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October 31, 2006

Fisking Philip Ball

A few days ago Mark Thoma posted an article by Philip Ball, "consultant editor of Nature", taking economists to task for, well, being economists.  Although Mark handled the rebuttal quite nicely, and there was lots and lots of fine commentary on Mark's site (a good chunk of which is summarized by Dave Iverson), I found the article so wrong-headed that I just can't help myself from commenting.  So, a-commenting I go:

Baroque fantasies of a most peculiar science, by Philip Ball, Commentary, Financial Times (free): It is easy to mock economic theory. Any fool can see that the world of neoclassical economics, which dominates the academic field today, is a gross caricature in which every trader or company acts in the same self-interested way – rational, cool, omniscient. The theory has not foreseen a single stock market crash and has evidently failed to make the world any fairer or more pleasant.

It is true that neoclassical economists tend to be the methodological children of Milton Friedman, heirs to a positivist tradition that directly connects explanation and predictability.  But predictability in this sense is conditional:  If X occurs then, all else equal, Y will follow.  As a matter of logic, large forecast errors may only prove that the arrival of X is especially uncertain, and that economists are not clairvoyant (a trait that I think is shared with physicists and other human beings).

To be fair, if Y equals a stock market crash, I cannot really tell you what X equals.  I am unaware of any serious economist who claims they can.  Even those economists who express knowledge of a "bubble" in some asset market or another shy from taking definitive stands on when and how the bubble will burst.  I do know this, however:  Economists have devoted a lot of energy to thinking about the lessons delivered by the Great Depression.  At least part of the conventional wisdom formed from that thinking is that it is a very bad idea to restrain liquidity when liquidity is most desired.  For an example of that wisdom in practice, I refer to you to the actions of the Federal Reserve in the aftermath of the 1987 market crash in the United States.  I'll stick my neck out and claim that the world was more pleasant as a result of putting that lesson into action. 

The usual defence is that you have to start somewhere. But mainstream economists no longer consider their core theory to be a “start”. The tenets are so firmly embedded that ... it is ... rigid dogma. To challenge these ideas is to invite blank stares of incomprehension – you might as well be telling a physicist that gravity does not exist.

That is disturbing because these things matter. Neoclassical idiocies persuaded many economists that market forces would create a robust post-Soviet economy in Russia (corrupt gangster economies do not exist in neoclassical theory)...

Economists accept -- insist, actually -- that institutions matter, and nobody would argue that market forces alone can create a "robust" economy absent well-defined property rights, functioning legal systems, and the like.  If you doubt that, check out the latest John Bates Clark award.

Neoclassical economics asserts two things. First, in a free market, competition establishes a price equilibrium that is perfectly efficient: demand equals supply and no resources are squandered. Second, in equilibrium no one can be made better off without making someone else worse off.

Wrong.  Mr. Ball is thinking of the concept of Pareto efficiency, which does indeed describe a situation in which "no one can be made better off without making someone else worse off."  But there is no presumption among economists that free markets and competition will deliver such an outcome. Any time an economist speaks of asymmetric information (conditions in which one person knows something another does not), externalities (things like pollution that is not paid for by the polluters), inflexible prices or wages, or taxes on any sort of economic activity, he or she is starting from the presumption that the free-market outcome is not efficient.  In fact, any time an economist speaks it is quite likely they are contemplating a world in which free-market outcomes are not efficient.  To not recognize this is demonstrate a startling ignorance of what economics is actually about.

The conclusions are a snug fit with rightwing convictions. So it is tempting to infer that the dominance of neoclassical theory has political origins. 

What?  Ever read Brad Delong?  Or Angry Bear?  Or Dean Baker?  Or Max Sawicky?  Good economists?  Yes.  Right wing?  Only by a standard so skewed as to be meaningless.

... the foundations of neoclassical theory were laid when scientists were exploring the notion of thermodynamic equilibrium. Economics borrowed wrong ideas from physics, and is now reluctant to give them up.

This error does not make neoclassical economic theory simple. Far from it. It is one of the most mathematically complicated subjects among the “sciences”, as difficult as quantum physics. That is part of the problem: it is such an elaborate contrivance that there is too much at stake to abandon it.

Well, OK, economics has become pretty mathematical, which does sometimes make it hard for non-economists to join the conversation. Shoot -- there are some papers that I can't figure out. But that does not equal an "error."  (And I still think quantum physics is a lot harder -- and every bit as abstract.)

It is almost impossible to talk about economics today without endorsing its myths. Take the business cycle: there is no business cycle in any meaningful sense. In every other scientific discipline, a cycle is something that repeats periodically. Yet there is no absolute evidence for periodicity in economic fluctuations. Prices sometimes rise and sometimes fall. That is not a cycle; it is noise. Yet talk of cycles has led economists to hallucinate all kinds of fictitious oscillations in economic markets.

