possible differences between the objectives of individuals and the objectives of the organizations they may be representing.
One glaring example is the CEO who can retire with $billions vs the long-term future of the company and its employees.
Another from the past is the auto executives who bowed to union threats of strikes etc by promising generous retirement benefits to be paid by the companies long after the executive's retirements.
Finding practical ways to ensure that all parties consider the long-term impacts of their decisions seems very important, and very difficult.
This is old news to economists, who have long studied the problem. See, for example, this 2002 editorial from Nobelist Joseph Stiglitz Corporate Corruption.
Actually, the system is working. Just not the way anyone wants it to work. Think about it. The ultranaive and selfserving mantra that the "market will always regulate itself" pretty much describes the current financial crisis. The crisis is simply a "correction", writ extra large with a vengeance and lots of innocent bystanders.
Keynes agreed that the market would fix itself "in the long run". But as he went on to observe, in the long run we are all dead. Regulation and taxes can certainly choke economic progress when done to excess, but they are not inherently problematic. What's problematic is that what is good or at least harmless in one economic environment can be bad or even perverse in another. Ideologues are willfully blind and deaf to this trivial observation.
This refers to the "no free lunch" aspect of economics. What's good for Peter will be bad for Paul, and vice versa. There is normally no win-win situation in any economic planning.
The correlary is the differences in objectives and incentives of individuals in government compared to the individual citizens - which is of course Public Choice for which James Buchanan got a Nobel prize.
Does any one care about a man by the name of Karl Marx?!... And the fact that he wrote (discussed, analyzed...) the CAPITALIST system (not any form of socialism) and that Marxian trained "economists" have been discussing this crisis for well over 30 years?!...
Oh yes, everyone knows that "Marx was wrong"... Just like Galileo.
May I humbly suggest reading Das Kapital ?...
I know it is a lengthy exercise (over 2.000 pages), but then you might understand what's going on in the real world of real world-wide economy.
In the longterm, there needs to be an independent, non-partisan methodology for economic and financial modeling which involves globally agreed upon standards, as in the world of climate modeling.