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Guest Post: The Pseudoscience Of Economics

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Submitted by Azizonomics

The Pseudoscience of Economics

Modern economics is obsessed with modelling. An overwhelming majority of academic papers on the subject work like so: they take data, and use data to construct formal mathematical models of economic processes. Models mostly describe a situation, and describe how that situation would be changed by a given set of events; a very simple example is that as the supply of a good diminishes, its price will increase. Another is that deficit spending increases the national income. A mathematical model is a predictive tool created to demonstrate the outcome of events in a massively simplified alternate universe.

As someone who rather enjoys voyages of the imagination, the use of mathematical models in economics is intriguing. The pretension that through using formal mathematical techniques and process  we can not only accurately understand, but accurately predict the result of changes in the economy is highly seductive. After all, we can accurately predict the future, right?

Wrong. The wonderful and terrible and confounding thing about our world is that it is a deeply unpredictable place, at least in the economic sphere where each number (for instance “aggregate demand” or “aggregate supply”) in an equation may loosely refer to millions of huge, complex and dynamic events. When you’re using huge simplifications to describe reality, those simplifications may miss the important details, and your projections may go askew.

Not all modelling is equal. Newton’s model of gravitation (since superseded by Einstein’s relativity) makes relatively accurate predictions about how gravitation works, and what would happen to an object dropped 500 metres above the Earth. NASA used Newton’s equations to fly to the Moon. Of course, even in physics there are occasionally divergences and oddities (which is why there are quite often unrepeatable or anomalous experimental results, for instance the recent experiment that seemed to show neutrinos travelling faster than the speed of light). So economics — with its fixation on creating models of situations, and using these models to attempt to predict the future, mimics physics, chemistry and biology, where data is collected, and used to produce theories of physical processes which allow a modestly accurate representation of the future.

The key qualitative difference, though, is that mathematical economic theories don’t accurately predict the future. Ben Bernanke — the chairman of the Federal Reserve, and one of the most-cited academic economists in the world told the world that subprime housing was contained. That is the economic equivalent of Stephen Hawking telling the world that a meteorite is going to miss the Earth, when it is really going to hit. 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.

The thing that I believe modern economists are most useful for is pointing out the glaring flaws in everyone else’s theories. Steve Keen has made a public name for himself by publishing a book entitled debunking economics, in which he explains the glaring and various flaws in modern economic modelling (DSGE, New Classical, etc).

Economics is a complex and multi-faceted subjects. Economists must be in some measure, philosophers, historians, linguists, mathematicians, statisticians, political scientists, sociologists and psychologists, and many other things. The trouble is that at some stage in the last century the multi-faceted multi-dimensional economics (like that Xenophon) was hijacked by mathematicians who tried to turn this huge and delicate subject into an equation. Yet economics — and economic decisions, from the macro to the micro level — is a human subject. It is subtle and psychological and sporadic. A human subject requires human language, human emotion, human intuition.

The grand theoretical-mathematical approach to economics is fundamentally flawed. Trying to smudge the human reality of economics and politics into cold mathematical shackles is degenerative.

So what to do if you want to understand the economy?

Follow the data, consider the history (similarities and differences between the past and the present) and explain your conclusions simply, as you would to a child. Consider philosophical definitions: what is money? What is demand? What is supply? What is value? How does demand affect supply? What are the global patterns of trade? Why have they emerged this way and not an alternative way? Consider possibilities. Admit the limitations of your knowledge and explore the boundaries. Stop forcing the construction of absolutes, grand frameworks, grand theories. No theory will ever be robust to everything nature will throw at it, but simple microeconomic heuristics (opportunity cost, cost-benefit analysis) combined with data-focussed historical analysis may be more robust than cold, dead mathematics.

As Heraclitus noted:

No man ever steps in the same river twice

No two situations are identical. And in this universe even tiny differences can have huge effects on the outcome of a situation. This is the butterfly effect, a term coined by Edward Lorenz, and derived from the theoretical example of a hurricane’s formation being contingent on whether or not a distant butterfly had flapped its wings several weeks before.

The pseudo-scientific school of mathematical economics hungers and craves for a perfect world, where each river is the same, where there is no butterfly effect, where human preferences are expressed in equation form, where there is no subtlety or ambiguity or uncertainty.

It is a dreamworld constructed by and for people with Asperger’s Syndrome.

 

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Wed, 05/02/2012 - 13:25 | 2391610 Cognitive Dissonance
Cognitive Dissonance's picture

Long time Zero Hedge readers might remember my four part series which discussed the money meme in some length.

"Perception, Inception and the Trojan Horse Money Meme"

Wed, 05/02/2012 - 13:26 | 2391614 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Yeah we have been discussing this topic everyday for years. 

PS, what happened to chat?

Wed, 05/02/2012 - 13:36 | 2391632 Cognitive Dissonance
Cognitive Dissonance's picture

LM

I just don't have the time to devote to ZH's chat at this time so I have been avoiding it completely. Once I am done with the extensive renovations to our Plan "B" retreat that I have mentioned a few times here on ZH I'll be able to spend more time (again) on ZH.

