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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 alw

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 :)

brc 11y ago
The best theories on economics date back much further than the twentieth century. The history of economics is far more interesting than trying to run experiments. A talented economist has to be able to come up with explanations for things they observe, which can then be proven out with further data. The mistake is in thinking it should or could be a hard science like physics.
- jevgeni 11y ago
  Exactly. I'm also doubtful that taking a more real science approach to economics (hypothesis -> experiment -> result -> rule) will work. It's a science about societies and societies change. For example, the financial markets are the most measured markets out there, with the most microscopic details recorded. One interesting thing that happens after financial crashes are crises of theory. For example prior to 1987 American options didn't show [volatility smiles](https://en.wikipedia.org/wiki/Volatility_smile https://en.wikipedia.org/wiki/Volatility_smile). After the crash the smiles appeared, making the markets a very different place. The same happened after Subprime and the LIBOR scandal, when the notion of a "risk-free rate" suddenly disappeared: governments now had to compensate for their default risk and market quotes were unreliable. Academics still struggle with the whole notion, although it seems that the current practice is settling around OIS discounting and CVA/DVA. The point is, rules change. Hence in economics you can't just empirically deduce a rule and let it be, you constantly have to recalibrate it.
  - sklogic 11y ago
    Only the real science approach ever works. If your "science" is using any other approach, it is not a science, period. And there is a proper, scientific approach in the economics: behavioural economics. Instead of hand waving about some "ideal", non-existant agents acting fully rationally upon a 100% correct and impossible information available, as the classic bullshit economics does, the proper, behavioural economics starts with studying the real individuals behaviour (which is very much doable, no matter what the others are saying), and only then drawing conclusions about the herd behaviour in a statistical scale.
    - JupiterMoon 11y ago
      Isn't his point that there is a sort of uncertainty principle in economics? For example when you study people they behave differently and furthermore as soon as they think that you think that they will behave in a certain way they may well behave differently -- especially if there is financial gain at stake for changing their behaviour. As you say this all derives from the biggest problem with all the social sciences people are not rational actors and any mathematical model has to encapsulate real human behaviour.
      - TuringTest 11y ago
        > For example when you study people they behave differently and furthermore as soon as they think that you think that they will behave in a certain way they may well behave differently That's not an inherent limitation for applying science. Signal theory has models that represent circuits with feedback loops, where the output ; similar models could be developed to study people who know are being studied. Also, if you use data collections that were compiled for other purposes, you can study the behavior of people who don't know are participating un such study. Big data is essentially that. > As you say this all derives from the biggest problem with all the social sciences people are not rational actors and any mathematical model has to encapsulate real human behaviour. There are theories that don't assume perfect rational agents, and can still predict behavior by studying the common human bias. See the work of behavioral economist Dan Ariely for an academic approach.
- analog31 11y ago
  The mistake is in thinking it should or could be a hard science like physics. That's fair, so far as academic research goes, as there are plenty of academics doing respectable work in in non-scientific fields such as music and poetry. But it's another matter to decide if and how to ethically apply the results of soft-science research (likewise music and poetry) in ways that affect society.
lottin 11y ago
All theories are abstract, that's the whole point of a theory. Without abstraction there's only observation and no reasoning. That's why I'm highly sceptical of the claim that it is possible to understand something simply by "letting the data speak" without "committing to a theory".
- sklogic 11y ago
  > Without abstraction there's only observation and no reasoning This is what the real science is. Observation and only observation. Reasoning is secondary and unimportant.
  - amelius 11y ago
    Not true. With reasoning, one can develop a model, and this model can be tested against reality by observations, thus closing the circle. Mere observations give no interesting and no useful results. Basically, you'll end up with an ever-growing list of facts.
    - sklogic 11y ago
      But all the reasoning should always be a direct consequence of the data. Not the other way around. Science, essentially, is nothing but a process of extracting information (as in the algorithmic information theory, not in Shannon sense) from the data. Reasoning is just a tool, one of the ways of representing this information.
