Wednesday, October 16, 2013

Economics to Guide Science?

Mark Thoma posts (15 October) a question on a thought (at least I think he is the author) on his always-interesting economics Blog, “Economist’s ViewHERE 
“Just a quick note on the efficient markets hypothesis, rationality, and all that. I view these as important contributions not because they are accurate descriptions of the world (though they may come close in some cases), but rather because they give us an important benchmark to measure departures from an ideal world. It's somewhat like studying the effects of gravity in an idealized system with no wind, etc. -- in a vacuum -- as a first step. If people say, yes, but it's always windy here, then we can account for those effects (though if we are dropping 100 pound weighs from 10 feet accounting for wind may not matter much, but if we are dropping something light from a much higher distance then we would need to incorporate these forces). Same for the efficient markets hypothesis and rationality. If people say, if effect, but it's always windy here -- those models miss important behavioral effects, e.g., -- then the models need to be amended appropriately (though, like dropping heavy weights short distances in the wind, some markets may act close enough to idealized conditions to allow these models to be used). We have not done enough to amend models to account for departures from the ideal, but that doesn't mean the ideal models aren't useful benchmarks.
Anyway, just a quick thought...”.
So far it has attracted 61 comments.  All those I read were interesting too, excepting the small number of ideologues.  So rather than adding to the long list which I think few will read on that far to mine, I shall post some thoughts briefly here.
Starting from the point of view that “the efficient markets hypothesis and rationality” has little to teach economists about the real world of economics in society (though it may have a useful pedagogical value as an examinable filter in a basic economics course), I offer the thought that we can assess its general value by a mind-experiment posing the reverse of the order above.
Suppose we were to construct a method of “studying the effects of gravity” by reversing the relationship proposed for the above hypothesis by applying as a conclusive step.
If the our studies of gravity followed a route from the real world of economics, human “misbehaviors”, as they are – we are not idealised atoms in a force field at all, but multi-faceted humans subject to a range of self-interested behaviours, what would this teach us about gravity?  Not much, I suggest.  Humans constructed many causes of physical events and associated changes, much of it imaginative in the extreme. 
Adam Smith’s early, “juvenile” essay, “The History of Astronomy” was written between 1744-c.58, while he was at Oxford University initially, and continued thereafter (it contains a report of a prediction of the appearance of a comet in 1758).  Though nominally about the history of astronomy, the first three parts were an unflattering account of ideas about the world and the universe among the early humans (the “savages”) and their close relationship to Pagan theology
In Section III, Smith writes:
Mankind, in the first ages of society, before the establishment of law, order, and security, have little curiosity to find out those hidden chains of events which bind together the seemingly disjointed appearances of nature. A savage, whose subsistence is precarious, whose life is every day exposed to the rudest dangers, has no inclination to amuse himself with searching out what, when discovered, seems to serve no other purpose than to render the theatre of nature a more connected spectacle to his imagination. Many of these smaller incoherences, which in the course of things perplex philosophers, entirely escape his attention. Those more magnificent irregularities, whose grandeur he cannot overlook, call forth his amazement. Comets, eclipses, thunder, lightning, and other meteors, by their greatness, naturally overawe him, and he views them with reverence that approaches to fear. His inexperience and uncertainty with regard to every thing about them, how they came, how they are to go, what went before, what is to come after them, exasperate his sentiment into terror and consternation. As those appearances terrify him, therefore, he is disposed to believe every thing about them which can render them still more the objects of his terror. That they proceed from some intelligent, though invisible causes, of whose vengeance and displeasure they are either the signs or the effects, is the notion of all others most capable of enhancing this passion, and is that, therefore, which he is most apt to entertain. To this too, that cowardice and pusillanimity, so natural to man in his uncivilized state, still more disposes him; unprotected by the laws of society, exposed, defenceless, he feels his weakness upon all occasions; hi strength and security upon none.But a savage, whose notions are guided altogether by wild nature and passion, waits for no other proof that a thing is the proper object of any sentiment, than that it excites it.
The reverence and gratitude, with which some of the appearances of nature inspire him, convince him that they are the proper objects of reverence and gratitude, and therefore proceed from some intelligent beings, who take pleasure in the expressions of those sentiments.
With him, therefore, every object of nature, which by its beauty or greatness, its utility or hurtfulness, is considerable enough to attract his attention, and whose operations are not perfectly regular, is supposed to act by the direction of some invisible and designing power. The sea is spread out into a calm, or heaved into a storm, according to the good pleasure of Neptune. Does the earth pour forth an exuberant harvest? It is owing to the indulgence of Ceres. Does the vine yield a plentiful vintage? It flows from the bounty of Bacchus. Do either refuse their presents? It is ascribed to the displeasure of those offended deities. The tree, which now flourishes, and now decays, is inhabited by a Dryad, upon whose health or sickness its various appearances depend. The fountain, which sometimes flows in a copious, and sometimes in a scanty stream, which appears sometimes clear and limpid, and at other times muddy and disturbed, is affected in all its changes by the Naiad who dwells within it. Hence the origin of Polytheism, and of that vulgar superstition which ascribes all the irregular events of nature to the favour or displeasure of intelligent, though invisible beings, to gods, daemons, witches, genii, fairies. For it may be observed, that in all Polytheistic religions, among savages, as well as in the early ages of Heathen antiquity, it is the irregular events of nature only that are ascribed to the agency and power of their gods. Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters.”  Adam Smith “The Principles which lead and direct Philosophical Enquries illustrated by the History of Astronomy” 1795, posthumous. 1980,  pp. 48-9. Oxford University Press, Liberty Fund, 1982).
In all honesty: how much further forwards has an understanding of nature advanced among all people on the planet since the “pusillanimous superstitions" of pre-history? 
If you consider that it is sufficient that the educated minority who study economics to understand the real world, as it is to study physics via using an economic model  to understand theories of gravity, then you are probably among those economists who wont agree with you, given that our discipline is driven by dissenting schools of thought, a long way short of consensus about core aspects of economic theory.   Among economists there are significant fissures about “the efficient markets hypothesis and rationality”.
So, importing non-disciplinary models into economics are likely to be as useless as exporting the many competing economic models into the theory of gravity.
Human societies are more complex than the physical world because they are about human behaviour.  
Developing ideas about humans based on simplified assumptions as if humans were atom-like and universally predictable is bound to end in tears, both of genuine frustration and from the consequences of one’s assumptions proving erroneous, or worse, the consequences of forcing others to conform to those erroneous ideas. 
NB: a significant number of the old Bolsheviks leaders of 1917 committed suicide, or were murdered by their former comrades within the first 20 years of them imposing the certainties with which they seized power. Among democratic politics those who become disillusioned tire and quit; the rest just tire.


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