In fact, we will be leaving for Plan "B" in a few hours and we will not be back until Sunday evening. That's the way it has been every (extra long) weekend for the last 3 months.

Wed, 05/02/2012 - 13:40 | 2391643 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

^^^This is an open question. 

Wed, 05/02/2012 - 14:46 | 2391846 NotApplicable
NotApplicable's picture

Not only is it all pseudoscience, it's all they know. All other theories have been presented to them as a historical artifact, if at all.

Robert Wenzel discusses his speech at the Fed, and how it was quite the eye-opening experience.

http://www.economicpolicyjournal.com/2012/04/my-fed-speech-details.html

Wed, 05/02/2012 - 16:07 | 2392046 CIABS
CIABS's picture

It's a waste of energy to focus on the "wrongheadedness" of most economic discourse.  If that's what it really is, then the economists doing it are useful idiots.  The discipline of economics is assiduously steered away from the truth by those in a position to do so, because there is so much at stake.  This is true of all of the so-called social sciences, for the same reason.  Widespread understanding of society would bring up the irresistible urge to change it, with regard to the maldistribution of power and wealth.  The most dangerous of the social sciences is the study of history.  All the others have been made intentionally ahistorical, in order that they be neutered.  Most of economics, like most social-scientific discourse, is pure brainwash.

Wed, 05/02/2012 - 13:47 | 2391660 vast-dom
vast-dom's picture

i modelled the shit out of SP and continually arrived at 800 for last year. So I'm first to admit my science is pseudo at best....until it isn't.....my timing, that's another pseudo issue....

 

the fed, that's not psuedo since benny has wrecked my modeling...so pseudo QE or pseudo QE results medium term?

Wed, 05/02/2012 - 14:38 | 2391821 sunaJ
sunaJ's picture

What you did is model the shit out of a shit model of another shit model based upon political and power considerations you probably are not aware of.  The rules will change to meet unrealistic expectations.  It is economic oligarchy perched on the cliff of anarchy.  You will be lucky before you are accurate, but good luck.

Wed, 05/02/2012 - 14:48 | 2391851 NotApplicable
NotApplicable's picture

Now why did you have to go and ruin a perfectly good post by mischaracterizing anarchy?

The word you're looking for is chaos (a resultant feature of an oligarchy's inability to maintain control).

Wed, 05/02/2012 - 13:35 | 2391626 midgetrannyporn
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I have assburgers.

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

Want some?

Wed, 05/02/2012 - 13:37 | 2391636 Zola
Zola's picture

The reason why Central Banks, central planning and current economics is so incompetent ? They would have to discover this : 

http://en.wikipedia.org/wiki/Psychohistory_(fictional)

 

Bernanke is 1000 years too early...

Wed, 05/02/2012 - 14:23 | 2391771 Dr. Acula
Dr. Acula's picture

>The reason why Central Banks, central planning ... is so incompetent

Because they don't have to be competent.

If they incur financial losses, they don't face liquidation. They just counterfeit and steal more.

 

Wed, 05/02/2012 - 13:38 | 2391638 CrashisOptimistic
CrashisOptimistic's picture

"Follow the data, consider the history (similarities and differences between the past and the present) and explain your conclusions simply, as you would to a child."

 

Okay.  I'll do that.

None of this matters.  There is no history of a civilization running out of air. 

Only oil matters.  Only oil matters.  7 billion can't live without oil.  

Oil is air.

A child could understand that.

Wed, 05/02/2012 - 13:42 | 2391650 AnAnonymous
AnAnonymous's picture

Billions live without oil but hey who cares?

Wed, 05/02/2012 - 15:44 | 2392010 CrashisOptimistic
CrashisOptimistic's picture

No.  They don't.

Wed, 05/02/2012 - 13:42 | 2391649 AlaricBalth
AlaricBalth's picture

The arrogance of those who believe they can model risk is astounding. David Li's huge miscalculation with his Gaussian Copula Function, which was supposed to measure and mitigate risk in the CDO markets, proved that risk modelling is an inexact science because you cannot consistently measure the behavior of people during extreme circumstances. Li's formula caused trillions of dollars in losses, reported and unreported and brought the world to the brink of the abyss.

Wed, 05/02/2012 - 13:48 | 2391665 insanelysane
insanelysane's picture

The problem is that the people that say, "well the mathematical models show X", are the same people that are saying, "this time is different."  That is insanity.

Wed, 05/02/2012 - 14:50 | 2391855 Dane Bramage
Dane Bramage's picture

Algorithms for predicting popular delusions - get 'em while they're hot!    Also available: fashion functions & madness modeling.

Wed, 05/02/2012 - 13:49 | 2391666 Downtoolong
Downtoolong's picture

Look, if  you’re goal is to rob hundreds of millions of people of  trillions of dollars, don’t you have to come up with some elaborate diversion to distract them and draw their attention away from what you’re doing? How else  are you going to get away with it?

Wed, 05/02/2012 - 13:52 | 2391676 Econophile
Econophile's picture

This is an old discussion, mainly between empiricists and the Austrians going back a couple hundred years. Why the author failed to discuss this is surprising. It is what Hayek called "scientism", the attempt to make economics like the physical sciences. Human behavior just ain't that easy. Menger, Mises, and Hayek wrote many books on this topic. Further, I didn't see any reference to Taleb, the latest along this line,  who ridiculed the failed Gaussian models of Modern Portfolio theory, efficient market theory, CAPM, etc. It's a fair topic to discuss, but it's nothing new.

