In the context of the financial meltdown, Niranjan Rajadhyaksha has asked some very important questions in his latest column in Mint:
Is it time to bury the myth of the omniscient financial expert? And of the economist who can predict everything to the second decimal point? They haven’t done too well, have they?
He goes on to say:
The problem is not the arrogance of the individual investment banker or trader, but the wider belief that they have the intellectual tools to predict the future with unerring precision. Both economics and finance suffer from what some have described as “physics envy”—the fond hope that social events are as predictable as physical events.
Our knowledge of the future is inherently limited and no amount of fancy mathematical modeling can overcome this fatal flaw… Keynes’ ideological sparring partner—F.A. Hayek, winner of the 1974 economics Nobel—wrote something similar in a book titled The Pretence of Knowledge: “I confess I prefer true but imperfect knowledge, even if it leaves much undetermined and unpredictable, to a pretence of exact knowledge that is likely to be false.”
Niranjan concludes: “What seems to be out of reach, however, is precisely what economists want most: predicting the future, the hallmark of ‘good’ science.”
Yet, we can predict with “apodictic certainty” – but all our predictions are qualitative, not quantitative. Our laws are “if this – then that” laws – like the laws of demand and supply, or the law of diminishing returns. The problem arises when the schools of economists infected with “physics envy” attempt the impossible: making quantitative predictions of future economic events, particularly prices. In a free economy, if anyone could do that he would be rich. He would not be rotting is some department of economics or some government statistical bureau.
Niranjan has quoted Hayek tellingly, and I recommend another Hayek classic: The Counter-Revolution of Science: Studies on the Abuse of Reason. It is here that Hayek nails the “positivists” who imitate physics and bring quantitative methods into the social sciences. Hayek calls it “scientism.” It is not science at all.
Society cannot be understood in the same manner that we comprehend the external world. Society is made up of individuals – and the key to a true social science lies in understanding this individual. The method is individualistic and subjective. We try to find “laws of thought” common to us all. These are laws of thought we first encounter in our own minds – through introspection. The method is “looking within and then looking out from within the consciousness.”
Thus, the laws of demand and supply, and of diminishing returns, are all “laws of thought.” They predict with apodictic certainty because they are based on the logical structure of the human mind. Since we are studying “human action” in the social sciences, and all action in markets is based on forethought, they are governed by the “laws of thought.” But there is nothing quantitative about it. You can read all the books by the Austrians, from Menger to Mises, and from Hayek to Hoppe, and you will not find any charts or graphs, nor any mathematics. It's only words, and each word weighs a ton - like "apodictic." And as the old song goes, "words are all I have to take your heart away."
I have carried the discussion further in my next column for Mint. I hope it is published soon.
I think the problem was that the wrong set of assumptions and wrong data were fed into models that were inherently too simplistic. I think the belief that humans can do everything better than machines led to people not building realistic systems.
ReplyDeleteits like democracy, not the best, but better than the rest, all professions, including docs, lawyers, accountants or economists....have quite a few wrongs..but then, the next alternative is worse.
ReplyDeletestatistics and predictions are not written in stone....and humans are not always rational.
but to move ahead, we do need some dotted lines.
Problem is someone else is drawing the lines for me.
An Evolutionist Speaks Out About Economists' Pretensions About Science
ReplyDeletefrom Adam Smith's Lost Legacy by Gavin Kennedy
Massimo Pigliucci, professor in the departments of Ecology and Evolution, Stony Brook, NY, contributes an important piece of work in the Blog, Rationallyspeakingout.org (‘a site devoted to positive scepticism') (HERE):
“Economics learns a thing or two from evolutionary biology”
“Economics is supposed to be a solid discipline, founded on complex mathematical models (and we all know math is really, really difficult). They even give Nobel prizes to economists, for crying out loud! And yet, economics has always had to fight off the same reputation of being a “soft” science that has plagued sociology, psychology, and to some extent even some of the biological sciences, like ecology and evolutionary biology. Indeed, like practitioners in those other fields of inquiry, some economists admit of being guilty of “physics envy,” that is, of using the physical sciences as the model for what their field ought to be like. Turns out even the assumption that a good science should be modeled on physics is “flawed,” to use Greenspan’s apt phrase.
looks like Mint published my letter to the editor on this piece. i had hoped niranjan would have not hesitated from criticising keynes for being the baap of all equation writing economists.
ReplyDeletehttp://www.livemint.com/2008/12/31222438/Unending-and-unfinished-scheme.html?h=B
(second letter)