This page has been archived and commenting is disabled.

Guest Post: The Mathematicization Of Economics

Tyler Durden's picture




 

Submitted by John Aziz of Azizonomics

The Mathematicization Of Economics

If one thing has changed in the last one hundred years in economics it has been the huge outgrowth in the usage of mathematics:

This is largely a bad development, for a number of reasons.

First of all layers of mathematics acts as a barrier to public understanding. While mathematics is a useful language for communicating complex ideas, those without training in mathematics will struggle to grasp what an author is trying to communicate if a paper consists mostly of equations untranslated into English. This is bad practice; it is easier to baffle with bullshit in an unfamiliar language than it is in plain English.

Second, mathematical models are always simplifications. Human action and economic behaviour is complex and unpredictable. While mathematical models can sometimes approximate a pattern quite well and so have some limited uses as toys, the complexity of human behaviour means that there are always unmodelled variables that can throw off a model’s output. Over-reliance upon or excessive faith in mathematical models can lead to bad forecasting and bad policy decisions. The grand theoretical-mathematical approach to economics is fundamentally flawed.

Third, attempting to smudge the human reality of economics into cold mathematical shackles is degenerative. Economics is a human subject. Human behaviour is not mechanical, it is not mechanistic. Physicists can very accurately model the trajectories of rocks in space. But economists cannot accurately model the trajectories of prices, employment and interest rates down on the rocky ground.

Economics would benefit from self-restraint in regard to the usage of mathematics. Alfred Marshall made some useful suggestions:

  1.  Use mathematics as shorthand language, rather than as an engine of inquiry.
  2.  Keep to them till you have done.
  3. Translate into English.
  4. Then illustrate by examples that are important in real life
  5. Burn the mathematics.
  6. If you can’t succeed in 4, burn 3. This I do often.

I hope the blowout growth in mathematics in economics is a bubble that soon bursts.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 10/11/2012 - 11:38 | 2877727 Lohn Jocke
Lohn Jocke's picture

In lay terms: people don't understand numbers and numbers don't understand people.

Thu, 10/11/2012 - 12:46 | 2877860 Alpo for Granny
Alpo for Granny's picture

Or thought of another way...Figures don't lie, but liars figure. 

 

Thu, 10/11/2012 - 13:20 | 2877973 Nothing To See Here
Nothing To See Here's picture

Aziz becoming Hayekian/Misesian without being aware?!?

Thu, 10/11/2012 - 21:18 | 2879383 Aziz
Aziz's picture

I agree with Mises and Hayek on a lot of things, but I usually get to a similar conclusion via a different route.

Thu, 10/11/2012 - 13:20 | 2877976 Spirit Of Truth
Spirit Of Truth's picture

However, if you believe in free will you can't truly believe in social science and economic projection. You cannot predict how people will act. Except, of course, if there is a trick, and that trick is the cord on which neoclassical economics is suspended. You simply assume that individuals will be rational in the future and thus act predictably. There is a strong link between rationality, predictability, and mathematical tractability. A rational individual will perform a unique set of actions in specified circumstances. There is one and only one answer to the question of how "rational" people satisfying their best interests would act. Rational actors must be coherent: they cannot prefer apples to oranges, oranges to pears, then pears to apples. If they did, then it would be difficult to generalize their behavior. It would also be difficult to project their behavior in time.

In orthodox economics, rationality became a straitjacket. Platonified economists ignored the fact that people might prefer to do something other than maximize their economic interests. This led to mathematical techniques such as "maximization," or "optimization," on which Paul Samuelson built much of his work. Optimization consists in finding the mathematically optimal policy that an economic agent could pursue. For instance, what is the "optimal" quantity you should allocate to stocks? It involves complicated mathematics and thus raises a barrier to entry by non-mathematically trained scholars. I would not be the first to say that this optimization set back social science by reducing it from the intellectual and reflexive discipline that it was becoming to an attempt at an "exact science." By "exact science," I mean a second-rate engineering problem for those who want to pretend that they are in the physics department - so-called physics envy. In other words, an intellectual fraud. - Nassim Taleb, The Black Swan: The Impact of the Highly Improbable, 2007

 

From my thesis - http://www.spiritoftruth.org/Thesis/Intro/

Thu, 10/11/2012 - 13:48 | 2878132 jpmrwb
jpmrwb's picture

Nonregularity in the realm of human action also makes hopeless the other way in which many economists try to ape the physical sciences: their "quantophrenia" (an irrational haste to introduce mathematical analyses to their work).

First of all, measurements require constant relations. So, in contrast to the natural realm, the utter lack of constant relations in the realm of human action precludes any useful measurements.

In the realm of physical and chemical events there exist (or, at least, it is generally assumed that there exist) constant relations between magnitudes, and man is capable of discovering these constants with a reasonable degree of precision by means of laboratory experiments. No such constant relations exist in the field of human action outside of physical and chemical technology and therapeutics. …

Those economists who want to substitute "quantitative economics" for what they call "qualitative economics" are utterly mistaken. There are, in the field of economics, no constant relations, and consequently no measurement is possible.

Secondly, equations also require constant relations. So, again in contrast to the natural realm, the utter lack of constant relations in the realm of human action precludes the formulation of any meaningful equations.

