Mistaking Beauty for Truth

By Sean Carroll | September 4, 2009 10:53 am

Everyone’s talking about this Paul Krugman essay on where economics, as a discipline, went wrong. Partly, “going wrong” means the failure to appreciate the risks in our financial system, and the corresponding failure to predict the crash we’re currently trying to deal with. But from an insider’s perspective, something else has happened: an uneasy consensus between two different approaches to economics has been shattered. One, which Krugman labels the “saltwater” approach, is associated (in the U.S.) with some variety of post-Keynesian analysis, generally identified with some willingness to have the government intervene in the economy over and above the Fed’s control of the money supply. The other, the “freshwater” approach favored by the Chicago School and other inland economists, is more purely free-market and non-interventionist. (Truth in advertising: I am not an economist.) These camps could more or less get along when everything was going fine, but have dramatically different reactions to a crisis. To the extent that you find freshwater economists claiming that unemployment is currently high, not because there aren’t many jobs, but because there are too many incentives for people not to work.

One of the reasons it’s a great essay is that it’s a wonderful example of popularizing science. You can debate all you like about whether economics counts as a science, but there’s little doubt that Krugman does an amazing job at explaining esoteric ideas in non-technical language, and is so smooth about it that you hardly realize difficult ideas are even being discussed. I wish I could write like that.

One part of the essay worth commenting on, or at least musing about, is the punchline. Krugman thinks that a major factor leading to the failures of economics to understand the mess we’re currently in was the temptation to think that beautiful models must be right.

As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

Without knowing much of anything about the relevant issues, I nevertheless suspect that this moral might be a bit too pat. Sure, people can fall in love with beautiful theories, to the extent that they overestimate their relationship to reality. But it seems likely to me that the correct way of understanding all this, once it’s properly understood, will look pretty beautiful as well. General relativity is widely held up as an example of a beautiful theory — and it is, when understood in its own language. But if you put the prediction of GR in the Solar System into the language of pre-existing Newtonian physics (which you could certainly do), it would look ugly and ad hoc. Likewise, Newton’s theory itself is quite elegant, when phrased in the language of potentials on a fixed spacetime background; but if you express the theory in terms of differential geometry (which you could certainly do), it looks like a mess. Sometimes the beauty/ugly distinction between theoretical conceptions is more a matter of how well we understand them, and less about their intrinsic qualities.

So my counter-hypothesis would be that it wasn’t beauty that was the problem, it was complacency. If you have a model that is beautiful and works well enough, you’re tempted to take pride in it rather than pushing it to extremes and looking for problems. I suspect that there is a very beautiful theory of economics out there waiting to be developed, one that understands perfectly well that individuals aren’t rational and markets aren’t perfect. One that has even more impressive-looking equations than the current favored models! Beauty isn’t always a cop-out.

CATEGORIZED UNDER: Science and Society
  • http://mengbomin.wordpress.com/ Meng Bomin

    Beauty isn’t always a cop-out.
    Ah yes, but I suspect that it is more of a cop-out when it comes to economics, which works with ridiculously heterogeneous fundamental units of analysis (individual humans) in environments too complex for the methods of the (more truly scientific) natural sciences like physics to be practical tools. No wonder so many financial journalists blame the attitudes that led to the crash on physicists coming to Wall Street.

  • Aaron Sheldon

    I suspect not.

    There will never be a single mathematical theory of economic behavior. Why? Because an economy is the means by which humans, or groups of humans act on the perceived value of materials and actions. So a mathematical theory that explains economic behavior would have to, by definition, predict the human perception of value.

    There is however hope for solid empirical theories based on the work of psychologists and sociologists, in experiments that have elucidated the statistical connection between the demographics of people and their perceptions.

  • http://www.quantumdegenerates.blogspot.com Andy

    Mechanics of the solar system is a simple system in the sense that there are only a few interacting components (it is still chaotic). I guess that economics is in some sense like statistical mechanics, in that there are a huge number of components to be averaged over. However, we are safe to assume particles in stat mech are identical and have predictable properties. I think here our analogy with physics breaks down. Has anyone ever been able to model human behaviour sufficiently precisely? Humans do crazy unpredictable things, and I think this will always be a problem for economics.

  • Ahcuah

    From my understanding of Mandelbrot’s The (Mis)behavior of Markets, all these models use Gaussians. But most economic data doesn’t fit Gaussians, but long-tail curves like 1/(1+x^2). So, why do they use Gaussians? Because they can do the calculations with Gaussians. Bad idea.

    Also, with supercomputers these days, I wonder if they couldn’t just accurately model the entire economy. It only takes about 300 million individual fundamental elements, along with additional things like corporations, governments, markets, transporation, etc. Surely, one could find a mix of characteristics of greed, fear, entrepreneurial spirit, inertia, etc., let the thing run, and see if it matches reality at all. And if not, vary the mix.

  • Steve B

    I suspect not as well. The laws of physics seem to be invariant with respect to time: we can, for example, model the evolution of the universe from very early times to the present and the results look very much like what we see today. I suspect that if the laws of physics changed with time this would not be the case.

    Markets, however, are not stationary: participants innovate, learn and evolve (at least over a business cycle or two). Markets also aren’t closed systems: their behavior is subject to external events which might have nothing to do with the assets being traded in the markets at all, whether that’s varying levels of government regulation, events like 9/11 or something else entirely.

  • Tom Hickey

    The fundamental error of economics as a science was trying to emulate the hard sciences and find an “elemental” factors on the basis of which a theory could be constructed. The elemental factors on which economics settled were rational expectations of a representative rational actor having perfect knowledge and participating in markets that are inherently efficient. This looks suspiciously more like the world of physics rather than the real world of people interacting socially, politically, and economically. Of course, it blew up with these asinine assumptions that have been disproved by cognitive and behavioral science. That’s just not the way human beings are wired, and it isn’t how they behave. Even the so-called law of supply and demand are not real laws as Keynes showed by introducing the concept of “stickiness.” Stickiness is similar to friction in physics, but there is no coefficient of stickiness.

    The idea that now people are unemployed because of perverse incentives or laziness would be ludicrous if it weren’t so insulting. These professors should be required to get out the ivory tower and work at Walmart for awhile to learn what the real world is like, or live in a tent city.

  • http://www.beezernotes.com beezer

    Go to CSPAN and watch a Senate or House Committee meeting. Economics has to deal, in part, with this type of very unpredictable and often very irrational behaviour.

