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Economics academia has become its own only client. Very few outside academia are interested in vector autoregression models of inflation, DSGE or identificatio

Economics academia has become its own only client. Very few outside academia are interested in vector autoregression models of inflation, DSGE or identification strategies. Traditional macroeconomic data and all the models that complemented it is technical debt.

DebtDeflation 1y ago
This. My undergrad was in Economics (a long time ago). There was a time I thought about doing a PhD, but ended up doing an MS in Quant Finance instead. It's hard to believe that anyone can take a DSGE model seriously as a model of how the economy works. For the unaware - graduate level Economics is nothing like pop Economics, it's essentially an applied math degree. But the math in question is extremely wonky. Mostly using Convex Set Theory and Brouwer Fixed Point Theorem from topology to prove the existence, uniqueness, and stability of a general equilibrium solution for a "market" of price-quantity commodity pairs. The assumptions needed to make it work are literally absurd.
- Onavo 1y ago
  Then why aren't all the quant shops snapping them up? It's not like their hiring needs are affected much by changes in the macro economy (except maybe trading volume and liquidity).
  - krackers 1y ago
    Borrowing a line from Rentec, probably because they'd rather prefer pure-math or physics people not "tainted" by economic dogma
    - ls612 1y ago
      On the other hand Cliff Asness and AQR are perfectly happy to rake in money by using the "dogma" as you describe it to analyze and trade in financial markets.
  - DebtDeflation 1y ago
    Because it's a very different type of math than that used in Quant Finance. Econ PhD programs don't want people with broad math skills, they want people who know the very narrow slice of math needed to solve these very unusual models. Quant Finance mainly uses PDEs and Brownian Motion stuff that all Math and Physics majors learn.
- ls612 1y ago
  The theory you are discussing (grad micro 101 equilibrium existence) is not actually crazy if you think about what the mathematical assumptions actually imply. Really the economic assumptions boil down to "small changes in prices lead to small changes in demand" and the math is just rigorously defining small in terms of a general topology.
  - Retric 1y ago
    Small price changes don’t necessarily lead to small results. There’s a reason companies advertise 19.99 not 20 which has been experimentally verified many times. People simply act irrationally, which is a fundamental issue when trying to treat economics as math.
    - kergonath 1y ago
      Matter is not continuous and yet we don’t need atoms to predict how a metal sheet will bend. There are a lot of sound theories about how to deal with discontinuity, and how the problem solves itself when numbers get large enough. Or think of it like weather and climate: we cannot predict that there will be a thunderstorm on a given day 2 months from now, but we can be fairly confident that in x years, the average global temperature will be y±z°C. Because when you aggregate enough events, statistical effects become dominant. "But reality is not linear" is not really a gotcha.
      - Retric 1y ago
        > Matter is not continuous and yet we don’t need atoms to predict how a metal sheet will bend. At sufficient detail atomic structure has a huge impact on how a metal sheet bends. Metallurgy seriously investigates at this level. Hand waving details is fine when discussing with friends, it’s not a sound foundation for serious academic research. Also, the degree to which the weather is unpredictable 2+ weeks out is somewhat overblown. It generally snows in DC several days a year yet the odds it snows in DC 2 weeks from now is essentially zero not ~4/365. Similarly you can more accurately predict thunderstorms than a pure guess 2 months from now. We may call it climate, but a physical model of earths tilt, prevailing winds, CO2, etc is better than just historic data.
- cyberax 1y ago
  I'm a pure math major, and I took several economics classes. The whole field was very baffling for me. The most reliable model was the dead simple IS–LM, which is based on observations. But you don't really need a lot of math for it, so it's boring. As a result, researchers keep trying to generalize the microeconomic behavior of people to derive macroeconomic laws. Like we do with the ideal gas laws. And this produces reams of beautiful math that you can investigate and tweak endlessly. But it doesn't seem to have a lot of predictive power.