[I]n mechanics the equation can render very important practical services. As there exist constant relations between various mechanical elements and as these relations can be ascertained by experiments, it becomes possible to use equations for the solution of definite technological problems. Our modern industrial civilization is mainly an accomplishment of this utilization of the differential equations of physics. No such constant relations exist, however, between economic elements. The equations formulated by mathematical economics remain a useless piece of mental gymnastics and would remain so even it they were to express much more than they really do.

Thu, 10/11/2012 - 13:49 | 2878137 jpmrwb
jpmrwb's picture

Nonregularity in the realm of human action also makes hopeless the other way in which many economists try to ape the physical sciences: their "quantophrenia" (an irrational haste to introduce mathematical analyses to their work).

First of all, measurements require constant relations. So, in contrast to the natural realm, the utter lack of constant relations in the realm of human action precludes any useful measurements.

In the realm of physical and chemical events there exist (or, at least, it is generally assumed that there exist) constant relations between magnitudes, and man is capable of discovering these constants with a reasonable degree of precision by means of laboratory experiments. No such constant relations exist in the field of human action outside of physical and chemical technology and therapeutics. …

Those economists who want to substitute "quantitative economics" for what they call "qualitative economics" are utterly mistaken. There are, in the field of economics, no constant relations, and consequently no measurement is possible.

Secondly, equations also require constant relations. So, again in contrast to the natural realm, the utter lack of constant relations in the realm of human action precludes the formulation of any meaningful equations.

[I]n mechanics the equation can render very important practical services. As there exist constant relations between various mechanical elements and as these relations can be ascertained by experiments, it becomes possible to use equations for the solution of definite technological problems. Our modern industrial civilization is mainly an accomplishment of this utilization of the differential equations of physics. No such constant relations exist, however, between economic elements. The equations formulated by mathematical economics remain a useless piece of mental gymnastics and would remain so even it they were to express much more than they really do.

Tue, 10/30/2012 - 22:33 | 2933495 hbjork1
hbjork1's picture

Seriously, it is good to see someone a post deditated to the difference between random events and human directed events as applied to statistical analysis.  Human behavior maybe all over the chart but it is not necessairily RANDOM. Dice thrown are random(if they aren't fixed).  Coin tosses are random, parts failures in equipment are random but people remember, communicate and plan.  Yesterday's probability distribution may not be todays probability distribution. 

Trading is the great Casino.  Buying or selling goods or labor is an attempt to optimise use of available resources.

Thanks Spirit!

Thu, 10/11/2012 - 11:33 | 2877730 ParkAveFlasher
ParkAveFlasher's picture

Aziz, kindly provide a useful example of point #2:

"While mathematical models can sometimes approximate a pattern quite well and so have some limited uses as toys, the complexity of human behaviour means that there are always unmodelled variables that can throw off a model’s output."

I have my own but I'd like to see what you would present.

Thu, 10/11/2012 - 14:03 | 2878200 verum quod lies
verum quod lies's picture

I'll do it for him: the CAPM. For example, it is not just the "market" driving prices around.

 

Thu, 10/11/2012 - 11:33 | 2877732 Element
Element's picture

Got any numbers of that?

Thu, 10/11/2012 - 11:36 | 2877736 Cognitive Dissonance
Cognitive Dissonance's picture

"I hope the blowout growth in mathematics in economics is a bubble that soon bursts."

It's not just math in economics. It's the present day "belief" in all things science. If "science" says it is true then consider it spoken by GOD herself.

Let us never mistake the finger pointing to the moon for the moon itself.

http://www.youtube.com/watch?v=sDW6vkuqGLg

Thu, 10/11/2012 - 11:59 | 2877767 Unprepared
Unprepared's picture

It has nothing to do with science. Every professional would greatly benefit with a dose of meta-thinking; what are the boundaries of their discipline and its tools? What is the purpose of their inquiries? Where do they stand in the scheme of things?

 

Mathematics is not a preset, crude language. It is a modelable set of logical codes and relationships with varying degrees of accuracy, meaningfulness and application. Every modeling technique ever invented by men has to suffer from a trade off between variations of Type I and Type II errors (statistics).

 

The difficulty with crude maths are equally relevant to other social science disciplines. However, few, like behavioral sciences went ahead using less math (statistics) and more experimentation.

 

Maths have enough tools to model systems as complex as markets, the problem is our (or our PhD's) expectations of what the model is supposed to provide;  universal future projections as opposed to local/situation simulations.

Thu, 10/11/2012 - 13:23 | 2877989 Nothing To See Here
Nothing To See Here's picture

"Maths have enough tools to model systems as complex as markets, the problem is our (or our PhD's) expectations of what the model is supposed to provide;  universal future projections as opposed to local/situation simulations."

If a model can't predict, then it's because it can't model what it pretends to model. Starting from there, maths DO NOT have the tools to model complex systems. It can only make abstract, incomplete representations which hold according to various assumptions, which assumption are never entirely true in the real world.

Thu, 10/11/2012 - 11:38 | 2877740 Confundido
Confundido's picture

The problem is not the use of math. The problem is that those who use the math don't understand economics! Even worse, they use assumptions that are wrong! 

For instance, EVERYONE uses national accounting to measure surpluses or deficits in flows, and then, then they speak of imblances, gaps out of equilibrium. However, that is a technique first proposed by Leo Walras, that worked during his years....you know why?? Because fucking Walras lived during the gold standard years! That's the only reason anyone could have come up with the fucking idea of a general equilibrium. 

