Economics as a positive science

August 14, 2012 at 3:33 am (Biology, Economics)

There are plenty of people these days acclaiming that economics (and more recently political science) has a physics envy.  The idea is that economics is preoccupied with mathematics, with optimization, and other concepts crudely adopted from the perfection of the physical world into the complexities of the social world.

In practice, the belief usually stems from some immature and naive aversion to mathematics rather than a genuine understanding of either physics or economics. But let’s take the idea seriously for a moment. The association is logically problematic because just because one set of methodology works better in one field, does not mean it isn’t the best methodology in another field. The complexities of the social world is not a strong argument (without a basis of comparison) against the usefulness and convenience of using demand curves, optimization, and dynamic programming to understand economic phenomena.

So what is really implicit in the argument here? The reason it seems so powerful is that it caricatures economists as a homogeneous collection of nerds who mistakenly adopted the language of physics when they really shouldn’t have; the story of “physics envy” is more persuasive than “they were simply all wrong”. The point of the argument is not to argue that economics methodology is flawed, but to open up the possibility that economics methodology is flawed by casting doubt on the credibility of economists. It is, for all intents and purposes, an ad hominem argument – not that there are any problems with that.

So is there really evidence that economists adopted the methodology of physics wholesale without considering its relevance? The historical evidence is weighed against that interpretation. The formalization of economics was an incredibly long progress that met heavy resistance on every milestone. Almost 40 years after the Econometric Society (the first society dedicated to mathematical economics) was established, the Cowles Foundation was expelled from the University of Chicago for what was perceived as excessively mathematical research. It wasn’t until the beginnings of the 1990s that economics students were expected to have basic mathematical training upon entering graduate school. The idea that “some economists just took physics and put it in economics” is ludicrous; the mathematical revolution was a gradual, and thus much more controversial and debated process.

More importantly, critics overstate the similarity between physics and economics. Physicists, for the most part, are not concerned with empirical phenomena; whereas over 80% of economists work with empirical phenomena and at least half of them make use of empirical evidence of some sort. Noam Chomsky once noted that the field that really has physics envy is postmodernist theory; they adopted both the incomprehensible terminology and the complete isolation from the human world.

The natural science that is most similar to economics is, in fact, evolutionary biology. Paul Krugman had given a series of talks arguing for this point in the past; here is a transcript. The crux of his argument is that both fields are founded on the basic idea that models can be incredibly useful, even if unrealistic. Like economics, evolution makes use of the concepts of optimization, equilibrium, and self-interest and competition (at the level of genes) as well as the lens of methodological individualism. It is interesting to note that no critic of economics has risen up in indignation to protest the use of these concepts in biology – even though they are far more widespread, entrenched, and superficially unrealistic. It is perhaps an unfortunate reflection of the mindset of academics that countless scholars have less faith in humans’ capacity for consistent behavior than that of sea cucumbers.

It is even more remarkable that the formalization of both disciplines have been incredibly successful, such that tools developed in these fields are rapidly being transplanted in other fields. The idea that voters can be rationally ignorant, or that all organizations are designed to economize on transaction costs, are far less plausible than the idea that a worker rationally responds to wage incentives or makes intertemporal decisions. And yet the former ideas have been developed into testable claims that are beginning to be widely accepted in the scholars of their respective fields. If we take the simplistic view that the ideas market is based on competition where the best ideas survive, it seems that many disciplines are far more susceptible to “mathematical” analysis than we had previously thought.

 

 

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Why are there so many ignoramuses in political theory? A rational choice perspective.

July 10, 2012 at 5:26 am (Oh the humanities!, Price theory)

I discovered a “ranking” of the upcoming stars in political theory today, as ranked by a collection of over a thousand political theorists in Moore’s Political Theory Today: Results of a National Survey. Out of sheer boredom, I went through the works of perhaps twenty or so, reading their biographical details, education, main publications and notable ideas. I would categorize these political theorists mainly into three similarly sized groups:

1) Shameless demagogues who see academic research as another front in a larger political struggle. The young theorist in Chicago is a nice example.

2) People well-trained in the rhetoric and obscurantist techniques of political theory, but without a cogent argument, nor any basic understanding of political processes.