It's true -- economists do not define business cycles as things that repeat periodically in a deterministic way, like sine and cosine waves.  Business cycles are instead defined somewhat loosely in terms of the co-movements of various aggregate variables (like GDP, employment, prices, etc., etc, etc.)  If we want to get a bit more statistically formal, we might define a business cycle in terms of co-movements of aggregate variables within particular windows of time (say two to eight years, meaning that we are ignoring very short-run and very long-run fluctuations in the economy).  And if want to define particular episodes of contraction (or recession) and expansion, we ask a committee to decide.

However we do it, the point is to identify a set of particular facts that can then be subjected to analysis, both theoretical and empirical.  Don't like calling it a cycle?  Fine.  Call it Aggregate Fluctuations.  Call it Co-Movement In Business Statistics.  Call it a Kumquat.  Just don't pretend a picky semantic point is serious criticism.

Meanwhile, the Nobel-winning neoclassical theory of the so-called business cycle “explains” it by blaming events outside the market. This salvages the precious idea of equilibrium, and thus of market efficiency. Analysts talk of market “corrections”, as though there is some ideal state that it is trying to attain. But in reality the market is intrinsically prone to leap and lurch.

I presume that Ball is referring to Real Business Cycle Theory.  Let me try a very simple description of real business cycle theory:  The business cycle -- those co-movements in macroeconomic variables that occur over certain frequencies (i.e windows of time) in the data -- result from random shocks that hit the economy combining with the intrinsic structure of the economy in such a way that those shocks are translated into ups and downs in GDP, employment, prices, etc., etc., etc.   

What is Ball's criticism of this view of the world? 

One can go through economic theory systematically demolishing all the cherished principles that students learn... [I]t is abundantly clear that herding – irrational, copycat buying and selling – provokes market fluctuations.

There are ways of dealing with the variety and irrationality of real agents in economic theory. But not in mainstream economics journals, because the models defy neoclassical assumptions.

Oh, I see.  Maybe he missed this paper. And this paper.  Or is unaware that conversations like this one, among economists who would otherwise describe their basic orientation as "neoclassical", are a part of any good macoeconomist's basic training.

Ball concludes:

There is no other “science” in such a peculiar state. A demonstrably false conceptual core is sustained by inertia alone. This core, “the Citadel”, remains impregnable while its adherents fashion an increasingly baroque fantasy. As Alan Kirman, a progressive economist, said: “No amount of attention to the walls will prevent the Citadel from being empty.”


October 31, 2006 in This, That, and the Other | Permalink


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The best part about the conclusion is how completely worthless it is. I will take his route of comparing economics to physics and point out that, at several points throughout the history of science, have people realized that everyone was just fundamentally wrong. Even if this were the case with neoclassical economics, it takes time for ideas that make up the core of our beliefs to change. It took the Church 300 years to apologize for excommunicating Galileo and submitting to house arrest for heretically suggesting that the earth revolves around the sun. More recently, people like Magueijo who suggest an alternate cosmological model, previously touched on by Dirac and even Feynmen, are generally just brushed off and scoffed at. It's completely ridiculous to suggest that because he perceives certain beliefs held by economists as wrong that it is a failing of the science as a whole.

Posted by: Alex Mohr | November 01, 2006 at 04:26 AM

But, but, but - we Angrybears are free traders. Doesn't that get us qualified as rightwingers?

Posted by: pgl | November 01, 2006 at 09:19 AM

Ball's rhetoric and argument structure reminds me of creationist rants about evolutionary biology. A similar mixture of mischaracterization and 'can you believe?' ad-hoc argument, and lack of interest in actual work by actual researchers.

Posted by: stefan | November 01, 2006 at 01:02 PM

Nice post.

Yes, but ... look what a great discussion Ball's reactionary commentary has produced in various blogs. Ball's article is, I believe, a reaction to what the press, some politicos, and sometimes we as underinformed or ideologically blinded economists spin up as economic theory/practice--not adequately owning up to limits, nuances, etc. of our methods.

Hence we economists are not guiltless as to some general criticism well-aired on Mark Thoma's blog. Sometimes too, we are not well-enough covered by the press as to contrasting views/theories, etc. (then again who is).

Still, as Dave A. aptly points out we economists (taken collectively) are not shy about criticising each other and learning from our criticism, our practice, etc.

Posted by: Dave Iverson | November 01, 2006 at 05:51 PM

"At least part of the conventional wisdom formed from that thinking is that it is a very bad idea to restrain liquidity when liquidity is most desired."