But we live in a Ponzi scheme, fuelled by shadow banking, that not even Gartman can figure out! He is bearish on gold because the monetary base, assuming he measured it right, is not growiing...So WHAT?? Shadow banking is growing, rehypothecation is growing...otherwise, how the fuck do you explain that over 95% of IG bonds and over 70% of HY bonds are priced above par??? You can't even hedge it with cds...you know why?? Because default expectations are fucked up. You know why? Because Ben is the fucking correlation here, given his FX swaps that manipulate the ccy EURUSD basis. That's why! Now, go back to model this Ponzi scheme with math. You can't! We live in an overdetermined algebraic system!

Thu, 10/11/2012 - 11:50 | 2877760 AetosAeros
AetosAeros's picture

Succint, to the  point,  but you forgot the most important thing:

'Fuck You Bernanke!'

Thu, 10/11/2012 - 12:00 | 2877768 Confundido
Confundido's picture

Oh, you're right...Here it goes: FUCK YOU, BERNANKE!

Thu, 10/11/2012 - 13:03 | 2877910 HoofHearted
HoofHearted's picture

OK, that's the best thing that can be said, though I'd include "Fuck you, S.E.C. Leave Sean Egan alone!"

The problem isn't the math at all. The problem is us. We have these ASSumptions built into the way people are going to act. And we all know what we do when we ASSume. People do whatever the hell they please. Maybe they are trying to maximize some utility function, maybe they are just braindead trying to make it through the day. Likely they don't understand any math and wouldn't know how to maximize anything very well.

Our biases cause the biggest problems in all of this. And when some rogue tries to ask why someone chose a certain model (whether neo-Keynesian with some parameters or DGSE or...) they typically ask said person to either shut up or leave the conference. Yes, I know that guy well. And I've enjoyed cities instead of listening to bullshit based on ridiculous assumptions or biases.

Thu, 10/11/2012 - 13:06 | 2877917 Bay of Pigs
Bay of Pigs's picture

"go back to model this Ponzi scheme with math"

+1 spot on...

Thu, 10/11/2012 - 14:07 | 2878218 verum quod lies
verum quod lies's picture

Actually, Minsky was pretty close but wasn't so focused on the math.

 

Sat, 10/13/2012 - 15:05 | 2885386 HardAssets
HardAssets's picture

Well stated.  Those fabricating the models don't know economics, and most of the economists don't know the day-to-day markets.

It is a rigged system run by criminals. They pay the academics to come up with all the b.s. 'models' & 'theories' to confuse the suckers, who believe its all much too complex for them to understand. (Its simple . . . theyre stealing from you.)

There are plenty of 'A students' who prefer to stay in school forever, rather than make a real living in the real world. They are very capable at memorizing and learning  . . . . . what is wrong.

Thu, 10/11/2012 - 11:49 | 2877758 insanelysane
insanelysane's picture

Reality: Infinity = Infinity

Hope: Infinity = Infinity + 1

Thu, 10/11/2012 - 11:51 | 2877762 silver surfer
silver surfer's picture

Ok, hmmm

Mathematics in economics works great as long as people act like machines then...

Sat, 10/13/2012 - 15:09 | 2885399 HardAssets
HardAssets's picture

Macro level isnt micro level. Mathematics has been very useful at the micro level - down to the level of the firm. It can be used to optimize processes. Just use the tool appropriately, and youre fine.

Thu, 10/11/2012 - 12:04 | 2877770 Benjamin Glutton
Benjamin Glutton's picture

Is Legal Tender Next?

It’s going to be illuminating to see whether the government appeals the big ruling on judges’ pay that was handed down last week at Washington. The case is called Beer v. United States. The Sun has written about it here and the editor of the Sun here. The plaintiffs are Judge Peter Beer and a rainbow coalition of some of the most distinguished judges on the federal bench. They have just won a ruling that prohibits Congress from suspending a system of automatic pay increases designed to protect their honors from inflation.

The United States Court of Appeals for the Federal Circuit, sitting en banc, handed down the ruling on Friday. The ruling hasn’t received much coverage in the press, though — at least in our view — it’s one of the most important cases of our time. The reason is that it has to do not only with the question of need for Congress to keep its promises and the need to attract a first class judiciary but also the question of constitutional money.

The judges turn out to be a special case because it is unconstitutional ever to diminish their pay. This is American bedrock that was laid down by the Founders because of the British tyrant George III. The king made judges dependent “on his Will alone, for the tenure of their offices, and the amount and payment of their salaries,” as America’s revolutionaries put it in the Declaration of Independence. So it was written into the United States Constitution that the compensation of judges “shall not be diminished during their Continuance in Office.”

It turns out, though, that the historical record is clear what the Founders thought dollars were. They used the word “dollars” twice in the Constitution. By a dollar they meant 371 and ¼ grains of pure silver or a 15th as many grains of gold. That’s the way Congress defined a dollar in law under the Articles of Confederation and the way Congress defined it in law in the first Coinage Act of the constitutional era.

The idea that a dollar could be worth a different number of grains of silver or gold at the end of a contract than it meant at the beginning of a contract would have horrified George Washington and nearly all of the other Founders (Benjamin Franklin, a printer, had a vested interest in paper money). So would the idea that the dollar would be permitted to decline over a decade to but a sixth of the number of grains of gold at which it was valued at the start of a decade. That is what has just happened in America.

