24 November 2014

Why I doubt my economics training.



The nice thing about Economics is that it gives us simple explanations about the world which are natural truths about human, thus we can use the conclusions drawn as axioms to guide our everyday life on what behaviour is good and evil.
Ok: now swap "economics" for "religion" and read the sentence again.

My alma mater was the School of Economics at the Australian National University.   The ANU is one of the most staunchly neoclassical schools in all Australia. Obsessed with markets, marginalism, and mathematics, the school was supposedly one of the very toughest in the land. I was not the very best student, but I did drink the Kool Aid. 

More recently my understanding has become more nuanced, not just because of the shift in public attitude largely driven by the global financial crisis. no longer can I believe that is possible the loan optimal to follow the path of ubiquitous unfettered markets as idealised by libertarians. But economists are asking the right questions, mostly. 

Although I do not agree with the recommendations set by Pickette, his work is certainly nuanced, will supported by evidence and is not set ideal logically opposed to the Say or Jevons. Rather, he accepts the vast majority of the orthodoxy, and proposes a critical way of thinking about the problems. The problem is that this critical approach was missing from an otherwise stellar education at the ANU. 

The use of mathematics and algebra is in fact a constructed for the indoctrination of potentially powerful individuals. By simplifying out all the problems, we are able to come up with simple models that contain one one, or a perhaps a few of variables, which will ultimately determine the outcome.

But the real world is not like this.

Much like in physics class, students will study aerodynamics, Newtonian physics, fluid dynamics, friction, etc, and typically study these in isolation. Usually a problem starts with a scenario such as"a ball is rolling down a hill", commonly followed by a long list of assumptions to isolate out any unwanted effects, "assume that there is no friction, air resistance, and that the ball is perfectly round". 

The real-world engineer will understand the physics, but will have to take account of the all the things that have been assumed away. So it is with economics and business.

The problem is, when a physicist is applied to a particularly difficult engineering problem, they will tend to accept the operating environment, and adapt their apparatus accordingly. The Economist on the other hand is more likely to attempt to change the environment or blame other exogenous variables. Physicist do not hold on to their Newtonian way of thinking when it fails to explain the pre-ambulation of mercury around the sun. The answer is, "the model does not explain the behaviour". This spurred on Einstein to develop his theories, and we now have Lagrangian mechanics, which is a re-formulation of classical mechanics. 

Basically, scientists went looking for a more complex models that closer match reality rather than trying to change reality to match the model. Economists usually don't do this.

The antidote is "we need to imagine people more complexly", as championed by John Green of crash course. Conversely, I am concerned that the default assumption that "everything is complex" would also lead people to give up on trying to understand. "Complexity" isn't an excuse for giving up.

So therefore it is very useful to start off with the simplicity of powerful models, but insufficient to accept them at face value. We must be able to relax the strict assumptions, and allow for multiple models each having their own effect simultaneously. Much like the ball rolling down the hill, gravitational forces might be the main driver, but air resistance and surface imperfections do exist, and do play their part. 

So yes, we need to imaginable more complexly, and the complexity of algebra does not make up for the lack of imagination in accepting which variables might be playing their part. 

I believe that we can go a lot further in teaching our students to think critically at the undergraduate level. 




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