      - amelius 11y ago
        > But all the reasoning should always be a direct consequence of the data. Not the other way around. In order to test a model, it is useful to collect new data.
      - warrenpj 11y ago
        I think it works both ways. Theories help us decide what to observe, or where to look and what we're looking at. Observation is useful to develop a theory (induction, or "educated guessing"). However, having a theory guides us towards newer, often subtler observations as we attempt to falsify it. Karl Popper called this the theory-ladeness of observation [1] [1] http://plato.stanford.edu/entries/popper/ http://plato.stanford.edu/entries/popper/
donkeyd 11y ago
I would be very surprised if banks and big trading companies aren't doing this already, in order to predict markets. Sharing this information, however, would eliminate their competitive advantage, so I assume they just do it secretly.
TheSpiceIsLife 11y ago
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.
- deleted 11y ago
  [deleted]
- hammock 11y ago
  Much denser, but if you enjoyed mccloskey, I recommend The Romantic Economist by Richard Bronk. It also repudiates the rigid but unrepresentative models of the average economics lesson, and explores the role of imagination and creativity (novelty) in the dynamic nature of economics that you've described.
- asgard1024 11y ago
  > 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.
  - 11y ago
rodgerd 11y ago
> 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. Essentially it's like pre-Enlightenment Natural Philiosophy, in that it's a discipline that claims to explain the way the world works, but actually explains who has the most sway in getting their ideas accepted. > ...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. I suspect reality will get about as much traction against idealogues of e.g. the Chicago School as actual climate science does agains useful idiots like Bjørn Lomborg. It's about providing views that happen to be useful to moneyed interests, not reality.
- CWuestefeld 11y ago
  I suspect reality will get about as much traction against idealogues of e.g. the Chicago School This is an odd criticism. I could see it applied to Chicago's cousin, the Austrian school, which clearly relies more on ideas (viz. the work of Hayek and Mises, both of whom considered themselves political philosophers as much as economists). But Chicago is just the opposite. It's been criticized for being too tied up in the mathematics of it all. Chicagoans love numbers.
  - JamesBarney 11y ago
    It's my understanding that your right that Chicagoan's are known for their love of math but not necessarily their love of empiricism. However they almost exclusively use RBC(real business cycle) models which are created based on stylized assumptions about human behavior(always rational, lives forever, always able to borrow) and then the parameters are played with until it fits some data in the real world(usually the parameters are completely unrealistic). And they make pretty terrible predictions. To my knowledge they aren't ever used to actually make any predictions about the economy. People who do predictions like the(CBO, FED, IMF etc..) use old school Keynesian-style aggregate models of the economy. Larry Summers said of RBC models 1. RBC models use parameter values that are almost certainly wrong, 2. RBC models make predictions about prices that are completely, utterly wrong, and 3. The "technology shocks" that RBC models assume drive the business cycle have never been found. (They assume that during recessions we just forget how to be efficient.)
wodenokoto 11y ago
Greatcomment, very insightful. I think another reason is that in business you need models you can reason about. One example is from a bank that advises customers on investment. They have to algorithms doing machine learning on the market, a decision tree and a deep neural net. Over time they can see that the neural net outperforms the decision tree, yet they cannot use the results to advise customers because it is a black box. Why should you buy this investment? "Because the computer said so" isn`t an answer that makes it sound like you know what you are talking about.
fennecfoxen 11y ago
> 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 I recall my family's PhD. economist relating an anecdote about an colleague explaining that he's making the usual set of assumptions like, say, "people live forever", before doing some math for students. :) Assume a spherical cow: https://en.wikipedia.org/wiki/Spherical_cow https://en.wikipedia.org/wiki/Spherical_cow
pachydermic 11y ago
Experiments are pretty damn crucial to the entire scientific process, right? What if you couldn't do controlled experiments? That's where economics is right now. Until we either get enough data or economists can run actual experiments (ie those that don't just rely on fabricated mathematical models) I don't think we'll have real rigor in economics. In the meantime, we still have to do our best. People still want ways to predict the future which suffer less from human interference (which is ideally what a mathematical model will let you do). That's still better than just asking people what they think (in some ways). A lot of simplifying assumptions have to be made to say anything useful about a system which includes billions of intelligent actors trading trillions of dollars. There's obviously room for improvement, and I think that'll happen once people are given the proper tools to make it happen.