    If you’re looking for beauty here, and one can find a sort of odd form of beauty here, it definitely won’t look like science. Much of the time, it doesn’t even look like our Constitution.

  • http://occamsmachete.com Pat Ferrel

    I think Tom is on the right track. I wonder how much of the problem with mathematical economic models comes from the fact that they are really sociological at their root. Predicting humans and when mass hysteria will kick in is to predict an incredibly complex thing that involves speed of communication, the scariness of the communicator, and what other things are in the news. I wonder whether economists sometimes loose track of how much is science and how much is human behavior.

  • Ramanan

    THE THEORY EXISTS. SORRY TO SHOUT BUT IT SEEMS TO ME THAT THIS IS THE ONLY WAY TO REACH OUT TO PEOPLE BECAUSE MAINSTREAM ECONOMICS AS IT EXISTS IS A BIG DISGRACE.

    There are these bunch of people mainly associated with the Levy Institute http://www.levy.org You can find it in the work of Wynne Godley and Marc Lavoie. They have written a beautiful book called “Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth ” http://www.amazon.com/Monetary-Economics-Integrated-Approach-Production/dp/0230500552 Unfortunately you cannot preview the book on google books or any other site. However the following may be helpful.

    I swear on my knowledge of General Relativity and Quantum Field Theory that this is what you may be wanting to see for Economics.

    The subject is called Post Keynesian Economics. The logic of this subject is as tight as any branch of science. It does NOT assume “agents” being rational or maximising any profits. It divides economies into households, firms, banks and the government. Instead of agents maximising, it uses something contrary – money as buffer and products as buffer instead of inventories.

    There are two starting points in the approach – government does not need to finance itself and issues bonds for interest rate maintenance and secondly “loans create deposits”

    The first one is totally opposite of what a “neoclassical” would tell you. But in fact it is perfectly logical. Deficits run an economy. Without deficits, an economy would collapse. Any transaction in the private sector creates both assets and liabilities. The government spends and takes the liability on itself so that the private sector grows. I wish I could write more here :(

    The second one is hard to believe it is contrary to a Loanable funds market which is what economists think exists. It seems to show that banks create money. The approach to study is called the “Engoneous money approach” In fact it is true. Again, I can write more on this but space is an issue here and this is a huge subject.

    Can I recommend you visit my favorite blog – Billy Blog – the index is available at http://bilbo.economicoutlook.net/blog/?page_id=1667

    I also recommend

    http://neweconomicperspectives.blogspot.com/2009/08/endogenous-money-approach.html

    http://neweconomicperspectives.blogspot.com/2009/08/primer-on-government-surpluses.html

    the person’s name is Randall Wray and he has really figured out stuff in the most elegant manner.

  • Ramanan

    (Continuing .. )

    Sean,

    The approach of Godley and Lavoie is the most logical approach to Economics. Firstly, they are consistent right from the start. They use – what they call – Stock Flow consistent approach. Stock is like stock of money, stock of debt etc. Flow is whatever happens in one period. e.g., consumption, investment (on capital goods), government spending for the period, tax for the period etc. (“I found out what economics is; it is the science of confusing stocks with flows” – Michal Kalecki)

    They divide an economy into households, firms, banks and the government. Now ‘everything comes from somewhere and everything goes somewhere’ is their elegant conservation law. Its different from money being conserved because it is not (Econophysicists don’t get it unfortunately). This is the transactions flow matrix whose rows and columns sum to zero. There is also a balance sheet matrix which is the full balance sheet at the end of every period. Here too all rows and columns, except one row sums to zero. Thats the net worth of the economy – the “tangible capital” This is their “social accounting matrix”

    Now, they never assume anyone is rational or that anyone maximises something. Instead e.g., firms have a target and their expectations are adaptive. Households too have adaptive expectations and money deposits are like “buffer”.

    They start from “sratch” – everything comes from somewhere. The economy kickstarts by the governments spending and reaches firms and then households. Households consume and give the money back to firms and save as well. There is no market for “loanable funds” – banks lend and then look for reserves at the central bank. they do not use the money “given” by households.

    One may ask – if the government is not constrained why does it tax – the answer is that it reduces “aggregate demand” else prices will rise. Now coming to prices, in Post Keynesian Economics, there is no market clearing mechanism (demand-supply) – producers keep enough supply so that the demand is satisfied. (Ever bargained with Steve Jobs). However if consumption is high, producers’ inventories will clear fast and instead of producing more they increase prices. Hence governments cannot solve all the problem at one go.

    This is a very short write-up. Sean – I will be very happy if you or someone reading this gets interested. I know what you are talking of precisely, since I had been in physics myself, I can relate to your post.

    Another important result of this school is that the so called “NAIRU” is a hoax. It is simply possible to have full employment unlike what an economist tells you. This is because of the way government spends in a modern economy which is different from the way it could spend in the Gold-Standard and the Bretton-Woods eras.

    Thanks. again – I know precisely what you are talking of – one doesnt need a jazzy theory for economics with path integral summed over different topologies and Lagrangians but at some level you may want a theory to be very logical and yet be “elegant”. Post Keynesian Economics is such a subject. (Not to be confused with Keynesian or New Keynesian)

    I end my comment here pointing to the best prediction of the crisis http://www.levy.org/pubs/sevenproc.pdf – Seven Unsustainable process by Wynne Godley – everything in that paper came true. It was based on the CBO projections and the “crash-landing” got delayed by 2-3 years because the Bush government ran a bit of deficit for a while. But it is simply the best prediction. Find me a better one and I will go to the Himalayas. (I do not write like this – not my personality but have to resort to this because Economists do not seem to understand simply accounting and only others can save the subject)

  • angusmcpresley

    Howard Stern has beautiful models on his show all the time, and judging from their responses, I find it hard to believe that anyone would ever think they were right about anything…

  • hackenkaus

    It’s curious that the most obvious parallel with physics has not been mentioned: string theory, which certain influential physicists have been telling us for years must be true because of it’s inherent mathematical beauty. And string theory is also similar to freshwater economic theory in that it is rather un-predictive, and that virtually any set of observed facts can be incorporated post-hoc.

    The above comparison is a bit unfair to string theory, however, in that it is still possible string theory is correct.

  • http://physicsmuse.wordpress.com Sandy

    Government intervention is more than an alternate idea. Its a huge part of the economy that is impossible to model, even though it is way more predictable then human economic behavior.

  • Tim Bartik

    As an economist, I agree more with Paul Krugman’s argument than with Sean Carroll’s.