The court deciding Beer didn’t get into legal tender per se. But the legal tender question is the elephant in the courtroom, so to speak. If a dollar can’t be diminished for judges — that is, if the legal tender laws are not good enough for judges — why should they be good enough for the rest of us? If they are not good enough for the contract between the government and judges, why should they be good enough for contracts between private parties?

complete article...http://www.nysun.com/editorials/is-legal-tender-next/88019/

Thu, 10/11/2012 - 12:18 | 2877779 onebir
onebir's picture

Conflicted Aziz meme:

Says burn the maths

...

Shows Hodrick-Prescot filter 'trends'.

---

Otherwise pretty sensible, other than "Third, attempting to smudge...' which is bald assertion.

(Note: over-reliance on HP filters for estimating trend GDP was probably a major contributing factor to underestimation of structural deficits & the developed world's current fiscal debacle.)

 

Thu, 10/11/2012 - 12:48 | 2877866 machineh
machineh's picture

Why would we expect a cyclical component in economics publications anyway?

Are mathematical economists like cicadas, emerging every 17 years from under their rocks to mate and die?

Thu, 10/11/2012 - 15:41 | 2878638 Vlad Tepid
Vlad Tepid's picture

Sort of, except for the mating part.  I learned on NatGeo that female humans are repelled by the pheremones of mathematical economists.

Thu, 10/11/2012 - 12:27 | 2877795 DUNTHAT
DUNTHAT's picture

Economists are not mathematicians.

THEY PRETEND TO BE.

 

Thu, 10/11/2012 - 12:43 | 2877846 machineh
machineh's picture

'illustrate by examples that are important in real life'

Recently I read an economic paper exploring the commonplace observation that VIX tends to rise when stocks decline.

The authors performed a heroic amount of calculation on an enormous database, fitting multiple models and reporting them with statistical panels.

Ultimately, all they showed was that VIX tends to rise when stocks decline, a fact known to every trader.

Not a single thing in the paper was useful to a practitioner. In blunt terms, enough computing to dim the lights nationwide didn't make any money.

Thu, 10/11/2012 - 13:32 | 2878034 NidStyles
NidStyles's picture

I do not pretend to be. I'm a Physicist and Economist though.

Thu, 10/11/2012 - 12:50 | 2877873 epwpixieq-1
epwpixieq-1's picture

Mathematics is a Language, one can express whatever one wants with it!

One either understands Nature (humans are part of Nature) and can speak in a such a way that the Reality will CONFIRM the description, or one can write something totally useless has nothing to do with the Natural (Nonlinear) Dynamics and Reality will (of course ) diverge. Nothing more and nothing less.

An interesting quote, that can express the above idea, in a more visual way:

"An unsophisticated researcher uses mathematics as a drunken man uses lamp-posts -- for support rather than illumination."

Thu, 10/11/2012 - 13:17 | 2877959 Turin Turambar
Turin Turambar's picture

"Mathematics is a Language, one can express whatever one wants with it!"

 

I guess I'm a little dense and need some help.  Would you mind please demonstrating to me how mathematics can describe and predict the impact of a person's dreams on Human Action?

 

Thanks in advance.  It'll be such a relief to know the answer.  ;-)

Thu, 10/11/2012 - 13:40 | 2878086 sebmurray
sebmurray's picture

A rather crude attempt:

 

HA = f(a.D + b.R)

 

Where D = dreams and R = reality, a and b are weighting factors based the importance an individual places on dreams vs. reality.

That of course doesn't predict anything, because the number of variables is probably infinite at any one time.

 

One could of course also rephrase it to say that this model describes Human Action as a function of Dreams and Reality but it just looks cooler in an equation doesn't it?

Thu, 10/11/2012 - 13:54 | 2878160 Turin Turambar
Turin Turambar's picture

LOL, very nice!   I'll let the equation speak for itself. 

 

Your next project is a perpetual motion machine.  ;-)

Thu, 10/11/2012 - 14:15 | 2878268 verum quod lies
verum quod lies's picture

The key in mathematical economics and finance are the assumptions. By assuming the right assumptions you can get any mathematical result you want. For example, assume perfect capital markets (e.g., no taxes, no transaction costs, etc.) and a serious of other unrealistic assumptions apply some math and you get Modiglinai and Miller's assertion that firm value is independent of its capital structure. Of course, there are taxes, transaction costs, etc. and actual people in the actual markets act as if the firm's value is dependent on its capital structure (i.e., at least in part). Anyway, it's the assumptions that tend to drive economic and financial economic "model" results.

 

Thu, 10/11/2012 - 13:30 | 2878025 sebmurray
sebmurray's picture

Well put, one can talk shit in any language and it will still be shit. The problem is the more eloquent you sound, the more likely people are to believe you...

Thu, 10/11/2012 - 12:52 | 2877881 sitenine
sitenine's picture

What a complete and utter load of shit! Economics does not acknowledge the existence or implications of the exponential function. There can be NO math in economics, or the entire fucking myth of perpetual growth implodes into the reality of limited resources. Economics is nothing more than a tool used to perpetuate the ponzi or illusion of promises that will not, indeed CAN NOT, be delivered.

