
Economics Has a Math Problem - gedrap
http://www.bloombergview.com/articles/2015-09-01/economics-has-a-math-problem
======
ThePhysicist
I was always interested in both Physics and Economics and did studies in both
disciplines.

As a physicist, the models that I encountered in economic theory always left
me quite disappointed. The main reason for this was that -like the article
says- most of the models used in Economics are based on abstract reasoning
about "ideal" markets and actors (or more recently on game-theoretic ideas)
instead of experimental data. One reason for this is of course that when many
of those models were developed (in the 50s or earlier) there simply was no
reliable (micro-)data available that one could develop a theory against.
Another big problem that kept Economics from taking a more experimental stance
towards model generation is of course that until recently it was very hard or
outright impossible to conduct large-scale experiments, which are the main
instrument to validate (or better, not falsify) a given theory in other
disciplines such as Physics or Biology.

That said, the recent computerization of all aspects of business and the
creation of virtual economies -like Eve Online, World of Warcraft- and
"transparent" markets -like Bitcoin- should provide ample data to develop
"real" models of economic behavior against, and I think that many researchers
actually already make use of this data.

The theories that will result from this will probably be more like those
developed in statistical mechanics though -i.e. making statements about the
aggregate behavior of the system- rather than those developed e.g. in
electrodynamics, where we usually can predict the behavior of even a single
particle. Would love -and be at bit scared- to be proved wrong about this of
course :)

~~~
TheSpiceIsLife
Great comment. Incidentally, have you come across Deirdre Mccloskey, I've been
reading her book 'Bourgeois Dignity: Why Economics Can't Explain the Modern
World' and finding it really interesting. Economics is a social science,
taking measurements / accumulating data and theorising on that data causes
changes in behaviour. Just sitting around talking about economics, or your
weekly budget, drives changes in behaviour.

As a layperson with a bit of an interest in economics I don't really see how,
as the article says "econ is now a rogue branch of applied math". More like
economics uses applied maths, or something like that. It's a 'social science',
we can't reveal the laws (let's call them 'habits') of economics like we do
The Laws of Nature, because circumstances change -both globally and locally
(macro / micro)- and new economic phenomenon emerge.

It'd be interesting to see what future historians have to say about present
day economics.

~~~
asgard1024
> Economics is a social science, taking measurements / accumulating data and
> theorising on that data causes changes in behaviour. Just sitting around
> talking about economics, or your weekly budget, drives changes in behaviour.

Funny - you could say the same about physics. For example, knowing that the
coming car may kill a person causes the human behaviour to change, namely the
driver will stop the car. Does that invalidate Newton's laws?

Yes we probably cannot predict universe totally. But we can do scenarios (of
complex emergent systems of interacting agents with bounded rationality), just
like in physics. In fact the whole point of doing that analysis is to change
behaviour of people, one way or another.

~~~
dragonwriter
> Funny - you could say the same about physics. For example, knowing that the
> coming car may kill a person causes the human behaviour to change, namely
> the driver will stop the car. Does that invalidate Newton's laws?

The difference is that whether a person will try to move out of the way of an
oncoming car is _not_ considered within the domain of physics (so them using
their knowledge of physics to predict that a car is a danger may change their
behavior, but not the accuracy of what physics predicts within its domain),
but whether or not a person will try to move their money out of the path of a
predicted stock market collapse _is_ within the domain of economics.

This doesn't actually make empiricism any less applicable to economics, but it
does compound problems in the empirical study of economics.

~~~
asgard1024
No, it's an artificial distinction (or perhaps better would be to say, there
is an artificial distinction where you decided that physics is not a social
science). In both cases, you can analyze two scenarios:

1\. Car continues and hits the person / investor won't move money out before
stock market crashes

2\. Car is stopped / investor will move the money out

In both cases, the physics or economics is no less applicable whatever the
circumstances of the actual decision. And just like physics cannot tell you
whether the car stops, economics cannot tell you whether investors will
actually move the money out. But what economics can tell you, under certain
assumptions, say, investors want to make money with this and this horizon,
whether or not are they likely to move out.

Let me give another example. Water flows downhill due to gravity. Yet, people
can decide to build water pump and aqueduct to get water uphill. In doing so,
they didn't break any physical laws. But if you ignore the pump, it may seem
that the water flow downhill anymore and so the laws are incorrect. What
happened is that now our model of the situation should include the pump, and
within the expanded model, physical laws are again preserved.

Similarly for instance, if the society decides to regulate markets, the
behaviour of the people can be changed, but they don't necessarily have to
break some universal economic law. The new behaviour can have a perfect
economic explanation, it's just that the frame of the model changed.

It seems that this "infinite regress" confusion (also called Lucas critique,
if I am not mistaken) is caused by ignoring the fact that every model of
reality only includes a portion of it and is never a perfect description (for
example we ignore the physics of human brain when we model the car hitting the
pedestrian).

