Saturday, April 28, 2018

Noah Smith: Econ Critics are Stuck in the Past

Earlier this week, Noah Smith wrote a response to critics of modern economics. Smith argues that most critics do not have a proper understanding of the successes of modern economics. He points out that while their arguments may have held weight in the past, they fail to acknowledge new improvements in the field. Here are two quotes that I think summarize his position,
"The problem with Reed's critique, like so many of the others listed above, is that it leaves out much of the story. Auction theory, random-utility models, matching theory, gravity-trade models, and some other mathematical theories have enjoyed enormous quantitative predictive success, sometimes using the neoclassical assumptions of utility maximization and rational action that Reed derides."
Smith goes on to say,
"The idea seems to be that economists mainly engage in a deductive enterprise, dispensing high theory from Olympian mounts of authority. This may have been an accurate stereotype at one point, but these days it bears little resemblance to reality: most economists are out combing through mountains of data, straining to glean facts about how the world really works. Economists study gender relations in the workplace, racial gaps, changes in labor contracts, early childhood education, minimum wage policy gaps, automation and the future of jobs and a vast array of other highly important, immediately relevant topics."
I agree with Smith that mathematical equations can have predictive success in economics. There are real mechanical relationships in the social realm that accurately fit mathematical equations. Although I think such relationships exist, I'm more inclined to believe that the vast majority of social reality does not operate mechanistically. There are too many non-conforming variables in the social realm that can't be inserted into a mathematical equation. This does not diminish the fact that sometimes mathematical relationships hold.

Smith is also correct to say that economists recognize the need for empirically supported theories. Most academic economists know that when a theory doesn't fit reality, the theory is wrong. This may have been a problem in past decades, but economists are now more cognizant that theories written in mathematical form are not automatically true.

When it comes to testing economic theories, econometric studies are always going to be questionable. Applying the scientific method (i.e. controlled experiments) to social reality is a difficult task. Quasi-experimental methods are worth developing, but we should always be wary about unseen confounding variables. Despite these difficulties, I believe that there are real economic relationships that can be discovered using econometrics. Smith is correct to mention this as a positive trend in the discipline.

Although I agree with points Smith makes above, I still believe that academic economics does an inadequate job analyzing current events. In my opinion, this neglect of current events is the true failing of academic economics. I don't think Smith properly addresses this issue. I believe this is the fundamental reason why economists did not foresee the financial crisis.

Today academic economics is dominated by theories about general economic phenomena. This includes econometrics and mathematical models. Academic economics can be accurately described as looking for general truths in economics. This is in the spirit of hard sciences such as chemistry and physics.

That's not to say that academic economists completely ignore current events and history. For example, MIT economist David Autor has analyzed the impact of trade with China. There are also entire journals dedicated to economic history. But just by reading some of the abstracts of the most recent issue of The Quarterly Journal of Economics and other top journals, it's clear that analyzing current events is not the focus. Instead the focus is on establishing general theories.

This can be most clearly seen in economics education. My undergraduate education was heavily weighted toward theory instead of analysis of real world events. There were some classes devoted to real world analysis (Economics of the European Union, Economies of the Pacific Rim) but for the most part, my education depended on learning theories. In order to know what was going on in the real world, I had to read The Economist and other publications outside of class.

This trend explains why economists did not foresee the 2008 financial crisis. Instead of analyzing the real world and examining sub-prime lenders, academic economists were busy trying establish general theories. In a sense, academic economists were (and still are) blind to the world around them. The incentive structure (i.e. publication in the top five journals) is based around establishing general theories rather than analyzing the real world events.

Before the financial crisis, there should have been academic economists devoted to analyzing exotic financial products in the financial system. These economists would have published papers maybe as early as 2005 to ring the alarm about the widespread fraudulent subprime mortgage securities. Although this type of work would have been useful, it was largely absent.

There was one person who did this type of research but he worked at a hedge fund. Michael Burry, the main character in The Big Short by Michael Lewis said, "I was in a state of perpetual disbelief. I would have thought that someone would have recognized what was coming before June 2007. If it really took that June remit data to cause a sudden realization, well, it makes me wonder what a 'Wall Street analyst' really does all day." I think this quote also works if we replace the words 'Wall Street analyst' with 'academic economist'.

Wednesday, April 25, 2018

Tony Lawson: The Nature and State of Modern Economics

This post is a collection of my favorite quotes from Tony Lawson's book The Nature and State of Modern Economics. Lawson's book does a great job explaining why academic economics is broken. I believe this quote adequately conveys as Lawson's main proposition:
"Notice that this does not amount to a rejection of all mathematical-deductive modelling. But it is a rejection of the insistence that we all always and everywhere use it." (page 36)
His argument can be divided into four main points:

A. Modern academic economics is dominated by mathematics (4)
B. The economy is a highly complex organism (4)
C. Mathematical equations don't fully describe complex real world events (4)
D. Real economic understanding comes from analyzing current and historical events (4)

The rest of this post is a collection of quotes from his book organized according to these four points.