- logfromblammo 11y ago
  We are almost to the point where an entity like Facebook or Amazon could do controlled economic experiments. Or they could gather so much data, that when filtering them based on the experimental criteria, whatever remains could show a significant result. Aside from the technical possibility of doing economic experiments, there is also the ethics of doing them. You are not only involving humans, but doing so on a grand scale. To prove a point, you would not only need to possibly send an economy into a recession, but you would have to do so dozens of times to get significant results. The people you are experimenting upon might get a little murdery.
rebootthesystem 11y ago
Assume a cow is a uniform sphere of milk... And sometimes that's how economics feels. Absolutely agree with your comment. Coincidentally, I was thinking about this yesterday as I watched one of many economists explain the market on TV. At some level I feel they grab onto one of N plausible ideas and go with it. They have to say something, right? After all, they are economists. I haven't failed to notice that there are very few (not one?) massively wealthy economists. That has to say something. If you look at the people who have made fortunes they are all practitioners, not theorists. In other words, they "touch and feel" the economy every second of the day for years and understand how it moves, at least at the relevant micro level, to gain advantages. This one thing has always bothered me about economics. Lots of economists publishing books and claiming all sorts of events and effects and none of them have significant financial success to show for their understanding of the economy. Fake Jedi's who talk about the force but can't use it. I'd like to see an economist on TV who starts their opinion of the economy in a Trump-esque way with: "I am very rich. I understand the economy and because of that I make $400 million per year". In terms of using models and simulations, well, we do a lot of FEA, mostly for thermal and fluid dynamics. I had a poster printed and hung in the lab. It reads: "The only person who believes the results of these simulations is the one who wrote the code". I stole that from my friends in aero who always talk about how careful you have to be with aero "codes", particularly at the extremes (low and high RN). Of course, FEA has gotten better and better over the years, yet it is true that you have to be very careful with how you interpret results. That's why we verify expected results experimentally by building a prototype every N variants of a design based on various criteria. I remember thermal management design to cool over 1,000 Watts of high power LED's concentrated within a small surface area. It took eight months of FEA and dozens of prototypes to get it right. Some of the proto's didn't behave anything like the simulation. Some behaved better. It's an art. And so my point is that we are likely to have a new crop of economists who will base their opinions on simulations without, perhaps, understanding just how imperfect they can be.
- Mikeb85 11y ago
  Plenty of economists work as traders, in banks, and have money and success to show for it. But they're not making economic policy, nor creating theories in academic settings. They're just using complex models to predict things, they have no interest in creating policies. In general, the economists who are successful are mostly ignored. An example of an economist who is successful would be Jan Hatzius, Goldman Sach's head economist.
scottlocklin 11y ago
Samuelson attempted to develop a sort of thermodynamics of economics. As far as I can tell it was a miserable failure. https://en.wikipedia.org/wiki/Foundations_of_Economic_Analysis https://en.wikipedia.org/wiki/Foundations_of_Economic_Analys... I'm a fan of using physics models for predicting behavior of large groups of people, but economics .... they do occasionally come up with nice statistical tools. Sort of like psychological researchers; those fellows whose papers can only be reproduced around 1/3 of the time.
saosebastiao 11y ago
Those theoretical models have held up to quite a bit of empirical scrutiny, and almost perfectly so in highly competitive markets like crops, energy (production, not distribution), housing, etc. I would say that the models have remained simplistic because economists have been trained to recognize the conditions when the theoretical models break down. Competition (or lack of it) is absolutely the number one area where the simplistic models break down, with psychological phenomena being a close second. Even where there is demonstrated and measured irrationality in individual decisions though, in aggregate the distortion effects tend to be minimized. Outside of these known areas of completixity and modeling deficiency, there have been several major breakthroughs in modeling and understanding other seemingly puzzling factors. Matching problems, search frictions, moral repugnance, game theory, asymmetric information, and discrete choices. There have been huge advances since the 1950's, it just takes some time to catch up with it all.