Wed, 05/02/2012 - 14:04 | 2391708 Dr. Acula
Dr. Acula's picture

>Menger, Mises, and Hayek wrote many books on this topic. Further, I didn't see any reference to Taleb, the latest along this line

FYI, Taleb is not an economist like the others. According to http://en.wikipedia.org/wiki/Nassim_Nicholas_Taleb, he is an "essayist... a practitioner of mathematical finance,[10]a hedge fund manager,[11][12][13] a Wall Street trader,["

Also, as an economist, Hayek is clearly not in the same class as Mises.

I would add Hans-Hermann Hoppe to your list of anti-empiricists.

 

Wed, 05/02/2012 - 17:16 | 2392240 trembo slice
trembo slice's picture

+ Rothbard... but meantioning the Austrians is sufficient.

Wed, 05/02/2012 - 19:55 | 2392543 Cassandra Syndrome
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Imo, Rothbard is the greatest. Even better than Mises. The Austrian perspective is about the only means of interpreting the economy in the dynamic form as the interactions of the multitudes of people. 

Mathematics is only useful Post Factum, it cannot be used to forecast. Cause and effect logic and A Priori reasoning is what works best with economic forecasts. 

Wed, 05/02/2012 - 21:40 | 2392738 trembo slice
trembo slice's picture

Rothbard is my favorite intellectual as well.

Wed, 05/02/2012 - 18:02 | 2392353 jpmrwb
jpmrwb's picture

I agree but I would also add Rothbard. Why didn't the author just say there are "no constants" in economics. That's why the models don't work.

Wed, 05/02/2012 - 13:54 | 2391677 mikesswimn
mikesswimn's picture

"The trouble is that at some stage in the last century the multi-faceted multi-dimensional economics (like that Xenophon) was hijacked by mathematicians who tried to turn this huge and delicate subject into an equation."

Don't confuse a mathematician with a foolish economist mathematically competent enough to construct a lagrangian.

Wed, 05/02/2012 - 14:24 | 2391679 barliman
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Brinng!, Brinng!

"Hello. Yes. Yes. I see your point. Don't worry, I'll tell them."

The Amalgamated Secret Societies of Wiccans, Intelligentsia, Pundits, Evangelists & Shibboleths  (ASSWIPES) called and wanted their objection to the use of the term pseudoscience made public.  They say they have spent an enormous amount of time and effort getting their various undertakings recognized as pseudosciences and feel ZeroHedge's careless use of the term with regard to Economics undercuts the value they have gradually been able to associate with the word.

barliman

Wed, 05/02/2012 - 15:14 | 2391850 Ignatius
Ignatius's picture

Maybe Steve Keen just got lucky.

Wed, 05/02/2012 - 14:02 | 2391704 Downtoolong
Downtoolong's picture

I suspect economist’s frustration may be a leading cause of their penchant for centralization. They’re all desperate to make a correct prediction, just once. But the only way that can happen is if they can force the outcome to happen no matter what.

Wed, 05/02/2012 - 15:10 | 2391909 Problem Is
Problem Is's picture

"They’re all desperate to make a correct prediction..."

Being wrong 100% of the time never bothered Alan "Crazy Chester" Greenspan...

Wed, 05/02/2012 - 14:05 | 2391712 ebworthen
ebworthen's picture

Excellent.

Economics is like weather prediction or climate modeling; walls of super computers churning data and models 24/7 and they still can't give you a good forecast.

Add to the rivers of varying data, collection techniques, and validity measures - the unknowable dynamic of individual human choices - and modern economics approaches alchemy requiring faith.

Wed, 05/02/2012 - 15:51 | 2392022 Stuck on Zero
Stuck on Zero's picture

There is excellent science behind weather forecasting and economics.  There is poor predictability because the science is stochastic.  Don't confuse the real masters of the science with the paid shills who will say anything for a buck.

 

Wed, 05/02/2012 - 14:05 | 2391717 mickeyman
mickeyman's picture

The purpose of economic theory is to cover political objectives with impenetrable bafflegab.

The decisions are made, and pointy-heads in ivory towers concur. Who are you to say they are wrong.

The same is true for geopolitics.

http://worldcomplex.blogspot.ca/2011/05/geopolitics-and-economics-cloaking-evil.html

Wed, 05/02/2012 - 15:35 | 2391989 Diet Coke and F...
Diet Coke and Floozies's picture

Agreed. See post below.

Wed, 05/02/2012 - 14:15 | 2391739 sunaJ
sunaJ's picture

It is not just people with Asperger's Syndrome that find such a mathmatically-modeled world appealing.  The desire to fortell risk runs deep within the human conscience.  It is part of what drives religion, economics and politics.  With fear-driven parts of life, we seem to choose willful deafness than face the music.  It is part of the human condition.  When the contorl over the recognition of our own ignorance is wrested from the psychopaths, perhaps then we can pursue a paradigm based on robustness and healthy self-governance.