Also, you should note there are situations where knowing more doesn't actually
change the behaviour (under assumption of certain rationality) - for example,
getting to know the exact odds of casino wins won't entice me to play.

------
atmosx
There are several problems with social sciences not just economics. Recently,
I've read an interview by Yanis Varoufakis[1]. Here's an interesting excerpt:

\---

 _Mariana Mazzucato, University of Sussex – How has the crisis in Greece (its
cause and its effects) revealed failings of neoclassical economic theory at
both the micro and the macro level?_

 _Varoufakis_ : The uninitiated may be startled to hear that the macroeconomic
models taught at the best universities feature no accumulated debt, no
involuntary unemployment and, indeed, no money (with relative prices
reflecting a form of barter). Save perhaps for a few random shocks that demand
and supply are assumed to quickly iron out, the snazziest models taught to the
brightest of students assume that savings automatically turn into productive
investment, leaving no room for crises.

It makes it hard when these graduates come face-to-face with reality. They are
at a loss, for example, when they see German savings that permanently outweigh
German investment while Greek investment outweighs savings during the “good
times” (before 2008) but collapses to zero during the crisis.

Moving to the micro level, the observation that, in the case of Greece, real
wages fell by 40% but employment dropped precipitously, while exports remained
flat, illustrates in Technicolor how useless a microeconomics approach bereft
of macro foundations truly is.

\----

I really don't know at what level of complexity someone must settle, in order
to have a viable mathematical model to predict financial crisis... How many
variables do you need? Then again a lot in economics depends on 'perception'.
A FinMin will never discuss devaluation of his currency, the moment he does...
The currency will drop. How can a mathematical model 'predict' such
behaviours?

[1] [https://theconversation.com/varoufakis-in-conversation-
with-...](https://theconversation.com/varoufakis-in-conversation-with-leading-
academics-as-syriza-splinters-and-election-beckons-in-greece-35861)

~~~
yummyfajitas
This interview is almost incoherent.

Note the contradiction: "no involuntary unemployment and, indeed, no money"
followed by "real wages fell by 40% but employment dropped".

The latter statement only contradicts Keynesian economics, which don't have
relative prices (Keynesian economics has only real and nominal dollars of GDP)
and uses money combined with sticky prices to explain involuntary
unemployment.

But although in one sentence he seems to think the Greek experience
contradicts Keynesian economics, he turns around and appeals to Keynesian
economics a few minutes later: "the 3.5% primary target for 2018 would depress
growth today".

~~~
yk
Actually, Keynes called his book _General Theory_ precisely because it
included unemployment, in the context of Keynesian economics usually called
the output gap. So "no involuntary unemployment and, indeed, no money" is a
insult from a Keynesian against neo-classic models.

Second, "real wages fell by 40% but employment dropped," this is precisely
what a Keynesian expects. The core insight of Keynesian economics is, that the
employees are also the consumers, so that falling prices lead to falling
demand.

~~~
yummyfajitas
No, Keynesian economics proposes that high real wages are what cause
unemployment - if an employee's real output drops but his real wage stays
flat, he might become unprofitable to employ. Since nominal wages are the real
sticky quantity, Keynesians propose inflation as a sneaky way to reduce the
employee's real wages.

~~~
yk
Usually Keynsian economics is understood as economic thought that is based on
aggregate demand, this is for example the view Wikipedia takes. [1] From there
it is straightforward to argue that higher wages lead to higher employment, a
view that makes Keynsian economics popular on the left.

The view, that too high wages cause unemployment, is a staple of supply side
economics, the view that the economic process is driven by the supply side.

Krugman argues a lot about sticky wages recently, but not because this is a
central tenet of Keneysian economics. Krugmann argues about sticky wages
because it is a good argument against the troika's handling of the Greek
crisis, since the internal adjustment in the Euro area would either mean
inflation in Germany or deflation in Greece.

[1]
[https://en.wikipedia.org/wiki/Keynesian_economics](https://en.wikipedia.org/wiki/Keynesian_economics)

~~~
yummyfajitas
Did you read the article on wikipedia? Start from the heading "Concept".

[https://en.wikipedia.org/wiki/Keynesian_economics#Concept](https://en.wikipedia.org/wiki/Keynesian_economics#Concept)

Supply side economics is not based on wage levels at all, but rather based on
tax-based disincentives to employment and investment.

[https://en.wikipedia.org/wiki/Supply-
side_economics](https://en.wikipedia.org/wiki/Supply-side_economics)

------
pjc50
Economics has an honesty problem. Financially motivated obfuscation is a
problem in other sciences: global warming denialism, sponsored studies
claiming that cigarettes aren't carcinogenic, all manner of food health and
safety claims, and so on. Generally the evidence is overwhelmingly against
them and the battle is mostly over PR and communicating to the public.

Economics is different; arguments that are very convenient to people who are
wealthy under the status quo are very difficult to challenge, resulting in
failed austerity programmes, "trickle down", and so on.

