Right Reason

Taking Equilibrium Too Seriously

In “All Systems Will be Gamed,” chapter six of Complexity and the Economy, Brian Arthurs argues that economics lacks a failure mode analysis of how systems work analogous to stress testing in structural engineering. The reason economics doesn’t have such a mode of analysis, Arthur argues, is that economists work with equilibrium assumptions that assume away the exploitive behavior that such stress tests are trying to predict: 

Economic analysis assumes equilibrium of the system in question, and by definition equilibrium is a condition where no agent has any incentive to diverge from its prevent behavior. It follows that for any system being studies no invasive or exploitive behavior cannot happen. If such a system could be invaded, some agents would be initiating new behavior, and the system could not have been in equilibrium. Equilibrium economics then, by its base assumptions, is not primed to look for the exploitation of systems, and as a result systemic studies of how systems might fail or be exploited are not central to how the discipline thinks. (Arthur 2014: 104).

As will be clear to those who read the book, Brian Arthurs really has an issue with equilibrium that becomes a consuming obsession. There is much to be said about the economics profession’s probable abuse of the notion of equilibria. Nevertheless, in attacking the concept, Arthurs does exactly what those who abuse equilibrium do: He takes equilibrium too seriously. As a conceptual tool, equilibrium is a useful way of constructing systems that can improve our understanding of the world. It’s only when we presume that we therefore assume away the unknown unknowns of life, to borrow Donald Rumsfeld’s illuminating phrase, through our systems that we err, yet that is an error Arthur makes himself with his own complexity approach.

 

Such system building isn’t bad per se. Indeed, it is neither good nor bad per se. Building systems, however primitive they may be, is one of the ways that the human mind comes to understand the world surrounding it. The men of system who helped to set up the 2008 Financial Crisis, be they investors who utilized a ridiculous degree of leverage or regulators who pushed value at risk as the way of doing risk management, made the fatal mistake of thinking that their systems were near perfect approximations of the real economy. They were the ones who assumed away tail risks and presumed that they knew enough to end history. The presumption of knowing all of the facts, not the presumption that an economy tends towards equilibrium is what did those men of the system in. (After all, it is very possible for an economy to be heading towards equilibrium and the people within it being wrong about what equilibrium it is tending towards.) 

Brian Arthur has nothing to say about such systems in his article. Instead, he wrongly believes that the sin was in the assumption of equilibrium, rather than in the presumption of knowledge. “Failure-mode studies are not at the center our our discipline for the simple reason that economics’ adherence to equilibrium analysis assumes that the system quickly settles to a place where no agent has an incentive to diverge from its present behavior, and so exploitive behavior cannot happen” (Ibid: 117).  

 

Yes, the assumption of equilibrium does bring much presumption of knowledge if one takes the assumption too seriously. But as a modeling tool, it is more thematic, providing the opportunity for a system builder to provide a coherent narrative, than descriptive. It is only when we assume, as do many equilibrium theorizers do, that Even the use of engineering as the chosen parallel over the course of the article betrays Arthur’s perspective as one who believes that it is possible for economists to reliably foresee how systems are exploited: “Once we have identified where and how exploitation might take place, we can break open the overall economic model of the policy system at this location, and insert a module that ‘injects’ the behavior we have in mind” (Arthur 2014: 111). 

In his very own vision of stress testing economic systems, Arthur still presumes that how the system will be exploited can become a known known, manipulable by analysts, but it’s the unknown unknowns that should be keeping policymakers awake at night. Brian Arthur’s conviction that policy can be improved by using stress-test analysis ignores that policymakers are already trying to figure out how the incentives impel people to take certain courses of action in different policy environments. Contra Arthur, the reason those policymakers make mistakes aren’t that they are working with equilibrium models, or that they aren’t sufficiently scientific. The reason is that no policymaker can’t know everything. 

 

 

Bibliography

Arthur, Brian W. 2014. Complexity and The Economy. Oxford: Oxford University Press. 