Wed, 05/02/2012 - 14:22 | 2391765 Dragline
Dragline's picture

It's worse than a pseudo-science.  Economics is a pseudo-religion that is used to support political theories like the divine right of kings in another age.  All political thought based on economics is doo-doo and should be rejected out of hand.

And since most politicians never read Debunking Economics or another history of the subject, they don't even know what they believe in and why its essentially counter-factual.  For example, historically the deregulation of markets and innovation in technologies has led to the concentration of wealth in the hands of a few.  No economist has ever explained why this is so.

A real attempt at a "science" of economics would throw out the equlibrium based models and start with the mathematics of Benoit Mandelbrot (like Taleb does) and the research of human behavior by  Kahneman & Tversky.  The whole thing needs to be thrown out and reinvented like the "earth-centered universe" once was.

Wed, 05/02/2012 - 15:30 | 2391963 Thunderlips
Thunderlips's picture

Damn Straight.  Econ textbooks still assert that barter predated currency economies as the main method of transaction, and there's absolutely no evidence barter was the primary method of transactions in a society. 

 

Pre currency economies were either command, reciprocity, or credit.  Credit actually predates currency in some early civilizations.  Barter onlyhappens in societies that are used to coinage, but for reason it's unavailable (shortage of coin and paper, inside prisons, etc.)

Mycenae doled out goods centrally, as did early Egypt.  Iroquis women divided the harvest according to need.  NW'ern Indians wined and dined each other as a form of competition.

This was a guess made by economists in the 18th century, and it still is handed down to successive generations of economists without ever being checked against Archeology or Anthropology.

Fri, 05/25/2012 - 03:23 | 2461509 Macrocompassion
Macrocompassion's picture

Pseduo-science is what Nobel Laurate and physicist Richard Friedman called economics and he was right! This is because so many of that "arts" kind  of academics somehow do not have sufficient imagination nor breadth of vision to appreciate that like gas molecules, the average properties of parts of our society can be modelled and to obey very exact laws.

Ths is the basis behind the model that I presented in Google Images DiagFuncMacroSyst.pdf  which is a complete representation of a country's social system of macroeconomic functioning. 6 entities support 19 different kinds of mutual flows of money versus goods, services and valuable documents. That is all that is needed but it is a more comprehensive model that the kinds that followed from the 2-sector one by F.Knight in 1933. yet the Keynesians still use slight variations on this antiquated model to show how our social system can be "cured". Shame on them and on all psedu-scientists! Today we have far better ways.

 

Wed, 05/02/2012 - 14:22 | 2391769 QuietCorday
QuietCorday's picture

I have always found this aspect of economics to be really odd. It takes no notice of other confounding cultural and personal quirks that play into people's economic behaviour.

As a tiny example, the number of people I have come across that never sell shares because they were inherited from parents or grandparents is quite astonishing. The number of people who retain economic understandings that derive from the mid 80s or mid 50s, understandings still influence their behaviour today, is remarkable.

All this creates "irrational" behaviour that economists simply cannot model. I remember being flummoxed at how unrealistic so much of the content on my partner's economics MA actually was -- it really was "how many angels can dance on the head of a pin" kinda stuff, when  ... errr... "angels" would have far better things to do than dance on pins.

The best economic forecasts and commentary, in my experience, have always come from people with some sort of social science or humanities background: politics-bods, anthropologists, historians ... people who have studied "people" and how they behave.  

Wed, 05/02/2012 - 14:29 | 2391784 i_call_you_my_base
i_call_you_my_base's picture

In my time spent modeling and being around others who model, two things became apparent: 1) a greater understanding of a system often gives an individual a false sense of control, and 2) people believe that greater complexity in the model results in a more "correct" prediction ("if I could just account for this one thing..."). Obviously, both of these are fatal errors. I often found myself saying things like, "it's better to acknowledge an unknown than to convince yourself you have accounted for it." People didn't listen because they didn't want to acknowledge the unknown. In their mind it opened the model to criticism. To them, having the unknown meant the entire thing was an unsolved problem and reflected badly on them.

Wed, 05/02/2012 - 14:42 | 2391836 SoNH80
SoNH80's picture

Agree 100%.  Their unwillingness to acknowledge unknowns-- integrate a range of outcomes-- actually undercuts their credibility.

Wed, 05/02/2012 - 15:40 | 2391996 LoneCapitalist
LoneCapitalist's picture

Are you talking about KNOWN unknowns or UNKNOWN unknowns. sarc.

Wed, 05/02/2012 - 14:31 | 2391793 SoNH80
SoNH80's picture

MICROeconomics is pretty damn near a science.  Marginal cost, how to minimize waste in producing X widgets for Y inputs, price elasticity, etc.  Command economies can have macro success at first, but their lack of microeconomic discipline and principles kill them over time.  My basic micro course in college was a hell of a lot of fun, and has remained a reference point for me since.

Mainstream MACROeconomics?  They're very good at predicting last quarter.

Wed, 05/02/2012 - 15:31 | 2391971 Diet Coke and F...
Diet Coke and Floozies's picture

Fully agree. See my comment below....