~~~
toyg
I partially agree with this view; however, to be fair, this is not a problem
with academic economics, but rather with "pop economics".

There is no lack of academic economists who can (and do) prove how austerity
programs and trickle-down are wrong; in fact, they're the only ones really
leading the charge on this matter in the political world at the moment.

The problem is that policy leaders not trained in advanced economic studies
(most of them lawyers by trade, as you would expect in the business of writing
laws) are awash in "pop economics", cheap literature peddled by suspect gurus
sponsored by interested parties. This creates a hegemonic but distorted view
of the field that is then very hard to shake.

~~~
pjc50
It's not just lawyer-politicians, but economic organisations like the IMF and
the ECB. Stiglitz' book on the subject is excellent, including the anecdote
about how we know that their advice is the same whatever the country and
situation because someone once forgot to search-and-replace the country name
before sending it out.

Then there's the Rheinhart-Rogoff excel error:
[http://www.nytimes.com/2013/04/19/opinion/krugman-the-
excel-...](http://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-
depression.html?_r=0)

~~~
toyg
Those organisations are sclerotic because they ultimately answer to
politicians, not to academics; they are political constructs first and
foremost, serving specific national interests, with heads nominated by
political leaders and (surprise) often lawyers themselves (e.g. Lagarde). In
fact, during recent events in Greece it became clear how their own researchers
disagreed with the policies being pushed from the top. It's like developers
were forced to write websites in PASCAL because their employers told them to.

The Excel error is also exemplary of what I referred to as "pop economics": a
single argument was "divulged to death" and transformed into mainstream
orthodoxy even though it was still being confuted in academic circles.

------
twitchard
I think there's a fundamental misunderstanding of what it is theoretical
economists are doing.

A medical scientist runs experiments on rats, to gain insight into what the
effects of a certain phenomenon might be on humans. Rats aren't humans, of
course, but we think they share important characteristics with humans. Of
course, human trials would be better---butbecause there are ethical and
practical difficulties in performing human experiments in controlled
environments, we are happy to accept the insights that come from studying
rats.

Theoretical economics studies the interactions of idealized 'rational' actors.
These aren't humans, of course, but like rats, we think they might share
important characteristics with humans. Like rational actors, humans have
things they want, and do respond to incentives. Economics is largely the study
of systems of incentives.

You can gain insight into the systems of rational actors---and insofar as you
believe the analogy between rational actors and humans, into human economic
systems---by writing equations and proving theorems.

I'm sick of this theme that theoretical economists are these dogmatic lunatics
who write equations on the board that have nothing to do with reality. They
are in the business of crafting powerful arguments about human nature by
analogy, which yes, aren't always accessible to those of us who haven't
steeped ourselves in the math, but I think that is no reason to dismiss their
insights as nonsense and saying they have a 'math problem'.

~~~
jal278
The issue is that assumptions such as perfectly rational actors can diverge so
far from reality that it renders the resulting idealized conclusions
meaningless from the perspective of actual human economies. The abstract study
of incentives is of course interesting in its own right, but may have little
to do with economics in practice -- i.e. the important practice of how
actually should we run an economy.

What theoretical economists do is not 'nonsense' but can become nonsense when
it naively forms the rationale for real-world policy.

~~~
twitchard
Rats are, in some ways, very different from humans too. But if it's impossible
to run human trials, or there are severe deficiencies in the way we are able
to execute them, studying rats is still the best argument.

If there is a convincing empirical economic study that widely contradicts a
theoretical consensus---yes, that evidence should be preferred. But that is
not often the case, and otherwise the theoretical argument is simply the best
argument there is.

What drives me bonkers, though, is the people who dismiss the math and its
conclusions as being 'meaningless', but then what they substitute is not
superior empirical arguments of their own, but their own emotional sentiments
and undisciplined intuitions (typically decorated by cherry-picked historical
observations).

~~~
jal278
The "rat is to human" (from a pharmaceutical perspective) as "rational actor
is to human" (from an economic perspective) I think is a very fragile analogy.
Rats and humans are very similar in their response to pharmaceuticals (and so
serve as reasonable first model), but the difference between rational actor
and human is so vast (at least in terms of how the real world works) that it
calls into question the value of rational actor models for real-world policy.

In that case, the "theoretical argument is simply the best argument" is wrong;
we should study economic history and human behavior rigorously and let that
inform our policy. Theory can serve as a useful model when it is validated by
some sort of observation and data -- but even when we cannot perform
controlled studies there is not a knock-down argument that "theory" must be
our best guess.

I agree that a person's interpretation of economics is very likely to be
influenced by their idea of how the world _should_ work; but this is more a
problem of our characteristic lack of critical self-reflection. And of course,
we should have cogent arguments for our interpretation of economics, ideally
rooted in objective evidence.