Thu, 10/11/2012 - 13:05 | 2877889 socalbeach
socalbeach's picture

A little math could have helped you in your recent hyperinflation article.  You approximated inflation as the % change in M2 money supply minus the % change in GDP. It turns out that is almost the exact same as the negative of the percent change in M2 velocity. Your inflation graph (M2NS-GDP) had inflation falling in the mid to late 70's.

Guest Post: Explaining Hyperinflation

Thu, 10/11/2012 - 13:30 | 2878022 NidStyles
NidStyles's picture

It was falling then. The Interest rates were as high as 15% in 1978. This was dropping Inflation.

Thu, 10/11/2012 - 19:42 | 2878338 socalbeach
socalbeach's picture

Here's a plot of Mr. Aziz' inflation estimate (blue) vs the CPI inflation rate (red) from Jan, 1976 thru Dec, 1979.  They are almost exact opposites of one another.  Just for fun I added a line of  -1*the % change in the velocity of M2 (green), and you can see it's almost the exact same as the blue line.  That similarity validates the comment I made in Mr Aziz' Explaining Hyperinflation article.

http://research.stlouisfed.org/fredgraph.png?g=bIL (%changes: CPI vs M2NS-GDP vs -1*M2 velocity)

This essay plus the Guest Post: Explaining Hyperinflation article = FAIL.

Fri, 10/12/2012 - 06:53 | 2880605 NidStyles
NidStyles's picture

That you decided to display CPI as if had any real bearing on Inflation rather than with the full spectrum of M-values it's telling that your argument hasn't a leg to stand on. M-values display the Inflation clearly. That there is a lag between the initial expansion and what the doctored information that the CPI show's is well known already. Even the pre-'82 CPI figures were screwed up and lousy. Half of them were weighted estimates and in no way shape or form were complete.

 

Put the chartology away and start learning actual Econ before you embarass yourself further.

Thu, 10/11/2012 - 12:59 | 2877902 marriedgeordie
marriedgeordie's picture

Wish I could follow this advice. But then, my papers would not get past he editor's desk

Thu, 10/11/2012 - 13:02 | 2877903 Variance Doc
Variance Doc's picture

Oh shit, here we go again - another one of these ignorant "math is evil and get rid of the math" type articles.

There is nothing wrong with using math to describe the world we live in, whether it is a physical system with known laws (e.g. physics) or a system with more hazy laws, but laws never-the-less (e.g. economics).  Humans collectively DO actually follow laws/patterns that can be mathematically/statistically modeled.  And this is an ongoing area of research by people like myself.  By the way, if someone is too stupid to understand math, it's not math's fault.  Whie you are trying to get over that concept, here's a coloring book, try to stay in the lines ------------------------------>

I can imagine having a conversation with your type back in the 1850s: 

me: "You know someday, man will fly just like birds.  It's a matter of math and engineering."

Aziz:  "Hey Ezekiel, this thre fella thnks weowil will fly like dem birds. Hahaha, what a ignoraumous.  Son, ain't no way whell fly.  Math? Why, that's no good.  We need shit in english terms 'n stuff."

Yes Aziz, those "silver birds" in the sky you see today are called airplanes.  A result of math and engineering, and not a result of English.

Thu, 10/11/2012 - 13:28 | 2878007 NidStyles
NidStyles's picture

"Humans collectively DO actually follow laws/patterns that can be mathematically/statistically modeled. "

 

No they do not. That you admitted to using them yourself to try and measure this show's that you have no clue what you are talking about. One only needs to see the Econ 211 example of modelled cereal consumption to understand that Mathematical Models do not represent reality in the least. Humans do not fit your cute little model you are trying to force them into.

 

This was the whole argument Mises made.

 

Economics =/= Engineering.

Thu, 10/11/2012 - 13:59 | 2878127 Variance Doc
Variance Doc's picture

Right, I no clue about what I'm talking about.  Trouble with your type is you have a tough time with complexity and deep thought, so that cereal consumption models in econ classes is state of the art in your view.  Any deviation from the model is termed a failure by your type.  But really, it is not a failure of the model per se, but a failure of you to understand science.  You need to understand the error process, e.g. measurment, etc.  Just because the model does not follow reality exactlly, does not mean the model is wrong.  If the model follows reality within an acceptible error, then the model is OK.

Think deeper if it is at all possible.  Think about how humans at an individual level become a collective dynamic.  Think about phase transitions, such as water turning to ice; where molecules have many degrees of freedom in the liquid state and are restricted to a lattuce in the solid state.  Now apply that to human behavior.

You see, it's really your mental limitations and your limited thought process that is the problem; much like people who thought space travel was impossible and turned to TV instead of solving problems.

 

"This was the whole argument Mises made."

You sound like that dopy chick from the other day: http://www.zerohedge.com/news/2012-10-09/woods-murphy-refute-11-myths-ab....

“Some Federal Reserve critics claim that the Fed has devalued the U.S. dollar through a massive expansion of the amount of currency in circulation,” says Kavoussi. “But not only is inflation low; currency growth also has not really changed since the Fed started its stimulus measures, as noted by Business Insider’s Joe Weisenthal.”

Do you actually have some thoughts of your own, or do you just parrot?

 

Thu, 10/11/2012 - 14:17 | 2878278 Nothing To See Here
Nothing To See Here's picture

Physical laws are constant. Human laws evolve. This is the fundamental difference that you ignore.

This evolution of human/social laws occurs through a very complex process which maths cannot fully capture. If maths could, it could predict their evolution.