Wed, 05/02/2012 - 14:31 | 2391795 BobPaulson
BobPaulson's picture

Thank you. The complete lack of empiricism in Economics is very very troubling. The fact that they had to buy a Nobel Prize to get some credibility speaks volumes.

For those not in the know, the so called Nobel Prize in Economics is a sham. Take a look at its origin.

Wed, 05/02/2012 - 20:37 | 2392589 CommonSense89
CommonSense89's picture

There is NO lack of empiricism in mainstream economics. That is precisely the problem. neoclassical and neo-keynsian economists rely completely on empiricism. It doesnt work (when both schools rely completely on incorrect assumptions, theories, etc. Shit, they actually teach kids the IS LM model in level 2 macro courses. They of course fail to mention that the inventor, Hicks, denounced such models as being mere teaching gadgets). Other heterodox schools either use less empiricism or outright reject it, like Austrians

Wed, 05/02/2012 - 14:32 | 2391801 Bunga Bunga
Bunga Bunga's picture

Where is Dr. Paul Krugman?

Wed, 05/02/2012 - 14:48 | 2391848 ebworthen
ebworthen's picture

Modeling his next book deal and emailing Obama about being his economic advisor for second term.

Wed, 05/02/2012 - 15:08 | 2391905 TheFourthStooge-ing
TheFourthStooge-ing's picture

...and breaking a few windows.

 

Wed, 05/02/2012 - 15:05 | 2391888 Problem Is
Problem Is's picture

"Where is Dr. Paul Krugman?"

Trying to pull his head out of his own ass hole using his feet for leverage...

Wed, 05/02/2012 - 14:45 | 2391844 Cycle
Cycle's picture

A model, like a map, is not the territory. Disregard of this principle results in much confusion. Economic modeling is simply a tool, one of many that can be applied to understanding relationships. It is the misapplication of the tool and the misinterpretation of the results,  and not something inherently flawed in the tool itself, that causes trouble. Even relatively simplistic business cycle models can be used as rough guides to the future, always keeping in mind the limitations of such modeling.

Wed, 05/02/2012 - 15:13 | 2391883 Problem Is
Problem Is's picture

"The trouble is that at some stage in the last century the multi-faceted multi-dimensional economics... was hijacked by mathematicians who tried to turn this huge and delicate subject into an equation."

Fallacy of the False Premise

It wasn't mathematicians that fucked economics up...

It was PhD Economists that fucked economics up by misusing mathematics trying to prove economics is a science... when in fact it is a social study...

Lay the blame where it belongs... On economists...

Wed, 05/02/2012 - 15:28 | 2391965 Diet Coke and F...
Diet Coke and Floozies's picture

With computer programming, garbage in = garbage out.

Same with economics. Garbage in = garbage out.

People need to stop making the assuption that TPTB don't know what they are doing. This is false, they know exactly what they are doing. If people knew the truth, there would be CHAOS in less than 24 hours. Can you imagine what americans would be like if they were told that the american standard of living has to drop so that more asians can be middle class? Not to mention peak resources... Why do you think every news story has a spin behind it? Stop thinking they are dumb. They are not.

Don't say economics is a pseudoscience just because some people use it to manipulate the masses. Everytime you make a choice in the face of scarcity, you are doing economics. When choosing an investment, do you not model it into the future using basic economic theories? The state of nature on the supply side is what I am betting on to take silver to the moon. 10 - 20 years from now. Not demand, CME, JPM manipulation, etc... If JPM wants to sell it to me cheap now, that is fine by me.

What is the alternative to modelling? Nothing? Throw darts at a list of commodities? Everything on red? Mathematics is a tool, and I agree that to focus on only that aspect for projections and modelling would be a mistake, but don't state that all economics is trash because a few misuse or manipulate it for personal gain or to help keep the chaos and entitlement down.

Remember the 'ceteris paribus' aspect of economics as well as 'cui bono'.

Wed, 05/02/2012 - 16:09 | 2392049 mickeyman
mickeyman's picture

Economics is a pseudoscience when it is used to make predictions of the future behaviour of markets, or when it is invoked to support some political interest rate target.

If you consider it simply as a mechanism for personal decision making, that is legitimate. The reason there are "schools" in economics but not in hard sciences is because the relative importance of parameters like profit, environment, society, differs from one market participant to another.

Depending on the relative value you ascribe to environmental protection relative to profit may cause you to make a different decision about the placement of a mine or a factory than another participant who values these things differently. Since all participants may potentially value things differently, it has to be very difficult coming up with equations that predict how everyone is going to respond to ZIRP, for instance.

Wed, 05/02/2012 - 16:28 | 2392084 Tall Tom
Tall Tom's picture

You seem to have a lot of misplaced faith in Physics.

If you knew the truth you would label Physics as a psuedoscience also.

We flew to the Moon using Newtonian Maechanics. True.

We were off course for well over eighty percent of the time for every single one of those flight. Mid course correction burns were routine.

As noted previously in the comments the sub topic of Physical Meteorology...Weather Forecasting...is not exact. The models are about 85% accurate. Again the modeling uses statistical analysis and forecasts madefor time periods greater than five days are notoriously inaccurate.