~~~
endzone
mathematical formalism was introduced precisely to allow the formulation of
"cogent arguments". you can't evaluate the evidence without economic theory

------
DanBC
One real world example is whether there are educational benefits to deworming
a child population in developing world countries.

If you use economist math you see a benefit. If you use epidemeologist math
you don't.

[http://www.cochrane.org/news/educational-benefits-
deworming-...](http://www.cochrane.org/news/educational-benefits-deworming-
children-questioned-re-analysis-flagship-study)

[http://www.cochrane.org/CD000371/INFECTN_deworming-school-
ch...](http://www.cochrane.org/CD000371/INFECTN_deworming-school-children-
developing-countries)

[http://www.theguardian.com/society/2015/jul/23/research-
glob...](http://www.theguardian.com/society/2015/jul/23/research-global-
deworming-programmes)

[http://www.bbc.co.uk/programmes/b0659q1f](http://www.bbc.co.uk/programmes/b0659q1f)

------
RA_Fisher
Meanwhile machine learning is the high interest credit card of technical debt,
what could go wrong?
[http://research.google.com/pubs/pub43146.html](http://research.google.com/pubs/pub43146.html)

I entered stats through econometrics. I love econometrics. Econometrics is
seriously hampered relative to other applied math fields by the inability to
apply large scale casual experiments. For this reason parsimony is soooo
important in modelling. Machine learning is the opposite of parsimony. Machine
learning is wonderful for many applications, it lets us shrug off a first
error of model selection, but it's not a panacea to the math problem and I
think it actually might make it much worse.

------
dovereconomics
While pursuing PhD in Economics, I've supported myself working as a data
scientist and, like ThePhysicist says, it's fairly disappointing that many are
oblivious of datasets, APIs, libraries,..

A good example of what can be done
([http://econprediction.eecs.umich.edu/](http://econprediction.eecs.umich.edu/))

On the other side, the claim "literary types who lack the talent or training
to hack their way through systems of equations" is groundless and mostly
fallacious. The "literary types" have grasped many politicized inconsistencies
and dedicate their research by deductive reasoning. Most of them are not 9/11
truthers.

------
WorldMaker
My insight in college taking some economics courses side by side higher level
physics and engineering courses was that economics has mostly gotten stuck in
algebra and has thus far failed to develop its calculus.

The easiest analogies for me to make are to electronics. Talking about
cash/debt is like talking about instantaneous voltage. It's sort of
interesting, but it isn't doing any actual work. In electronics it is the flow
of that voltage, the current, that is more often more important and more
interesting and more directly applicable to the "work" of a circuit...

I think you get a very different view of economics if you model it more like
electronics circuits than just about any of the other economics models I see
discussed. I've often wondered what would happen if someone actually bothered
to attempt such a model and apply some deep scientific rigor to it.

~~~
nobbis
Economists were modeling the economy using circuits in 1949 (see MONIAC),
before the Integrated Circuit was even invented.

~~~
WorldMaker
Thanks for the interesting reference to look up. I had not heard of the MONIAC
before. Looks like this is also a sideways referent in Terry Pratchett's
Making Money which draws in some interesting dots in that book.

------
crdoconnor
>That would make the techniques less interesting to many economists, who are
usually more concerned about giving policy recommendations than in making
forecasts.

Therein lies the real reason for the panoply broken economics models. They are
more often used for the purpose of lobbying rather than for impartial
prediction.

Much of the profession (particularly the elites) only exists as an
intellectual pretext for maintaining and perpetuating existing power
structures. It's about as scientific as the departments of Marxist economics
were in the former Soviet Union or the Vatican in 15th century Italy.

------
chrismealy
If economists could manage to get themselves thought of as humble, competent
people on a level with dentists, that would be splendid.

~~~
Gibbon1
My beef is when I read economists claims about perfect markets I think, 'Wow!
With markets I should be able to solve the traveling salesman problem in
polynomial time'

~~~
dmichulke
Well, I am not a big fan of today's "more debt, more gov't spending = more
prosperity" but markets only parallelize a process and the best ones at this
process survive while the worse ones drop out of the market.

So, in a sense, if you assume ideal markets to have an "infinite number of
participants", then yes, you can solve TSP in polynomial time but otherwise
they will just evolve like bitcoin miners which as of yet still didn't solve
the "find a decent hash" problem an order of magnitude faster even though
there are many of them.

