Young Economics.

Political ideology = f(mathematical tractability)

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One of my favorite things about economics is its attempt at scientific rigour through modeling. A good model makes predictions and can be falsified. A heavy reliance on math helps cut through the sort of semantic bullshit that helps post-modernist professors avoid saying anything in 500 pages.

The general opinion of economists (if there is such a thing) is pretty insensible to unsupported opinions. Every schmo, douche and ragamuffin has an opinion about the economy. To get a Nobel, you need an opinion, sure. But it has to be properly modeled and then give interesting results.

This is the source of much of the mockery concerning economics. All our assumptions about purely rational, self-interested consumers, for example, are clearly wrong. But they do make for some whiz-bang models that do a decent job explaining what’s happening in the economy. Everyone knows that we should also take into account people’s irrational exuberance and despair, their hopes and dreams, their penchant for terrible, terrible decisions. But how do you model any of that? The mathematical challenges are beastly.

Our need that any idea be mathematically tractable before it becomes canon is, I believe, one of the reasons why economists skew to more right-wing economic views. The free market is a gigantic mathematical crutch. A world of rational consumers, all finding their optimal consumption bundles at the tangency point of a separating hyperplane of free-market prices is a sunlit world we can wander at will. Take away the assumptions and it’s a dark, wolf-infested wilderness.

(Incidentally, communism also has some mathematical legs. Economists like to compare real-world results unfavourably with those generated by a wholly theoretical ‘social planner’ who knows all, sees all and is concerned only with the net welfare of the citizens of his domain. In this situation, the inefficiencies caused by public goods and externalities are gone, to the benefit of all. Sadly, when the theoretical social planner becomes the very real Stalin, the optimality breaks down somewhat.)

My point in all this is not “let’s all be sad.” Mathematical economics is developing. We can handle ambiguity, status quo bias, risk aversion, liquidity constraints, inter-dependent utility, expectations, hyperbolic discount rates, institutions, multiple equilibria and on and soporifically on. Each of these are incredibly boring and esoteric, yes, but they all have immense consequences for our ability to model the world more realistically. And the better we get at modeling the world, the more diversity of opinion economic orthodoxy can tolerate.

For example, twenty years ago an economist might look at Russia and say, “hey, they’re not doing so hot. How about we look at our models and see what they say. How shocking, more free markets would be optimal. Let’s buy them some of those.” We can still do that, but now we can say, hey, maybe Russia is in a crummy equilibrium and needs a big push of investment to get it to a better one. Or maybe parasitic institutions and perverse incentives are pushing entrepreneurs towards corruption rather than productivity. Or maybe the economy has insufficient investment because the average Russian is risk averse, has a hyperbolic discount rate, and expects that inflation will gnaw away at any savings he puts in the bank. I don’t actually know much about Russia, but if I actually cared I could make a hypothesis, throw together any number of models and see if they make any accurate predictions. No longer does our own mathematical ineptness constrain us to the most bare-boned skeleton as proxy for the living economy.

If nothing else, improved ability to model the world may just allow us to agree with things we agreed with anyway. Welfare state? Subsidized health care? Gays marrying (I may be over-stating the power of models with that one)? I’m a fan. But now I can be a fan on a professional level.

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Written by manopoly

June 16, 2009 at 7:46 pm

Posted in Uncategorized

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