Wow. That sounds like a rule-of-thumb, like the common-sense kitchen-table economics of the Average Joe. You offer this as a vindication for economic "science"? Ball will surely like that.

To Ball's undeniably correct observation "The conclusions are a snug fit with rightwing convictions. So it is tempting to infer that the dominance of neoclassical theory has political origins.", you answer by pointing out that there are also one or two economists who are not right-wingers. I suggest you take a basic course on scientific reasoning to learn why this "argument" cannot succeed.

Posted by: piglet | November 02, 2006 at 04:16 PM

"I will take his route of comparing economics to physics and point out that, at several points throughout the history of science, have people realized that everyone was just fundamentally wrong. Even if this were the case with neoclassical economics, it takes time for ideas that make up the core of our beliefs to change."

Well. There are several important things to point out. While it is true that physics has been revolutionized in the 20th century to the extent that Newtonian classical mechanics has been recognized as incorrect, it is worth remembering that Newtonian mechanics, far from being "fundamentally wrong", was and is still approximately correct. It correctly accounts for a wide range of observations. Does this apply to neoclassical economics? Secondly, it is worth noting that physicists of the 1900s were quick to understand that their traditional models were not sufficient any more to account for a new range of observations. Their reaction was not to massage the data, to discuss away unwelcome evidence or to ridicule those asking hard questions. A few papers written by an unknown physics teacher by the name of Einstein revolutionized the science and within a few decades, physical science received a whole new foundation. Why could that happen? because Einstein was right, that's why. This is why physics is a science.

What do we see in economics? Theories are not confirmed by empirical observation but nobody cares. I have been over at Mark Thoma's, and now on this discussion, and I haven't seen anything that seriously refutes Ball. Most troublesome is that many economists participating in the discussion don't even grasp what this is about. You simply don't get it, that's the really sad thing.

Posted by: piglet | November 02, 2006 at 04:30 PM

Piglet …

Maybe the real problem is with Economic Fundamentalism, Fred Argy covers the main bases for effective criticism of "economic fundamentalism here: http://www.australianreview.net/digest/2003/03/argy.html

Two questions: 1. How does one distinguish between "economic fundamentalists" and other practicing economists? 2. How does one practice economics w/o being libeled as a fundamentalist?

Posted by: Dave Iverson | November 02, 2006 at 04:41 PM

piglet --

We're all about constructive criticism here, but honestly you're not giving me much to work with. You assert that you haven't seen anything to refute Ball's criticisms. Perhaps you should go back and read Mark and my posts -- both of us point out that several of Ball's claims about economics are just simply wrong. You criticize my grasp of logic by pointing out that I cannot refute the rightwing nature of the discipline by pointing out a few economists who do not fit into that category. I may have been unclear on the point: "Rightwing" is a term that has absolutely no meaning or value in an informed discussion of issues. It is a cheap polemical trick, suited only to the discourse of coffee house pseudo-intellectuals. Define rightwing and maybe the conversation can progress, although I suspect that it will reveal only that your definition of rightwing is hopelessly out of the mainstream.

I'm quite glad that you think the lessons we have learned about the problems with moneatary policy in the Great Depression are so obvious. I was not giving a particularly deep rendering of that discussion in my post, but I do suggest that you read the relevant chapters in Friedman and Sschwartz's monetary history to gain some understanding of how existing orthodoxy of the time helped to turn a problem into a disaster. And you also might recall that there were views of the world -- still are, I suppose -- holding that the overaccumulation of capital followed by deep and prolonged slumps was the inevitable state of free market capitalism. I think the neoclassical economists carried the day on that one.

You suggest what we see in economics is theories not confirmed by enpirical evidence. I'm not sure what you mean by this. That our theories are untestable because they are not subject to controlled experimentation? Neither you nor Ball have offered anything that helps in understanding what are your real objections. Instead you set up straw men, knock them down, and dance gleefully around a vanquished pile of nothing.

I am guessing that Ball's objections -- maybe yours as well -- is that economists have the temerity to call their discipline "science". If that is what you object to, I say fine. On that there is precisely zero at stake. If you want, call economics an attempt to construct coherent stories about social phenomenon. I'm proud enough of that.

Posted by: Dave Altig | November 03, 2006 at 09:05 AM

As far as I can see, David Altig's claim is that since David doesn't know what Philip Ball is talking about (e.g., the contrast between the response of linear systems to random shocks and nonlinear dynamics, Alan Kirman's work), Philip Ball has not made his case.

Posted by: Robert | November 04, 2006 at 06:16 AM

FYI, Eric Beinhocker addresses all this and more in his book "The Origins of Wealth." Here's an entry I posted at my blog:

If you only have time for two chapters, make it chapters 3 and 4.

Posted by: Optimist123 | November 06, 2006 at 05:02 PM

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