A. Modern academic economics is dominated by mathematics

1. "As is widely recognised, it is mostly only modelers that get appointments in university economic faculties; it is mostly only such modelers that get promoted; it is mostly only modelers that get research grants from certain sources; it is mostly only PhD's and post doctorate research taking the form of mathematical deductive modeling that get funding; it is mostly only this sort of research that can get published in core journals, etc." (page 139)

2. "In other words, I think it is fair to say that, within the economics academy, there are instance where this mathematising project maintains itself by closing off lines of intellectual competition, where it manipulates conditions both of variety generation and environmental selection." (page 246)

3. "...let me first observe that in economic journals the formalistic modelling activities seem currently to be continuing unabated." (page 106)

4. "This insistence often runs over to claiming that any contribution that does not take the form of a mathematical model is not proper economics." (page 205)

B. The economy is a highly complex organism

5. "Economics too has its more basic concerns. There include such matters such as social relations, collective practices, social positions, community, capitalism, money, corporations, technology, gender, rights obligations, human nature, care trust, crises, economy and so forth." (page 6)

6. "The conception of social ontology I have in mind is processual in that social reality, which itself is an emergent phenomenon of human interaction, is recognized as being highly transient, being reproduced and/or transformed through practice; social reality is in process, essentially a process of cumulative causation." (page 62)

7. "If the situation is one in which two or three mechanisms or tendencies are thought to dominate a phenomenon of interest, perhaps a range of likely outcomes can be safely speculated." (page 21)

8. "...the materials and principles of social reality are the same across economics, sociology, politics, anthropology, human geography and all other disciplines concerned with the study of social life." (page 45)

C. Mathematical equations don't fully describe complex real world events

9. "Even if the ontology I defend is roughly right, there may yet be pockets of social reality that provide the appropriate conditions for successes when utilizing methods of formalistic modeling, as I regularly acknowledge." (page 210)

10. "Social reality is of a nature that is significantly at variance with the closed systems of isolated atoms that would guarantee the conditions of mathematical deductivist modelling." (page 112)

11. "Firms, money, markets, institutions, social relations, even individual identities, cannot be experimentally isolated for each other." (page 16)

12. "...we are faced not with a ubiquity of regular behavioural patterns underpinned by isolated systems of human atoms, but with the perpetual emergence of novelty..." (page 122)

D. Real economic understanding comes from analyzing current and historical events

13. " is clear that the recent crisis situation (like almost any social situation) is something that needs to be understood rather than modeled." (page 122)

14. "Of course, the details of the recent period are complex, and a full understanding requires, amongst other things, a detailed analysis of the numerous structural transformations in the financial sector during this period..." (page 115)

15. "However, I should emphasise that explanatory analysis required to render any chosen contrast phenomenon of interest intelligible can take many forms. It may involve the identification of a hitherto non-existent local mechanism or set of conditions, or a reworking of previous understandings, including seeing connections or relations previously unnoticed, or even the elaboration of a highly abstract account of the workings of a system in its entirety. It all depends on context." (page 20)

16. "Suffice it to say that an intellectual opening up of the economics academy would be revolutionary indeed, allowing at least the possibility of genuine debate on all issues and the promise of progress and a freeing up of resources for relevant research that have long been allocated for practices that have little if any grounding or rationale or obvious practical benefit." (page 123)

Thursday, March 29, 2018

Alfred North Whitehead and the sociology of knowledge

Alfred North Whitehead (1861-1947) was a philosopher best known for co-authoring Principia Mathematica in 1910 with Bertrand Russell. Historian Carl Becker said,
Professor Whitehead has recently restored a seventeenth century phrase - 'climate of opinion'. The phrase is much needed. Whether arguments command assent or not depends less upon the logic that conveys them than upon the climate of opinion in which they are sustained. (The Heavenly City of the Eighteenth-century Philosophers, 1932)
 This post is a collection of my favorite quotes from Whitehead.

