In point of fact, in modern macroeconomics where expectations of the future are central, the most important variables are often not observable. So when one hears a criticism like that leveled by Tom [another Tom], realize that taking such a criticism to its logical conclusion means that almost no macroeconomic discussion can proceed.As Maynard observed, economics is a moral science rather than a positive science. Econometrics is just guessing, since the vagaries of human cognition, volition, affect, and behavior interact with uncertainty. Not only is the future uncertain both ontologically and epistemically, but also the data are largely estimates rather than the result of measurement or counting. Hence, expectations cannot be more than educated guesses based on assuming that the future will resemble the past, more or less, and the data are more or less representative.
Wednesday, November 5, 2014
Menzie Chinn — Known Unknowns in Macro
Menzie Chinn uncovers a truth.
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11 comments:
Christ Church, Oxford #
6 July 1938
Dear Maynard
(...)
I am not sure that I agree altogether with your hostility to the idea of economics as a natural science; tho' no doubt it has its own special modes of procedure.
(...)
Yours
Roy (Harrod)
http://economia.unipv.it/harrod/edition/editionstuff/rfh.349.htm#40043
Physics envy.
By the way, in the exchange, never again the term "moral science" appears after Maynard mentioned it.
Apparently Roy did not find it worth discussing about it. Why not? A possibility is that Roy agrees with Maynard: economics is a moral science and that's beyond any discussion.
Another possibility is that he thought that was really an unimportant question.
Your guess is as good as mine.
The principal thrust of Keynes's attack on neoclassical economics, which he called "classical economics," is that economics is a "moral science" (we would say "social science") that is based on effects of human cognition, volition, affect, and behavior in relation to not only a natural environment but also a social environment, rather than being a natural science in which humans are like atoms that follow natural laws expressed as equations which economic scientists can discover as natural scientists discover laws of nature expressed as equations.
Keynes was a mathematician. There's a reason that the General theory is not formalized. If he thought this could be accomplished, Keynes had the mathematical chops to do it.
It was really Samuelson that created "Keynesian" macro based on econometrics, and we are still living with the effects of that blunder.
It's interesting that Keynes considered economics a moral science, gave so much relevance to introspection and was so averse to mathematics.
The Austrians are loath to the mathematization of economics; they consider economics a moral science, as well (calling themselves philosophers), and they, too, emphasize the role of introspection by wise and enlightened men, whose opinion is law admitting no appeal.
The great difference is that among Austrians these enlightened men (priests and oracles, really) were preferably of Central European and petty provincial aristocratic stock (unlike Keynes, who was only a representative of the English "educated bourgeoisie").
Frankly, in that sense, at least Samuelson sees economics as accessible to the common men (like himself).
If we were under the metals I don't think the 'physics envy" would be that bad of an analytical way to go...
Since you would be subject to the ebbing and flowing of the presence of a physical substance. .. . PV=mRT and so forth...
So now that we are no longer under the metals of course the context has changed and we shouldn't rely on analytical approaches akin to those of the physical sciences. ..
That characterization of physics is simplistic anyway. I would say is "Newton's envy', or an obsession that comes from Illustration and rationalism (and later on, positivism) to describe "God's perfect universal machine" in a mechanical way.
Most complex physics have to deal with raw uncertainty - even classical body physics!. If economists want to use maths, it's ok, but at least use the correct maths and don't try to model economics based on classical mechanics because that's not how it works.
Unfortunately this is well beyond the capabilities of most economists (and they may have physicists envy for that lol) - not all ofc, but interestingly enough current interesting works on heterodox economics usually come from people with varied backgrounds and multidisciplinary teams.
That's why you see a lot of maths and physics phd's in high finance, but not many economists. And even so, those get it wrong because many think you can tame uncertainty through normal distributions and Markov Chain's.
Maybe Keynes was right after all, and we should drop maths entirely...
Well we have to use math... how else can we measure outcomes?
We use the USD system to measure inputs & outcomes...
this doesnt have anything to do with whether or not we understand that we have the authority to operate our economic systems however we want to...
Its not like we are subject to our own economy like we are subject to the weather, etc...
rsp,
We can use basic algebra to operate the monetary system but that's not the same as talking about the broad "economy" IMO.
Monetary economics or government policy are a subset of a bigger system we can't control or predict in many ways. That does not mean we shouldn't try to thought, Keynes was very clear about that.
We CAN and SHOULD control monetary economics, and we MUST use maths (algebra mostly) for that. But economics is more than monetary economics, those take place in a bigger superset of human + environment relationships and that's where uncertainty takes place.
That's why monetary/fiscal economics is mostly reactive (through stabilizers and levers), rather than proactive (that it can be, through investment, but decisions regarding those are taken in a more uncertain context).
Economics is moving on to complexity economics, agent-based computational economics and econophysics.
From the POV of MMT the breakthrough is in Post Keynesian monetary economics and Post Keynesianism in general (including Sraffa and Minsky in PKE) and Institutionalism beginning with Veblen.
Well we have to use math
Not a question of using math or not using math. That's a false dilemma. The issue is how to use math appropriately to context rather than to publish articles on one hand and to blind with bullshit on the other.
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