    It may be true that in the “long-run”, economic models that incorporate market imperfections can have just as much if not more mathematical rigor than economic models that assume markets work perfectly. Of course, as Keynes famously stated, in the long-run we’re all dead.

    In the short-run, in general it is much harder to rigorously explain many market imperfections in the context of a model. If such a market imperfection cannot with present tools be rigorously modeled, you have two options:

    (1) Simply assume the market imperfection is there and continue with the rest of the model;

    or

    (2) Assume the market imperfection does not exist (because we cannot explain why it should be there in a rigorous fashion), and go on with the model.

    The second approach is perceived by some economists as more “rigorous” and more “scientific”. Other economists would disagree, and would argue that you need to include in your model a market imperfection that is empirically observed to exist. Just because you cannot rigorously explain something does not leave you free to ignore it.

    So, I think Paul Krugman has identified a problem with some economists’ philosophy of what is the most scientific form of economics. I have no idea of how this methodological debate would be perceived by a physicist. I’m not even sure if there are analogous issues in physics.

  • greg

    Sounds like a perfect description of string theory……

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  • http://scienceontap.blogspot.com ARJ

    It’s worth noting that there were several economists (and just plain observers as well) who DID foresee this collapse coming, but their timing was often off (some had been predicting it for 4-6+ yrs. before it finally came), and their voices were drowned out by the din of the Pollyannas. They saw through the false “beauty” that mesmerized others, and that Krugman accurately describes. Sean makes an interesting point in speculating that an even more beautiful mathematics may yet account for it all, though I’m not sure that math is even much required to explain the results of deregulation + human greed.

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  • Tim

    Have you ever read _Debunking Economics_?

    It’s not a matter of complacency with a beautiful mathematical theory. The math of economics is a sick joke. It’s more a matter of forgetting that a mathematical model, no matter its beauty, is *useless* if it does not actually model.

    And economic models don’t (model, that is). So Krugman is exactly right. If anything, he’s understating the case. Economists* want economics to be a “hard” science so badly that they’ll accept patent absurdities in their models, just so long as they get their math, so as to separate themselves from the unwashed masses of the social sciences.

    And I’m not exaggerating — the holes in modern economic theory are insane. It’s as if General Relativity started out by positing: “we shall take it as given that no objects have mass…” and then building a nice model from there.

    * Of course, not all economists. But there is really no economic discourse, outside of the broken kind, that gets any real play outside high academia, from what I see. And the kind of economic thinking used in policy-making is 100% of the broken variety.

  • http://www.cthisspace.com Claire C Smith

    Maybe there should be a meta-mathematical model for how applied mathematics is used, in economics in particular. Maybe there already is. If current maths has a difficult route ajusting to unpredicatble random variatons in a classical system, of all of the systems used, economics is the best one to study. It seems that in Economics, as an interesting and very relevant subject, it includes a lot of human behaviour, as mentioned here, combined with concrete systems. What about breaking this up into two parts. 1) Regardless of the subject, what can be learned from how we combine predictive math theory with ones less so. Then 2) In Economics, as an example, how it can be used. The reasoning relationship between the two parts could be too great though. Maybe that’s part of the problem.

    Claire

  • chemicalscum

    Economics is not a science it is ideology. When you hear of an economic theory ask “cui bono” ? The other Nobel prizewinning liberal economist Joseph Stiglitz is quite open about that:

    “there is no theory backing the doctrine of unfettered markets. That’s just an ideology that serves special interests”

    Krugmann touches on it when he says.

    “The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at…”

    The looney mathematical models are not beauty, they are just propaganda.

  • Just Learning

    The problem with GR is that it is a low energy approximation of large scale systems, and as such is perfectly useless for almost every human endeavor of immediate consequence. It does provide a boundary for relevant physics, but for the most part it can be effectively ignored (and don’t confuse GR with Riemannian geometry). As such, it represents a perfect failure of science because it gives the appearance of utility without actually requiring understanding of the universe.

  • Ramanan

    Economists don’t know simple bank reserve accounting.

  • http://lablemming.blogspot.com/ Lab Lemming

    Is there a selection effect occurring, where people who suspect the fundamental laws of physics to be ugly and stochastic choose to leave theoretical physics?

  • JKH

    Neoclassical calculus and geometry is the CNBC of mathematics. There is nothing beautiful or elegant about it. It is noise.

    Algebra is the future of economics.

    It’s also the basis of Post-Keynesian logic.

  • http://www.geocities.com/CapeCanaveral/Hall/2638/1MrMorganNewPhysics.doc lfmorgan

    way too much playing with words is killing the internet! Hey! There are better things we can all do!

  • http://www.aitj-co.com/gcsgz5/blog Gordon Stangler

    While I am a firm believer in beauty in mathematics, I feel that it is not the answer, or the theory that requires beauty, but the questions. Are the questions you can answer simple, elegant, and deep? Are they new ideas, or rehashing the same material answered in other theories, just recast in new mathematics?

    Beauty in mathematics and physics can get us far, but it is not the ultimate decider of truth. Experiment is.

  • jr

    Did Krugman predict it ? Or is ne ‘not even wrong’ .
    They do not even pay attention to common sense – as in
    all those advertisements on TV for big loans, regardless
    of whether you are in jail, are broke, etc. Multiply that
    by millions and you have a trillion dollar problem.

  • Apthorp

    In “Where Mathematics Comes From” Lakoff takes on the “romantic myth” of mathematics to demolish the platonic assertion that numbers are external and real that underlies the notion articulated by Keats that beauty iff truth. Krugman’s “romance with the idealized market” comment echoes Lakoff . Supporting a beautiful concept with math makes it true in the Platonic world.

    Chemicalscum’s point that economics reflects ideology make a good deal of sense if you assume that any mathematical model derives from concepts in embodied brains. Math as the invariable, rigorous “exists in the universe” truth reflects pretty well on the economic conceptualization. However, If both have conceptual foundations the harder work of establishing the mappings needs to be done. Unfortunately doing this work may expose the ideology and/or outright flim-flam.

    Physicists, string theorists among others, seem to get Lakoff’s point. It’s hard to find someone knowledgeable who claims string theory is true, or even representative of reality. It might be. Conceptualizing the idea by following the beauty of the math or adding new conceptualizations to existing ones move the project forward. But saying it mathematically or scientifically doesn’t make it true.

    It’s worth noting that some mathematicians and economists are far from the only or worst caught in the platonic romance. Consider the sad case of literal biblical creationists who embrace the romance so completely that to deny that their beliefs are scientific (begotten not made son of math?) is to deny them personally.

