This episode features Matheus Grasselli, Deputy Director of the Fields Institute for Research in Mathematical Sciences and Institute for New Economic Thinking grantee, discussing how the use of advanced mathematics in economics enables innovative new thinking and could help transform what's possible in the field. Below is an intrduction from Grasselli on how the role of math in economics is changing and what could be next in this exciting area of study.INET
Matheus Grasselli: How Advanced Mathematics Can Support New Economic Thinking (video)
Interview with Marshall Auerback
The 2007-08 financial crisis was a wake-up call to mathematicians working in the area of quantitative finance, which was by then a mature subject, having grown in size and influence since the pioneering work of Black, Scholes, and Merton in the 1970s. Because the financial instruments that relied on sophisticated mathematics – collateralized debt obligations (CDOs) and other structured products – were at the very center of the crisis, many of us started to look for general models that likewise would put finance at the core of economic activity. It came as somewhat of a surprise that mainstream macroeconomic models, for example those routinely adopted by central banks around the world, had no fundamental role for banks, or financial markets for that matter, other than that of passive intermediaries.
The exceptions were the models used by heterodox economists following earlier work by, among others, Hyman Minsky and Wyne Godley. A general framework to formulate these models is what is called the stock-flow consistent approach, in which the economy as a whole is divided into sectors (households, banks, firms, governments, etc.) and every financial transaction between sectors generates a flow of funds, which in turn alters the stocks of balance sheet items (deposits, equities, etc.) Keeping track of these stock-flow relationships over time leads to systems of equations describing the evolution of the economy as a whole.
My research with the Institute for New Economic Thinking consists of analyzing the systems of equations obtained in this way using the tools of modern dynamical systems theory, including bifurcations, global estimates, and topological properties. As is often the case in judicious applications of mathematics, this kind of study can reveal phenomena that are extremely hard to identify simply by “thinking through the model.” I strongly believe that when motivated by historical experience, grounded by empirical data, and guided by institutional knowledge, mathematics can be much more than a mere language of formalization. It can act as a powerful tool for discovery.Grasselli is collaborating with Steve Keen.
2 comments:
The most advanced mathematics known still can't generate perpetual motion, which is what is necessary for neoclassical economics theories to work.
Economists still haven't figured out simple addition and subtraction apparently.
It isnn't about the math…it's about how the math is applied.
Credit crunches, bank runs, etc took place long before CDOs and “structured products” were born or thought of: e.g. in the 1800s.
Credit crunches take place because one of the basic activities carried out by fractional reserve banking is risky if not actually fraudulent. That activity consists of building up liabilities that are fixed in dollar terms, while investing depositors’ money in assets that can fall drastically in dollar terms. And when that fall takes place, as it's bound to sooner or later, the bank is bust.
The way out of that problem is very simple and was set out by John Cochrane in the WSJ recently. See:
http://www.hoover.org/news/daily-report/150171
(No subscription to the WSJ needed)
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