3) A minority of liberal theorists defending what the rest of us already know, with ever more arcane language and terminology that they themselves probably are uncomfortable with. (Free Market Fairness…)

If this is not enough of an evidence of the continued intellectual hollowness of the field, consider this: there are perhaps 25% of liberal theorists who consider the rest of the field to be a complete joke; and there are perhaps 25% Marxist/post-structuralist theorists who also consider the rest of the field to be a complete joke; and this has been the state of the discipline for roughly a hundred years. They can’t both be right, and it follows that at least 50% (you do the math) of the discipline is a complete joke and has been for a hundred years. That is not a sign of a healthy discipline.

So why is political theory such a mediocre field? Why do they seemingly not advance despite the mountains of contrary evidence against the relevance of Hegelian theory, the hollowness of ethics, the irrelevance of moral philosophy without an analytic foundation? How can they proceed so comfortably in their theorizing even as the rest of the discipline (political science) moves further and further away?

C.P. Snow, and later Krugman, refers to this fundamental divide as a difference of “culture” – the culture of nerds and the culture of the literary intellectuals. But I think the difference in culture is merely the result of something more fundamental – a difference in incentives. A personal anecdote would be illustrative here. When I was in my first English class in college, which was taught from a heavily postmodernist perspective, I managed to convince myself that the various vices commonly associated with postmodernist writing – the use of obscurantist terminology, the use of namedropping, analogies and anecdotes as proof, the avoidance of any clear argument or direction, and the general lack of rigor and preciseness – as, indeed, virtues. If they’re not, how else could I have any faith left in the “elders” of the literary tradition that I was eagerly following? And more pertinently, if I do not pretend that postmodernist writing is rigorous and useful, how do I bring myself to conjure up the 8 paged, double spaced essays that I desperately need for a good grade in the course?

After I abstained myself from (or rather, was yanked away from) the literary tradition and switched to economics through the influence of some brilliant minds, I found it pretty obvious, in retrospect, how silly it all was. And I think any reasonably educated and astute mind – once he suspends his faith in the intellectual authority of some literary academics for a moment – can easily recognize after some serious reading and thinking that there is little value in postmodernism, or the poststructuralist tradition, or more specifically deconstructionism. The key thing I want to point out here is that there really is no culture. Culture is persistent, unchanging and, in the short term, irrational. Yet it is possible for one to turn from an addict of postmodernism to a fervent critic of it merely in response to the changing of incentives.

So why do some disciplines seem to have such failing incentives? How do these incentives come by? It may be worthwhile to consider how some disciplines succeeded as a contrast. Economics and analytical philosophy are two disciplines that are widely regarded as successful, in the sense that they have managed to weather criticism, and in the case of economics, colonize other disciplines. A crucial common characteristic, I propose, is that both disciplines arose primarily in Anglo-Saxon countries, which have several cultural characteristics that influence the incentives of the academe:

  1. The Anglo-Saxon academe is highly reverent of positivism and the natural sciences
  2. The Anglo-Saxon and especially American public tends to be critical or skeptical of authority and elites
  3. The Anglo-Saxon countries were relatively unaffected by the Second World War, and thus are less prone to political radicalism in its aftermath

The combination of these factors, I think, are why economics and philosophy both had an analytic turn in the first half of the 20th century. In economics, this is what critics justifiably deride as “physics envy”; an obsession with putting everything into neat mathematical models and equations, and an eventual complete rejection of all non-mathematical research (in stark contrast to the early 20th century, when mathematical economics was a fringe, suppressed field). This was necessary both to gain some credibility in the public, especially among bureaucrats and the business elite; and as a reaction against the rapid turn to Marxism in the continental academe. I think, in retrospect, it would be fair to credit much of the modern relevance and rigor of economics – especially compared to other social sciences – with this (in the context of the global intellectual culture) rather accidental quantification of economics.

-t.b.c.

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Freedom in markets and freedom in the academia

June 2, 2012 at 4:37 pm (Information, Oh the humanities!, Price theory)

Here’s one curious phenomenon: The vast majority of those academics who spend careers studying market failures and how government intervention can correct them (by this I don’t mean only economists speaking in the language of economics, but any social scientist implicitly arguing for a role in public planning and regulation in controlling markets) are also vehemently against public control of a market that is probably the most prone to the pursuits of self-interest at the expense of others (i.e. failures to internalize costs) – the academic market.

I don’t mean the generation of ideas in the broad sense. I mean the system with which we generate, debate and publicize those ideas in most developed countries, through the research university system and in the form of publications, lectures and conferences. If we were to analyze it as a market – with society (including other academics) purchasing knowledge from academics in return for salary, social status, and reputation – it is a very peculiar market indeed. There are several characteristics that seem to define the academic market:

1. Extreme difficulty in measuring output and productivity, especially in the short-run and outside of the sciences.

2. An almost complete inability to internalize costs. Having bad ideas doesn’t hurt you – look how well our sociologists and anthropologists are doing.

