Paul Samuelson — a case of badly invested intelligence

5 Feb, 2014 at 13:28 | Posted in Economics | 23 Comments

Paul Samuelson claimed that the “ergodic hypothesis” is essential for advancing economics from the realm of history to the realm of science.

But is it really tenable to assume that ergodicity is essential to economics?

The answer can only be – as I have argued

here

here

here

here

and

here – NO WAY!
 
Obviously yours truly is far from the only scientist being critical of Paul Samuelson. This is what Ole Peters writes in a highly interesting article on Samuelson’s stance on the ergodic hypothesis:

Samuelson said that we should accept the ergodic hypothesis because if a system is not ergodic you cannot treat it scientifically. First of all, that’s incorrect, although I think I understand how he ended up with this impression: ergodicity means that a system is very insensitive to initial conditions or perturbations and details of the dynamics, and that makes it easy to make universal statements about such systems …

Another problem with Samuelson’s statement is the logic: we should accept this hypothesis because then we can make universal statements. But before we make any hypothesis—even one that makes our lives easier—we should check whether we know it to be wrong. In this case, there’s nothing to hypothesize. Financial and economic systems are non-ergodic. And if that means we can’t say anything meaningful, then perhaps we shouldn’t try to make meaningful claims. Well, perhaps we can speak for entertainment, but we cannot claim that it’s meaningful.

In what sense would saying something that’s patently false be “meaningful,” or “scientific” rather than “historical”? You can see where I’m going with this. Important models that economists use are not ergodic, so what’s this debate about?…

Samuelson’s comment makes little sense. A hypothesis is about something we don’t know, but in the case of finance models this is something we do know. There’s no reason to hypothesize—the system is not ergodic. It’s like hypothesizing that 3 times 4 is 0 because it makes the mathematics simpler. But I can calculate that the product is 12. Of course, a formalism that’s based on the 3-times-4 hypothesis will run into trouble sooner or later. In economics, that happens with the ergodic hypothesis when we think about risk, or financial stability. Or inequality, as we’re just working out at the moment.

And this is Nassim Taleb’s verdict on Samuelson’s view on science:

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 …

In orthodox economics, rationality became a straitjacket … This led to mathematical techniques such as “maximization,” or “optimization,” on which Paul Samuelson built much of his work … This optimization set back social science by reducing it from the intellectual and reflective 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 …

uesc_09_img0509The tragedy is that Paul Samuelson, a quick mind, is said to be one of the most intelligent scholars of his generation. This was clearly a case of very badly invested intelli­gence. Characteristically, Samuelson intimidated those who questioned his techniques with the statement “Those who can, do science, others do methodology.” If you knew math, you could “do science” … Alas, it turns out that it was Samuelson and most of his followers who did not know much math, or did not know how to use what math they knew, how to apply it to reality. They only knew enough math to be blinded by it.

Tragically, before the proliferation of empirically blind idiot savants, interesting work had been begun by true thinkers, the likes of J . M . Keynes, Friedrich Hayek, and the great Benoît Mandelbrot, all of whom were displaced because they moved economics away from the precision of second-rate physics. Very sad.

23 Comments

  1. […] Lars Syll linked to a fantastic interview with the mathematician Ole Peters the other day that dealt with the topic of ergodicity and how it relates to economic and financial markets. First, a comment on the source. […]

    Pingback by Ergodicity Versus History: A Critical Commentary on the Work of Ole Peters | Fixing the Economists— 11 Feb, 2014 #

  2. BTW question to Lars: Did Peters get his discussion of
    ergodicity from Davidson or from Samuelson directly?

    Comment by pilkingtonphil— 7 Feb, 2014 #

    • Definitely Samuelson
      [I noticed Ivan’s comment before, alleging that Peters only repeats Davidson’s critique, which as far as I can see is only a wild conjecture without substance, actually, since there’s so much more of technical/formal depth in Peters’ critique than in Davidson’s (and my) critique.]

      Comment by Lars Syll— 7 Feb, 2014 #

      • Perhaps. But I do note that the interviewer cites Davidson in this regard…

        Comment by pilkingtonphil— 7 Feb, 2014 #

        • True, but I can’t recall that Ole cites Davidson in his publications.

          Comment by Lars Syll— 7 Feb, 2014 #

      • What I meant is that Peters takes the claim “Samuelson said that we should accept the ergodic hypothesis because if a system is not ergodic you cannot treat it scientifically” at face value (and that such a reading is really a stretch from the original Samuelson paper). If he doesn’t cite Samuelson on this point in his own work, then obviously he got this from somewhere else, most likely from Davidson.

        As for where he goes from there… let’s just say in my opinion Peters’ argument is either wrong or trivial (depending on interpretation), and in fact has very little to do with the kind of non-ergodicity post-keynesians emphasize. After all, if stock prices followed geometric BM, their process is formally non-ergodic (since it grows over time), but the underlying “economic laws” are very stable. Agents living in such model would have no problem estimating parameters from past data and forming predictions.