  - raffael_de 1y ago
    Economists are stuck at a ceteris paribus level of comprehending what's going on. Forget about differential equations.
  - Findeton 1y ago
    Thing is, the part about using math for economics is highly debatable and that's why Austrian School of economics doesn't use it. From that perspective, we use ranking systems for our preferences, at the individual level, so using math for aggregate behaviour is just not well substantiated. This point of view comes from Carl Menger, which started the whole marginalist revolution.
    - cyberax 1y ago
      > Austrian School of economics doesn't use it Well, yeah. They're basically a cult with three rules: 1. The market is perfect. 2. If the market is not perfect, then it's the fault of the government. 3. If you have any questions, see 1.
      - Findeton 1y ago
        No, they don't say that the market is perfect. And if you want a cult, that's the current keynesian economics. Anyway, I don't see any way around not using math. Because value is subjective and that means it's a ranking system of preferences, not based in nominal values.
- k2enemy 1y ago
  > Mostly using Convex Set Theory and Brouwer Fixed Point Theorem from topology to prove the existence, uniqueness, and stability of a general equilibrium solution for a "market" of price-quantity commodity pairs. The assumptions needed to make it work are literally absurd. This is true for the first foundational courses in micro and macro. The profession has moved beyond this and the last forty plus years of research have been looking at various relaxations of these assumptions.
  - monkeyelite 1y ago
    Even the undergrad is like this. I was shocked to learn it wasn’t a historical study of economic theory and instead a technical course in stats and modeling.
- abdullahkhalids 1y ago
  I just went through the DSGE wiki page [1]. It says the following about the model, which if true, then I can see why it is an completely unserious model. > Below is an example of the set of assumptions a DSGE is built upon: > Perfect competition in all markets > All prices adjust instantaneously > Rational expectations > No asymmetric information > The competitive equilibrium is Pareto optimal > Firms are identical and price takers > Infinitely lived identical price-taking households > to which the following frictions are added: > Distortionary taxes (Labour taxes) – to account for not lump-sum taxation > Habit persistence (the period utility function depends on a quasi-difference of consumption) > Adjustment costs on investments – to make investments less volatile > Labour adjustment costs – to account for costs firms face when changing the level of employment [1] https://en.wikipedia.org/wiki/Dynamic_stochastic_general_equilibrium https://en.wikipedia.org/wiki/Dynamic_stochastic_general_equ...
  - Matthyze 1y ago
    Are these not the 'friction can be ignored' assumptions of economics? They are, of course, blatantly false. But that doesn't stop such models from effectively modelling real-world behavior. Granted, I know a slight bit about general equilibrium theory, but nothing about DSGE.
- fluorinerocket 1y ago
  It's fine to want to solve interesting math problems for the sake of it I suppose but they shouldn't be so certain about things when telling politicians what policies will work
- imtringued 1y ago
  One of the more disturbing things is that economists both believe in it and don't believe in it. Like, the standard Arrow Debreu market assumes that you don't carry over money balances from one day to the next, yet economists will vehemently argue in favor of being able to violate Arrow Debreu markets, but the market is in equilibrium anyway.
nxobject 1y ago
The opportunities are in applications that lead to job opportunities in other departments, especially with the rise of secondary data analysis in other fields… I would sell myself as as a methodologist in a field of application, rather than an economist first. For example, I do health systems research in an academic medical center. I work with a health economics research unit that doesn’t mint PhDs, but does hire at all stages of the academic career, and there’s been a lot of mobility for their “alums” - just not in traditional Econ departments.

