Economics and Physics Envy
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Question: When is a Nobel Prize not a Nobel Prize?
Answer: When it's the one awarded in economics.
The "Nobel Prize in Economics" is not a Nobel Prize at all. The real Nobel Prizes were established by the will of Alfred Nobel.
Nobel invented dynamite. He was a shrewd businessman, too. He set up more than ninety factories to produce his explosives and he created an effective network to market them.
When Alfred Nobel died, in 1896, he left the bulk of his considerable fortune to establish the Nobel Prizes. There were five of them originally: physics, chemistry, physiology or medicine, literature and peace.
The prizes were supposed to be awarded to "those who during the preceding year, shall have conferred the greatest benefit on mankind." The Nobel Foundation later modified the "preceding year" part because it was impossible to assess scientific value in such a limited timeframe.
That's how things stood until 1968. That year the Bank of Sweden was celebrating its three hundredth anniversary. As part of the celebration they instituted a new prize, "The Central Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel." The first such prize was awarded in 1969. Money from the bank funds the prize in perpetuity.
The idea, it seems, was to put the economists on a par with the scientists. That fits well with the way economics has developed since the end of the Second World War.
There has been economic thought among humans for about as long as there has been trade among humans. But there was no discipline of economics until 1776.
That's the year that Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations. From then on, until fairly recently, economics was a lot like philosophy, only about money. It was based more on assumptions and reasoning than on how the real world actually worked.
That was obvious when I was studying for my degree at night while working in business during the day. My courses described a world that stood still a lot. In my day job, the world never stood still.
In class, people made rational decisions after considering perfect information about only economic criteria. In my daytime world, people were often irrational, never had perfect information, and considered many things besides money.
While I was going to school, though, things were changing. Economists contracted "Physics Envy." The primary symptom is thinking that the only way to be respectably scientific is to do things the way physicists do them.
"More equations!" cried the economists. And so it came to be.
All that math left the impression that they actually understood what was going on. As Paul Krugman, a winner of the Economics Prize himself, put it: "The economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth."
Economists mostly treat the economy as if it is some kind of magnificent clockwork. They talk about "imperfections" in markets. That implies the possibility of perfection and the need for someone, probably the government, to fix things.
But, the economy is not a clockwork or any kind of machine. Those "imperfections' are there because economies are giant, natural, human systems. That makes them messy and hard to manage.
In fact, the economy is a lot like the weather. Both are giant, complex systems, with multiple, interacting causes. In both cases, the system is far easier to predict than it is to manage.
Economists aren't even very good at that. It was no lesser light than John Kenneth Galbraith, the world's best six-foot-seven economist, who said that "The only function of economic forecasting is to make astrology look respectable."
So tomorrow we have economists pretending to be scientists. It would be funny if it wasn't so scary.
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Very interesting article, Wally. Please forgive me for saying so, but I loathe economists. They think everything in the universe can be explained by economics, and as such they are generally a very arrogant lot. They are indeed pretty good at predicting the past, but beyond that contribute less than they give themselves credit for. I greatly enjoyed watching Steven Levitt of Freakonomics fame make fun of economists in a speech last week. Thanks, Wally.
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Thanks, Bret. I DO with you'd tell us how you really feel, though. I think one advantage of being an economist is that your very job title inspires jokes of all kinds. On a serious note, I've been truly cheered by the rise of behavioral economics. You know, "economics as if people mattered."
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Great article. I guess it makes sense that meteorologists and economists share common traits, except that meteorologists tend to better predict their area of study than economists can theirs. No economists that I've seen were able to predict the economic collapse in 2008, but my local weather people were able to accurately predict thunderstorms last week. There are laws that govern the creation, destruction, ebb and flow of weather patterns (which can be seen and felt), but because the economy is intangible, it can be affected by anything from a freak oil spill to a dictatorial changing of the guard to Lindsay Lohan's latest imprisonment.
This begs the question: Why are we allowing these guys airtime?
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Thanks, Jonathan. I think the answer to your least question is that economists have done some good, just not as much as they seem to think. When you compare the downcycles in the economy today with those in the Nineteenth and early Twentieth Centuries, interventions seem to me to have results in both shorter and less severe slumps.
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I know more about economics now than I did, thanks to your post Wally. But I do know enough about science to be dangerous. Science is not as exact as we might think it is. The answers science gets depends on the questions that are asked. I seem to have noticed a plethora of previous scientific "truths" being refuted in resent years.
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Thanks, Mary Jo. You're right about science not being perfect. It's usually no dispassionate either. But most science seeks validation of a hypothesis in the outside world. I don't see economics as doing that. Instead economists mostly argue with or seek validation from each other. That would be fine, if they didn't have the opportunity to screw up entire economies with a flick of the theory.
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Harry Truman once said he wanted to hire a one-armed economist as his adviser. That way when making a prediction, his economist could never say ".But on the other hand. . . ."
Economist, and people seem to forget that all models are wrong; some are useful. As an analytical engineer, I try to remind people that the purpose of analysis is insight, not "the" answer.
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Thanks Doug. I've heard that same thing about professional ethicists. They say, "One the one hand … but on the other."
You're dead on about models. I did some model building early in my career, on a mainframe using a special language created for the purpose. My big learning was that models are captive to your understanding of the system and the assumptions you make. It taught me to fall back on philosophy sometimes to understand modeling.
And I truly this line you shared with us: "the purpose of analysis is insight, not 'the' answer." That's a keeper.
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I found this really interesting, Wally, thanks. I don't think most people have heard the back story to the prize for economics, but it makes a lot more sense. I'm currently taking a finance course, and I was surprised by the number of "Nobel" prize winners called out in the text for seemingly basic and incremental theory.
Anyway, I always thought the 2006 Nobel Prize given to Muhammad Yunus for his development of Micro Loans in Bangladesh was for Economics, but indeed I see it was actually for Peace. It's too bad he didn't remain in the economics category, it would have given added some credibility to that award.
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Thanks for joining the conversation, Scott. I'm just as glad that Yunus' award is in the peace category. It's not for developing an elegant theory or a creative equation. It's not for propounding a theory. It's for actually doing something, and something quite transforming at that.
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I won't go as far as saying I loathe economists. However, I would like to see the Nobel Prize go to people like Levitt, Ariely or Hartford...people who use economic theory to attempt to explain behavior...not people who try to force behavior into an economic model.
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I think that the behavioral economists will have their day, David. It won't happen quickly at places like the Nobel Committee, but it will happen.
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Thanks for this - excellent and interesting stuff. This message needs to be said loudly and often. The epidemic "professionalisation" of intellect and expertise has produced armies of modellers who, for the sake of their reputations and prestige, tend to defend their models as if they were defending real territories. A model is a map or representation, not a reality, and like all representations, is inherently imprecise and certain to break down at some points. Physicists (and I am one) have had a lot of successes with models - but most of the systems we model have nothing like the complexity of an economy.
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Thanks for stopping by, Paul. You're right about models, they're just incomplete representations of something larger. Most models are heavily dependent on the assumptions that form the foundation of the model. Consider the quantitative models that got us into trouble quite recently.
The models were rational but investors are not. So when they made a "flight to liquidity" the models broke down. As Keynes said, "In a crisis, markets can remain irrational longer than you can remain solvent."
The models were based on necessarily limited historical records. As Niall Ferguson said of the Long Term Capital Management's model, "They had plenty of mathematics, but not enough history." And the models could only look backward. They simply couldn't predict things that hadn't happened before.
Now pile your point on top of that. Economies are complex adaptive human systems driven by thousands or millions of actors. We can't even model the weather. How can we possibly model that.
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