Noah Smith — confusing mathematical masturbation with intercourse between research and reality

13 August, 2016 at 14:15 | Posted in Economics | 9 Comments

There’s no question that mainstream academic macroeconomics failed pretty spectacularly in 2008 …

Many among the heterodox would have us believe that their paradigm worked perfectly well in 2008 and after … This is dramatically overselling the product. First, heterodox models didn’t “predict” the crisis in the sense of an actual quantitative forecast.

64f5d94d9836c6a09b5d2009f0d4634a845bb2d7ba56bbaa16176c2fd0e958c0This is because much of heterodox theory is non-quantitative. Basically, people write down English words explaining their conceptual ideas about how the economy works. This describes the ideas of mid-20th-century economist Hyman Minsky, who wrote books and essays about the instability of the financial system. Minsky, though trained in math, chose not to use equations to model the economy — instead, he sketched broad ideas in plain English …

At the end of the day, policymakers and investors need to make quantitative decisions — how much to raise or lower interest rates, how big of a deficit to run, or how much wealth to allocate to Treasury bonds.

Noah Smith

Noah Smith — like so many other mainstream economists — obviously has the unfounded and ridiculous idea that because heterodox people like yours truly, Hyman Minsky, Steve Keen, or Tony Lawson, often criticize the application of mathematics in mainstream economics, we are critical of math per se.

I don’t know how many times I’ve been asked to answer this straw-man objection to heterodox economics– but here we go again.

No, there is nothing wrong with mathematics per se.

No, there is nothing wrong with applying mathematics to economics.

amathMathematics is one valuable tool among other valuable tools for understanding and explaining things in economics.

What is, however, totally wrong, are the utterly simplistic beliefs that

• “math is the only valid tool”

• “math is always and everywhere self-evidently applicable”

• “math is all that really counts”

• “if it’s not in math, it’s not really economics”

“almost everything can be adequately understood and analyzed with math”

So — please — let’s have no more of this feeble-minded pseudo debate where heterodox economics is described as simply anti-math!

russell_ackoffNo real problem worth solving can be solved without some basic research. Therefore the engagement of faculty and students on real problems yields basic research problems whose solutions are of practical significance. Furthermore, the validity of these solutions can be tested in the most effective way known: in application. This avoids one’s confusing mathematical masturbation with intercourse between research and reality.

Russell L. Ackoff

 

9 Comments »

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  1. Altogether I thought Noah Smith’s Bloomberg column was remarkably dishonest. He puts up a strawman — “Many among the heterodox would have us believe that their paradigm worked perfectly well in 2008 and after” — and proceeds with a laundry list of generic critiques of heterodox models that no orthodox model has escaped. He concludes, “there is currently no alternative macroeconomics waiting in the wings”.
    .
    Yes, we might say in reply, “But is there any workable orthodox macroeconomics on the main stage?” Never mind what may or may not be in the wings — what is occupying the main stage and what justification is there for treating it with respect?
    .
    Smith, in the Bloomberg piece, seems to concede the abject failure of mainstream macro. So, tear up the script, demolish the sets, clear the stage. This show has flopped.
    .
    If, as Krugman has claimed elsewhere, geometric sketches, never mind non-existent “perfect” heterodox models, carry more valid insight and predictive power than ponderous DSGE models, it is past time to move on, to drop the pretence of presumed efficacy.

  2. If I could masturbate mathematically, I certainly would not confuse it with the other kind!

  3. An astrologer uses math and other tools to predict future human events based on the position of the stars.

    Orthodox economics is the ongoing argument about the best mathematical tools to use in predicting future human events based on the stars.

    Lars Syll argues that math alone cannot predict human events based on the position of the stars. We must limit our mathematical conclusions and make much more limited claims about relationship between human events and the position of the stars, understanding that all is uncertain.

    Noah Smith says, “Your astrology is useless unless you make very specific claims like I do.”

    The truth is that the position of the stars have no bearing, mathematical or otherwise, on human events.