        Comment by ivansml— 7 Feb, 2014 #

  3. “…ergodicity means that a system is very insensitive to initial conditions or perturbations and details of the dynamics, and that makes it easy to make universal statements about such systems…”

    Sounds like what I was saying about chaos theory some time back in this comments section…

    Comment by pilkingtonphil— 7 Feb, 2014 #

  4. I must say that when I read Samuelson (which I’ve only just started to do), much of it looks more Lance Taylor or Stephen Marglin, like Kaldor, Harrod, Kalecki or Joan Robinson than like the mainstream economics of today. I understand the differences between left/Post Keynesians like Robinson and neoclassical-synthesis bastard Keynesians like Samuelson, but given how the profession has moved over the past 30 years those differences look a lot smaller today. It seems to me that in terms of conceptual framework, if not political views, Samuelson (or Tobin, Solow, etc.) would be more at home in RWER than in today’s mainstream journals. Certainly they would be well to the left of, say, Paul Krugman.

    In particular, I think Taleb is mischaracterizing Samuelson a bit. Certainly there is maximization in Samuelson’s work, but no more than in Keynes — or for that matter in Marx. I really don’t see anything like the rational optimization over all future time that makes today’s mainstream macro so intellectually sterile. He’s much more eclectic in his behavioral assumptions.

    Maybe it’s a generational thing. To me, posts like this feel like fighting the last war.

    Comment by JW Mason— 6 Feb, 2014 #

    • I would rather apply the term bastard Keynesians to those foolish Post Keynesians who think that an economy is always demand constrained. Not because I necessarily disagree with it but because Keynes clearly indicated that he believes in a regime change during a recession and not that the “recessions rules” always apply.

      You read the name Marshall quite a lot in the General Theory so whether you like it or not, Keynes was not opposed to classical economics. He just pointed out that it doesn’t work during recessions. Samuelson’s neoclassical synthesis is thus very much in the spirit of Keynes.

      Comment by Keynes Still Matters— 6 Feb, 2014 #

    • JW,

      I agree in some ways but not others. Most of today’s economics is the natural progression from Samuelson. He is the intellectual progenitor of modern macro, even if he sounded reasonable. Basically, if you accept ergodicity, axioms of revealed preference, and expected utility–all of which Samueslon in some way or the other propagated–you will get the natural results of RBC. The New Keynesian results follow from making ad hoc additions to the basic model that do not follow from their basic premises. In this I am with the fresh water types–New Keynesian economics is incoherent.

      To mount a coherent intellectual alternative you have to challenge the basic premises–unfortunately that means fighting the last war.

      Samuelson seems like Lance Taylor today. Today is the operative word. Samuelson did not take his models to their full logical conclusion. The DSGE types have done it. That is all. Also, Lance Taylor comes from the MIT stable–basically playing with toy models that supposedly give insight. I have tremendous respect for Taylor, his eclecticism, erudition, and ability to play on a turf that is the natural playground of DSGE types–but has that got him any recognition from the mainstream?

      As to using capital stock measures–they are indeed problematic. And the problem has been compounded by the heavy use of hedonic adjustment, which has substantially distorted real capital since the tech boom. My own view is we should avoid the use of “real” aggregate capital stock as far as possible–use nominal capital stock scaled to nominal GDP or nominal investment scaled to nominal capital stock, or use capacity utilization, or other indicators to measure slack. More broadly, being aware of the pitfall and trying to check robustness through other measures is useful. Mainstream is of course blithely unconcerned.

      That said, I like your basic philosophy, gleaned from your blog, that it is better to spend ones energies on building something constructive.

      Comment by srini— 8 Feb, 2014 #

      • I agree — If we draw a line from Keynes (or from Ricardo or Joan Robinson) through Samuelson and keep going, we’ll end up at something like modern macro. But the converse is also true: If you draw a line from modern macro through Samuelson and keep going, you’ll end up somewhere in the vicinity of Keynes (or Ricardo, or Joan Robinson).

        I agree with you about hedonic adjustment. “Real” measures of investment and the capital stock have been rendered meaningless, if they weren’t already, by the quality adjustments for computers and related goods. I’m not sure what the “nominal capital stock” refers to, though? Total assets? Tangible assets? Valued at current cost, historical cost, market value? Historical cost requires you to choose a depreciation rate. Any measure that reflects the present value of future income depends on the discount rate. I think we may have to throw out the idea of a “stock of capital” entirely — although that requires giving up the idea of a profit rate, which would poses its own challenges.

        In my opinion, anyone (like comrade Phil P., for example) who thinks they know the correct solution to these problems, has not really thought them through.