brc 11y ago

The best theories on economics date back much further than the twentieth century. The history of economics is far more interesting than trying to run experiments. A talented economist has to be able to come up with explanations for things they observe, which can then be proven out with further data. The mistake is in thinking it should or could be a hard science like physics.

jevgeni 11y ago
Exactly. I'm also doubtful that taking a more real science approach to economics (hypothesis -> experiment -> result -> rule) will work. It's a science about societies and societies change. For example, the financial markets are the most measured markets out there, with the most microscopic details recorded. One interesting thing that happens after financial crashes are crises of theory. For example prior to 1987 American options didn't show [volatility smiles](https://en.wikipedia.org/wiki/Volatility_smile https://en.wikipedia.org/wiki/Volatility_smile). After the crash the smiles appeared, making the markets a very different place. The same happened after Subprime and the LIBOR scandal, when the notion of a "risk-free rate" suddenly disappeared: governments now had to compensate for their default risk and market quotes were unreliable. Academics still struggle with the whole notion, although it seems that the current practice is settling around OIS discounting and CVA/DVA. The point is, rules change. Hence in economics you can't just empirically deduce a rule and let it be, you constantly have to recalibrate it.
- sklogic 11y ago
  Only the real science approach ever works. If your "science" is using any other approach, it is not a science, period. And there is a proper, scientific approach in the economics: behavioural economics. Instead of hand waving about some "ideal", non-existant agents acting fully rationally upon a 100% correct and impossible information available, as the classic bullshit economics does, the proper, behavioural economics starts with studying the real individuals behaviour (which is very much doable, no matter what the others are saying), and only then drawing conclusions about the herd behaviour in a statistical scale.
  - JupiterMoon 11y ago
    Isn't his point that there is a sort of uncertainty principle in economics? For example when you study people they behave differently and furthermore as soon as they think that you think that they will behave in a certain way they may well behave differently -- especially if there is financial gain at stake for changing their behaviour. As you say this all derives from the biggest problem with all the social sciences people are not rational actors and any mathematical model has to encapsulate real human behaviour.
    - TuringTest 11y ago
      > For example when you study people they behave differently and furthermore as soon as they think that you think that they will behave in a certain way they may well behave differently That's not an inherent limitation for applying science. Signal theory has models that represent circuits with feedback loops, where the output ; similar models could be developed to study people who know are being studied. Also, if you use data collections that were compiled for other purposes, you can study the behavior of people who don't know are participating un such study. Big data is essentially that. > As you say this all derives from the biggest problem with all the social sciences people are not rational actors and any mathematical model has to encapsulate real human behaviour. There are theories that don't assume perfect rational agents, and can still predict behavior by studying the common human bias. See the work of behavioral economist Dan Ariely for an academic approach.
analog31 11y ago
The mistake is in thinking it should or could be a hard science like physics. That's fair, so far as academic research goes, as there are plenty of academics doing respectable work in in non-scientific fields such as music and poetry. But it's another matter to decide if and how to ethically apply the results of soft-science research (likewise music and poetry) in ways that affect society.

lottin 11y ago

All theories are abstract, that's the whole point of a theory. Without abstraction there's only observation and no reasoning. That's why I'm highly sceptical of the claim that it is possible to understand something simply by "letting the data speak" without "committing to a theory".

sklogic 11y ago
> Without abstraction there's only observation and no reasoning This is what the real science is. Observation and only observation. Reasoning is secondary and unimportant.
- amelius 11y ago
  Not true. With reasoning, one can develop a model, and this model can be tested against reality by observations, thus closing the circle. Mere observations give no interesting and no useful results. Basically, you'll end up with an ever-growing list of facts.
  - sklogic 11y ago
    But all the reasoning should always be a direct consequence of the data. Not the other way around. Science, essentially, is nothing but a process of extracting information (as in the algorithmic information theory, not in Shannon sense) from the data. Reasoning is just a tool, one of the ways of representing this information.
    - amelius 11y ago
      > But all the reasoning should always be a direct consequence of the data. Not the other way around. In order to test a model, it is useful to collect new data.
    - warrenpj 11y ago
      I think it works both ways. Theories help us decide what to observe, or where to look and what we're looking at. Observation is useful to develop a theory (induction, or "educated guessing"). However, having a theory guides us towards newer, often subtler observations as we attempt to falsify it. Karl Popper called this the theory-ladeness of observation [1] [1] http://plato.stanford.edu/entries/popper/ http://plato.stanford.edu/entries/popper/

