Brother, can you spare me a viable Economic Theory?


Prof. Robert Nadeau, through Scientific American claims that current economic theory is a severe (and irrational) hindrance to fighting global warming.
(the exact link is:
http://www.sciam.com/article.cfm?id=brother-can-you-spare-me-a-planet ).
The claim is:
  1. Current (neo-classical) economics is based on false premises.
  2. These false premises include this important premise: That nature is irrelevant to economic growth (and that natural resources are boundless).

Because the irrelevance of nature is a premise of Economic Theory, it is not surprising that it pops up as an outcome of Economic Theory. Given the type of models they work with, economists have to claim that fighting global warming is economically inviable. And when they do so, it’s a tautology – what they are actually saying is: “since we assume that nature is irrelevant to Economics, no action to save natural reasorces could possibly be cost-beneficial”. A claim which is, of course, absurd.


Nadeau is, as they say, right on the money. But he goes on to claim that the bulk of the trouble is in the fact that economic thought has false premises – and here I disagree with him. Yes. You heard me right. I don’t think that false premises are a problem. Not at all. Of course Economics has false premises. Look at “Principles-of-economics-translated” (which I previously posted). The physical sciences, as well as engineering, after all, do marvels with false premises and over-simplified models. Most of physics is about finding false premises which are just good enough. They need to be as simple as possible – as long as they work.

A simple example from Data Analysis:

Suppose you are given a sequence of numbers:

1 2 3 4 5 6…
How do you continue the sequence? Can you find the next few numbers in the series?
Easy: it’s a linear series, each number is the former +1. Easily, we get:

1 2 3 4 5 6 7 8 9 10 11 12…

So far so good. But what do you do if I take the original series and add a small perturbation, say:

1 2.01 2.99 4.02 4.98 6.03 6.97

Well, this isn’t a linear series no more. But it is close. You can still assume that linear extrapolation might do the job. It won’t be exact. Would it be good enough? That depends on what you’re trying to achieve. What precision do you really need? If you’re a carpenter, building a cupboard, and these are millimeter lengths of wooden boards, it will be enough. If you’re designing a combustion engine, then you need to do better. As a general rule:
<em>Use the simplest model that </em>gives meaningful results.<br />
You have got to check the results. Results are meaningful if they work. We know that Einsteinian Physics works because GPS works, and because we can use it to hurl spacecrafts through the solar system. I know that the data analysis models I work with are good when they allow me to compress videos better. When you constantly check your results, bad ideas and weak theories cannot survive for long. They will eventually get wiped out.
These considerations become shaky when we enter the realm of the social sciences. How do you check a theory? What do you compare your models to? You can’t have controlled experiments when you’re doing social sciences. How do you disprove a theory? How much evidence do you need in order to eliminate a wrong idea? The scocial sciences are a lot harder than the physical sciences. And scocial scientists know that. Most economists do not. The best of them – Amaratya Sen, Kenneth Arrow, Galbraith – they know, and they keep saying it out loud. But the vast magority of economics undergrads fail to get that message. Econimics is a social science, disguised as a physical science. They use intricate math. They have mathematical models. But they are studying social phenomena. And because social situations are so hard to quantify, economists can (and do) disregard the most important aspect of the physical sciences – knowing the limits of your models.
Going back to my previous example, it is clear that a linear model will give rise to errors, when you try to estimate the second series with it. It is good enough if you’re only interested in low precision. It won’t fo if you need high precision. Worse, it will utterly fail when the underlying series stops being linear. Take:

1 2 3 5 7 11 13 17 19…

What’s the next number now? This isn’t a linear series. This isn’t a quadratic series. This is the list of prime numbers. No technical model can give you that. You’ve got to forget about extrapolation techniques. You have to look at the series, and use your common sense, your experience, your imagination. No amount of technicalities can achieve a good result with this series. But suppose you do choose a linear model. How do you know it doesn’t work? How large a deviation are you willing to accept?
What economy lacks is not sound premises, but feed-back from reality.

In my next post I will take a look at the fundamental theory of markets, and see what neo-classical economics got right, and what they got terribly wrong.

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2 thoughts on “Brother, can you spare me a viable Economic Theory?

  1. jikirsch

    “economists have to claim that fighting global warming is economically inviable. ”

    The real reason why trying to reach action conclusions via model analysis in social sciences (and as an Economics student once upon a time , Economics is one of them ) is that your idea of what is possible and viable taints the model.
    All models are simplified , had a model maker tried to simulate the agreements reached in the eighties within the “package deal” , agreements between all parties in a market to share and act responsibly.
    Most critics would say “hey , this violates the premise that anyone would do what is best for him !!! “.
    People are not mice (Malthus ) and en lighted self interest can (hopefully) overcome blind short sighted interest.
    I want to see an economic model that accepts the following :
    1. some people would rather have less material things if it achieves a more comfortable social order (I would ).
    2. People value a belief for a better quality of life for their decendents (note : belief , not proof ) more then economic activities.
    3. a possibility of a society valuing economic activity less then stability and happiness.

    All the above would cause an issue with a straight current economic model.
    This simply reminds me of a quote from Heinlein (paraphrased ):
    “The question of ecology is not how many mice can live in an ecology, but what is the quality of life of these mice”.

    The economic assumptions assume that when an expansion activity is possible it will be done , ever heard of self control ?

    Reply
  2. te

    excellent submit, very informative. I ponder why the other specialists of this sector don’t
    understand this. You must proceed your writing. I’m sure, you’ve a great readers’ base
    already!

    Reply

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