  • Haelfix

    I disagree with Krugman (as usual). The freshwater economists had a lot of impressive data and empirical agreement with models in the 70s and 80s. This is why it became such a huge fad in the biz and absolutely not vacuous (incorporating game theory and other beautiful mathematics). Meanwhile it was the post Keynsian models that seemed incompatible with data at the time (and were subsequently tweaked).

    People who disagree with the efficient market scenario have a huge burden of proof on them, it makes after all, explicit predictions. Assume that it wasn’t the case, then you could in principle gather sufficient information to consistently beat the market. Do you think there is a behavioral crisis in the market? Fine, then put your money down, short the stocks (or whatever market you choose) when it becomes appropriate in your model and proceed to make millions.

    Alas, no one has consistently had a model that does this longer than some standard deviation or two, and all have failed abysmally over say 20 year intervals, even mutual funds seem to underperform say generic indices over time. So while no one actually takes the assumptions too literally (its more like imperfect markets with inpenetrable fog), its sort of like a thermodynamic limit which is a surprisingly good approximation to reality in many cases.

  • http://eskesthai.blogspot.com/2009/06/follow-up-to-economic-manhattan-project.html Plato

    Sean said:

    So my counter-hypothesis would be that it wasn’t beauty that was the problem, it was complacency. If you have a model that is beautiful and works well enough, you’re tempted to take pride in it rather than pushing it to extremes and looking for problems.

    Complacency on whose part?

    If seen from certain perspective, capitalistic approaches might deem necessity of action as if “revenues were to be affected,” while from an electoral position, people might think and wonder who is supporting governmental infrastructure?

    This then might filter down to who and what is necessary for economic purpose(dynamics) in order to sustain, and then evocatively it had always been an ole thinking machine who thought to say this form of economics has always been beautiful, while in essence, not much had changed over the many years since the thirties.

    Steve Hsu had some reporting to this end.

    Best,

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  • http://arunsmusings.blogspot.com Arun

    Haelfix wrote: “The freshwater economists had a lot of impressive data and empirical agreement with models in the 70s and 80s. ”

    Krugman’s answer to that point would seem to be: “To be fair, finance theorists didn’t accept the efficient-market hypothesis merely because it was elegant, convenient and lucrative. They also produced a great deal of statistical evidence, which at first seemed strongly supportive. But this evidence was of an oddly limited form. Finance economists rarely asked the seemingly obvious (though not easily answered) question of whether asset prices made sense given real-world fundamentals like earnings. Instead, they asked only whether asset prices made sense given other asset prices. Larry Summers, now the top economic adviser in the Obama administration, once mocked finance professors with a parable about “ketchup economists” who “have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup,” and conclude from this that the ketchup market is perfectly efficient.”

  • http://arunsmusings.blogspot.com Arun

    Any physicist can see the fallacy in this argument by Haelfix:

    “People who disagree with the efficient market scenario have a huge burden of proof on them, it makes after all, explicit predictions. Assume that it wasn’t the case, then you could in principle gather sufficient information to consistently beat the market.”

    No, the market just has to be sufficiently chaotic for no amount of information to be sufficient to be able to consistently beat it.

  • Aaron Bergman

    I think Haeflix is confusing the various forms of the efficient market hypothesis. I guess the weak form has problems, but the strong form seems unsupportable.

  • Jdhuey

    What made Newtonian physics work so well was that it idealized the physical processes – frictionless surfaces, perfectly elastic collisions, etc. ; it separated the pristine ideal from the messy real. In some situations, like celestial mechanics, the ideal dominates over the messy; conversely, for most Earthbound purposes it is the messy that dominates. So when it comes time to translate the theoretical into the practical that messy real part has to be considered – that is the realm of engineering. The tack most often used is to figure out a way to reduce the impact of the messy part and make whatever you are doing operate as close to the ideal as you can, hence ball bearings and lubrication.

    For economics systems there is much much more messy parts than ideal parts – and while there are lots of Economic Theorists out there, there seems to be a dearth of economic engineers. (The current economy could certainly use a Scotty about now.)

  • Ramanan

    Jdhuey,

    I cannot disagree with you. However, there are macroeconomic constraints which hold to the last penny. Very powerful conclusions can be made from these identities. The identity is

    G – T = S – I + M -X

    comprising the Government Spending, Taxes, Saving, Investment. iMports and eXports. It says if imports are much higher than exports, and if the LHS is small then private net saving (S-I) will be less or negative. Economists simply do not understand this accounting identity.

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  • http://www.kmellis.com Keith M Ellis

    Relativity is among the worst possible available examples for an idealized mature science. It’s probably the last great scientific discovery which will ever be built largely from reasoning from first principles (with numerous experimental clues, but still). It’s beautiful and elegant because it can be. Very little contemporary science has this luxury.

    A better example would be that other profoundly successful modern physical theory, the Standard Model of particle physics. It’s not beautiful or elegant. But it’s both mature and true.

    It’s important to understand that there’s a good reason why physics and math are the most mature and most successful sciences: they’re easy. That’s the low-hanging fruit. The natural phenomena that we restrict to the domain of the science we call “physics” are—as natural phenomena go—uncluttered, simple, and easy to abstract because they are already close to abstraction, anyway.

    That said, the last hundred years have seen the development of analytical techniques and tools which have allowed complex systems to be studied usefully in abstraction—the rise of the science of statistics is certainly the best example of this.

    And so, yes, it’s both possible and likely that certain characteristics of economies will be described by beautiful and elegant theories. But not reductively so, which is what the comparison to relativity brings to mind and is certainly the quixotic hope of certain varieties of economists. Economists would be doing better to emulate biologists than physicists. They’ll learn this sooner or later.

  • Haelfix

    Arun, thats sort of the point. The EMH was originally stated as a sort of random walk model. That doesnt say that share prices are not wrong or always in equilibrium, only that no participant can actually systematically pick out the innefficiences and profit from them on average.. eg, no information exists in the historical record, behavior of humans or accumulated time series such that you could price them better (read the only extra information is inherently chaotic). The recent stock crash is a perfect example of this. You had a lot of computer analysis that had been consistently beating the market for about a decade, only to have their gains completely wiped out in one downswing.

    In order to beat the *weak* form of the EMH (which is what most people consider close to being valid), you have to outperform an index with some deterministic model over a long timeframe.

    No one has yet to accomplish that, despite tens of thousands of attempts.