Astronomy Won't Tell Us Our Place in the Cosmos

 

 

 

From The Big Think's "Bill Nye: How Finding E.T. Will Change the World":

It would change the world for a price of a cup of coffee and wait, there's more.  It wouldn't be the work of a guy like Galileo or Copernicus or Kepler, these are famous names in astronomy, or Isaac Newton or Einstein.  It would be the work of all of us.  It would be the work of all of us taxpayers and citizens of the earth who participate in this.  Now it might be U.S. taxpayers nominally, but guarantee you the European Space Agency, Canadian Space Agency, almost certainly the Indian Space Research Organization, the Roscosmos, everybody would have a small part on this mission.  Everybody would be involved.  And if we were to find evidence of life it would change the world.  Change the world.

The argument here is little more than the government funding science as a religion. This isn't an argument about the material benefits of science; rather, it's an argument about how finding life on another planet will help us understand our place in the universe. That's not funding science, that's funding religion. 

 

From times primordial, space has always attracted mankind’s spiritual energies. Whether it’s the Mayan astronomers’ use of astronomy to precisely express what they thought was the cyclical nature of time or the builders of Stonehenge aligning points of the monument with the solstice and the equinox, human nature has been attracted time and time again to the celestial heavens in mystical wonder. 

That same wonder continues today to such an extent that Apollo 11’s landing on the moon attracts widespread commendation as the greatest human feat to date. Forget feats as the creation of a communications network enabling people in Beijing and Tokyo to speak in close to real time, forget the exponential rising of the living standards of nations across the world over the past two decades, forget that over seven billion human beings now live, Armstrong walking on a piece of rock around two hundred thousand miles from another human being is the seminal accomplishment of the human race. Really, the Apollo program was the most expensive photo op in history. Washington DC needed proof of liberal democracy’s superiority over communism, and NASA happily provided that. 

 

We can certainly wonder at the universe, yet that wonder should be informed by philosophy, and Σοφία tells us that there is all too little meaning to be found in distant rocks or distant molecules, even if they may be living. Moreover, if there is any meaning to be found in nature, it can be found here on Earth. 

Wonder is something that we can experience in our daily lives, and something that we shouldn’t save massively expensive expeditions across the solar system. We don’t need to spend other people’s money in order to show that humanity is a small part is a wider  cosmos. All we need to do for that is to watch BBC’s Planet Earth from the comfort of our living rooms. 

Scientism's High Priesthood

In The Huffington Post's "Pseudophysics: The New High Priesthood," Amir Aczel writes about the prevalance of physicists who are taking speculation about the world, like the existence of a multiverse, and preaching them as gospel truth to the public: 

But let's now look at the very vocal minority of theoreticians who, without a shred of experimental evidence to support their claims, are now telling us what, in their view, nature is truly made of. They do it through articles in popular magazines and through too many YouTube videos, but mostly through recent books aimed at the average reader....

But the most irritating book of them all, and the best example of the new pseudophysics, has nothing to do with the multiverse. It is about where our single, known universe might have come from. In his 2012 book A Universe From Nothing: Why There Is Something Rather Than Nothing, the physicist Lawrence M. Krauss informs us that the universe came out of nothing. Sheer nothing. Nada. Zip. How does he know? Every leading theoretical physicist I have posed this question to, including the American Nobel Prize winner Steven Weinberg and the Dutch Nobel Laureate Gerard 't Hooft, have told me definitively that we have no idea where our universe came from: We can't tell what happened before, or even at, the Big Bang. If Krauss' screed is not pseudoscience, I don't know what is. If I am going to believe him, I could just as well subscribe to the medieval "sciences" of alchemy or astrology. Krauss gives no evidence for his carelessly cobbled-together conjecture, but he makes up for it by his aggressive tone. Studying the book carefully, I found that Krauss implies that the source of his hypothesis is a research paper by the cosmologist Alex Vilenkin. At my request, Vilenkin sent me a copy of his article, and -- not surprisingly -- I found that what he says differs markedly from Krauss' conclusion. Vilenkin's universe does not at all start from "nothingness." It begins from a bubble of a preexisting piece of a very condensed kind of spacetime called a "quantum foam..."