My beef with economists is that they themselves are not subject to markets so
the bad ones and the good ones survive and you end up with lots of noise.

~~~
crdoconnor
>Well, I am not a big fan of today's "more debt, more gov't spending = more
prosperity"

Because austerity is working out just brilliantly everywhere it's been tried?

What people tend to forget about government deficits and debt is that it is
just one side of the economic coin. It's exactly the same thing as saying "the
private sector saves too much".

~~~
vixen99
'Because austerity is working out just brilliantly everywhere it's been
tried?'

Measured on what timescale?

~~~
crdoconnor
Well, the IMF and ECB's time scale for predicted recovery in Greece has been
18 months ever since austerity was implemented in 2009.

So that's roughly four complete and total fuck ups in a row.

How much more time do you need?

There's always a chance, of course, that austerity is utterly destructive
towards the Greek economy but very good for German financiers (with the ear of
the ECB) who would like to pick up a port or state electric company on the
cheap and who like the flood of cheap labor the austerity crisis has
instigated.

------
georgeglue1
Pure economics should be about applying abstractions to help us understand the
world. The world is pretty sophisticated, so I'm fine with mathematically
sophisticated abstractions. Even when those abstractions fail intuitively,
they _can_ be useful and extended for other subareas of economics or are
simply philosophically fascinating. More often than not though, a lot of
prominent theory seems impracticable or intractably limited. This is a valid
criticism.

Noah Smith is slightly misdirecting his complaints though. If we're looking at
applied economics or policy, the amount of math is not intimidating to anyone
who has taken a couple of years of non-introductory statistics. The most
important econometrics papers of the past few years apply basic regressions
with only a few additional valid statistical techniques.

~~~
runarberg
I'd think economics should be about describing systems in terms of cost, and
finding how much a certain action will cost or profit the system. There is
tons of economy to be found in the natural world, and it is mostly shunned by
economists, and left to the naturalists. I don't know of any other science
that ignores the natural world like that. And yes I see a problem with that.
The probability of being wrong becomes huge. What good is an abstraction if
it's wrong?

------
endzone
reminder: noah has never published an academic paper in economics and it looks
unlikely that he ever will. he is simply not a competent guide to the field.
this entire thread is a perfect example of the blind leading the blind: a
journalist (noah) presents an entirely one sided view of the field, and
intellectually lazy posters take it as a cue to dump on an entire academic
field while freely admitting their ignorance of any of the details.

newsflash: most economists are acutely aware of the imperfections in their
models. sure, you can find the blinkered and dogmatic, but that is
unsurprising in such a large and varied field. the subject encompasses a
serious variety of subjects and methods you (the hn poster) simply know
nothing about. for example, machine learning techniques are really nothing
new. theorists have been aware of the kahneman/tversky result for decades.
please bear this in mind before you lazily declare the intellectual bankruptcy
of the entire field.

p.s so-called econophysics was a direct attempt to apply models from hard
science to economics and it has been a complete failure, since it lacks an
underlying model of human behaviour. turns out this is quite important...

------
clavalle
I find it interesting that many economists tend to ignore the limits of their
own theories.

For example, the dogma that markets tend toward efficiency.

This is true -- as long as certain axioms are not violated. But they seem to
forget about the axioms on which their conclusions are built and march forward
as if their conclusions are _absolutely_ true and apply that assumption to
problems where they simply do not hold because the axioms on which they are
built are violated.

To continue with the 'markets tend toward efficiency' conclusion: it does not
hold when there are negative expectations for a party for _not_ making a
transaction. And they invented a fudge factor to get around this a bit (that
still doesn't work for all cases) which is to make sure the equations when
taken in aggregate do not _generally_ lead to negative expectations for not
making a transaction. This holds in many more cases but still not all.

Where does it fail and why does it matter? Well, the axioms underlying the
'markets tend toward efficiency' work great in capital markets. They tend to
completely fail when pain or death is potentially involved in a transaction
(severe negative expectations) but they may look like they _should_ work and
you can find limited cases that _do_ work. So, basically war or crime or
relationships or corruption or or poverty or healthcare or any other of those
human interactions pain or death tend to come into play. A huge swath of
sectors where politicians and special interests and the economists that inform
them try to craft policy to fit a misapplied theory. Yet, economists march on
pretending the theory holds from the axioms to the conclusions and on to the
further conclusions built on those hold because 'mathematics' \-- who can
argue with mathematics?

------
im3w1l
I don't think a model based purely on empiricism will work. Because people
will read about the model and try to correct for their biases.

On the other hand a purely game theoretic model is not satisfactory either
because a lot of people wont read about the model, and wont act optimally.