    People have tried to model the market as small pertubations away from the ideal, with varying innefficiences persisting longer than relaxation time scales. Others have tried to put in the ‘animal spirits’ by hand, so we are talking about a market that is subject to *momentum* according to some behavioral finance model, business cycle or boom/bust period. Also failed to beat the market. And so on and so forth.

  • Tom Hickey

    The present state of economics can be compared to the three body problem. While this presented a difficulty in classical physics, physicists did not sweep it under the rug but pursued it, in spite of the difficulties. On the other hand, economic models typically rely on ceteris paribus, even though keeping all things equal in a dynamic system is not possible. This is like solving for two bodies “with anomalies to be ignored for the purpose of simplification.” As Ramanan observes, until economists shift from easily to handle stocks to difficult to model flows, economics will remain in its infancy. In other fields this has been the transition from emphasizing structure to focusing on function. For example, in biology and medicine, the body is not very well modeled as a machine. A living organism is more than the sum of its parts and their relative positions. Treating a person is not like fixing a car.

    Of course behavior is messy, but one doesn’t get around this by pretending it is not. Cognitive and behavioral scientists are working on this, and there are maths that are applicable. Interesting research reveals that cities resemble brains in communications flow. Markets likely do, too, since brains generate them. As we learn more about how human beings operate neurologically, we are likely to be able to model economic conditions better than we are doing now — and having to pay for.

    As George Lakoff has observed, most are still captured by the 18th century idea of disembodied reason and are thereby misled by a concept that cognitive science has disproved. Unless we update out thinking, we are going to be biased by reinforcing outdated neurological pathways that have become set through a process of miseducation.

  • Tom Hickey

    Interesing article by Barry Eichengreen on where economics went wrong (it didn’t really, the people using it did) and where it is heading (inductive rather than deductive).

    The Last Temptation of Risk

    Moreover, readers of Karl Denninger’s The Market Ticker, ZeroHedge, The Baseline Scenario, and similar blogs know that a great deal if not most of the reason for the crisis (and the correspponding “crisis in economics”) has little to do with economics and everything to do with unethical and even fraudulent behavior, capture of the state by a plutocratic oligarchy, intentional mispricing of risk, and other shadow factors leading to systemic breakdown. Where there is money, there will be cheaters and crooks in suits. No amount of modeling can overcome these kinds of problems, anymore than economics can anticipate exogenous shocks.

    Check this out:

    A Tale Of Two Capitalisms: Research Into Homicide Rates And The Link To Political Economies

    Hall lays most of the responsibility for higher crime rates at the door of the neo-liberals who claim competitive individualism and greed can be stimulated and harnessed to create wealth. That might be true, he argues, but it also corrodes our ability to empathise with others.

  • Apthorp

    “Relativity is among the worst possible available examples for an idealized mature science. It’s probably the last great scientific discovery which will ever be built largely from reasoning from first principles”

    I might not be time to, metaphorically, close the patent office quite yet. What, exactly, are first principles? The axioms of a theory seems like a good guess, like F=ma. Reasoning from them would give the exposition of that theory. What relativity did was create some new ‘first principles’ by looking at the problem in a different way.

    The pattern of relativity is one that ought to repeat: given a theory, what doesn’t it cover? what doesn’t it get quite right? The big advances are in changing or extending what one might think of as first principles in some way. There seems no reason why molecular biology couldn’t produce similar effects.

  • Kuas

    Efficient markets imply no free lunch, but it does not follow that no free lunch implies efficient markets. Haelfix and numerous freshwater economists seen unable to grasp this simple logical truth.

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  • http://scienceblogs.com/transcript Alex Palazzo

    Beauty?

    I think that too many individuals mistake beauty for insight. What makes general relativity so “beautiful” is that it leads to a deeper insight, in this case that the laws of physics are the same in every frame of reference. With this one assumption everything falls into place. This one assumption helps us to better understand all the details that fill our everyday life.

    What insight has the Chicago School of economics provided? That the government is bad? In fact their simple minded view is a sickness that purveys libertarian thought. Instead of explaining all the details of our lives it simply ignores them.

    Sure a simple view is easier to comprehend, and it may be beautiful (on paper), but it anything but insightful.

  • jr

    your model would have to deal with the fact that after some time
    people learn to game the system. Then your model is worthless
    for predicting anything.

  • Just Learning

    GR is not beautiful. It is a perfectly ugly theory. The assumption of general equivalency is a brilliant condition to place on the universe that completely breaks down at predictable limits. That GR can provide predictions of those limits is truly remarkable, but GR itself gives us a false sense of confidence. It convinces us that we have an understanding of physics when in reality we are poking around in the dark turning little knobs that we don’t understand.

    What GR tells us is that below a certain energy scale, if we make the assumption of general equivalence, we can reduce the number dials that we need to take into consideration. So while general equivalency is a brilliant assumption, the product of that assumption is a theory that does not have the power to explain much of the phenomena of the universe.

  • http://home.comcast.net/~djmpark/index.html David Park

    As far as I can tell, Krugman’s principal message is that we should return to the lessons of classical Keynesianism, which seems to boil down to more fiscal stimulus by the central government. (I thought that Keynes theory was originally counter-cyclical and I don’t know whatever happened to the ‘counter’ part because it seems that for the last 70 years or so government has always spent as much as it could get its hands on.)

    Krugman gives a short history of macro-economic theory “From Smith to Keynes and Back”. But he leaves out an important economic school of thought that had a lot to say about business cycles, which correctly made important predictions, and which does have a rational and understandable view of economic affairs. That is the Austrian school. (Ever since reading Karl Popper I hate to advocate ‘schools’ of thought because they should be assimilated and not simply defended in a static form – but these guys haven’t been assimilated at all.)

    http://en.wikipedia.org/wiki/Ludwig_von_Mises

    http://en.wikipedia.org/wiki/Friedrich_Hayek

    http://en.wikipedia.org/wiki/Austrian_economics

    So how do these people differ from Krugman and Keynes?

    For one thing they don’t much believe in classical mathematical models of the economy. They don’t think the economy is anything like classical mechanics. They claim that economies are just way too complicated to model or simulate in a classical manner. They think that economic actions spring from individual human actions (why von Mises titled his major book ‘Human Action’) and to simulate an economy you would have to essentially simulate the behavior of a large set of neurons in each person’s brain in addition to other things. Course-graining doesn’t work well.

