Saturday, April 28, 2018

David Orrell — The Economics Debate: The Problem isn’t Bad Economics, It’s Bad Science

“The test of science is its ability to predict”— Richard Feynman
Is economics "cargo cult science" (Richard Feynman)?
Of course, as I point out in my forthcoming book Quantum Economics, economics should not be compared directly with weather forecasting. For one thing, the fact that economists’ predictions and models affect the economy (the financial crisis of 2008 for example was in part caused by faulty economic risk models) means that their responsibility is more like that of engineers or doctors. Instead of predicting exactly when the system will crash (no one has ever asked for a precise ‘date’), they should warn of risks, incorporate design features to help avoid failure, know how to address problems when they occur, and be alert for conflicts of interest and ethical violations. The profession’s failings in these areas, rather than any particular forecast, are the real reason so many are calling for a genuinely new paradigm in economics, as opposed to a rehashed version of the old one....
Evonomics
The Economics Debate: The Problem isn’t Bad Economics, It’s Bad ScienceDavid Orrell is an applied mathematician and author of popular science books. He studied mathematics at the University of Alberta, and obtained his doctorate from Oxford University on the prediction of nonlinear systems. His work in applied mathematics and complex systems research has since led him to diverse areas such as weather forecasting, economics, and cancer biology.

28 comments:

Matt Franko said...

To even begin to predict you have to start to identify causal relationships... and imo you have to be trained in the skills that are required to be able to do this type of thing... which Economists are NOT...

Even this guy here who appears to have a technical background of sorts says "the financial crisis of 2008 for example was in part caused by faulty economic risk models" which is missing the mark... doesnt make technical sense...

You had the recent bridge collapse at FIU... that is not because the people building that bridge "underestimated the risk of collapse"... it appears they improperly adjusted the tension force in one of the structural members at the one load bearing end and it caused a catastrophic failure... which will be investigated and corrected by competent and qualified people..

Nobody looking back at the 2008 crash has investigated that adequately from a causal standpoint.... they are still just doing stochastic illustrations of different random asset price variations to see if the depository institutions would have enough regulatory capital to remain within regulatory ratios for randomly selected % fluctuations in risk asset prices without including any possibility of non-risk asset fluctuations due to fiscal and monetary policy themselves...

ie still leaving it to chance...

this is not technically impressive sorry and further looks stupid...

Matt Franko said...

"His work in applied mathematics and complex systems research has since led him to diverse areas such as weather forecasting, economics, and cancer biology."

So iow he is not qualified to weigh in here on a post mortem of 2008.. he's not cross trained in Accounting and Finance or banking regulation... he has the math for sure but that is not enough...

Andrew Anderson said...

Here's a causal relationship: the largely sham liabilities of banks, credit unions, etc. toward the non-bank private sector nullify what would otherwise be the stability enhancing negative feedback of GENUINE liabilities toward the non-bank private sector.

Matt Franko said...

AA, To you any abstraction is a "sham!" youre not technically competent ... abstractions are what technically competent people work with and use successfully ALL THE TIME...

Andrew Anderson said...

The sham nature is as follows: The liabilities of the banks are for fiat but the non-bank private sector may not even use fiat except for grubby, unsafe, inconvenient physical fiat, aka "cash".

Andrew Anderson said...

So you believe phony negative feedback will stabilize a system? Call yourself an engineer? Call yourself competent?

Andrew Anderson said...

To you any abstraction is a "sham!" Franko

Really? Any evidence for that?

AXEC / E.K-H said...

The brouhaha about prediction: which Feynman is right?
Comment on David Orrell on ‘The Economics Debate: The Problem isn’t Bad Economics, It’s Bad Science’

Feynman said:
(i) “The test of science is its ability to predict”
(ii) “The future is unpredictable.”#1

Which Feynman is relevant for economics? Of course, both but economists in their confusion took (i) and ran away with it. The bottom line of the prediction brouhaha is: scientists do not predict the future, only charlatans do, and only morons take them seriously.#2

As a matter of principle, a theory cannot be dismissed because it does not predict the future. Therefore, economics from Jevons/Walras/Menger to DSGE cannot be dismissed because it has not predicted crises. The criterion of science is logical and empirical consistency: “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant) So, economics ― Walrasianism, Keynesianism, Marxianism, Austrianism ― has to be dismissed because of material/formal inconsistency and nothing else.#3

The point is that scientists use the word prediction in a quite different sense from everyday usage. For example, Einstein deduced gravity waves from his theory in 1916 and in our days, 100 years later, they are observed. Only in the very specific sense of ‘testable hypothesis’ scientists make ‘predictions’.