As for Hawking miscalculating an asteroiid impact...That would not be too surprising at all. The Partial Differential Equations used to describe orbital trajectories are modeled and are subject to Boundary Conditions. If a boundary is violated by an unforseen anomalous event then the model degenerates rapidly. Refer to trajectory anomalies noted in routine Apollo Moon Missions and my first supporting paragraph.

Likewise when we look at Quantum Physics it even becomes less predictive of actual singular events. We may collectively understand the probabilities whre sub atomic particles may end up but asking for accuracy is well beyond our capabilities.

Economics is a young and growingQuantitative Science. Certainly there. are many limitations that it has...just as our Modern Physics...but it can be useful in its present form. Yes there are many problems with it.

However it works on the local level for short term forecasts. Its limitations becomes apparent on longer term evvents.

Tall Tom
I Cor 13

The crossover of the scholars from Physics to Economics is remarkable.

Wed, 05/02/2012 - 18:23 | 2392350 Dr. Acula
Dr. Acula's picture

>Economics is a young and growingQuantitative Science

"there is in the universe something for the description and analysis of which the natural sciences cannot contribute anything. There are events beyond the range of those events that the procedures of the natural sciences are fit to observe and to describe. There is human action... It is a fact that up to now nothing has been done to bridge over the gulf that yawns between the natural events in the consummation of which science is unable to find any finality and the conscious acts of men that invariably aim at definite ends... There is, on the one hand, the field of external events, about which we can learn only that there prevail mutual constant relations among them, and there is the field of human action, about which we cannot learn anything without resorting to the category of finality. ... In the field of human action all quantitatively determined magnitudes refer only to history and do not convey any knowledge that would mean something beyond the specific historical constellation that generated them"

-Ludwig von Mises, The Ultimate Foundation of Economic Science

 

 

Wed, 05/02/2012 - 19:54 | 2392544 WorkingClassHero
WorkingClassHero's picture

poams.org is enlightening if you can understand the theories presented

Wed, 05/02/2012 - 20:35 | 2392597 Dr. Acula
Dr. Acula's picture

I think it's absurd.

Thu, 05/03/2012 - 13:14 | 2394332 WorkingClassHero
WorkingClassHero's picture

Thats a pretty ignorant response.  What specifically do you find absurd about the material presented?  Its basically a summary of Machian Physics.  Mach was Einstein's mentor, and Einstein certainly didnt find the material to be absurd.    

Wed, 05/02/2012 - 16:40 | 2392115 randomdrift
randomdrift's picture

When systems become too large and too interconnected, they no longer have a closed solution. That is called "chaos." --- The scientific field of "Chaos theory" deals with predicting the behavior of these types of systems. 

During the late 1990s, academics stopped writing models for the structure of the world economy, because, they recognized that it had become chaotic and traditional modeling was no longer valid. Go to a university library and look up those models, you will see that the late 1990s is about when they stopped being published. This is why.

However, that doesn't mean that the world's economy is unpredictable, only that you must use different techniques. One approach is neighborhood sensitivity analysis. That was how the FOMC did it under Greenspan. --- I knew what they were doing and did very well during that period. Unfortunately, Breneke's methods are not so transparent.

 

Wed, 05/02/2012 - 16:57 | 2392167 randomdrift
randomdrift's picture

Incidentally, Chaos theory didn't come from physics, it came from ecology. However, it migrated rather quickly to electrical engineering and economics. ---  Those three fields deal with systems that are often described using very similar types of equations: In particular, matrices of differential equations. 

Wed, 05/02/2012 - 18:42 | 2392427 Dr. Acula
Dr. Acula's picture

It came from mathematical physics, not ecology:

"An early proponent of chaos theory was Henri Poincaré. In the 1880s, while studying the three-body problem, he found that there can be orbits which are nonperiodic, and yet not forever increasing nor approaching a fixed point.[37][38] In 1898 Jacques Hadamard published an influential study of the chaotic motion of a free particle gliding frictionlessly on a surface of constant negative curvature.[39] ... Much of the earlier theory was developed almost entirely by mathematicians"

Source: http://en.wikipedia.org/wiki/Chaos_theory#History

 

Thu, 05/03/2012 - 00:53 | 2393032 randomdrift
randomdrift's picture

Thanks. I just Learned something.  --- I published on the topic during the early 1970's but, until now, didn't know that earlier history. 

Wed, 05/02/2012 - 16:55 | 2392157 Tao 4 the Show
Tao 4 the Show's picture

Actually, predicting rock movements in space is not easy either. Two bodies can be solved for exactly. Three or more -not.

Wed, 05/02/2012 - 16:59 | 2392173 randomdrift
randomdrift's picture

Yeah. I know. --- I took Legrangian and Hamiltonian dynamics when I was an undergraduate. 