    This idea of the Austrians is also boosted by some modern ideas of computation. An interesting book on this is ‘The Lifebox, The Seashell, and the Soul: What Gnarly Computation Taught Me About Ultimate Reality, The Meaning of Life, And How To Be Happy’, by Rudy Rucker. This has quite a bit about Stephen Wolfram’s ideas. The idea is that we can view the world as a computation and sub-computations. Most of these computations are what he calls “Gnarly”. Basically, a gnarly computation is one that does not have a shortcut to the answer. With non-gnarly computations, like classical physics say, one can derive formulas that give the answers. With gnarly computations one has to go through the whole messy detail step by step. There are no shortcuts. Simulating an economy is almost certainly a gnarly computation.

    There is certainly a difference between Krugman and the Austrians when it comes to markets and prices. The Austrians do not believe there is such a thing as an objective value of something that should underlie its price (such as the amount of labor that went in to make it.). Prices represent subjective values and there may even be many prices existing for the same object or service. But, more importantly, prices (including interest rates) represent information about what people are willing to do. And that is why they put a great emphasis on free markets (and freedom in general!). People cannot reasonably plan their actions without that information. On the other hand Keynes and Krugman see markets as “a casino” and “irrational” and crazy and generally they don’t see them, and the “information” they convey as much worthwhile.

    (There is an old cold-war joke. An American and a Russian General are conversing. The Russian says: “When the entire world except New Zealand is Communist…” The American interrupts, “What do you mean? Why not New Zealand?” “Well, we need someplace to obtain market prices.”)

    Von Mises wrote a book in the 1920’s, ‘Socialism’, in which he predicted the ultimate fall of the Communist state because they could not successfully plan an economy. Was he right or wrong? I suppose we could argue about it.

    The Austrians and Krugman also differ as to the cause of business cycles. Krugman blames it on irrational markets, crazy investors, “capitalism running off the rails” and in general private people not buying enough. The Austrians put the major blame on governments, central banking and artificial credit expansions. Also, with governments interfering with market mechanisms and prices, such that prices no longer represent what people want to do or are capable of doing.

    For example:
    1) The central government forces low interest rates through flooding the banking system with ‘easy’ money, or allowing banks to issue more money on fewer reserves.
    2) This sends the wrong information to everybody. People save less because there is less return. Entrepreneurs start more projects, especially long term projects, because it is easy to finance them.
    3) But since people are not saving more, and are actually consuming more, the resources for carrying out these projects are not actually there. You have a fair amount of mal-investment and there is no way to get around this or pretend that it didn’t happen. Someone, somewhere is going to be worse off for it.

    This is not quite the same as Tulip Mania in Holland during the 1600’s. That was an extremely limited thing. It was confined to one city and a small group of people. It had no chance of bringing down the whole economy. But when governments create a systemic credit bubble they also bring about the inevitable systemic reaction.

    The Austrian ‘cure’ for a credit bubble is:
    1) Let deflation take place. It clears the markets and provides lower prices for ordinary people, who dearly need it.
    2) Let real interest rates rise. It increases real saving and generates the resources to get the economy going again.

    The Krugman prescription is just the opposite. He wants to maintain the high prices that were generated during the credit expansion. He wants houses to stay at their high prices. He wants builders to continue building. He wants individuals not to save more but to continue buying houses and shopping. Falling demand is a problem and fiscal stimulus must be used to shore it up. In other words, he wants conditions at the peak of the bubble to continue. It seems to me a little bit like trying to turn back the tide or “the hair of the dog that bit you.”

    The Austrians don’t like central banking. Krugman thinks the Fed has done a wonderful job. From 1790 to 1910 there were inflations and deflations but basically prices ended up about where they started. The Fed was created in 1913 and since then the dollar has lost 96% of its value. Oh, but the Fed has kept the economy on an even keel hasn’t it? Well, what about the major recession of 1920 (more about that in a bit) or the Great Depression of 1929 to 1946, or the present situation that may also be a Great Depression? It doesn’t seem like a wonderful record to me.

    In 1920-21 there was a severe crash. Industrial production fell by over 20%, Unemployment was quite high. Farm prices crashed. What to do about it? Warren Harding, as a deliberate matter of informed policy and not as an oversight or through “meanness” did nothing. It was all over in a year. You never hear of the Great Depression of 1920-21. Everybody has forgotten about it.

    As for the Great Depression itself there definitely was a credit expansion in the 1920’s. And I think people like Hayek warned about it. I think there are a lot of myths associated with the Great Depression. It is not true that Hoover did nothing. He did a lot of stimulus spending, started the Reconstruction Finance Corporation, and many programs that Roosevelt built on. (By the way, there was a significant market rally in 1930.) Many people say that Roosevelt got us out of the depression. I don’t see how people can say that. The economy never recovered during his lifetime. I don’t think even Krugman claims that. What Roosevelt did was get us into a major war. Krugman says that WWII got us out of the depression. I don’t agree with that either. Economic conditions, and most other things, were miserable during WWII. There were shortages and rationing. No new cars, no new refrigerators, no new nothing but armaments. We really pulled out of the depression in 1947 when Truman cut government spending by 66% and cut taxes. The Keynesians were furious! They said we would be right back in the depression if government didn’t keep up the fiscal stimulus.

    It is interesting, and greatly worrisome, that during our present economic problems you hear NO SUGGESTION on the mainstream media, or from Krugman, that we might cut spending on our overseas wars or armaments programs and return it to ordinary people or use it to bolster social programs. If anything, it is just the opposite. People believe that WWII got us out of the depression, so it would seem counter-productive to cut war spending.

    I don’t know for certain that Krugman is wrong and that the Austrians are correct. It is possible that there is something to economics that is very complex and counter-intuitive, and that I am just not smart enough or educated enough to understand. But barring that, I suspect that the worse is not over by a long shot. I don’t see how anything fundamental has been done to put the economy on a better track. It looks like the people who caused the problem are being rewarded and one more massive attempt to inflate the bubble is underway, with some very minor temporary success.

    And there is one more thing I would like to finish up with. The very legitimacy of government is under question. In my view there is such corruption and arrogance in D.C. that you couldn’t even cut it with an ax. People ought to read some history of the French Revolution. One reason the Austrians put such importance on freedom is that people who are not free just don’t give a damn. There is a lot of justified but dangerous unrest. The political elites don’t care what people think. When the populace was 99% against the bailouts they did it anyway. If people are against all the wars they do it anyway. If people are against the infringements of civil rights they infringe anyway. You can see the anger at the “town meetings” on health care. Nobody knows what the bill will have in it and most people believe, probably rightly so, it won’t be good for them. The meetings just provide an outlet for the anger.