Science proceeds from the known to the unknown: “The object of reasoning is to find out, from the consideration of what we already know, something else which we do not know.” (Peirce) Only in this sense science makes ‘predictions’.

All this is well-known among methodologists: “We are very far from being able to predict, even in physics, the precise results of a concrete situation, such as a thunderstorm, or a fire.” (Popper)#4

The problem of economics is NOT failed predictions but that it is a failed science or, in Feynman’s famous term, a cargo cult science.#5

Egmont Kakarot-Handtke

#1 For the full quotes see ‘Scientists do not predict’
https://axecorg.blogspot.de/2016/02/scientists-do-not-predict.html

#2 Scientists do NOT predict the future
https://www.theguardian.com/money/2017/sep/02/economic-forecasting-flawed-science-data

#3 What is dead certain in an uncertain world: economists’ abysmal incompetence
http://axecorg.blogspot.de/2016/07/what-is-dead-certain-in-uncertain-world.html

#4 Uncertainty: ‘Whereof one cannot speak, thereof one must be silent’
https://axecorg.blogspot.de/2016/04/uncertainty-whereof-one-cannot-speak.html

#5 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
https://axecorg.blogspot.de/2017/05/what-is-so-great-about-cargo-cult.html

Noah Way said...

Nobody looking back at the 2008 crash has investigated that adequately from a causal standpoint

Deregulation starting with Clinton, followed by Bush freed banks from protective restraints. Banks "invested" massively and speculatively in real estate, causing a housing bubble.

Banks magically transformed liabilities into assets (AAA rated investments) by giving no-interest short-term balloon loans (for 100% of inflated value + cash down payment) to unqualified buyers without income verification. Banks profited from the mass sale of toxic mortgages. Banks then profited again when bailed out, free money for breaking the economy! Corporate welfare at its finest. Too big to fail, and now they are twice the size.

Among other things, of course. It's not rocket science, it's just greed and corruption. Stochastic analysis of random asset price variations is just obfuscation.

Andrew Anderson said...

Banks magically transformed liabilities into assets (AAA rated investments) by giving no-interest short-term balloon loans (for 100% of inflated value + cash down payment) to unqualified buyers without income verification. Noah Way

Which is why we need a risk-free, 100% liquid-at-all times PAYMENT SYSTEM apart from the one that must work through the banks, i.e. inherently risk-free accounts at the Federal Reserve for all US citizens, US businesses, State and Local governments, etc.

Moreover, ALL privileges for the banks (eg. deposit insurance, eg. lender/asset buyer of last resort, etc) should be abolished so that the banks are then 100% private with 100% voluntary depositors so that the risk-free system is not disadvantaged by privileges for the banks.

This way, banks can be allowed to fail since the alternative risk-free, 100% liquid-at-all times payment system shall allow the economy to function while the wreckage is cleared.

Matt Franko said...

Neither of you two guys know what you’re talking about... you’re both just pissed off about it .... rightly so but that doesn’t explain anything...

Andrew Anderson said...
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Andrew Anderson said...
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Noah Way said...

@Franko: First you complain that there is no analysis from a "casual viewpoint", then you cry that the most blatantly obvious casual viewpoint is wrong.

You demonstrate a critical shortage of intellectual competence.

Andrew Anderson said...

So sham accounting and sham negative feedback can't be the cause of banking crises?

And another payment system, in addition to the one that must work thru banks, isn't a good idea anyway?

Matt Franko said...

Nothing you identify is causal...

Matt Franko said...

If there is a plane crash, if somebody asked you guys what caused it, you guys would say "plane fall down go boom!" like a toddler or something... that's not an acceptable causal explanation...

Noah Way said...

So please enlighten us poor materially incompetent ones, oh Great Master of Causality. What caused the Great Recession?

Andrew Anderson said...

Nothing you identify is causal.. Franko

I point out how the system is inherently unjust and inherently unstable and Franko wants to know "Huh? What really caused it to crash?"

God says "Do not steal"; "Do justice"; Franko asks "What theft? Besides look at all the material wealth the system has created! It just needs the proper authorities in charge. We'll get the system working perfectly eventually; it needs no fundamental reform."

One thing you apparently don't be believe, Franko, is "God resists the proud (Those who think, for instance, that they can get away with injustice if clever enough) but gives grace to the humble."