3. Conflation with several other markets – in the sense that society does not only demand knowledge (in the narrow sense of useful, relevant information about society or the physical world) but also entertainment, grading, political ammunition and other goods from academics.

It suffices to say that there is great potential for market failures among academics, the most pertinent of which is probably the incentive for academics to peddle nonsense in place of actual knowledge. Any honest scholar who has bothered to examine the last 30 years of postmodernist research in the humanities surely will not disagree that such market failures exist.

In a sense, “intellectual freedom” is a specific case of “free markets”; if we are so eager to impose our restrictions on badly functioning markets, then why is it considered taboo to even speak of limiting intellectual freedom? Perhaps when one thinks of intellectual freedom, one thinks of a young genius challenging an out-dated orthodoxy with daring conjectures; when one thinks of limits of intellectual freedom, one thinks of Giordano Bruno burning at the stake for questioning religious dogma.

It helps to think in terms of another perspective. Think of intellectual freedom as the struggling sociologist whose discipline is eroding in significance as it is gradually replaced by quantitative methods, and who has never had a knack for mathematics; he has no choice but to join the dying chorus of fellow sociologists decrying the “unrealistic” and “inhumanistic” nature of mathematical modelling, whatever merit these criticisms may have. And think of limits of intellectual freedom as a political adviser in the Medieval times, who is forced to provide useful and accurate analyses of each situation simply because his head will be cut off (by the enemies or by his own liege) if his advice turned out to be wrong.

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May 24, 2012 at 1:47 am (Uncategorized)

I\in\{back\}!

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Metaphysical nonsense

September 27, 2011 at 9:11 pm (History, Oh the humanities!)

Mao Zedong – “Idealism and metaphysics require the least effort, as they allow people to say whatever they want to say. They are not based on objective reality, and objective reality cannot falsify them.” (1955)

Alain Badiou, philosopher and Maoist – “Our epoch is most certainly the epoch of rupture, in light of all that Lacoue–Labarthe has shown to depend on the motive of mimesis. One of the forms of this motive which explicitly attaches truth to imitation is to conceive of truth as a relation, a relation of appropriateness between the intellect and the thing intellected. A relation of adequation which always supposes, as Heidegger very well understood, the truth to be localizable in the form of a proposition. Modern philosophy is a criticism of truth as adequation. Truth is not limited to the form of judgment. Heidegger suggests that it is a historic destiny. I will start from the following idea: Truth is first of all something new. What transmits, what repeats, we shall call knowledge. Distinguishing truth from knowledge is essential. It is a distinction already made in the work of Kant, between reason and understanding, and it is as you know a capital distinction for Heidegger, who distinguishes truth as aletheia, and understanding as cognition, science, techne. Aletheia is always properly a beginning. Techne is always a continuation, an application, a repetition. It is the reason why Heidegger says that the poet of truth is always the poet of a sort of morning of the world. I quote Heidegger: ‘The poet always speaks as if the being was expressed for the first time.’ If all truth is something new, what is the essential philosophic problem pertaining to truth? It is the problem of its appearance and its becoming. Truth must be submitted to thought not as judgment or proposition but as a process in the real. This schema represents the becoming of a truth. The aim of my talk is only to explain the schema. For the process of truth to begin, something must happen. Knowledge as such only gives us repetition, it is concerned only with what already is. For truth to affirm its newness, there must be a supplement. This supplement is committed to chance—it is unpredictable, incalculable, it is beyond what it is. I call it an event. A truth appears in its newness because an eventful supplement interrupts repetition. Examples: The appearance, with Aeschylus, of theatrical tragedy. The eruption, with Galileo, of mathematical physics. An amorous encounter which changes a whole life. Or the French revolution of 1792. An event is linked to the notion of the undecidable. Take the sentence ‘This event belongs to the situation.’ If you can, using the rules of established knowledge, decide that this sentence is true or false, the event will not be an event. It will be calculable within the situation. Nothing permits us to say ‘Here begins the truth.’ A wager will have to be made. This is why the truth begins with an axiom of truth. It begins with a decision, a decision to say that the event has taken place. The fact that the event is undecidable imposes the constraint that the subject of the event must appear. Such a subject is constituted by a sentence in the form of a wager: this sentence is as follows. ‘This has taken place, which I can neither calculate nor demonstrate, but to which I shall be faithful.’ A subject begins with what fixes an undecidable event because it takes a chance of deciding it. This begins the infinite procedure of…
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Links