    We need new debate on what things government can actually do. We need more consideration of limited governmental powers based on the rule of law. We need a government that obeys the law. Otherwise there are going to be pretty horrible problems.

  • The Real Deal

    GR looks beautiful, until it bumps against quantum theories. QCD looks beautiful, until one try to use it to figure out the simplest things, like where all mass comes from. Or where any particle comes from for that matter.

    Theories can be utterly beautiful and wrong of course. It is wiser to operate that all theories have some degree of incompleteness. Because theories are created by humans.

    Economic theories, the most dismal of all science, is sure to be mostly wrong. But nevertheless we have the case where in the USA, an entire finance industry, famous central banker, big time politicians, big biz CEOs, government regulators, and most esteemed gang of economists, all worshiping a single economic theory. They bet the whole farm of eggs on the darn thing and now don’t even have an omelet to enjoy.

  • thomas

    I’ve been reading this blog since before it became part of Discover Magazine. Looking at the Math and Physics section of discovermagazine.com, the top article has a tag line from 2005: “Scientists hunt for the unseen matter that glues together the cosmos. But some wonder whether it even exists. ” This is actually a terrible article. Any article that tries to sew doubt about the existence of dark matter should at least mention the Bullet Cluster, which completely rules out certain kinds of dark-matter-free theories which were becoming popular up until August 2006.

    Moving down the page, one of the four highlighted articles is “biocentric universe” bullshit from a “stem-cell guru”. Next, an ordinary article about large-scale quantum effects observed in biological systems entitled “Is Quantum Mechanics Controlling Your Thoughts?”.

    Recently, Paul Krugman mentioned this post of yours as “Discover”. Sean, you stopped associating with bloggerheads.tv for a reason. Do yourself a favor and dissociate yourself from:

    “Biocentrism should unlock the cages in which Western science has unwittingly confined itself. Allowing the observer into the equation should open new approaches to understanding cognition, from unraveling the nature of consciousness to developing thinking machines that experience the world the same way we do. Biocentrism should also provide stronger bases for solving problems associated with quantum physics and the Big Bang. Accepting space and time as forms of animal sense perception (that is, as biological), rather than as external physical objects, offers a new way of understanding everything from the microworld (for instance, the reason for strange results in the two-slit experiment) to the forces, constants, and laws that shape the universe. At a minimum, it should help halt such dead-end efforts as string theory.

    Above all, biocentrism offers a more promising way to bring together all of physics, as scientists have been trying to do since Einstein’s unsuccessful unified field theories of eight decades ago. Until we recognize the essential role of biology, our attempts to truly unify the universe will remain a train to nowhere.”

  • coolstar

    hackenkaus has it exactly right here, and I’m only upset bc I didn’t read this post earlier in the week. I suspect it’s not exactly an accident that Sean either didn’t see or didn’t wish to comment on this analogy (well, I don’t really expect him to BELIEVE it’s valid, let’s be clear on that).

  • http://home.comcast.net/~djmpark/index.html David Park

    I’ve been thinking about this overnight and would like to take a more optimistic view. I’m beginning to think there is a beauty in economic theory – if one is inclined to the Austrian theory.

    They are saying that in order to have a well functioning economy it is necessary to have exchange of information (including information about our wishes and desires), cooperation and (most of all) freedom. We may not be able to predict the outcome because it is gnarly, and most of all because we cannot predict the problems the economy and the whole society will have to solve in the future.

    I think it is rather nice that this theory says that freedom is central to economic and societal success, that it depends on mankind’s better nature, and that it values the free flow of information. I think that it is also rather nice that empirical observation backs this up. When people are enslaved or compelled, when information is choked off, blocked or distorted, when solutions are imposed from the top by small groups of elites, then again and again we see failure.

    The results may not be perfect. We don’t know how to solve all problems now. The desires and preferences of other people may not be in accord with our views of what is best or with our tastes. There may be all kinds of missteps and messiness but it is the economic theory that works. And it is not that different from what makes science work.

  • Rich888

    Hi,

    There is a parallel to physics in the area of String Theory. Lee Smolin in “The Trouble with Physics” brilliantly details how this elegant but ultimately useless theory came to supplant all other approaches in this field. And the parallels are striking: String Theory flourished not because of what it explained, (ultimately nothing) but because it was beautiful math. Look at these equations, they give a beta function! The theory must be true! Well, no.

    Explaining things is hard, solving math problems is easy. Both physics and economics stuck their heads in the sand and simply stopped trying. It is fascinating that two fields that were hotbeds of intellectual advancement mid twentieth century gave way to degenerative abstraction. A generation lost, at who knows what cost.

  • http://faeriemud.org David McCorkhill

    The beauty of general relativity was not obvious to the physics community of 1910-1920.

    Today we can say that trading one absolute (an absolute reference frame for the space-time continuum) for another (the speed of light is always the same) was a perfectly elegant (and even beautiful) way of resolving an important issue in physics. I can look at Maxwell’s equations and say they contain no implication of any particular reference frame.

    But at the time Newtonian physics looked much more beautiful. The simplicity of F=ma had been mathematically extended to cover any system for which the Lagrangian was known. General relativity threatened to tear down that beautiful edifice until Einstein went to Prague and learned to use Hamiltonians to describe his new system in much the way Lagrange had done for Newtonian mechanics.

    Einstein could see the beauty of his new assumption, but for much of the physics community he was upending the entire beautiful edifice of the science in order to explain (in a fairly arbitrary manner) the results of the Michelson-Morley experiment. It was only after he had shown that edifice could be rebuilt on the new assumption that others began to see the beauty of his new edifice. Especially when he showed that new and different predictions could be made based on this new edifice and we could determine which one was right.

    We could say that neo-classical economics now finds itself at the Michelson-Morley crossroads, with its predictions in ruins after the current downturn in the economy. We could say that economists are now tasked with rebuilding their beautiful edifice on some other set of assumptions.

    But that would be unfair to Newtonian mechanics. Neo-classical economic thought has never enjoyed the real-world success that physics did before Einstein. It has always been more of a formalization of pre-existing biases than a true science. Excuses are its primary modus operandi. However beautiful its theory, its motivations have always been base and unenlightening.

    It is time for a real science of economics, one that is not founded in the biases (left-wing biases as well as right-wing biases) of its creators, one that takes simple assumptions (preferably premises more believable than those of the neo-classicists) and proceeds to predict ALL of the behaviors of all of the markets we can observe in the real world. If you cannot predict extraordinary popular delusions, much less the madness of crowds, you cannot come to the table of true science.