Sociology of knowledge

"A philosopher of imposing stature doesn't think in a vacuum. Even their most abstract ideas are, to some extent conditioned by what is or is not known in the time when he lives." (Quoted in Dialogues of Alfred North Whitehead by Lucian Price)

"Systems, scientific and philosophic come and go. Each method of limited understanding is at length exhausted. In its prime, each system is a triumphant success: in its decay it is an obstructive nuisance." (Adventures of ideas, 1933)

"The main importance of Francis Bacon's influence does not lie in any peculiar theory of inductive reasoning which he happened to express, but in the revolt against second-hand information of which he was a leader." (The Aims of Education, 1929)


"The chief danger to philosophy is narrowness in the selection of evidence." (Process and Reality: An Essay in Cosmology, 1929)

"The ultimate metaphysical principle is the advance fro disjunction to conjunction, creating a novel entity other than the entities given in disjunction." (Process and Reality: An Essay in Cosmology, 1929)

"Philosophy is the self-correction by consciousness of its own initial excess of subjectivity... the task of philosophy is to recover the totality obscured by the selection." (Process and Reality: An Essay in Cosmology, 1929)


"By relieving the brain of all unnecessary work, a good notation sets it free to concentrate on more advance problems, and in effect increases the mental power of the race." (An Introduction to Mathematics, 1911)

"Civilization advances by extending the number of important operations which we can perform without thinking about them." (An Introduction to Mathematics, 1911)

"The science of pure mathematics, in its modern developments, may claim to be the most original creation of the human spirit." (Science and the Modern World, 1925)

Bertrand Russell and the philosophy of logic

Bertrand Russell (1872-1970) was an influential philosopher best known for his contributions to analytic philosophy. Nicholas Griffin said
It is difficult to overstate the extent to which Russell's thought dominated twentieth century analytic philosophy: virtually every strand in its development either originated with him or was transformed by being transmitted through him. (The Cambridge Companion to Bertrand Russell, 2003)
Philosopher A.J. Ayer said,
The popular conception of a philosopher as one who combines universal learning with the direction of human conduct was more nearly satisfied by Bertrand Russell than by any other philosopher of our time. (Bertrand Russell as a Philosopher, 1972)
This post is a collection of my favorite quotes from Russell.


"When you are studying any matter, or considering any philosophy, ask yourself only: what are the facts and what is the truth the facts bear out?" (BBC Interview, 1959)

"Reason is a harmonizing, controlling force rather than a creative one." (Our Knowledge of the External World, 1914)

"In astronomy, the law of gravitation is plainly better worth knowing than the position of a particular planet on a particular night, or even on every night throughout the year. There are in the law a splendor and simplicity and sense of mastery which illuminate a mass of otherwise uninteresting details." (On History, 1904)


"Starting with premises which would be universally admitted to belong to logic and arriving by deduction at results which as obviously belong to mathematics, we find that there is no point at which a sharp line can be drawn, with logic to the left and mathematics to the right." (Introduction to Mathematical Philosophy, 1919)

"The fact that all mathematics is symbolic logic is one of the greatest discoveries of our age; and when this fact has been established, the remainder of the principles of mathematics consist in the analysis of symbolic logic itself." (Principles of Mathematics, 1903)

"Thus mathematics may be defined as the subject which we never know what we are talking about, nor whether what we are saying is true." (Mathematics and the Metaphysicians, 1917)

William James and the philosophy of thought

William James (1842-1910) was an American philosopher and psychologist best known for his contributions to Pragmatism. Philosopher George Santayana said,
Philosophy to [James] was rather like a maze in which he happened to find himself wandering, an what he was looking for was the way out. (Character and Opinion in the United States, 1920)
Biologist Francis Crick said,
In his monumental work, The Principles f Psychology... he described five properties of what he called 'thought'. Every thought, he wrote, tends to be part of personal consciousness. Thought is always changing, is sensibly continuous, and appears to deal with objects independent of itself. (Astonishing Hypothesis: The Scientific Search for Soul, 1994)
This post is a collection of my favorite quotes from James.


"The most violent revolutions in an individual's belief leave most of his old order standing. Time and space, cause and effect, nature and history, and one's own biography remain untouched." (What Pragmatism Means, Lectures at the Lowell Institute and Columbia University)

"Abstract rules indeed can help; but they help the less in proportion as our intuitions are more piercing, and our vocation is the stronger for the moral life. For every real dilemma is in literal strictness a unique situation..." (The Will to Believe and Other Essays in Popular Philosophy, 1897)

"The bigger the unit of deal with, the hollower, the more brutal, the more mendacious is the life displayed." (Letter to Henry Whitman, 1899)

"No philosophy can ever be anything but a summary sketch, a picture of the world in abridgment, a foreshadowed bird's eye view of the perspective of events." (A Pluralistic Universe, 1909)

"Reduced to their most pregnant difference, empiricism means the habit of explaining wholes by parts, and rationalism means the habit of explaining parts by wholes." (A Pluralistic Universe, 1909)


"There is but one indefectible certain truth, an that is the truth that Pyrrhonistic skepticism itself leaves standing - the truth that the present phenomenon of consciousness exists." (The Will to Believe, 1897)