Your beliefs in the power of maths are nothing more than scientism. The very root of central planning and all that's immoral with the world. People pretending to "know" how best to run the world throgh charlatanistic science.

Thu, 10/11/2012 - 14:26 | 2878318 Variance Doc
Variance Doc's picture

"Physical laws are constant."  Right.  Please see https://en.wikipedia.org/wiki/Oil_drop_experiment.

Thu, 10/11/2012 - 14:37 | 2878372 Flakmeister
Flakmeister's picture

Beg pardon?

Thu, 10/11/2012 - 14:57 | 2878438 Variance Doc
Variance Doc's picture

Oops, meant to cite Newtonian motion (cir. 1665) vs. Relativistic motion (cir. 1905).  The point being that physical laws do in fact change (get reformulated) as we gain a deeper understanding of the universe, as opposed to these blockheads with concrete thoughts like “humans cannot be modeled...”, etc.

Thu, 10/11/2012 - 15:03 | 2878472 Flakmeister
Flakmeister's picture

Humans can certainly be modeled, that being said you cannot predict with certainty the actions of an individual....

For those with a leaning to the history of science, the first example of such a situation was the old kinetic theory of gases....

Now if people claim some form of incompleteness, I'll point out quantum mechanics...

Thu, 10/11/2012 - 15:08 | 2878503 Nothing To See Here
Nothing To See Here's picture

"The point being that physical laws do in fact change (get reformulated)"

Man you are confused beyond redemption. The fact that we need to reformulate physical laws from time to time because of our understanding of it has evolved does not mean that physical laws themselves change. The Universe has always worked the same way. It is our sense of it which evolves. On the other hand, as I said, human laws DO change.

Sinking in now?

Sat, 10/13/2012 - 13:45 | 2885240 HardAssets
HardAssets's picture

V Doc - - A major problem with mathematical modeling of human behavior at the macro scale (as found in much of todays economics) is that one cannot keep everything except the tested variable constant as in a physical science lab experiment. Human beings are always suckers for someone who will come along and offer them 'certainty'. This can come from witch docter, priest, politician, or some guy with a computer filled with 'models'. The 'geniuses' at LTC Mgmt had all the answers and plenty of arrogance. They actually believed they were all knowing and all seeing when it came to their fortune telling. Hubris is dangerous.

My undergrad work was in engineering and computer science. I later did advanced work in finance. I like math and am good at it. I also recognize its value and limitations.

BTW - ad hominem attacks on those holding a different view than your own are a shabby tactic and very transparent.

Thu, 10/11/2012 - 13:11 | 2877939 Turin Turambar
Turin Turambar's picture

So much more needs to be said about this, but this admission is the first step towards recovery.  The crux of the matter imo is an epistemological question.  Until you set a proper foundation, everything else is just built upon sand, but for what it's worth, as many as there are frustrated mathematicians in economics, there are even more poor, if not downright ignorant, philosophers - see Paul Krugman, who can't even recognize the most basic of economic fallacies (broken window):

 

http://lewrockwell.com/block/block210.html

Thu, 10/11/2012 - 13:16 | 2877956 Winston Churchill
Winston Churchill's picture

Exactly , maht is just the veneer of science on a voodoo physcology variant.

Going back to math for a minute. There is a field in pure math that deals

with probabilities with insufficient data sets.A close relative was a pioneer in this field,

I do not know if it died with him.I doubt if economists would be capable of using it

anyway.I barely understood it and learned far more math than they ever have/could.

Thu, 10/11/2012 - 13:27 | 2878009 Variance Doc
Variance Doc's picture

No Winston, math is the language of the universe, not just a veneer.  It allows us (and probably the Martians, who will NOT bail out the Earth - they understand math enough to avoid the cluster fuck called "Western Banking" ) to communicate effectively and understand our surroundings (in a galactic sense).

Thu, 10/11/2012 - 13:34 | 2878054 Winston Churchill
Winston Churchill's picture

Truly I agree completely.

I am just objecting to is misapropiation/strangulation by the economists.

They could not find their own backside without both hands.

Krugman probably cannot tie his own laces.

Actuaries are mathematicians that find math too exciting.Economists are people that

cannot be mathematicians.

Thu, 10/11/2012 - 13:32 | 2878028 Turin Turambar
Turin Turambar's picture

Winston,

Statistics and probability don't really work well with economics (Human Action) because a basic presuppostion of probability is that it is necessary for events to be members of a homogenous class.  Think of spins of a roulette wheel or drawing a particular card from a deck of cards.  There is no probability density function if there is no invariant class of events.

I'm sure this could be described more clearly, but I hope you get the gist of it.  It's not a problem with statistics per se, but rather, an improper application of it.  In a somewhat similar manner, this is the issue with econometrics as it applies to Human Action.  Math and statistics cannot take into account imagination, creativity, new options and ways of thinking, etc...

 

This is not to say that math is not useful, but I think math is more useful in a historical context because economic history is a subject of nonmethodological inquiry.  The important  thing to keep in mind when using math in historical analyses is the manner and thought which is behind the APPLICATION of math to a historical analysis of data.  If your economic thinking is wrong, and you choose the wrong set of data, your conclusion will be wrong, regardless the accuracy of the math.