There is absolutely nothing wrong with speculation in physics -- and the correct theories are eventually confirmed by experiment and observation. But it is definitely wrong -- misleading and dishonest -- to preach to an unsuspecting public, mostly uninitiated in science, mere hypotheses as if they were confirmed facts. This isn't science, and it isn't honest scientific reporting. Physicists should be the purveyors of facts, not dreams.

Amir Aczel certainly has a point about how physicists like Lawrence M. Krauss have preyed on the public fascination with scientific discovery by teaching them theories with little foundation as if they were gospel, but Aczel doesn't touch on one of the most disappointing elements of the new high priesthood: Their inability to talk philosophically about their subjects. In A Universe From Nothing, Krauss has  no dialogue with the philosophical treatment of nothingness and even goes as far to say that philosophers like St. Thomas Aquinas couldn't have reasoned about nothing because they lack modern physics. That would be fine if he showed how they went wrong; yet, it is Krauss making the mistakes: he even assumes that a universe of nothing comes with the laws of quantum mechanics. That certainly isn't nothing. Krauss' arrogant attitudes towards philosophy are repeated across the high priesthood. Neil deGrasse Tyson, a preacher within this high priesthood, has gone as far as to say that philosophy is essentially futile. 

 

Ignorance of philosophy is more than an ignorance of the contributions that Plato, Kant and others have made to our understanding of the world. Ignorance of philosophy is an ignorance of the very underpinnings of what we call 'science' today. Science just didn't come out of nothing fully formed, like Athena coming out from Zeus' brow already clad in armor. Instead, it emerged as a gradual process of philosophers coming to a certain understanding of the world, which was informed by a array of different beliefs like the manifestation of divine revelation in the natural world, empiricism, and even the institutions of the university system. To really understand science, we have to understand how it came to be, and all of those factors are assumed away by the scientism's high priesthood. They would like to reject questions about metaphysics as nonsense, but they are themselves participants is an activity itself contingent upon a certain metaphysical understanding of the world. 

Scientism's high priesthood also results in the public having a warped view about what science actually is. In shows like MythBusters and on Facebook pages like "I Fucking Love Science," we see science simply showcased as a simple process of accumulating data and then getting truth at the end. That perspective blinds the public to the importance of paradigms and the importance of speculation to our understanding of the world. Rather than actually getting people to pay attention to how the sausage is made, it simply creates enthusiasm about those small slices of science which are prima facie fascinating. "Cyanide and Happiness" well lampooned this ascpect of scientism in a single cartoon:

Overall, the high priests of scientism have not only warped the public understanding of science, but they have warped how science should fit in with the other disciplines we use to study the world. As Amir Aczel pointed out, they sell a faulty notion of science to the public in which speculative notions like the multiverse are sold as science. That is not all they do, though, and by refusing to think philosophically about their subjects, scientists like Krauss ignore that science itself is part of a larger tradition of understanding the world, and thereby warp our image of what science should be. 

 

Simple Economics

A very pertient post from the comments section of "Teen employement and the minimum wage: sixty years of experience" on MarginalRevolution by The Other Jim:

I think you misunderstand what “economics” actually is. It is the act of taking a blindingly obvious truth, and desperately trying to find (and twist) information so as to persuade others that it isn’t true. To wit:

>If the price of something goes up, people buy less of it.

 

As Peter Boettke has repeatedly emphasized: Simple economics is NOT necessarily simple-minded economics. 

Economics: What it Can and Cannot Do

From The National Review:

After 40,000 years of civilization, we very clever creatures still cannot predict the weather with any reliable degree of detailed accuracy more than about a week out. (But some of us still pray for rain.) Scientists who have spent their lifetimes working on extraordinarily specialized problems routinely are baffled by new and unexpected developments. (But some of us still believe the universe is turtles all the way down.) Our highest-paid stock-pickers routinely are outperformed by darts thrown at a board, by kindergartners, and by monkeys. (But some of us still believe in the sure thing.) On and on it goes: Executives reliably make disastrously bad decisions about their own businesses, and most entrepreneurs fail.