donkeyd 11y ago

I would be very surprised if banks and big trading companies aren't doing this already, in order to predict markets. Sharing this information, however, would eliminate their competitive advantage, so I assume they just do it secretly.

TheSpiceIsLife 11y ago

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.

deleted 11y ago
[deleted]
hammock 11y ago
Much denser, but if you enjoyed mccloskey, I recommend The Romantic Economist by Richard Bronk. It also repudiates the rigid but unrepresentative models of the average economics lesson, and explores the role of imagination and creativity (novelty) in the dynamic nature of economics that you've described.
asgard1024 11y ago
> 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.
- 11y ago

rodgerd 11y ago

> 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. Essentially it's like pre-Enlightenment Natural Philiosophy, in that it's a discipline that claims to explain the way the world works, but actually explains who has the most sway in getting their ideas accepted. > ...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. I suspect reality will get about as much traction against idealogues of e.g. the Chicago School as actual climate science does agains useful idiots like Bjørn Lomborg. It's about providing views that happen to be useful to moneyed interests, not reality.

CWuestefeld 11y ago
I suspect reality will get about as much traction against idealogues of e.g. the Chicago School This is an odd criticism. I could see it applied to Chicago's cousin, the Austrian school, which clearly relies more on ideas (viz. the work of Hayek and Mises, both of whom considered themselves political philosophers as much as economists). But Chicago is just the opposite. It's been criticized for being too tied up in the mathematics of it all. Chicagoans love numbers.
- JamesBarney 11y ago
  It's my understanding that your right that Chicagoan's are known for their love of math but not necessarily their love of empiricism. However they almost exclusively use RBC(real business cycle) models which are created based on stylized assumptions about human behavior(always rational, lives forever, always able to borrow) and then the parameters are played with until it fits some data in the real world(usually the parameters are completely unrealistic). And they make pretty terrible predictions. To my knowledge they aren't ever used to actually make any predictions about the economy. People who do predictions like the(CBO, FED, IMF etc..) use old school Keynesian-style aggregate models of the economy. Larry Summers said of RBC models 1. RBC models use parameter values that are almost certainly wrong, 2. RBC models make predictions about prices that are completely, utterly wrong, and 3. The "technology shocks" that RBC models assume drive the business cycle have never been found. (They assume that during recessions we just forget how to be efficient.)

wodenokoto 11y ago

Greatcomment, very insightful. I think another reason is that in business you need models you can reason about. One example is from a bank that advises customers on investment. They have to algorithms doing machine learning on the market, a decision tree and a deep neural net. Over time they can see that the neural net outperforms the decision tree, yet they cannot use the results to advise customers because it is a black box. Why should you buy this investment? "Because the computer said so" isn`t an answer that makes it sound like you know what you are talking about.

fennecfoxen 11y ago

> 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 I recall my family's PhD. economist relating an anecdote about an colleague explaining that he's making the usual set of assumptions like, say, "people live forever", before doing some math for students. :) Assume a spherical cow: https://en.wikipedia.org/wiki/Spherical_cow https://en.wikipedia.org/wiki/Spherical_cow

pachydermic 11y ago

Experiments are pretty damn crucial to the entire scientific process, right? What if you couldn't do controlled experiments? That's where economics is right now. Until we either get enough data or economists can run actual experiments (ie those that don't just rely on fabricated mathematical models) I don't think we'll have real rigor in economics. In the meantime, we still have to do our best. People still want ways to predict the future which suffer less from human interference (which is ideally what a mathematical model will let you do). That's still better than just asking people what they think (in some ways). A lot of simplifying assumptions have to be made to say anything useful about a system which includes billions of intelligent actors trading trillions of dollars. There's obviously room for improvement, and I think that'll happen once people are given the proper tools to make it happen.