Maybe a two-tiered model, with "fish" and "sharks" could be a solution.

~~~
ancap
Your comment demonstrates beautifully how economics is not an empirical
science. Much of what is taught in economics is founded on a flawed premise.

------
Mikeb85
This is really the important part of the article:

> Their overview stated that machine learning techniques emphasized causality
> less than traditional economic statistical techniques, or what's usually
> known as econometrics. In other words, machine learning is more about
> forecasting than about understanding the effects of policy.

And it's true. Economists care more about forecasting than 'understanding the
effects of policy' because the money is to be made forecasting while working
for a bank or a large corporation.

Economics can't be codified the way physics can because economics models human
behaviour (which is constantly changing), not physical laws than can be tested
and retested.

------
HSO
I shouldn't even comment on this BS article but here we go, duty calls (
[https://xkcd.com/386/](https://xkcd.com/386/) )…

1) First of all, let's make clear that there are no "the economists" and there
is no "economics" that could be identified with whatever peeve _du jour_ of
"the journalists". Economics as a field, understood as the study of exchange
between decision-making agents in more or less large systems[1], is marked by
an extreme diversity of approaches and opinions on even basic questions. From
my superficial understanding of other fields, this seems to be a big
difference between economics and the sciences, and on the other hand rather
similar to the humanities. If you're going to criticize something, better make
it specific and name names.

2) It is fashionable for "technical" people to scoff at the mathematics used
in economic theory (basically, analysis, optimization, linear alg, and
measure-theoretic prob), pretending that the problems arise because the tools
are too primitive. First, perhaps they should remember that a lot of the
foundations of mathematical economics were laid by people way above their
paygrade. I'm talking about von Neumann, for example, or Fischer Black.
Usually, when smart people do something that does not make sense to you, you
take a step back and ask what _you_ might be missing, and usually there is a
nontrivial answer to that question. Paul Romer, sorry, is a good economist but
he has a BS in math. I would say that's my definition of a "lightweight when
it comes to equations". That's not to say he shouldn't criticize, he should!
But let's not pretend that there was no reason to "go formal" in economic
theorizing or that there were/are easy modeling choices.

3) In my experience, most of the criticism of economic models comes from
ignorance of the goal and context of a model and a too literal reading of the
math. For example, if you take Markowitz's portfolio optimization (mean vs
variance of a linear combination of a multivariate normal), it is correct that
individual returns have non-exponentially decaying "heavy" tails, the copula
is not (unconditionally) Gaussian, and risk is therefore not captured in
variance and correlations (not least because they may in fact be undefined).
But that is completely beside the point of the model, which is simply to
express the idea that the risk of a portfolio is not necessarily additive and
that there is a tradeoff between risk and return. The point being, although it
is expressed in mathematical language, it is actually a qualitative model.
Once you realize this difference to more descriptive models in the sciences,
economic theory starts to make a lot more sense.

4) The real problem of economic theory may be the disconnect between how many
people have a stake in it and how many people have the time and leisure and
inclination and background to understand what the theorists are actually
saying.

5) Side comment and half-reply to _ThePhysicist_ 's complaint: The reason to
go with the "perfect gas"-type models in economic theory, I think, is that you
are dealing with self-interested, utility-maximizing particles or "agents" ->
acting particles. The thinking being that if you put in constraints of some
form, say a short-sales constraint in a financial market model, you make the
model very special. But in the messy real world agents would find a way around
this particular constraint eventually. So the unconstrained general
equilibrium models are trying to give you a big picture, "this is where the
market tends to" type of result. There is so much more to be said on this
point but I'm already way above my allocated time for this "duty call"...

6) Last but not least, let me state my opinion that there is nothing
inherently noble about science. It is a method to gain knowledge, and it is
contingent on the affordances of the field to which it is applied. In economic
theory, your basic problem is lack of data. Now that may change in some
subfields, and that's great. So the scientific method can be applied in those
subfields eventually. But we need answers or opinions today for practical
problems. I see economics as akin to philosophy how Russell [2] understood it.
Let me quote him:

 _“Philosophy, as I shall understand the word, is something intermediate
between theology and science. Like theology, it consists of speculations on
matters as to which definite knowledge has, so far, been unascertainable; but
like science, it appeals to human reason rather than to authority, whether
that of tradition or that of revelation. All definite knowledge—so I should
contend—belongs to science; all dogma as to what surpasses definite knowledge
belongs to theology. But between theology and science there is a No Man’s
Land, exposed to attack from both sides; this No Man’s Land is philosophy.
Almost all the questions of most interest to speculative minds are such as
science cannot answer, and the confident answers of theologians no longer seem
so convincing as they did in former centuries.”_

One should be aware of the limits of this approach but one should also not
assume that there was a choice between science and this. If there was, it
wouldn't even be a contest! The realm of science may get bigger over time, as
more and more data is gathered, but again, we need answers today and in real
time, not in 100 years, to decide on regulations, interest rates, portfolios
or budgeting decisions. In almost all the big economic questions, your sample
size is one and the possibility to experiment is nil. The world is arguably
nonstationary on time-scales that matter, economic mechanisms change, and
every statistical test and computational experiment is always a joint
hypothesis test of your assumptions, about which I said in (1) above that
there is and perhaps can be no consensus.

In short, it's not that people don't know there is a problem. It's that there
has so far been no better solution.

______________________

[1] I'm just making this definition up on the fly but if someone has a better
one, I'm all ears.

[2] B. Russell. A History of Western Philosophy. George Allen & Unwin, 1945.

------
_pmf_
Economics is like fantasy football league. I predicts the future based on
isolated personal preferences and ideologies of the "scientist", optionally
sprinkled with small scale observations of data with dubious accuracy.

------
Vagelis
Considering financial policies are the de-facto social discussion around the
Globe, and progress of the human species is being discussed and perceived in
financial terms, it is no wonder the role of philosophy has fallen to
economists.

One can hope that data-driven economics could improve predictions, but keeping
the theory discussion alive is vital, if we are to ever understand our goals
as something more than increasing production and consumption (quantitative).

Using the correct set of data, has long been the main issue with economic
theory conflicts, and data-driven economics can only make a difference (and a
huge one) if that changes.

------
hrzn
The maths models used in economics are rarely checked against real-world data,
but when they are they often turn out to be wrong.

A major instance of this problem comes from models used for trading, which
often assume Gaussian distributions and Brownian-motion behaviors. According
to those, extreme moves such as the ones occurring during economic crises such
as the one of 2007 are several sigmas away from the mean -- making them
supposed to happen perhaps once every 10^10 years. Yet they happen every 20
years. Taleb's book "Black Swan" is an interesting resource on this topic, for
those interested.