  • http://home.comcast.net/~djmpark/ David Park

    In response to David McCorkHill: Economics or sociology will never be able to predict extraordinary popular delusions. What we can do is set up systems that limit their destructiveness. Such systems would promote the free flow of information, give people the freedom to speak out and expose delusions, and limit the power of small groups of people to impose their delusions on society as a whole.

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  • Steve

    As discussed in the new book “Life, the Universe, and the Scientific Method”, sciences come in many forms with all sorts of questions and ways of approaching them. What they have in common (and what their methods must have if they are to capture the power of a true science) is a mechanism by which an advocate is forced to abandon a treasured theory. In some sciences, experiments do this. In others, observations. Even so, scientists (being human) will often (and probably more often than not) ignore contradictory observations or experimental results, rather than abandon their favorite theory. Then, in a functioning scientific community, this is pointed out, and we inch towards a model for reality.
    The problem with macroeconomics is that it has no mechanism accepted by its community that forces advocates to abandon their theories. Macroeconomic observations are largely few-variable correlations in a high variable space, with controlled experiments essentially impossible. Thus, Krugman, Reich and others on the left (and their counterparts on the right) can choose their position based on whatever (ideology, morality, the like) and then pick and choose the data that they need to advocate that position. Just like lawyers, who select and ignore data to get to their desired conclusion (“my client is innocent”).
    Krugman’s blog is hilarious in this respect, from global climate change to stimulus spending, to economic theory. He selects data to support his view, ignores data that oppose it, the bloggers pile on with attacks of hypocrisy. and he wraps it up calling everyone who disagrees with him mentally ill. The entertainment value of this is priceless, but so is its value to illustrate the difference between science and non-science.
    Now, in my community (biomedical research), if I published data that supported my theory and buried data that did not, I would be disbarred by my community. Economics has no such community. Hence the problem.

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  • Karthik

    On to Psychohistory!

  • Jingjok

    David Park #49 says:

    In 1920-21 there was a severe crash. Industrial production fell by over 20%, Unemployment was quite high. Farm prices crashed. What to do about it? Warren Harding, as a deliberate matter of informed policy and not as an oversight or through “meanness” did nothing. It was all over in a year. You never hear of the Great Depression of 1920-21. Everybody has forgotten about it.

    Not quite everyone has forgotten about it. My grandfather was a farmer during that time, and my father was growing up, later to become an accountant because farming was such hard work for such small returns. The truth is farm prices remained depressed until about 1927, and even then remained low. They returned to pre-1920 levels in 1929, just in time to be devastated by the next collapse. In fact, this was brought up in my Economics 101 class in 1960, when the professor started to introduce Keynes. Government intervention after World War II did a lot to make medium-sized farms (300 acres or so) prosperous until they were absorbed by huge agribusinesses in the 1980’s and 90’s. The Department of Agriculture’s County Agents did tremendous work in increasing productivity and improved marketing practices.

    When I began reading about the Efficient Markets Hypothesis I was astonished that people couldn’t see it was insane.

  • Jim

    Full disclosure: I’m not an economist either. But I’d like to submit a variation to your counter-hypothesis. It wasn’t complacency, exactly, so much as indifference, or to be less charitable, arrogance. One of the political winds Krugman alluded to began with the Reagan administration. When they took office they were facing some very tough decisions about how to deal with an economy stuck in stagflation. Instead of taking a step back and retrenching, they bifurcated the economy with supply side economics. So instead of dealing with the economy as a whole, they focused on policies that would help the investment class, assuming the rest of the economy would come into line eventually if rich people were investing. What this meant was that all retrenching would be done by people whose income was primarily through their paychecks. Investors would move forward. Clinton had an opportunity to make some changes, but he went with Rubin over Reich and tended to favor supply side policies. The result was a top-heavy economy with more and more money flowing into increasingly unstable and mysterious instruments. But at least we didn’t discourage financial creativity. By the time the economy crashed we’d had 30 years of commitment to a mirage, upon which entire careers had been built. As well, an entire generation had grown up and incorporated this outlook into their political identification. Consequently, you can’t call prevailing economic ideas into question without threatening the security of those who hold them. All the people who count were of a mind. In order to be a person who counts, you had to subscribe to the mirage, too, otherwise you were ignored. In other words, if you commented on the emperor’s bare backside, you were making yourself irrelevant. Despite the fiasco of the last two years, it still appears that those making policy are committed to sustaining the status quo, with bandaides.

  • yop

    “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”

    ….context would be nice. its hard to imagine a context that this is a remotely gracious comment.

    …not surprising ive heard talk in pubs where the words “finance” and “lynching” have been in same sentence.

    dunken chat i know, but many a true word spoken in jest and all that…..

  • chris

    I think Krugman is spot on. Physicists tend to forget that it is quite impossible to consistently reduce human behavior to a few parameters.

  • Brian

    Some random thoughts:

    Economics has to get rid of, once and for all, the notion that risk as a concept can be fully accounted for by variability. They’re trying to take the easy way out on that one.

    I suspect that Econonomics fell in love with the idea of the Invisible Hand, which posits that people behave rationally, besides the more obvious and traditionally emphasized angle. While often true it is not always so.

    One thing I think economists rely upon is that the individual players in the markets are themselves fungible. There are no elephants. This is demonstrably not true–regulators and central banks have great powers, as do some corporations and investment groups.

  • Ramanan

    Austrian Economics is religion not Economics.

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  • perspicacious

    Haelfix
    just wanted to point out -there is considerable evidence to prove that efficient market theory especially the strong version of it is a load of bull.
    For starters
    -Read the lecture by Warren Buffett titled ‘ The Superinvestors of Graham and Doddsville’. Its about the group of investors who are his friends also who consistently beat the market not over years but decades
    -Secondly read Drermans paper on how low PE stocks constantly beat the market
    and finally a personal word of advice – if you want to get rich, dump EMT real quick
    the 2 ways to get rich are read Krugman for Macro and follow Klarman for Value Investing
    Cheers

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Cosmic Variance

Random samplings from a universe of ideas.

About Sean Carroll

Sean Carroll is a Senior Research Associate in the Department of Physics at the California Institute of Technology. His research interests include theoretical aspects of cosmology, field theory, and gravitation. His most recent book is The Particle at the End of the Universe, about the Large Hadron Collider and the search for the Higgs boson. Here are some of his favorite blog posts, home page, and email: carroll [at] cosmicvariance.com .

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