Economic theory is based on faulty mathematics.

Post #321,579 by Another Scott 2/17/10 12:10:01 AM Reply	Economic theory is based on faulty mathematics. http://www.angrybear...pproximation.html [...] This post is long so I will try to put the punch-line up here. Economists make terrible errors when they say a statement "a reasonable approximation" of reality. Two very different meanings are conflated. One is that direct evaluation of the statement shows that rejection is subtle so the statement is approximately true. The other is that all claims which would be true if the statement were absolutely true are approximately true. There is a general reliance on a sort of smoothness assumption, so that a model based on approximately true assumptions must have approximately true implications. It is absolutely known and positively proven that this idea is totally false. The result that it is totally false is old and very well established (google "epsilon equilibrium") People who study the implications of the assumptions must know this. Yet the idea that there is some general smoothness property in the mapping from assumptions to conclusions absolutely dominates economic theory. Yes I just said that economic theory is based on assuming something which is known to be a false statement in mathematics. The reason is simple. Without the demonstrably false assumption that approximately true assumptions imply approximately true conclusions, economic theory would lead to no conclusions. The results of theories would be mere hypotheses to be rejected if they didn't fit the data. Economists absolutely claim that this is how they use theory. This is absolutely false. Standard models have implications which are rejected by the data and yet they remain standard models. [...] An interesting read. Cheers, Scott.
Post #321,581 by Andrew Grygus 2/17/10 2:25:57 AM Reply	Economics is not sufficiently reality based . . . . . to be compared to witchcraft.
Post #321,582 by jake123 2/17/10 3:08:50 AM Reply	Personally, I think that it depends on the economist's general approach. Those that take a historical approach have a lot more weight with me: "this situation is relevantly similar to these situations in the past; people in these situations tried these solutions: here's how they worked out." Those that depend entirely on models always struck me as being relevantly similar to bands that built songs by formula; it might have the appearance of a good song, but usually wasn't... and when it was, it was usually a case of hitting the odds from time to time. It's why I still look at Marx and Keynes with respect.
Post #321,588 by boxley 2/17/10 8:57:58 AM Reply	too bad it only applies to economists not climatologists :-) If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #321,591 by jake123 2/17/10 9:31:24 AM Reply	That's why I pay attention when they say that CO2 and global temperature are strongly correlated in the paleological record :)
Post #321,585 by static 2/17/10 7:31:04 AM Reply	That got complex very quickly. :-O It goes back to what I maintain about our economic system: people think it has equilibrium, like a boat. It doesn't. It's more like a bicycle: you have to work to keep it upright and that means you have to stay moving. Wade. Q:Is it proper to eat cheeseburgers with your fingers? A:No, the fingers should be eaten separately.
Post #321,604 by beepster 2/17/10 10:44:19 AM Reply	Appears to be a generalized damnation of the entire field of study based on the correct fact that modeling will not work to determine short term (microeconomic) price trends on an absolute (every time) basis. I don't think there's any economist that would tell you that because they would be assuming away the gambling factor of the stock market (emotional investing, herd mentality...whatever you want to call it). It appears the expectation is that a "model", to be valid at all, must be 100% accurate...and we are talking about predictive of human behavior...and I'm not sure of any field of science that could claim that. I believe the idiomatic expression that applies to this would be throwing out the baby with the bathwater? I will choose a path that's clear. I will choose freewill.
Post #321,608 by Another Scott 2/17/10 11:18:02 AM Reply	I thought that might get a rise out of you. ;-) "Robert" is Robert Waldmann - http://www.angrybear...t-angry-bear.html Robert Waldmann: ...born the day after Kennedy was elected (November 9 1960). I have a PhD in economics (Harvard 1989) and teach economics at the University of Rome "Tor Vergata". I wasn't always like this. I have a bachelor's degree in biology. Oddly, I don't blog much at my own site rjwaldmann about economics or Italy. Currently, I am obsessed with Obama, but I'll try not to bore people with stuff they already read 10 times today. As an economist (roughly) I am interested in behavioral economics, growth, and the economics of inequality. Actually much of my current research, such as it is, is really in econometric methodology and statistics. I was very unorthodox in the 80s, but the orthodoxy is much less rigid now. He seems to have the chops to know what he's talking about, and well aware of the glass walls in his house. :-) Cheers, Scott.