DebtDeflation 1y ago

This. My undergrad was in Economics (a long time ago). There was a time I thought about doing a PhD, but ended up doing an MS in Quant Finance instead. It's hard to believe that anyone can take a DSGE model seriously as a model of how the economy works. For the unaware - graduate level Economics is nothing like pop Economics, it's essentially an applied math degree. But the math in question is extremely wonky. Mostly using Convex Set Theory and Brouwer Fixed Point Theorem from topology to prove the existence, uniqueness, and stability of a general equilibrium solution for a "market" of price-quantity commodity pairs. The assumptions needed to make it work are literally absurd.

Onavo 1y ago
Then why aren't all the quant shops snapping them up? It's not like their hiring needs are affected much by changes in the macro economy (except maybe trading volume and liquidity).
- krackers 1y ago
  Borrowing a line from Rentec, probably because they'd rather prefer pure-math or physics people not "tainted" by economic dogma
  - ls612 1y ago
    On the other hand Cliff Asness and AQR are perfectly happy to rake in money by using the "dogma" as you describe it to analyze and trade in financial markets.
- DebtDeflation 1y ago
  Because it's a very different type of math than that used in Quant Finance. Econ PhD programs don't want people with broad math skills, they want people who know the very narrow slice of math needed to solve these very unusual models. Quant Finance mainly uses PDEs and Brownian Motion stuff that all Math and Physics majors learn.
ls612 1y ago
The theory you are discussing (grad micro 101 equilibrium existence) is not actually crazy if you think about what the mathematical assumptions actually imply. Really the economic assumptions boil down to "small changes in prices lead to small changes in demand" and the math is just rigorously defining small in terms of a general topology.
- Retric 1y ago
  Small price changes don’t necessarily lead to small results. There’s a reason companies advertise 19.99 not 20 which has been experimentally verified many times. People simply act irrationally, which is a fundamental issue when trying to treat economics as math.
  - kergonath 1y ago
    Matter is not continuous and yet we don’t need atoms to predict how a metal sheet will bend. There are a lot of sound theories about how to deal with discontinuity, and how the problem solves itself when numbers get large enough. Or think of it like weather and climate: we cannot predict that there will be a thunderstorm on a given day 2 months from now, but we can be fairly confident that in x years, the average global temperature will be y±z°C. Because when you aggregate enough events, statistical effects become dominant. "But reality is not linear" is not really a gotcha.
    - Retric 1y ago
      > Matter is not continuous and yet we don’t need atoms to predict how a metal sheet will bend. At sufficient detail atomic structure has a huge impact on how a metal sheet bends. Metallurgy seriously investigates at this level. Hand waving details is fine when discussing with friends, it’s not a sound foundation for serious academic research. Also, the degree to which the weather is unpredictable 2+ weeks out is somewhat overblown. It generally snows in DC several days a year yet the odds it snows in DC 2 weeks from now is essentially zero not ~4/365. Similarly you can more accurately predict thunderstorms than a pure guess 2 months from now. We may call it climate, but a physical model of earths tilt, prevailing winds, CO2, etc is better than just historic data.
cyberax 1y ago
I'm a pure math major, and I took several economics classes. The whole field was very baffling for me. The most reliable model was the dead simple IS–LM, which is based on observations. But you don't really need a lot of math for it, so it's boring. As a result, researchers keep trying to generalize the microeconomic behavior of people to derive macroeconomic laws. Like we do with the ideal gas laws. And this produces reams of beautiful math that you can investigate and tweak endlessly. But it doesn't seem to have a lot of predictive power.
- raffael_de 1y ago
  Economists are stuck at a ceteris paribus level of comprehending what's going on. Forget about differential equations.
- Findeton 1y ago
  Thing is, the part about using math for economics is highly debatable and that's why Austrian School of economics doesn't use it. From that perspective, we use ranking systems for our preferences, at the individual level, so using math for aggregate behaviour is just not well substantiated. This point of view comes from Carl Menger, which started the whole marginalist revolution.
  - cyberax 1y ago
    > Austrian School of economics doesn't use it Well, yeah. They're basically a cult with three rules: 1. The market is perfect. 2. If the market is not perfect, then it's the fault of the government. 3. If you have any questions, see 1.
    - Findeton 1y ago
      No, they don't say that the market is perfect. And if you want a cult, that's the current keynesian economics. Anyway, I don't see any way around not using math. Because value is subjective and that means it's a ranking system of preferences, not based in nominal values.
k2enemy 1y ago
> Mostly using Convex Set Theory and Brouwer Fixed Point Theorem from topology to prove the existence, uniqueness, and stability of a general equilibrium solution for a "market" of price-quantity commodity pairs. The assumptions needed to make it work are literally absurd. This is true for the first foundational courses in micro and macro. The profession has moved beyond this and the last forty plus years of research have been looking at various relaxations of these assumptions.
- monkeyelite 1y ago
  Even the undergrad is like this. I was shocked to learn it wasn’t a historical study of economic theory and instead a technical course in stats and modeling.
abdullahkhalids 1y ago
I just went through the DSGE wiki page [1]. It says the following about the model, which if true, then I can see why it is an completely unserious model. > Below is an example of the set of assumptions a DSGE is built upon: > Perfect competition in all markets > All prices adjust instantaneously > Rational expectations > No asymmetric information > The competitive equilibrium is Pareto optimal > Firms are identical and price takers > Infinitely lived identical price-taking households > to which the following frictions are added: > Distortionary taxes (Labour taxes) – to account for not lump-sum taxation > Habit persistence (the period utility function depends on a quasi-difference of consumption) > Adjustment costs on investments – to make investments less volatile > Labour adjustment costs – to account for costs firms face when changing the level of employment [1] https://en.wikipedia.org/wiki/Dynamic_stochastic_general_equilibrium https://en.wikipedia.org/wiki/Dynamic_stochastic_general_equ...
- Matthyze 1y ago
  Are these not the 'friction can be ignored' assumptions of economics? They are, of course, blatantly false. But that doesn't stop such models from effectively modelling real-world behavior. Granted, I know a slight bit about general equilibrium theory, but nothing about DSGE.
fluorinerocket 1y ago
It's fine to want to solve interesting math problems for the sake of it I suppose but they shouldn't be so certain about things when telling politicians what policies will work
imtringued 1y ago
One of the more disturbing things is that economists both believe in it and don't believe in it. Like, the standard Arrow Debreu market assumes that you don't carry over money balances from one day to the next, yet economists will vehemently argue in favor of being able to violate Arrow Debreu markets, but the market is in equilibrium anyway.

nxobject 1y ago

The opportunities are in applications that lead to job opportunities in other departments, especially with the rise of secondary data analysis in other fields… I would sell myself as as a methodologist in a field of application, rather than an economist first. For example, I do health systems research in an academic medical center. I work with a health economics research unit that doesn’t mint PhDs, but does hire at all stages of the academic career, and there’s been a lot of mobility for their “alums” - just not in traditional Econ departments.