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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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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Wikipedia wars

June 7, 2011 at 4:50 pm (Information, Politics)

“Palin’s supporters abuse Wikipedia to justify Paul Revere gaffe” (this is heavy!).  Check out the edit history.

The unfortunate fact is that “edit wars” like this go on every day in thousands of articles about recent events and contentious political issues. Very few people seem to realize how utterly incapable Wikipedia is at dealing with these agenda-based edits. The editing process (any user – even without an account – can edit almost any page at any time) might have been great for the first four years or so of Wikipedia’s history, when there was a lack of quantity, not quality. Today it is a main obstacle to achieving the high standard of quality that traditional encyclopedias had. Every hick in the streets seems to think that he knows everything about Global warming, Taiwan independence, Deontology, real analysis, and the fact that human relationships exist in communist countries.

To be fair, Wikipedia does have its share of well-written articles, and in particular the ones on mathematics are often fabulous. But even in these highly technical subjects, long-term editors have been leaving for projects with more sensible rules such as PlanetMath. The dispute-resolution process is hopelessly cumbersome, and the lack of respect for academic writings is prevalent even among many of the administrators.

(The funny thing is that the whole Wikipedia thing got started because an Ayn Rand fan misread “The Use of Knowledge in Society”.)

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USSR and China, post-1989

June 7, 2011 at 12:25 am (Development)

I’ve been wanting to write about the prospects and possible consequences of democracy in China for a while, but every time I find myself hopelessly ignorant of too many things and end up retreating to the books. I think it is very difficult in general for any reasonable and honest writer to make any particular claim about politics which he would be willing to defend strongly. The more you know, the more uncertainly there seems to be. Hence why I refuse to profess any particular political belief (though I hold many) beyond a few general guiding principles: religion is undesirable, war is almost always bad, and nationalism is a disease.

I think I will concede, then, that I don’t have any particular opinion on Chinese politics that I am willing to defend and debate about. I will, however, offer some specific but illuminating (I hope) bits of statistics in this post that often seem overlooked in contemporary debates. For the period 1945-1991 the PRC is often lumped together with the Soviet Union as the “Second World” by Western observers, and while I think they are a lot less similar than most people realize, it is nonetheless very useful to compare the economic growth of the Soviet states and China from 1989 to today. Here is a link to a graph of GDP per capita (PPP/inflation-adjusted) over time for several post-Soviet states and the People’s Republic of China. Here is another link showing instead GDP per capita growth. Both graphs are from around 1982 to present. The data is from the World Bank. The graphs are reproduced below for convenience (but try out Gapminder nonetheless, if you haven’t):

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A few comments on Grade inflation

June 1, 2011 at 1:57 pm (Personal experiences, Price theory, Rochester)


One of the most unpleasant things I had to deal with while studying under the American system is grade inflation. I grew up studying for one of the most harshly curved exams in the world, in which usually less than 2% of students receive an A in each subject, and less than 7% receive a B (there is no +/-). The American system was obviously a drastic change for me. The first day I entered my American high school (for the senior year), I realized that I could receive an A with work that formerly only deserved an E. I was quite delighted for about twenty minutes before it dawned on me that the system is absolutely terrible, especially for students like me who only knew how to distinguish ourselves by our grades.

Steven Landsburg has an excellent article that says pretty much everything which needs to be said about grade inflation – why it exists and why it is horrible. Grades, he argues, are fundamentally a source of information to employers. With less distinction on the higher end of the curve, employers are not able to distinguish between the best and the slightly less great applicants. This makes it difficult to allocate work effectively in society and hence reduces productivity. He raises the example of a worker worth $40,000 and another worker worth $30,000 with a similar profile (let’s say they both get a 4.0 – the matter is more complicated but essentially the same once we introduce lower GPAs). Because the employer cannot distinguish between them, their average value drops from $35,000 to something like $32,000. While the lesser worker is quite content, the better worker ends up a lot worse.

As a student and as someone who has studied in an alternative system, there are two points I would like to add:

First, the focus is somewhat narrow. The biggest problem, I would argue, is probably not with the “demand” but with the “supply”. To be succinct, this is because students influence their own value as workers.  If employers cannot distinguish between the best and second-best students, the best students may choose to slack off (until they can barely, but still, get an A) and hence reduce their future productivity. Or, more optimistically, they may find other methods to set themselves apart besides studying for classes. These methods should also increase their future productivity (with the possible exception of socializing with professors), but are certainly not effectively as taking classes, or such methods of selection would have been adopted without grade inflation.*
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How NOT to be an environmentalist

May 31, 2011 at 11:57 am (Politics, Price theory)


Germany plans to completely abolish nuclear power in a decade. As always, the Greens have managed to do the single thing that will most contribute to global warming and pollute the environment at the same time. When the German industry can no longer rely on electricity generated by nuclear fission, they will turn to the second best option: coal. Note that nuclear power has not killed a single person for over two decades. Coal, on the other hand, claims the lives of tens of thousands of people in China every year, through mining incidents and lung disease. The problem, of course, is that Western countries only care about Third World livelihood when the unions tell them to.

As a few case studies have shown us, the problem with nuclear power is mostly an illusory one. When the leaders of a country have the sufficient courage and commitment to develop nuclear energy, its citizens eventually see that the benefits far outweigh the costs. Hence why the French (who have relied almost exclusively on nuclear power for three decades) are still highly favorable towards nuclear energy, despite years of incessant propaganda from competitors in the energy sector. Let me end with one of my favorite quotes from Professor Steven Landsburg:

“…I am frankly a lot more worried about my daughter’s becoming an environmentalist than about her becoming a Christian…we face no current threat of having Christianity imposed on us by petty tyrants; the same can not be said of environmentalism. My county government never tried to send me a New Testament, but it did send me a recycling bin…”

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