    • Noah Smith’s implicit philosophy of science does seem to me to be a form of pseudo-physics, where it is somehow possible to predict people’s future choices from present conditions, as if they were planets orbiting the sun in obeisance to Newton’s laws of motion and gravity or billiard balls following a strict geometry while bouncing around a perfectly flat table after being precisely struck by a skilled player. Trained in actual physics, Noah Smith once seemed more resistant to the mythology of pseudo-physics that pervades the mainstream, but he needs the myth in this instance to justify his rhetorical pose of “there is no alternative” in the apparently “objective” frame of Popperian Science, where we test theory against reality by making predictions and evaluating the measured deviation quantitatively.
      .
      The fundamental issue, which Noah Smith side-steps entirely, isn’t about math or pseudo-physics. The fundamental issue is whether the economy as a social and political system of distributed decision-making can be considered efficiently self-regulating, at least within the bounds of a monetary policy of controlled interest rates on government bonds.
      .
      A self-regulating economy might be like the weather — unpredictable and chaotic within bounds defined as the climate. The argument is that underneath the apparent chaos, there are forces and institutions always bringing the chaos back to some efficient norm, and any deliberate and centralized response to a particular extreme event is as likely to further destabilize the system as to improve its functioning.
      .
      The highly mathematical modeling exercises of theoretical macroeconomics — especially the DSGE modeling — aren’t aimed, contra Smith’s implication — at producing accurate quantitative predictions. They use math to try to prove a qualitative proposition: that the economy is efficiently self-regulating despite the appearance of dynamic instability.
      .
      The mainstream consensus, among so-called New Keynesians, is that the economy is, in the main, self-regulating, but not quite efficiently so. Consequently, ad hoc modifications and qualifications to the model of self-regulating efficiency improve the correspondence to the actual economy’s behavior, or at least to stylized caricatures of the actual business cycle. In this view, the economy is subject to exogenous “shocks” to which it will respond, adjusting in the right general direction, but more slowly than is efficient, so appropriate policy interventions can aid the adjustment and “help” the economy to perform better.
      .
      The admitted failure to “predict” the GFC of 2008 and the subsequent prolonged recession might be better characterized as a conspiracy to cause this state of affairs. The GFC of 2008 wasn’t a matter of getting a quarter-point adjustment in Treasury rates wrong at a meeting of the Federal Open Market Committee, because the staff served up a misleading DSGE-based forecast. (As far as I know the staff did not serve up a DSGE forecast in 2005-7 and if they did, the Committee members did not take it seriously — no one takes this b.s. seriously as quantitative “science” and looking at an actual DSGE model forecast wouldn’t encourage doing so.) The GFC of 2008 was a consequence of failing to regulate adequately mortgage lending and financial securitization. In part, because economists working off the laissez faire mythology endorsed deregulation and regulatory negligence.

      In 2005 and after, as the housing bubble mounted toward $2 trillion, economists debated whether an objective observer could even conceptualize a bubble, because efficient markets taught us never to question the ways of the market god in setting prices. It is idiocy to think one can do monetary policy in the abstract, modeling the reaction function of the Fed’s Open Market Committee, and just assume away the problems of banking and financial market regulation as solved — or the source, I suppose, of “exogenous” shocks to the system to which the system will adapt spontaneously and with regard to which policy may improve or speed the adjustment. This is mainstream economics, or, in another context, this is your brain on drugs.
      .
      The alternative Noah denies is not a perfect predictive model. It is to admit that the economy is something we do, even if it sometimes feels like something that just inexplicably happens to us. And, the economy doesn’t regulate itself in any meaningful sense. We regulate our own behavior, coordinate our cooperation thru institutions peopled by people, not equations. Very imperfectly indeed.
      .
      There’s some pretty sophisticated math in support of the proposition that the economy could not possibly be a self-regulating system akin to a Walrasian system of markets approaching general equilibrium in price, as implicitly imagined in DSGE models. But, ultimately the alternative to mainstream macroeconomics is to just say no to the premise of a self-regulating economy and to study, not wholly unrealistic analytic models, but the history and functioning of the actual institutional economy.
      .
      Admitting that the economy is something we do does seem an echo of Cassius warning Brutus, “The fault . . . is not in our stars,
      but in ourselves, . . . “

      • At a meta-level, I just wonder what sort of exogenous shock is required to end the stalemate. Smith, Krugman, et al say “If you don’t assume equilibrium/self-regulating/etc. then you cannot do the useful things that we do.”

        The heterodox seem to respond, “Yes we can, at least, sort of.”

        When does someone like Keen start saying, “That ‘useful thing that you do’ is not a thing that can be done.”?

        Smith’s post is pegged to something by Frances Coppola. Maybe the shock needed is an indirect attack, focused on the male domination of economics. Maybe economics gets to its Jane Goodall by insisting on more professorships for people named Jane?

  4. In general, I think the worst mistake economists made was to apply math to theories. It led to gross oversimplifications like utility/profit maximization that are not true. It also led to a lot of useless theoretical papers, and tortured econometrics with error properties that are so complex as to defy correct analysis.

    As Buffett says, “I would rather be approximately right than precisely wrong.” That’s what economics is. Even worse, other social sciences are now following economics into the mathematics pit, rendering them worse than before. Current economics is a pretentious mess of overaggregated data crammed into models that pretend to correspond to reality.

    Economics would be better off dropping the math.

  5. What algorithm was there – is there – for calculating the moral risk component of micro and macroeconomics?

  6. Posts like Smith’s become very tiring. These people not seem to understand that many things relating to social and human behaviour are not best understood algebraically and are not usefully quantified. I really do not know what is wrong with them. One has to question their mental well-being.

  7. I usually ignore anything written by ‘Noah Clue’.


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