~~~
endzone
gosh, i wonder why those traders use those simple, outdated models to make
extraordinarily expensive decisions every singly day when they could just read
the "black swan"

------
pdkl95
I like Mark Blyth's brief summary[1] of this problem. Not only is it important
to base your theories on _actual data_ , it is also vitally important to
remember that the map is not the territory. All models are an imperfect
representation of reality, so they should always be viewed with appropriate
scepticism, even when the math seems to work out elegantly.

[1]
[https://www.youtube.com/watch?v=hmWbkPezgtU](https://www.youtube.com/watch?v=hmWbkPezgtU)

------
NumberCruncher
There is a main difference between Physics and Economics. Physics tries to
explain the laws of nature which do not change over time. But Economics tries
to explain the laws of a system based on human knowledge and believes which is
anything but robust. Using modeling techniques borrowed from
Physics/Mathematics in the field of Economics can work very well but only if
the laws you are investigating are robust over a given period of time.

Edit: typo

------
k2enemy
If anyone is interested in something other than shitting on economics...

The other half of the article seems interesting. Does anyone have handy
references (besides the Athey and Varian papers in the article) to how machine
learning is being used to establish causation rather than focusing on
prediction? I've heard several places that there have been big strides lately
in this area, but I'm not sure where to look.

~~~
marketforlemmas
Here's a link to the slides that she used for the NBER talks. I've flipped
through them and there seems to be some references to working papers (that
Googling should be able to surface):

[https://onedrive.live.com/?cid=351055fdce7d0ff1&id=351055FDC...](https://onedrive.live.com/?cid=351055fdce7d0ff1&id=351055FDCE7D0FF1%21330395&ithint=folder,pdf&authkey=!ACqeqfcqAxdediE)

------
qewrffewqwfqew
Doesn't (over-applied) machine learning just lead towards a variation of
exactly the same problem?

Instead of "this model fits the curve and sounds attractive and sciencey" it
becomes "this model fits the curve and was done by computer!"

Not really the "empiricism coming to economics" that the author claims, but I
guess it could support better outcomes. For a while.

------
igravious
Economics is fascinating because it is where ideology meets math.

Economics has a math problem only if you're not honest about your mathematical
models reflecting an ideological position rather than "reality" (whatever
that's meant to mean in the context of economics).

------
DanielBMarkham
I love watching smart people argue, so I love economics. Economics is a great
source for jokes. "Economics is astrology for people who know calculus", "How
many economists does it take to reach a conclusion?", and so on.

As much as I like picking on economists and watching them bicker, there's
actually a method to the madness. (Except for the shills, I'm looking at you,
Krugman[1]). When done correctly, economics becomes kind of a cross between a
courtroom and a bullshitting session. People present various theories and sets
of measurements. Lots of discussion around instrumentation and epistemology
takes place. At the end of the day, the discussion wraps up to be something
like "Given that most of us agree that these kinds of initial conditions
mostly lead to these kinds of results, do most of us think that these kinds of
initial conditions currently exist?" (Note that the "most of us" can very well
be different sets of folks)

Oddly enough, it turns out that this kind of discussion has lots of real-world
value.

Machine learning and deep learning especially has a pretty cool new role here,
but it will never take of this dynamic ongoing discssion.

So no, economics doesn't have a math problem. It doesn't work like that.
Perhaps a better way of putting is this: people who expect the world to be
deterministic have a problem with economics. That situation is unlikely to
change.

[1] I pick on Krugman because his shtick is already knowing the answer, no
matter what the question is. He also likes showing us his Nobel. Somebody said
once that every Krugman column should begin with "Damn fools!" In this way,
this isn't economics; as far as I can tell it's personal aggrandizement using
economics as a prop. A huge ego is a terrible thing to waste. But damn, it
sure is entertaining!

[Several edits for clarity]