Thu, 10/11/2012 - 13:48 | 2878133 Winston Churchill
Winston Churchill's picture

Disagre slighly there.That relative of mine was getting paid big money by the life

insurance/assurance industry as a consultant on top of his salay as a chair in pure math.

They put their money where their mouth was on the predictive value of his work.

Thu, 10/11/2012 - 14:01 | 2878183 Turin Turambar
Turin Turambar's picture

How does the example of your relative disprove my point that statistics applied to economic theory is a misapplication?  What do you think your relative examines?  If he's an actuary, he examines historical data regarding a class of events (life span).  All people die.  That's pretty much as invariant as you can get as to a class of events.  Maybe I wasn't specific enough.  I was speaking of statistics and probability regarding their applicability as tools for the discovery of economic theory, NOT analysis of historical data and events.

Thu, 10/11/2012 - 14:12 | 2878208 Variance Doc
Variance Doc's picture

"There is no probability density function if there is no invariant class of events."  It is almost impossible you're that dumb.  You can simply change the measure space (e.g. sigma algebra) and BOOM, there's a different probaility measure.  Please STFU.

"Think of spins of a roulette wheel or drawing a particular card from a deck of cards."  Really?  This is your probability world?  LOL.  I imagine you as a car salesperson:  "This car has 500 horsepower - think of 500 horses pulling you down the street." 

 

Thu, 10/11/2012 - 15:37 | 2878368 Turin Turambar
Turin Turambar's picture

Okay Einstein, let's look at 2 scenarios in which 2 different people are pulling into a station to buy gas, and the gas is the same price in both scenarios.  What can your precious statistics tell me about these two scenarios?  NOT A DAMN THING!  The scenarios are not invariant, so you're guessing.  You're precious statistics certainly can't tell you that one might not even buy any gas because the gas is $4/gallon, and he only has $1, or that one may be pulling up in his truck to buy gas for his lawnmower, so he only needs half a gallon for the lawnmower instead of a full tank for the truck.  

This is a good example as to why ceteris paribus thought experiments are so indispensable in economic theorizing.

Sigh, I've been promising myself to be more civil.  :-(

Thu, 10/11/2012 - 18:52 | 2879069 Umh
Umh's picture

To the man with a screwdriver everything looks like a screw. I used to find it frustrating when I was working to have meetings that were never going to produce results because the people weren't actually communicating they were expressing their biases.

Thu, 10/11/2012 - 13:24 | 2877993 NidStyles
NidStyles's picture

Better yet stop using Mathematics in Economics completely. As Mises stated. Mathematics are an Ideal Measurement that can not possibly be accurate enough to measure the Non-Ideal Man's Action.

Thu, 10/11/2012 - 13:35 | 2878006 Still Life Living
Still Life Living's picture

The rules of mathematics drive much of theoretical economic research.  The concept of "rationality" in economics is actually a mathematical one, not a psychological one (see Hal Varian's graduate text Microeconomics).  It basically means that preferences are ordered, they are convex, and they are bounded.  All of these are mathematical premises. 

Even Nobel-Prize winner Gary Becker stated that some issues like altruism are rarely considered by economists because the math is too difficult to model effectively. 

And Bayesian (or self-learning) statistics is also difficult or expensive to implement in a modelling environment, even though most believe probability is learned through iterative processes.

Economics is best as a descriptive field of study, one that can tease out a reasoned answer to the question "what happened?".  But when it is used for predictive purposes, it is at best driving looking through the rear-view mirror.  Worst of all is when economics is used prescriptively at the behavioral level -- at that point it becomes dogmatic, and can easily turn into fascism.  

Economics is the study of what people do, not what mathematical constructs tell us they should do.  That is called religion.

 

Thu, 10/11/2012 - 14:53 | 2878426 Sandmann
Sandmann's picture

Economics is Moral Philosophy which posits a Rational Man making Moral Choices

Thu, 10/11/2012 - 13:37 | 2878067 falak pema
falak pema's picture

One thing one must keep in mind is what Newton said when he was running the Bank of England : How do you cope with human irrationality when you predict the future? 

Its very true today. Economics is a game in real time, in a real world, with a constantly moving target. Its not "dead" science its "live" science. 

And the protagonists are mutants; thus unpredictable; except when it comes to basic instinct trends. 

So mathematical modelling should not de used to predict but to analyse past. Prediction should be done on a more complex interactive modelling basis, where the human psyche paticipates. And nothing, no economic dogma, should be assumed to be in concrete. 

Thu, 10/11/2012 - 22:54 | 2879728 Sandmann
Sandmann's picture

Newton never ran the Bank of England but the Royal Mint

Thu, 10/11/2012 - 13:37 | 2878069 neutrinoman
neutrinoman's picture

There's always the "least publishable unit" tendency in academia -- publish even the obvious, even if it's well-known and has already been exhaustively explored. After all, the Dean will be scrutinizing your publication list when that tenure/promotion decision comes up ....

One of my economics professors in college was a student of Keynes, who was a student of Marshall. He quoted to us Keynes' tribute to Marshall, by way of describing what an economist ideally should be:

"The study of eocnomics does not seem to require any specialized gifts of an unusually high order. Is it not, intellctually regarded, a very easy subject compared with the higher branches of philosophy or pure science? An easy subject, at which every few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must be a 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 insitutions must lie entirely outside his regard. He must be purposeful and disinterested in a simulataneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician."