Andrew Anderson said...

Yes, please do Franko. And "Just put me and my kind in charge" is not sufficient as far as a fix.

Tom Hickey said...

"Causal" is an ambiguous term. It has many meanings in ordinary language. Philosophers have been debating causality since the emergence of the Western intellectual tradition in Ancient Greek. It began with Thales of Miletus (c. 624 - 546 B.C.) in Ionia, which is on the coast of what is now Turkey.

Causality in modern science controversial. Pretty much everyone accepts that deterministic functions express "causal" relationships. But there is disagreement over stochastic functions and the criteria of causality.

Generally speaking, "causality" means a relation between cause and effect, and "causation" is the specification of the relationship, e.g., as a function. A lot of the debate in specific instances in science involves showing the how of causation.

Causality is concerned with why in addition to how, and it is a broader category that is explored in metaphysics, epistemology and philosophy of science. There are many theories of causality.

Matt Franko said...

“God resists the proud ”

I’m not saying I am smart I am saying you are stupid.... BIG difference....

Matt Franko said...

“What caused the Great Recession?”

Need an interdisciplinary team, time, and last but not least: $$$$

Andrew Anderson said...

Need an interdisciplinary team, time, and last but not least: $$$$ Franko

Time? How much more time do you need? We've had 400 years of recurring bank crisis and you need still more time?

Talk about stupid, will you?

Here's some more Scripture: A scoffer seeks wisdom and finds none, but knowledge is easy to one who has understanding. Proverbs 14:6

and

“And to man He said, ‘Behold, the fear of the Lord, that is wisdom;
And to depart from evil is understanding.”
Job 28:28

I see NO fear of the Lord in you, Franko, in that many a non-believer has better manners than you.

Noah Way said...

"Need an interdisciplinary team, time, and last but not least: $$$$"

Nope, just half a brain to connect the obvious causes with the resulting effects.

No wonder the Great Recession remains a mystery to you ...

AXEC / E.K-H said...

Tom Hickey

The topic is prediction in economics and you landed at causality. And what you as the distinguished MMT philosopher and opinion leader have to tell the audience is: “There are many theories of causality.” So what?

The point is that if there are many theories the field is in the state of utter confusion because, as a matter of principle, only one theory can be true. Science is the quest for the true theory as philosophers know since Plato.

In economics, there are folks who claim that they saw the financial crisis of 2008 coming and that Orthodoxy badly failed on this account. What these folks try to bring across is that they have the true theory because, as everybody knows: “The test of science is its ability to predict.”

Fact is that prediction is ill-understood in economics. There are basically two types of prediction: the pre-scientific and the scientific.
(i) The shaman says that in his state of superhuman awareness it has been communicated to him that in the near future the great dragon will swallow the sun.
(ii) The scientist says, according to my calculations, which are based on the Theory of Gravity and given initial conditions, I conclude that the people in Togo will observe a total solar eclipse on March 29, 2006.

Let us assume that the event happens as ‘predicted’ then follows from (i) that the shaman has extraordinary/inexplicable abilities, and from (ii) that the theory is true, with the qualification that in the future perhaps somebody will come up with an even better theory.

Because in economics we do not have the true theory ― Walrasianism, DSGE, Keynesianism, Post Keynesianism, MMT, Marxianism, Austrianism are provably false ― a prediction that comes true is not more than a lucky guess at the betting shop.

The crisis prediction brouhaha is just another distraction from the fact that economics is a failed/fake science. This applies also to MMT which is just another political fraud.#2

Egmont Kakarot-Handtke

#1 The futility of testing economics blather
https://axecorg.blogspot.de/2016/03/the-futility-of-testing-economics.html

#2 For the full-spectrum refutation see cross-references MMT
http://axecorg.blogspot.de/2017/07/mmt-cross-references.html

Noah Way said...

Science is the quest for the true theory

Science is the study and investigation of the physical and natural world. Theory is conjecture or hypothesis that proposes to explain something. If a theory is proven it becomes a law or principle. Adam Smith's three laws of economics are false, based on a priori reasoning.

only one theory can be true

I've got a couple of theories about Franko, more than one of them may very well be true.

AXEC / E.K-H said...

Noah Way

You say: “I've got a couple of theories about Franko, …”

NO. You have, at the very best, got a couple of HYPOTHESES about Franko. Your blather does not deserve the designation theory. A theory is the humanly best mental representation of reality and satisfies the criteria of material/formal consistency.

Egmont Kakarot-Handtke