        Comment by JW Mason— 10 Feb, 2014 #

  5. […] Lovely note on the ergodic hypothesis at Lars Syll’s blog. […]

    Pingback by ergodic hypothesis | George Cooper— 5 Feb, 2014 #

  6. I’ve tried to look up precisely what Samuelson wrote about ergodic hypothesis. Paul Davidson (and everyone else who repeats his criticisms, including Peters) seems to refer to this article: “What Classical and Neoclassical Monetary Theory Really was” [1], or actually, to its later version published in a collection edited by Clower.

    Skimming through the paper, indeed, Samuelson does mention ergodicity. But the whole paper is about building a formal model of classical monetary theory where money is neutral (which is not something Samuelson actually believed to be true at the time) – and from the context it’s clear that discussion of ergodicity applies to classical theorists (who, apparently, included young Samuelson), not to the science of economics in general.


    “Finally, there was an even more interesting third assumption implicit and explicit in the classical mind. It was a belief in unique long-run equilibrium independent of initial conditions.
    […]
    Technically speaking, we theorists hoped not to introduce hysteresis phenomena into our model, as the Bible does when it says “We pass this way only once” and, in so saying, takes the subject out of the realm of science into the realm of genuine history.”

    Unless the later version of the paper contained some significant changes, I don’t see how this could be even remotely interpreted the way Davidson does.

    [1] http://www.jstor.org/stable/133458

    Comment by ivansml— 5 Feb, 2014 #

    • On the other hand, Samuelson admitted defeat in the Cambridge capital debates, but that admission changed nothing among economists holding such assumptions. It was either ignored or explained way.

      It may be that Samuelson didn’t believe that economics was ergodic but just acted as-if for methodological convenience. But what happened in the case of others is another story.

      There certainly seems to be a strong belief in rationality and ergodicity among some economists, regardless of what was actually going on in Samuelson’s mind.

      The point is that neither of these assumptions is tenable factually. Using assumptions for methodological convenience is fine. That’s what modeling is about.

      But then going on to draw sweeping universal conclusions regarding the course of actual events and prescribing policy based on this is certainly unscientific, as subsequent events show through disconfirmation. That, too, is ignored or explained away.

      Comment by Tom Hickey— 5 Feb, 2014 #

      • Samuelson admitted defeat in the Cambridge capital debates, but that admission changed nothing among economists holding such assumptions.

        True. But let’s be honest here. Hardly any heterodox economists have accepted the implications of the Cambridge capital debates either. Pick up any heterodox journal — RRPE, JPKE, Metroeconomica, even CJE, even RWER for that matter — and I guarantee you there will be a macro article that makes use of a quantity of capital.

        Comment by JW Mason— 6 Feb, 2014 #

        • Oh, but the Cambridge Capital Controversy applies to how to aggregate output, consumption and so on too. Not only capital. And you almost never see heterodox articles ignoring these aggregates either.

          Comment by pontus— 6 Feb, 2014 #

          • The CCCs mean that we cannot use consumption and output data? Really? Please explain why, Mr. Pontus, because I think you’re talking through your…

            Comment by pilkingtonphil— 7 Feb, 2014 #

        • Well, they should stop. But the key reason for the CCCs was
          to stop the mainstream from saying that income is distributed along
          marginalist lines. No heterodox economist makes this stupid
          claim.

          Comment by pilkingtonphil— 7 Feb, 2014 #

          • But the key reason for the CCCs was to stop the
            mainstream from saying that income is distributed along marginalist
            lines. No heterodox economist makes this stupid claim.
            The point of the controversies was to figure out how to talk about
            the world in a logically consistent way. You can’t pick and choose
            when to worry about logical consistency based on the conclusions
            you want to reach.

            Comment by JW Mason— 7 Feb, 2014 #

            • I don’t think it was. Robinson later said in the 1970s that it was a waste of time. All she was trying to do was demolish the marginalist distribution argument which, given real world conditions, is self-evidently ridiculous.

              Comment by pilkingtonphil— 7 Feb, 2014 #

    • I don’t see the contradiction. If you accept hysteresis-like phenomena you are not doing ergodic economics. But Davidson et al never suggested otherwise. They just said that most economics assumes such phenomena away which is self-evidently true.

      Comment by pilkingtonphil— 7 Feb, 2014 #

  7. Samuelson was a towering intellect. As Ole Peters says he made conceptual assumptions that were wrong but that is part of science.

    Comment by dwayne woods— 5 Feb, 2014 #

  8. Presumably Samuelson wouldn’t have thought Climate Science, Ecology or much of Biology to be ‘proper’ science. But the alternative to science is not voodoo, as Turing showed (morphogenesis).

    Comment by Dave Marsay— 5 Feb, 2014 #


Sorry, the comment form is closed at this time.

Blog at WordPress.com.
Entries and Comments feeds.