logfromblammo 11y ago
We are almost to the point where an entity like Facebook or Amazon could do controlled economic experiments. Or they could gather so much data, that when filtering them based on the experimental criteria, whatever remains could show a significant result. Aside from the technical possibility of doing economic experiments, there is also the ethics of doing them. You are not only involving humans, but doing so on a grand scale. To prove a point, you would not only need to possibly send an economy into a recession, but you would have to do so dozens of times to get significant results. The people you are experimenting upon might get a little murdery.

rebootthesystem 11y ago

Assume a cow is a uniform sphere of milk... And sometimes that's how economics feels. Absolutely agree with your comment. Coincidentally, I was thinking about this yesterday as I watched one of many economists explain the market on TV. At some level I feel they grab onto one of N plausible ideas and go with it. They have to say something, right? After all, they are economists. I haven't failed to notice that there are very few (not one?) massively wealthy economists. That has to say something. If you look at the people who have made fortunes they are all practitioners, not theorists. In other words, they "touch and feel" the economy every second of the day for years and understand how it moves, at least at the relevant micro level, to gain advantages. This one thing has always bothered me about economics. Lots of economists publishing books and claiming all sorts of events and effects and none of them have significant financial success to show for their understanding of the economy. Fake Jedi's who talk about the force but can't use it. I'd like to see an economist on TV who starts their opinion of the economy in a Trump-esque way with: "I am very rich. I understand the economy and because of that I make $400 million per year". In terms of using models and simulations, well, we do a lot of FEA, mostly for thermal and fluid dynamics. I had a poster printed and hung in the lab. It reads: "The only person who believes the results of these simulations is the one who wrote the code". I stole that from my friends in aero who always talk about how careful you have to be with aero "codes", particularly at the extremes (low and high RN). Of course, FEA has gotten better and better over the years, yet it is true that you have to be very careful with how you interpret results. That's why we verify expected results experimentally by building a prototype every N variants of a design based on various criteria. I remember thermal management design to cool over 1,000 Watts of high power LED's concentrated within a small surface area. It took eight months of FEA and dozens of prototypes to get it right. Some of the proto's didn't behave anything like the simulation. Some behaved better. It's an art. And so my point is that we are likely to have a new crop of economists who will base their opinions on simulations without, perhaps, understanding just how imperfect they can be.

Mikeb85 11y ago
Plenty of economists work as traders, in banks, and have money and success to show for it. But they're not making economic policy, nor creating theories in academic settings. They're just using complex models to predict things, they have no interest in creating policies. In general, the economists who are successful are mostly ignored. An example of an economist who is successful would be Jan Hatzius, Goldman Sach's head economist.

scottlocklin 11y ago

Samuelson attempted to develop a sort of thermodynamics of economics. As far as I can tell it was a miserable failure. https://en.wikipedia.org/wiki/Foundations_of_Economic_Analysis https://en.wikipedia.org/wiki/Foundations_of_Economic_Analys... I'm a fan of using physics models for predicting behavior of large groups of people, but economics .... they do occasionally come up with nice statistical tools. Sort of like psychological researchers; those fellows whose papers can only be reproduced around 1/3 of the time.

saosebastiao 11y ago

Those theoretical models have held up to quite a bit of empirical scrutiny, and almost perfectly so in highly competitive markets like crops, energy (production, not distribution), housing, etc. I would say that the models have remained simplistic because economists have been trained to recognize the conditions when the theoretical models break down. Competition (or lack of it) is absolutely the number one area where the simplistic models break down, with psychological phenomena being a close second. Even where there is demonstrated and measured irrationality in individual decisions though, in aggregate the distortion effects tend to be minimized. Outside of these known areas of completixity and modeling deficiency, there have been several major breakthroughs in modeling and understanding other seemingly puzzling factors. Matching problems, search frictions, moral repugnance, game theory, asymmetric information, and discrete choices. There have been huge advances since the 1950's, it just takes some time to catch up with it all.