By Simon Grey, on November 10th, 2011
Recently, I’ve been thinking a lot about how pointless economic models are. A good portion of this is probably due to being in a college microeconomics class (which uses Mankiw’s book, which Vox picks apart here.). What passes for mainstream economics is nothing more than gussied-up tautologies and pretty models that don’t actually prove anything. What irks me most is how the proponents of the mainstream view—in this case my professor and Mankiw’s textbook—act so certain about everything they assert.
For example, Mankiw devotes a chapter to the actions of a monopoly in the free market, complete with very precise mathematical models. Yet, this entire chapter is utter B.S. because all the models in the world don’t change the fact that said models are based entirely on assumptions and tautologies, and stupid tautologies at that. The models, then, only say what the programmer thereof tells them to say. This isn’t science; it’s an appeal to personal authority, writ large.
In the same vein, an economic prediction is only going to be as accurate as the assumptions upon which it is based. The reason why so many mainstream pundits missed the housing bubble is not because they lacked computational power with which to build their macroeconomic models; it’s because their assumptions about the housing market and banking industry were wrong. They thought housing growth could be sustained forever, or that the current housing growth was organic instead of government-subsidized, or that the government would be able to subsidize housing forever, etc.
Trying to build on assumptions of arbitrarily-defined variables being correlated to one another is a recipe for failure, as is evidenced by decades of repeatedly doing so. The time has come to put away the pretentious belief in the need for mathematically precise models; this isn’t physics, after all. Ultimately, the foundation of economics must be built on understanding Man as an economic actor. This paradigm shift cannot come soon enough.
By Christopher Briem, on September 29th, 2011
I read this headline and really couldn’t believe it. ComputerWorld of all places has this story today: Pirates tap BI tools to forecast, boost attendance. Notice there is no mention of improving on field performance as a means to improve attendance. They just want to narrow in on what poor folks are still willing to sit and watch another losing season.
Hey, I’m all for applying wonkery in all the weird corners of the world, but there is something perverse about that story and the Pirates endless losing streak. Moneyball is about how Billy Beane used some fundamentally econometric techniques to actually improve Oakland’s performance on the field. The Pirates’ version of that skips the box score and focuses entirely on squeezing more efficiency from the box office. I think that article says it all.
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By Ajay Shah, on February 7th, 2011
Raghuram Rajan has an interesting piece on what went wrong with the economics profession in the years that led up to the global crisis. His big issues: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.
I think these, in turn, are directly related to the incentives of academic publishing. It’s a recurring theme in agency theory: When the principal rewards the agent for performance in a certain direction, an excessive focus upon that comes about, and performance in other directions gets contaminated. When universities created an incentive structure linked purely to peer-reviewed journal pubs, economists focused on performing for each other, instead of performing for the world.
So in our diagnosis of the crisis, just as we criticise the HR policies of banks, we should also criticise the HR policies of universities.
While I’m quite aware of the narrowing of the mind that comes about from the Western-style process of focusing on pubs and tenure, it is not easy to find an alternative HR framework. George Stigler had a fascinating little article on this (which I was unable to find: do you know it?).
In India, in particular, the economics profession suffers from the twin maladies of low pressure and the historical baggage of development/socialist economics. On average, if an Indian economics department was given strong incentives to publish more, it would be an improvement. Performing for economists is better than not performing. At the same time, on the scale of mankind, it does seem that economists need to do more in terms of performing for the world.
Why does the publishing+tenure process work well in science and engineering? I have an opinion of one element that is in play there. In science and engineering, bringing in resources through research contracts is essential for doing research because research requires expensive equipment, staff, etc. There is, then, a joint production of academic publications alongside performing for the world (which allocates research funding). Hence, when the principal asked for academic publications, this did not generate a closing of the mind. In contrast, most research in economics in the top departments worldwide does not require bringing in external funding. So that source of pressure for performing for the world is absent.
 
By Ajay Shah, on January 27th, 2011
One of the important mistakes that India is making, in terms of integration into the world economy, is in visa rules. A key element
of progress there is the new `Visa on Demand’ program, which has now been expanded. The list of lucky countries now stands at: Japan, Singapore, Finland, Luxembourg, New Zealand, Cambodia, Laos, Vietnam and Philippines. This needs to now cover the G-20 countries. Another big frontier is setting up convenient access to work visas in order to support the burgeoning need for skilled foreigners who are needed in the Indian labour force.
Russell K. Nieli on the power of meritocracy as seen in Caltech. The IITs are similar to Caltech in two respects: No concern for how
`well rounded’ the background of an applicant is, and no concern in the admissions process for parentage or donations. The IITs do
care about caste to some extent in the admissions process, while Caltech cares about nothing other than brainpower.
Materials of the 2010 Neemrana conference organised by NCAER, NBER and ICRIER.
Sigh. Building a clean environment is hard!
Materials from the recent IGIDR finance conference.
Annie Lowrey on Slate on the role of prizes in public funding for research.
Mobis Philipose on competition against Nifty options at NSE by Nifty options at SGX, and on the problem of transaction taxes and exchange competition.
A household survey by CMIE tells us something about how ordinary households see the debate about the Bimal Jalan committee.
Sindhu Bhattacharya has an article in DNA about foreign airlines who are being prevented from operating in India. We need
a treaty framework that would render such things unlawful.
A. D. Miller in the Guardian on why Western authors like Mother Russia.
Interesting developments in the freedom of speech.
I guess they noticed that if you take the first word on every seventeenth page, it spells out “Death to the Shah”. That’s nothing, I have a blog that is banned in China!
A great story about how grain and oil led to the collapse of the USSR. By Yegor Gaidar.
Joe Keohane on boston.com on the odd feature of forecasting: The guy who gets the huge event right is often likely to fare badly in
ordinary times.
Lant Pritchett says that the notion of an `ethics code’ for economists is a silly idea.
By Ajay Shah, on August 26th, 2009
The Bank of Israel has become the first central bank worldwide to raise interest rates.
A few weeks ago, I wrote an elongated blog post titled Does unconventional monetary policy and unusual fiscal policy presage an upsurge in inflation?. This was partly motivated by the concerns of the time (this was in mid-June) about the exit strategy of central bankers. I had argued that inflation targeting gave the right framework for all three phases: the sharp drop in the policy rate, the shift to quantitative easing when the short rate fell to zero, and the eventual rise of interest rates. It is not surprising that the first mover on the exit process is an inflation targeting central bank.
A Taylor rule with an inflation coefficient of 1.5 and an output coefficient of 0.5 gives us a rough approximation to the thinking of inflation targeting central banks. The puzzle then lies in forecasting the extent to which inflation will exceed the target and forecasting the extent to which output will be below the target. These two forecasts are hard to make. But as I said in the above article:
As the financial system comes back to life, as the money multiplier comes back to normal values, the intellectual framework of inflation targeting will shape the responses of the central banks. There will obviously be some mistakes in forecasting inflation, given that the parameter estimates in our models are driven by normal times. But one can expect an average error of zero in the sequencing through which unconventional monetary policy is withdrawn. And when mistakes are made, when de jure inflation targeting is in place, the bond market will know that these are mistakes of execution and not a change in strategy.
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