Marshall always viewed economics as a means to, not only technical understanding, but also clarity on human society and how societies can improve themselves. That's why he held mathematics at arm's length. He used it to illustrate, but was careful not to reify formulas into a false precision or to believe that mathematics gave him precise abilities of prediction and control over society or human behavior.

Thu, 10/11/2012 - 14:17 | 2878280 KingTut
KingTut's picture

This is total nonsense.  If anything economics is bankrupt because it isn't mathematical enough.  For the most part, macro economics is really just social philosophy wrapped in psuedo mathematics.  Just because the average modern citizen is innumerate, doesn't mean we should 'protect' him from serious mathematics.

If you want to see some good math applied to economics, check out Steve Keen's work.  He's using mathematic devised in the 1950's for analyzing complex electrical circuits and machines (like suspension systems on race cars), and applying it to the complex flows of money through our endogenous money/credit system.  It's still early days, but appears to be extremely promising.

As for the "great excuse" for all bad economics theories: animal spirits, most economic theoires have a highly moralisitic ideological version of human behavior at their core.  They are based on how people should behave according to the economist.  Absolute tripe ensues.  The fact is most people are pretty sane and practical when it comes to their money.  When they do make mistakes, it's usually because of poor information.  There are few gambling addicts (in Vegas and Wall St.), but the majority are statistically predictable.

Use a good model of human behavior based on modern psychology rather than 18th century philosophy, and you might actually have a descent theory of economics.  The math is just an essential tool for dealing with the enomous number of possibilities and actual trasnactions.

Thu, 10/11/2012 - 14:52 | 2878422 Sandmann
Sandmann's picture

Steve Keen starts from the premise that the System is in Disequilibrium with which I agree. Most Economic Models start from the idea that the system tends towards Equilibrium which I think is bunkum. Steve Keen needs mathematical models to simulate Disequilibrium and I think that is valid because it is Disequilibrium and it can only exist in a mathematical model. What I reject is Mathematical Modelling tending towards Equilibrium because I do not believe in a Self-Balancing Economic System

Thu, 10/11/2012 - 14:48 | 2878410 Sandmann
Sandmann's picture

Economics is a branch of Moral Philosophy which is why Adam Smith was a Moral Philosopher at Balliol College, Oxford. It is why Economics has "Goods" and "Bads" and "Utility Functions" and why it was between Choices and Trade Offs. The Mathematicians tried to make it "Scientific" rather than Moral - and ended up reducing everything to reduced-form equations where the Stochastic Variable was the most important function - the bigger it was the tighter the correlation. Mathematics tried to model human behaviour according to Gas Laws and failed miserably because the variables are not constant or linear and just as Velocity is not stable in MV=PT the assumptions cannot hold. The greatest tragedy in Modern Economics was John Hicks and his IS/LM analysis which is an attempt to impose a template on chaos.

Thu, 10/11/2012 - 14:54 | 2878432 Sandmann
Sandmann's picture

Long Term Capital Management was a Mathematical Model of Unreality

Thu, 10/11/2012 - 21:24 | 2879398 Aziz
Aziz's picture

Perfect example.

Thu, 10/11/2012 - 16:30 | 2878807 MedicalQuack
MedicalQuack's picture

Love it and for sure this is correct, I used to write code so listen to those who have the skills, but I was a good person and didn't into the bad areas although we all know it's there, just like anything else in life, do the right thing, but enough have not and bad code was written for desired versus accurate results.

Again I just love to hear the quant in the documentary that teaches quant school too say there's way too much math in the financial markets.  Watch the other burned out tech spending 60k to learn how to become a quant...power is in the code and formulas that moves the money and controls the world.   I do my best to keept telling everybody this, we are under the Attack of the Killer Algorithms and that includes math!  Watch the video at the end of my 44 links that show bad math and flawed code attacking, every day life occuraneces.  I started beating this drum 3 years ago and said we need a Department of Algorithms or something like it when the Madoff case broke loose. 

Data mining and getting accuracy is bad and I have to add chapter 45 where my car insurance took the new owners of my house I sold 6 months ago as a secondary driver. this is data mining at it's best as even my agent had no clue, but I did <grin>  He said we have two sides of the business and they don't always talk..yeah the code and data mining side that gets it wrong and the credible information on the other side and when they mix, watch out! 

http://ducknetweb.blogspot.com/2012/02/attack-of-killer-algorithmsdigest...

Thu, 10/11/2012 - 20:02 | 2879208 mantrid
mantrid's picture

  1. Burn the mathematics.

ah, more math-illiterates, as if keynesians and monetarists weren't enought disaster now we need austrians and their math ignorance spreading. burn Galileo, burn books of Darwin, burn Harry Potter, burn all the stuff you don't understand and never managed to learn. no wonder we suffer monetary-illiteracy if we can't even grasp what math is and what is it for.

Sat, 10/13/2012 - 14:24 | 2885316 HardAssets
HardAssets's picture

mantrid - - thank you for providing us with a perfect example of the use of logical fallacies in an argument. Youre using a 'straw man' argument - - saying that those who doubt the value of the use of mathematics to predict macro economic outcomes must be math 'challenged' and anti-science. They must also be ready to burn books,  & witches at the stake (a general ad hominem attack).

Perhaps your comments were a kind of spoof and given as an illustration of philosophical illiteracy and poor logic.

Do NOT follow this link or you will be banned from the site!