Post #321,610 by boxley 2/17/10 11:25:45 AM Reply	hmm, Mises by the backdoor If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #321,635 by beepster 2/17/10 4:03:53 PM Reply	I know who he is... ..and am not questioning his chops...but he's using the same technique he says is failed to make his point. He's arguing from the specific to a generality... There isn't anyone, even the folks who came up with the theories of efficient markets and resource allocation, that would pretend that those theories could be put into practice as a short term price predictor for the stock market. By their very nature, the short term and emotional factors violate the premise of "perfect information". Unless I know the specific state of mind of every single person buying that stock at their time of purchase, I don't have "perfect information". However, when you accumulate that data to a macro level, it somewhat balances that out and higher level predictive models that trend over time and not by minute are much more predictive. They consider things that are measured...like profit level, starts, consumer confidence levels...etc. And the "science" of building econometric models, and reading the data and the predictive behavior across all of the variables in the equation is hugely beneficial to determining public policy as it relates to what tools to use to "push" the economy in directions that it needs to go. But no, it won't help the day trader get rich. Again, my read is that he's arguing macro theory, in order to be valid, should 100% apply to micro events, otherwise its invalid. Sort of like saying that biology isn't science because it can't predict with 100% accuracy that the single cell creature in the ocean will evolve along this specific path to become a human...every time. I will choose a path that's clear. I will choose freewill.
Post #321,642 by Another Scott 2/17/10 8:32:58 PM Reply	I read it a little differently. It seemed to me that he was mainly arguing for more care in the use of language to describe, and thinking about, economic models. He said: I'd say that, in a standard general equilibrium model, informational efficiency does imply allocational efficiency. So to the extent that one accepts such models as guides, one should believe that, for practical purposes informational efficiency implies allocational efficiency. The problem is that approximate informational efficiency does not imply approximate allocational efficiency. IOW, in a model with perfect information, the allocation results do follow. However, in the real world we don't have perfect information, so we have to be more careful. Mathematics tells us that we cannot assume that a little noise in the information gives a little noise in the allocation results. It doesn't follow, no matter how much we might like it to. When talking about a "good approximation" it's important to be clear about what meaning of the term is being discussed. It seems like a reasonable point to me. FWIW. Cheers, Scott.
Post #321,644 by boxley 2/17/10 9:09:22 PM Reply	like I always said about climate models climatology is a lot like economics, we dont know enough about the peripheral effects. We see carbon rising slightly behind temperature for good reason but the pieces we dont understand are huge. Models are built using imperfect information with noise that can be adjusted the wrong way or suppressed. One fellow thought in the next 30 years we are looking at 650ppm c02 in the atmosphere with intense effort to curtail it starting now with no decent prediction as to what 650ppm actually means to the climate and ultimately the weather If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #321,645 by Another Scott 2/17/10 9:32:52 PM Reply	The analogy is bad. The Earth's climate is a complicated black box. We know much of the science. We know much of the physics; we don't know all the various pieces and how they interact with enough precision. But we're getting better. Economics models are an attempt to explain large-scale human behavior in an economy. It's not physics - it's herd mentality. Fundamentally, economics attempts to apply mathematics to one of the social sciences. It's much less deterministic than a physical system. Even though the climate models are still young, they're actually very good. And getting better all the time. What economic model from even 5 years ago would have predicted the Great Recession? What economic model can predict the state of the world economy in 30 years with any confidence? I'd have much more confidence in the prediction of the state of the climate from present models. You can even play with some of them on your own PC or Mac (courtesy of your nemesis James Hansen's group ;-) - http://edgcm.columbia.edu/software2/ FWIW. Cheers, Scott.