August 17, 2011 at 6:42 pm (Links)

1a. Two physicists’ latest foray into economics (bad)

1b. Freakonomics’ latest foray into postmodernism (terrible)

2. Political views of Muslim Americans

3. Top All-Time Donors, 1989-2010

4. The Big Lie About the ‘Life of the Mind’

5. Rick Perry’s college transcript

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Chinese languages and economic prosperity

August 6, 2011 at 3:37 pm (Arts and languages, Economics)

A while ago I had a post about why learning Mandarin may not be the best idea for those working in business. One reason I outlined was that much of the industrialized regions of China were not Mandarin-speaking areas. In addition to this, one point I forgot to mention was that the ethnic Chinese who dominate business and trade in Thailand, Malaysia, Singapore and to a lesser extent Vietnam and Indonesia are also not native Mandarin speakers.

I do not have access to figures about the dominance of ethnic Chinese in trade and business in these regions, but I have been able to roughly calculate the GDP per capita (in USD) of these Chinese communities. I will then compare that with figures for the majority-Mandarin speaking provinces of China, in an attempt to show that economic opportunities in these non-Mandarin speaking communities are much greater for foreign investors. I will also list the figures for the North American Chinese community for those who are interested.

I will list the main native Chinese languages of each community by their ancestral origin. This will be roughly ordered by descending number of speakers, but I will not provide actual figures for each language as estimates here tends to vary considerably.

Now, it is true that many of the businessmen in these communities have learnt to understand Mandarin. However, that is usually their third or fourth language (with the possible exception of Singapore, Taiwan and mainland China, where there has been government-promoted Mandarization), and in general they understand it less well than English. In that sense, learning Mandarin will not provide any networking advantage for a native English speaker.

There are also a fair number of ethnic Chinese who speak Malay (in Malaysia and Indonesia), Thai (in Thailand), and English (in all countries). In Thailand, in particular, the majority of the Chinese speak Thai as a native language. However, I will only list the main native Chinese languages for comparison purposes.

Countries that are not included for lack of data: Philippines, Vietnam, Cambodia

—Overseas Chinese—

Malaysian Chinese community:

Languages: Hokkien, Hakka, Cantonese, Teochew

Population: 7m (25%)

Avg. Income: $12,936

Singaporean Chinese community:

Languages: Hokkien, Teochew, Cantonese, Mandarin

Population: 3m (74%)

Avg. Income: At least $43,867
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Ten commonly misused terms

August 5, 2011 at 2:37 pm (Arts and languages, Evolution and psychology, Mass media)

1. Social construct

Social construct refers to a specific and arbitrary social arrangement. It can be compared to the idea of a social contract, although a social contract often involves common knowledge while a construct does not.

In critical studies and in other fields, there has been a trend of labeling pretty much every social or natural phenomenon as a “social construct”, often with the implication that it is imaginary and undesirable. But many of these “social constructs” can be attributed to natural causes, and are completely unrelated to society.

Examples:

  • Languages are social constructs.
  • Gender roles are largely social constructs.
  • The idea that “romantic love” exists is a social construct.
  • Language use is not a social construct.
  • Gender is not a social construct.
  • The feeling described by “romantic love” is not a social construct.

2. Ad hominem

The notion of argumentum ad hominem is distinct from the notion of personal attacks. Argumentum ad hominem is to relate a person’s argument with his character; if someone states that homosexuality is immoral, and is revealed to be a closet homosexual, it is an argumentum ad hominem to question his hypocrisy, though it is not intended as a personal attack. It is also logically permissible.

On the other hand, it is entirely possible to make a personal comment without making an argumentum ad hominem, and in fact this is very common in daily conversation – “It’s not what you said, but the way you said it” “I don’t like your attitude” – etc.

3. Ethos, pathos, logos

These are commonly known as the three “modes of persuasion”, but they are nothing of this sort. Ethos (sense of authority/credibility), pathos (emotion), and logos (reason) belong to the audience. The three modes of persuasion are appealing to ethos, appealing to pathos, and appealing to logos.

These terms are also often confused with each other. For example, Brutus’s speech to the citizens in Julius Caesar is often cited as an appeal to ethos or pathos, but it is in fact mostly an appeal to logos. While he talks about his love of Caesar, and of Rome, it was not an attempt to establish his own character or appeal to the audience’s emotions, but to justify the act of killing Caesar as a reasonable decision. One can speak of his own character and of emotions without it being an appeal to either ethos or pathos.



