66 sats \ 14 replies \ @Undisciplined OP 6 Feb \ parent \ on: Is Studying Economic Data "Doing Economics"? econ
Great comment! I just wanted to add to this part that they are also railing against the type of deterministic mathematical models used in physics. Those models inherently rely on fixed parameters (constants of nature) that have no analogue in economics.
I think they are also correct about that point, but I also think it is the source of an overzealous rejection of mathematics in general.
Mises, iirc, didn't say such constants are non-existent. He has an interesting aside where he talks about the limitations of human knowledge and the effect this has on human knowledge. He has asides about "super-intelligences" and kind of "god mode" views of a phenomena, where he admits perhaps future man would be able to create theories with more perfect information (think mass computing, data surveillance, etc, my emphasis not Mises').
But he was very adamant that the approach of his contemporaries was confused because of the way they tried to jam physics approaches onto questionable models of finance, because he saw it wasn't true and didn't reliably work. There is also the issue of defining units when transferring the physics approach to finance, which Mises rightly saw as a problem that physicists would be appalled at. Imagine not keeping track of meaningful units as a physicist lol, unheard of.
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the issue of defining units when transferring the physics approach to finance
My undergraduate background was physics and mathematics. When I went to grad school for econ, the reckless disregard for units in econ models blew me away. I had already been skeptical of that kind of modelling from reading the Austrians, but it would be jarring to anyone approaching it from physics or chemistry.
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Curious what you mean as to the reckless disregard for units. I have a whole bunch of problems with how economists work, but disregarding units wasn't on my list of complaints.
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The units thing becomes apparent when you try to bridge modern micro and macro economics. Responsible econometrics people use units as best they can, but in order to bridge theories to make them intelligible you get into a lot of synthetic units that only make sense in certain models. There is also a classic criticism from Austrian school that the way that decisions are made at the margin are often ordinal -- meaning we rank goods and costs according to some rank/order, but we can't meaningfully assign cardinal units (number units) to them.
The other side of this argument is we now have computing power and mathematical theory we didn't back then in Mises' time to help us mixing ordinal / cardinal models, but the other side (modern econ) really likes to stick to black-box models of inflation that obscure actual realities. Think CPI core inflation (minus housing and energy)... a joke.
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Another way to put this would be that modern quants are using a variety of models that work and provide predictive and hopefully sometimes explanatory power, but that comes from sophisticated models that bear no allegiance to economic dogma. They're just models that survive and are useful.
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That reminds me of reading about the development of artillery targeting formulas. As one might expect, they started with the simple parabolas suggested by classical mechanics, but those turned out to be incredibly inaccurate, because none of the simplifying assumptions hold. Then, they tried to add in the frictions and other factors, but that became too complicated. Ultimately, they solved it through massive trial and error, where they explored how dozens (maybe hundreds) of variables affected the shell's trajectory.
Even when all the relevant theory is precisely developed, there can still be value in doing atheoretical empirical work.
To tie it back to the original prompt, though, were all those artillery specialists "doing physics"? I think it's reasonable to say they weren't.
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It wasn't all totally black-box and statistical. There is a lot of analog computing with carefully calibrated theory and decades of data behind the artillery used in WWII. Lord Kelvin & early wave / Fourier analysis applications. Really interesting stuff.
But yes, you are right. I'm pretty sure the early way of doing "stats simulations" was just basically trying a bunch of stuff and recording the outcome. The two approaches are important, I think. There is a lot to be said for "American ingenuity" in WWII where the Axis powers thought Americans were absurd and often had backwards solutions to things, but hey unorthodox works
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There are lots of mathematical models that are used by economists where the units just don't make sense: for example, you might see an exponent that has units. I remember being surprised by this, because in physics checking to make sure your units make sense is routine.
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That's one of my favorite quotes and I had no idea who said it. Now, I still have no idea who said it, but I do know his name.
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I think it's a bit more subtle than that.
If you consider that exponential functions are inescapable in financial mathematics and modeling human economies, it could be argued certain constants like 'e' and 'pi' count as esoteric constants of economics -- however I understand what you mean. They are dragged in almost through the universality of mathematics itself, and we can express many functions using these constants without them having any explanatory nature.
I'm still not certain such constants don't exist for econ -- constants which describe limiting behaviour in graph theory (human relationships, barter, etc) exist and so may naturally be considered "constants of finance/economics".
But yes, the whole modern Keynesian / mathematical econ black box where they pretend the theories about inflation and the variables in them are akin to proven physical Theories (theories with the capital 'T' in science), it's not intellectually sound.
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Totally fair correction. I was thinking about what you discuss towards the end.
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