~~~
brc
Good comment - I remember while studying economics (a subject I have always
enjoyed) I got into an argument with some fellow students who felt that it was
too 'fluffy' and 'not enough meat'. They wanted to do equations and get hard
answers.

The truth is that Economics is the study of choices in a world of limited
resources, and that the process is exactly as you have said : observing
initial conditions, material decisions and subsequent outcomes. It is, as laid
out by Adam Smith, also dependent on certain initial inputs (theory of moral
sentiments) which produce rational actors.

The amusing thing for me is that, despite repeated tests and outcomes, people
continue to think that they can wander off the reservation and get better
outcomes with the same humans by trying different things to try and control
the flow of limited resources. The results are rarely pretty, but the siren
song of being able to improve things and be hailed a hero draws people into
thinking the rules do not apply.

Krugman wandered off the reservation a while back and hasn't been worth
reading since at least 2008.

The point is, you don't have to agree on economic policies to agree that it's
not a hard science and shouldn't be treated as such.

~~~
igravious
2008? That's a coincidental year. Around about the time of the last crisis and
the beginning of austerity politics. The worst economic period since the Great
Depression arguably. The rich getting ever richer. Real wages for most people
stagnating or falling. Massive unemployment and under-employment. Quantitative
Easing not creating real jobs and fixing infrastructure. Low interest rates
(still!) Multinational corporations with so much money through tax evasion
schemes that they literally don't know what to spend it on. The ongoing
privatisation of public services which rarely if ever benefits the public.
Essentially, ongoing class warfare and levels of inequality not seen in
practically a century. Regulatory and political capture and political
collusion. Trade agreements on the horizon being negotiated in secret that
would exacerbate every issue already mentioned.

And you say Krugman has wandered off reservation? Rubbish. He's got to keep
banging the same drum because nothing's getting fixed.

------
tim333
The use of machine learning seems promising. One of the troubles with using
regular mathematical equations is that at the end of the day economics is
about human behaviour and that doesn't fit. Take a recent phenomenon like the
2008 crash. Banks increased lending, bankers made big bonuses while passing
the risk on to various other parties and used some of the money to lobby
politicians and keep the whole thing going until it suddenly collapsed leaving
the other parties with the bill and the bankers with their bonuses. You're not
going to capture that in a simple equation but running machine learning on say
50 previous crashes might get wise to what's happening.

I'm guessing you could run something like face recognition software but
instead of faces it could recognise effects like the above and flash some
politicians being paid off to turn a blind eye to high risk - give 'em a kick,
warning or similar.

------
gooseus
I feel like Nassim Taleb (Fooled By Randomness, Black Swan, Antifragile) has
been making a similar point for years now.

Unfortunately I don't know enough about economics to comment any more than
that.

------
amelius
Any recommendations on economics books with just the right amount of math, for
non-economists with a college degree?

I'm looking for the economics equivalent of Feynman's lectures on physics.

~~~
asgard1024
The book I got recommended from Steve Keen, when I asked him a similar
question, was J.M.Blatt: Dynamic Economic Systems. Although he has beautifully
simple approach, it is really outside the standard economic theory and apart
from Keen and perhaps few other individuals, sadly no one really follows in
Blatt's footsteps.

~~~
endzone
keen is a complete charlatan and the laughing stock of the economic world. he
doesn't even understand the basic economic theory he attempts to criticize

~~~
asgard1024
Are the believers in so-called "economic theory" so desperate that they have
to resort to name calling?

I sincerely hope someday you would read Blatt's book with an open mind. It has
_nothing_ to do with Keen, and on few pages with a bit of matrix math he
obtains far better model than economists with their supply and demand curves
can ever hope. (In fact, John von Neumann apparently had fingers in it too -
shame he didn't live longer, we could have a proper economic theory today.)

------
mamon
Capitalism is a greedy and cruel system where 2 + 2 = 4. Socialism is a a
blessed system claiming that in a name of social responsibility and justice 2
+ 2 should equal 7 (at least)