In spite of the massive piles of evidence surrounding them, politicians routinely tell us that if we will merely give them the power to do X, then Y surely will follow. The Obama administration predicted that if the stimulus and other policies were enacted, then unemployment would decline to 5.2 percent. (It isn’t 5.2 percent.) Mitt Romney says that if we enact his agenda, the result will be 4 percent growth. Personally, I think that politicians should be goosed with a Taser every time they use the word “percent” in a future-tense sentence. But to be more charitable, let’s instead conclude that such projections should be viewed skeptically.

Unhappily, many economists desire to play kingmaker and therefore lend the prestige of their discipline to the wishful thinking of politics, where arguments are oversimplified to a point that is indistinguishable from dishonesty. They are aided in this by journalists who provide a bridge from the rigorous world of academic research to the standards-free world of political discourse. The result is something like a fairy tale or just-so story. That voters choose to accept such fanciful promises is another piece of evidence that our politics is not rational but ritual.

 

Closely related to this is Friedrich Hayek's now famous quote from The Fatal Conceit: "The curious task of economics is to demonstrate to men how little they really know about what they can imagine they can design." Also related is Hayek's banquet speech after recieving the Nobel Memorial Prize:

(T)he Nobel Prize confers on an individual an authority which in economics no man ought to possess.

This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence.

But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally.

There is no reason why a man who has made a distinctive contribution to economic science should be omnicompetent on all problems of society - as the press tends to treat him till in the end he may himself be persuaded to believe.

One is even made to feel it a public duty to pronounce on problems to which one may not have devoted special attention.

I am not sure that it is desirable to strengthen the influence of a few individual economists by such a ceremonial and eye-catching recognition of achievements, perhaps of the distant past.

I am therefore almost inclined to suggest that you require from your laureates an oath of humility, a sort of hippocratic oath, never to exceed in public pronouncements the limits of their competence.

Economics is not a discipline dealing with exact predictions about future events. Even the idea that we can know how the economy will function in the coming years can pretty much be falsified in one image:

 

The most humbling image for modern economics.

Blaming the failure of that prediction on merely the partisan desires of the Council of Economic Advisers is missing the point. There were good economists that sat on the council and Christina Romer, certainly a successful economist by any objective criteria, chaired it. However, the economics profession as a whole has been infected by the idea that the type of precision found in the physical sciences can and ought to be striven for in economics.

Robert Lucas advocates this type of approach in his article, "Methods and Problems in Business Cycle Theory", when he writes:

One of the funcations of theoretical economics is to provide fully articulated, artificial economic systems that can serve as laboratories in which policies that would be prohibitively expensive to experiment with in actual economies can be tested out at much lower cost. To serve this function well, it is essential that the articial "model" economy be distinguisged as sharply as possible in discussion from actual economies.

and

On this general view of the nature of economic theory then, a "theory" is not a collection of assertions about the behavior of the actual economy but an explicit set of instructions for builing a parallel or analogue system - a mechanical, imitation economy. A "good" model, from this point of view, will not be exactly more "real" than a poor one, but will provide better imitations. Of course, what one means by a "better imitation" will depend on the particular questions to which one wishes answers.

This is pseudo-scientific nonsense. The economy is simply too complex for a single model to be able to imitate and by focusing on testing singular propositions with these models, Lucas looses focus on what economics can do.

Economics can never say whether or not GDP will increase by a given percent each year. It can never provide us with a reliable prediction of the course of unemployment in the course of even a couple of years. What economics can do, though, is provide pattern predictions about the general pattern of the economy at the margins.

It can tell us that instituting rent-control will lead to a shortage of low-income housing at the margin and it can inform us that at the margin landlords will seek other means, like a key charge, for charging for rent. It can tell us that expanding the money supply beyond the demand for it will lead to inflation. It can tell us that socialism will anywhere and everywhere fail. Those are powerful predictions, but they do not try and overstep the bounds of economic reasoning by making predictions about the exact quantities that will change or the exact times those changes will happen.

Such predictions are now and will always be beyond the economist.