Post #321,646 by drook 2/17/10 10:03:07 PM Reply	What makes economics very different from physical sciences Elements in the system (people) are aware of the "rules" of the system and consciously alter their behavior in response to what they believe the rules to be. -- Drew
Post #321,650 by boxley 2/17/10 10:37:31 PM Reply	welcome to quantum physics If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #321,656 by Another Scott 2/17/10 11:21:31 PM Reply	That's not how quantum physics works. There are strong, well-understood rules and equations that will give you the answer to a quantum mechanics problem. The answer includes a probability. http://en.wikipedia....B6dinger_equation As Drew said, Economics tries to apply mathematics to Calvinball. The players are always changing the rules. Cheers, Scott.
Post #321,658 by boxley 2/17/10 11:25:44 PM Reply	Re: That's not how quantum physics works. yes it is, the answer depends on the observation. Is the cat dead or not? If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #321,659 by drook 2/17/10 11:37:31 PM Reply	Economics is not falsifiable -- Drew
Post #321,669 by boxley 2/18/10 11:07:50 AM Reply	What? ever hear of ponzi? If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #321,660 by Another Scott 2/17/10 11:44:17 PM Reply	It's both. Observation collapses the wave function. It doesn't change the physics. More: http://en.wikipedia....%B6dinger%27s_cat Cheers, Scott.
Post #321,648 by boxley 2/17/10 10:35:39 PM Reply	climatology isnt herd mentality? bwahahahaha as for your link? you have to use their model no peaking at the source code. Microsoft for climate prediction anyone? If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #321,653 by Another Scott 2/17/10 10:49:16 PM Reply	So run it against history. Treat it as a black box. Does it do a reasonable job with the historical data or not? http://www.grida.no/...c_tar/wg1/308.htm If you really want it, the source is public domain - http://edgcm.columbi...port2/faq/#faq003 HTH. Cheers, Scott.
Post #321,655 by boxley 2/17/10 10:57:10 PM Reply	thanx, downloaded will review If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #321,611 by drook 2/17/10 11:33:17 AM Reply	I don't think so He doesn't get into this, but I think the reason economics is doomed to never have predictive value (as currently practiced) is that the premises are subject to change, and are continually being manipulated by people seeking competitive advantage. Let's take gravity as an example. Suppose it were not a natural law but a collective agreement we all use to keep each other (and ourselves) anchored to the ground. But we all want to be just a little bit more firmly anchored than anyone else. If we have access to the mechanisms through which gravity is exerted, some people will attempt to anchor themselves at the expense of their neighbors. Long term, it's better for everyone that we all stick to the ground, since there's the most overall gravity exerted. But there will be local maximums, where some people dig underground as their neighbors float off into space. As long as small, powerful groups or individuals have the ability to exert control over larger groups, the only valid short-term predictions will concern the behavior of these predatory groups. The only way to control short-term atavistic behavior is to change the system itself, limiting the scope for individual actors to drive large scale changes. -- Drew
Post #323,619 by What-are-Dice? 3/28/10 6:00:46 PM Reply	Re: Appears to be The baby is tossed out with the bathwater, and in it's place, people like jake123 substitute methods of knowledge acquisition that are prone to the same (and often worse) problems caused by "approximation". I don't like it when people use a legitimate criticism of one thing to imply a legitimate defense of an alternative. "B" has this flaw--therefore we must use "A" doesn't make sense, especially when "A" has the same problems in greater magnitude than "B". To Wrap it up: 1. Economics is not science--it is trying to become a science. 2. This means that historicism, Austrianism, Keynesianism and Monetarism are all non-sciences. 3. If you defend one over the other you do so for emotional reasons--unless one is actually capable of predicting novel facts.
Post #323,623 by crazy 3/28/10 6:51:35 PM Reply	Welcome Nice starting post. Slightly overly aggressive for a newcomer, but fit in with the flow of the thread.
Post #323,629 by folkert 3/28/10 8:45:38 PM Reply	Introduce yourself, please! We like to know whom we argue with!
Post #323,649 by boxley 3/29/10 8:57:51 AM Reply	welcome to the non herd If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)

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