Wed, 05/02/2012 - 17:47 | 2392320 michael_engineer
michael_engineer's picture

Speaking of rock movements in space:

Hey you, ZH editor. You should do an article to debunk this asteroid mining concept. This link is a good start : http://www.yourmedievalfuture.com/?p=437 The asteroid mining news blurb may have been part of some disinformation campaign or an attempt to mislead the public perception on resource depletion issues. Or somebody might have been looking to dupe some investors. Questions for those mining guys : What concentration of valuable minerals are you expecting to find out there? Are those concentrations typical in meteorites that are already on the earth? If these minerals are embedded in rock or iron or manganese and impure and separation needs to be done then exactly which process is going to be used? Which machines and chemicals will you be taking to an asteroid? Do those processes work in zero gravity and zero atmosphere? How much tonnage are you bringing back per mission? What are the energy calculations for de-orbiting that mass? How big a heat shield will be needed? Shirley, someone must have done some calculations on weight, volume, and the amount of fuel to get out of orbit, get back, and de-orbit. Is the back of that envelope or that napkin still available? Or did it get tossed out after those "wannabe mining" guys ate lunch together? Talk about building a proverbial bridge to nowhere. Hope they are not going to be using government money for any funding. WAIT!!! That just might be it. Maybe they are just tring to divert some public funds to pad some corporations bottom lines with no real hope for a profitable business model. Wouldn't that be a swindle?

Wed, 05/02/2012 - 18:19 | 2392385 New_Meat
New_Meat's picture

mikie, maybe u ought to do the work, since the Tylerz kinda' busy on whatever makes them money

But then, u might enjoy Ringo's SF trilogy (so far). Don't know when a Trilogy morphs into more--what do you call that?  After all, if GOOG is promoting it, we all know that it will be under the company's motto of "Do No Evil".

Right?

Yeah!

- Ned

Wed, 05/02/2012 - 18:47 | 2392434 bjfish
bjfish's picture

I am very impressed with the level of economic understanding of ZH readers.  I tried to describe ZH to one of my more academic (econ prof.) colleagues - a radical econ/investor blog that is unconstrained by political correctness, has great insights and ample disdain for central banks, PhD's, cntrl - p, and politicians in general - just like me.

Sorry I couldn't make it a pithier description.

On the topic at hand, I will not defend statistical number-crunching, but lets not paint the whole field of econ with this one brush. Understanding how things work (ppl, markets, the world, etc.) is very valuable and requires economic understanding. Many economists are the very embodiment of reasonableness, rationality, and logic (see Mankiw's blog - since I don't have one :).

What has given the field a bad name and caused much confusion is the hacks or presstitutes or sycophants (calling Paul Krugman), who will spout any nonsense for a price. 

 

Wed, 05/02/2012 - 21:00 | 2392655 besnook
besnook's picture

as a reformed economist(i have been clean for more than 30 years now) this article is hilarious.  economists used to be a humble lot who recognized their limitations. as one econometrics professor described it-"i have made decisions that were suppose to be good that turned out bad and bad decisions that turned out good." this told me modeling is more about a game that the guy who turns out a truly accurate predictive model wins. another prof in the brand new field of environmental economics modeled things as abstract as the value of a vista to a very logical model valuing a tree at 175000 dollars. this told me, with some imagination, numbers can be arranged to paint any picture one desired.

i noticed early on that the greatest limitation of economists was ego. some were truly driven to predict, uhh,err, forecast the future with a mathematical model, others, like me, liked to play with numbers to see what they might reveal and, with the advent of computers, many others thought they could build models that could finally incorporate all possible variables.  some of these guys were fn brilliant even as i thought of myself as brilliant. it was much later that i realized the fallacy of genius when i noticed that plain old average people could forecast the future with about the same accuracy as economists. some got it right. some got it wrong. some got it right using logically connected data. some got it right using btshtcrzy unconnected data. and the ones who got it wrong were on the same thought process as those who got it right. this led to my theory of the delusion of genius(only as it applies to economics. genius, i presume, has better applications in the hard sciences) which says being really smart doesn't neccessarily mean you are really smart.

so now i look for an understanding of economics and forecasting in the behavior of crowds, the flow of rivers and weather systems because my math skills have turned to shit but my concept skills are intact.

 

so what do i think is happening? this is like a 100 year flood or even a 500 year flood where dams are broken devastating the river valley that has gently ebbed and flowed on a predictable basis with minor washouts every now and then to a totally changed landscape forming a new direction for the river in a chaotic manner, at first, totally unpredictable and gradually forming a new flow out of that chaos to be finally tamed again by unnatural forces that, again, cannot be sustained forever.... or markets go up, markets go down, markets boom, markets collapse. that is about as predictive as is possible.

Wed, 05/02/2012 - 21:04 | 2392661 TerraHertz
TerraHertz's picture

I've long thought that economic modeling in general is always doomed to failure, for one simple and inescapable reason.

The models attempt to describe a complex system. But the problem is, that system consists of human beings (and other entities like corporations) each attempting to make a profit at the expense of everyone else

Now one way to profit at others' expense, is to predict what they are going to do, and somehow preempt them in a way that benefits you (and not them.)

One way to predict what others are going to do, is to understand the model(s) they use to guide their actions within the system. In other words, the way they understand what YOU (and everyone else) are likely to do. Once you know what they *think* you are going to do, you can beat them by acting contrary to their expectations.

The point is, no matter how accurately developing 'economic models' reflect the system *now*, it's always in many entity's best interests to preemptively behave in ways contrary to those models. Thus making the models invalid.