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How extremists cope with widespread dissent

July 28, 2011 at 3:41 am (Humans, Politics)

How do extremists continue believing what they believe? The recent attack in Norway, I think, has brought up this question in many people’s minds (helped by the fact that the perpetuator is white and blonde and thus ought to be perfectly normal). The usual response is that they must be either unintelligent or mentally disturbed. Neither, from my observations, is true. In fact, those who take a definite political position have on average a higher intelligence than the “moderates” and the politically unaffiliated, and political extremists are well-represented in the academia and in prominent professions.

The most common trait among extremists, I would say, is the ability to rationalize why others disagree with you, a trait that is usually seen by others as a form of cynicism – for example, a central tenet of Marxism is the fundamental role of ideology, or that what people believe tend to be a result of their socio-economical circumstances. A second and related trait is the belief that their beliefs are misrepresented by others to be something related and wrong, but that they themselves are in fact different. For example, Marxists are notorious for their many ideological streams, each of which criticizes and fights against the others; while the neo-Nazis take great pains to distinguish themselves from the Nazis.

For a practical demonstration, here are two excellent examples of how extremists deal with ideological insecurity, one from the Marxists and one from the neo-Nazis:

1. Badiou: On Different Streams Within French Maoism (an interview with Alain Badiou, a prominent French “philosopher” and probably the most famous Maoist in Europe)

2. Do you ever lose faith in your racist beliefs? (a thread on Stormfront, the largest neo-Nazi forum on the Internet)

Note:
I do not imply by this post that extremism itself is a bad thing. In fact, I have plenty of extreme beliefs, such as my atheism and my belief that family as a social institution ought to be abolished; and I am sure we can find in history countless examples in which an extreme minority turned out to be correct (by beliefs, I mean only falsifiable beliefs, not opinions relating to moral values, although these two are often confused with each other).

However, most beliefs held by an extreme minority are probably false, and this is especially true for those that have been out of favor for years – in the above two cases, the Maoist beliefs about class struggle and the viability of central planning; and the fascist belief that race is a fundamental determinant of personality.

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Efficient arguments

July 16, 2011 at 1:08 am (Humans)

I. How ordinary people argue over issues:

A: Intellectual property protection is such a ridiculous thing. How do you justify charging $10 for a music album that costs next to nothing to produce*?

B: Wow, I can’t believe you said this. So you want to STEAL from honest artists*? Would you like others to steal from you too*? I think I might defriend you on Facebook.

A: Well, YOU don’t have to worry about buying stuff because you’re rich*. Not everybody is as privileged as you*. And record companies are too rich anyway. If they were honest, they could pay more of their profits to the real artists*!

B: Not stealing from others is not a choice, it is a moral duty*! “Thou shall not steal”*. You only think intellectual property is bad because you don’t want to pay for what you purchase**! You know who else forcibly took the property of others? Adolf Hitler.*


II. How economists[1] argue :

A: I detest intellectual property rights, for they limit the spread of innovation.

B: I support intellectual property rights, for they provide an incentive to innovate.

A: That is a good point. Let’s find some way of quantifying the benefits from providing incentives to innovate and the costs of limited innovation and compare their magnitude, then we shall know which of our opinions is more valid.

III. How sociologists argue:

A: Over the last few years there has been significant debate about whether intellectual property rights are desirable or even justifiable. Certain economists have argued that intellectual property rights may have some merit, based on their so-called “cost-benefit” mathematical model. But such mathematical models with their reliance on complicated equations and statistical jargon grossly simplify the realities which underlie intellectual property, in the context of an increasingly deregularized and privatized society which operates under the neoliberal doctrine of “free market” capitalism. (Althusser, 1965)  Indeed, seen properly in the context of the late-capitalist épisteme, intellectual property is no more than a metaphysical form of social coercion designed to benefit the upper middle-classes by protecting the status quo – hence the eerie resemblance of the ideology’s name to the classical belief of “property rights”, which had always been more concerned with protecting the physical property of the privileged rather than the mental property of the poor, thus justifying drastic cuts in education, arts and culture, even as the tax system is made to disproportionately favor the wealthy bourgeoisie.

^
1. Except for Steven Levitt. Here’s the Levitt argument: Is intellectual property protection a good thing? Well, how would my daughter feel about it?

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