"Consciousness, then, does not appear to itself chopped up in bits... a 'river or a 'stream' are the metaphors by which it is most naturally described. In talking of it hereafter, let us call it the stream of thought, of consciousness, or of subjective life." (The Principles of Psychology, 1890)

"As we take, in fact, a general view of the wonderful stream of out consciousness, what strikes us first is this different pace of it's parts. Like a bird's life, it seems to be made of an alteration of flights and perching." (The Principles of Psychology, 1890)

Wednesday, March 28, 2018

Charles Sanders Peirce and consciousness

Charles Sanders Peirce (1839-1914) was a philosopher and psychologist who is often regarded as the 'father of pragmatism'. The Stanford Encyclopedia of Philosophy says,
Peirce held that the continuity of space, time, ideation, feeling, and perception is an irreducible deliverance of science, and that an adequate conception of the continuous is an extremely important part of all the sciences.
This post is a collection of my favorite quotes from Peirce.


"By 'semiosis', I mean... an action or influence, which is or involves, a cooperation of 3 subjects such as a sign, its object and its interpretant..." (Pragmatism, 1907)

"The entire universe is perfused with signs if it is not composed exclusively of signs." (Quoted in Essays in Zoosemiotics by Thomas Sebeok)

"The index asserts nothing; it only says 'there!'. It takes hold of our eyes as it were and forcibly directs them to a particular object and there it stops." (On the Algebra of Logic, 1885)

"Uniformities are precisely the sort of facts that need to be accounted for." (The Architecture of Theories, 1891)

"The one primary and fundamental law of mental action consists in a tendency to generalization." (The Architecture of Theories, 1891)

"All the evolution we know of proceeds from the vague to the definite." (Collected Papers, 1931-1958 posthumous)


"Consciousness must essentially cover an interval of time; for if it did not we could gain no knowledge of time and not merely no veracious cognition of it, but no conception whatever." (The Law of Mind, 1892)

"...instantaneous feelings flow together in a continuum of feeling, which has in a modified degree the peculiar vivacity of feeling and has gained generality." (The Law of Mind, 1892)

"Qualities of feelings show myriad-fold variety, far beyond what the psychologists admit." (Pragmatism and Pragmaticism, 1903)

"The recognition by one person of another's personality takes place by means to some extent identical to the means by which they are conscious of their own personality." (The Law of Mind, 1892)


"An 'argument' is any process of thought reasonably tending to produce a definite belief. An 'argumentation' is an argument proceeding upon definitely formulated premises." (A Neglected Argument for the Reality of God, 1908)

Carl Jung and the philosophy of dreams

Carl Jung (1875-1961) was a psychologist best known for his analysis of dreams and symbols. Writer Colin Wilson said,
For Jung, the 'psychic world' (i.e. the world of the mind) was an independent reality, and it was possible to travel there and make the acquaintance of its inhabitants." (Rudolf Steiner: The Man and His Vision, 1985)
 Historian Lewis Mumford said,
Whereas Freud was for the most part concerned with the morbid effects of unconscious repression, Jung was more interested in the manifestations of unconscious expression, first in the dream and eventually in all the more orderly products of religion and art and morals. (Interpretations and Forecasts, 1967)
This post is a collection of my favorite quotes from Jung.


"In other words, our conscious representations are sometimes ordered (or arranged in a pattern) before they have become conscious to us." (Man and His Symbols, 1964 posthumous)

"We can never legitimately cut loose from our archetypal foundations unless we are prepared to pay the price of a neurosis..." (Quoted by J. B. Priestly in Times Literary Supplement)

"Every archetype is capable of endless development and differentiation." (Psychology and Alchemy, 1952)

"Because there are innumerable things beyond the range of human understanding, we constantly use symbolic terms to represent concepts that we cannot define or fully comprehend." (Man and His Symbols, 1964 posthumous)


"We know as little of a supreme being of matter. But there is little doubt of the existence of a supreme being as of matter. The world beyond is reality and experiential fact. We only don't understand it." (Letter to Morton Kelsey, 1958)

"For lack of empirical data, I have neither knowledge nor understanding of such forms of being, which are commonly called spiritual... Nevertheless, we have good reason to suppose that behind this veil there exists the uncomprehended absolute object which affects and influences us..." (Memories, Dreams and Reflections, 1963 posthumous)


"Man, as we realize if we reflect for a moment, never perceives anything fully or comprehends anything completely." (Man and His Symbols, 1964 posthumous)

"There is, however, a strong empirical reason why we should cultivate thoughts that can never be proved. It is that they are known to be useful." (Man and His Symbols, 1964 posthumous)

"Every interpretation is hypothetical, for it is a mere attempt to read an unfamiliar text." (Modern Man in Search of a Soul, 1933)

"By using scientific instruments, he can partly compensate for the deficiencies of his senses." (Man and His Symbols, 1964 posthumous)