Taken to the next level of game-playing abstraction, one can gain much advantage by generating and promulgating false models, and attempting to herd the understanding (and actions) of others by convincing them that your models are valid. (Fiat currency, private central fractional-reserve banking, take a bow please.)

The pursuit of accurate economic models is thus a stupid, naive folly, that in itself displays a fundamental failure to understand the nature of economics.

Forget economic models. Study gaming theory, politics, and the psychology of conspiracy, ego-mania, psychopathy, and elite cabals.

As for the forever-unmodelable economy, its simplicity and utility to all would be greatly enhanced by arresting and removing from it everyone involved in the 911 conspiracy, the corporate government scam, Zionism, the NWO globalists, every member of the Bilderbergers, CFR, Cttee of 300, and so on. Also eliminating the insanity of corporate personhood.

Thu, 05/03/2012 - 01:22 | 2393058 randomdrift
randomdrift's picture

I agree that the central problem is globalism. For example, in the introductory speaches at the Biodiversity Convention in Rio in 1992, they declared the intention to move to a controlled world economy. By the end of the next decade, the interconnectedness of the world economy had reached a point that the system was chaotic and had to be constantly proped up and directed by government intervention. --- I assume that that didn't happen by chance but by deliberate design.  

Ecological systems also increase their diversity (that is they increase the number of species in the system and their interconnectedness) until it destabilizes them. Then, they lose diversity until they restabilize. Over time they evolve into fairly diverse stable configurations. --- We need to eliminate the government intervention and allow the world's economic system to re-estabish some inherent stability. 

Thu, 05/03/2012 - 01:27 | 2393063 SpicyTuna
SpicyTuna's picture

Something always bothered me about the Quantity theory of money equation. Then it occured to me: this equation cannot predict a currency collapse.

 

Increasing monetary expansion (i.e. M increases) will merely return a different numerical answer: you will never get an N/A answer from this equation. Am I to believe the Denarius never existed?

I suppose what the equation is saying, is that infinite monetary expansion will lead to infinite price level expansion.

Wikipedia says:

While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in the short run.

So this equation holds true in the long run... are we supposed to ridiculouly assume the dollar, the pound, the yen etc are thousands of years old??

Thu, 05/03/2012 - 02:15 | 2393093 mr. mirbach
mr. mirbach's picture

When I saw the headline for this post I thought that maybe somebody had paid attention to what I wrote about Economists last month.

It is still poignant and germane to this post, so here it is again. 

 

"Sciences are capable of producing repeatable and provable results within a very small margin of error.   Economics is a contrivance born from sociology and philosophy. Sociology uses scientific methods and statistics to draw broad conclusions about observed events, behaviors and trends.  Philosophy is not a science, it is mental masterbatiory speculations about things that cannot be proven with complete certainty.

Therefore, economics is a mental masterbation that uses math to model sociological events, behaviors and trends in an attempt to manipulate people and public policy towards profit maximization and to explain failed attempts to manipulate people and public policy towards profit maximization.

Economic writings date back to Mesopotamia, Aristotle wrote on economic subjects. Early economics was simple forcasting (such as plant in spring, harvest in fall, drought is bad, keep stores for bad times, winters are cold) and understanding value, interest and monetary alternatives to barter. Economics was not distinguihed from Philosophy as a seperate discipline until Adam Smith's The Wealth Of Nations treatise in 1776. 

It is irrefutable tha many of  Keynes most basic assumptions were antiquated (such as the assumptions regarding the 40% agrain society), flawed (assumptions about the nature of "utility") or just totally wrong (infinite growth, infinite resources).

Keynesian Economics will eventually be discredited just as blood-letting to balance the humors was abandoned for real science. Austrian Economics is better than Keynesian economics in the assumptions, but still ALL economics is based on assumptions and historical trends. 

I have more faith in astrologers than economists." 

 

Thu, 05/03/2012 - 03:23 | 2393129 cnhedge
cnhedge's picture

US Daily: 2012 US April Payroll Preview: Sluggish
http://www.cnhedge.com/thread-4078-1-1.html
http://www.jinrongbaike.com/

Thu, 05/03/2012 - 16:27 | 2395025 matrix2012
matrix2012's picture

"...My initial urge was to study physics but I soon came to the conclusion that the lingua franca of political discourse was economics. Thus, I enrolled at the University of Essex to study the dismal science. However, within weeks of lectures I was aghast at the content of my textbooks and the inane musings of my lecturers. Quite clearly economics was only interested in putting together simplistic mathematical models. Worse still, the mathematics utilised were third rate and, consequently, the economic thinking that emanated from it was atrocious. In short shrift I changed my enrolment from the economics to the mathematics school, thinking that if I am going to be reading maths I might as well read proper maths..."

 

Quoted from the profile of Yanis Varoufakis, a Professor of Economics.

Read further about the fascinating Greek economist at http://yanisvaroufakis.eu/about/

 

It happened that Prof. Yanis already moved out to the USA, read more about him in this frank interview:

http://yanisvaroufakis.eu/2012/05/02/2101/#more-2101

Fri, 05/04/2012 - 19:51 | 2398576 Monk
Monk's picture

The problem isn't modeling but the fact that economics involves information based on money, which is essentially debt.

 

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