IN WITH A BANG, OUT WITH A WHIMPER

Stephen Gordon, a professor of economics at Université Laval posts (12 September)

HERE on National Post:

Stephen Gordon: The case for mathematical models in economics

To be sure, not all useful contributions to economics have come about by means of mathematical modelling: Adam Smith’s “invisible hand” is probably the best and most celebrated example. The idea that socially optimal outcomes could be brought about by agents pursuing their own self-interest is the foundation of much of modern economics.

But as compelling as Smith’s insight was, it was left to economists such as Kenneth Arrow and Gérard Debreu, working almost two centuries later, to identify the assumptions one has to make about the economy, to arrive at Smith’s conclusion. And perhaps more importantly, they also identified the conditions in which markets don’t work as he imagined.

COMMENT

I recommend readers consult Robert Gordon’s article in full. It makes a case for what he calls ‘rigour’. He comments on the fallacies in Adam Smith’s labour use of the theory of value, a theory long pre-dating Smith’s use of the LTV. 

He lauds the rigour of the of maths. I suggest that the so-called rigour in maths in economics is also a fallacy. 

People’s behaviour are not sufficiently or consistently identical enough to be treated like the maths of electrons. Even simple supply and demand diagrams (after  Alfred Marshall’s ‘cross’ diagram long taught in Econ 101) and the associated maths give a false impression of economic equilibrium. When applied to the theory of general equilibrium - its authors were lauded by mathematical Nobel Prizes - we see both the genius and absolute irrelevance of maths of human behaviour.

I once wrote a short book, way back when I taught first year economics students who were struggling with simple maths (Kennedy, “Mathematics for Innumerate Economists’, Duckworth, 1982), which was reasonably well received by its readers, so I did my bit to help them.

Heavy maths of modern macro econmics systems regularly come in with a bang and go out a few years later with a whimper (as often with more Nobel Prizes!). 

Read: David Warsh, 2006: Knowledge and the Wealth of Nations, Norton, for an excellent survey - he does not agree with my take but he is the best living writer on modern economics and its mathematical fads and fancies. 

Also follow the link for Stephen Gordon’s piece in National Post. and let me have your take on it.