Postmodern Economics and Physics?

Mark ThomaMark Thoma highlighted a recent article, A Crisis at the Edge of Physics. You might wonder why an economist would be interested in a crisis going on in the physics world. For those who don’t follow economics, his explanation is probably not too helpful, “Seems like much the same can be said about modern macroeconomics (except perhaps the ‘given the field its credibility’ part)…” Let me discuss this for a moment, because it is really quite interesting.

As I’ve long speculated, certain kinds of physics are pushing up against the limits of knowledge. High energy physics is destroying particles with more and more energy, leading to ever more bizarre theories of the cosmos. Dark matter and dark energy are showing the cosmos to be mostly “things” we only know don’t seem to exist the way regular matter and energy does, but still interacts with it in unusual ways. Could it be that there is nothing else to know and that theoretical constructs about the universe will not be verifiable through experiment? Some physicists think so, “They criticized a newfound willingness among some scientists to explicitly set aside the need for experimental confirmation of today’s most ambitious cosmic theories — so long as those theories are ‘sufficiently elegant and explanatory.'”

This is shocking because for decades now, scientists have been beating up on postmodern literary theorists who claim that there is no objective truth. And now we have physicists (Of all scientists!) claiming that their theories don’t need to be right but instead just “elegant” and “explanatory.” This has long been the basis for supersymmetry theory. But I have to say, I’m not sure this is the wrong approach. Maybe at the extreme edges of science, experimentation will be useless. Clearly, we should still be doing it — or trying to. But it is possible that we can probe only so far when it comes to the creation of the universe.

This is really interesting, however, in how it relates to economics. Far from looking at things that call into question the universal limits of knowledge, economics deals with pedestrian issues. Economies may be very complicated, but there are no fundamental constraints on understanding them. However, many economists on the right have in fact given up worrying about real world data. They have their Real Business Cycle (RBC) models that are “sufficiently elegant and explanatory” that it doesn’t matter if they have no relationship to the real world.

In the past, I’ve written about my own experience with large scale environmental models. There is a strong urge to get lost in those models — to see them as more real the the world they supposedly model. A good example of this kind of thing in economics is the use of Dynamic Stochastic General Equilibrium (DSGE) models, of which RBC models are part. The idea with these models is to derive macroeconomic outcomes based upon microeconomics. I’m not an economist. But I can tell you that in environmental models, it is usually best to not use micro-scale models in macro-scale models. For example, it is best to model carbon respiration with one big leaf rather than with a detailed forest model. Clearly, there are times when you want a detailed forest model. But in general, macro-scale models are best when they are based on simple empirical models.

And why is that? To me, the biggest issue is that the more elements you add to a model, the more degrees of freedom you add. So you end up with a model that is entirely dependent upon calibration. And the model loses its meaning because its results are swamped by exactly how the calibration is done. What has happened in the RBC models is that economists have given up on modeling the real world and use it just to look for elegance and explanatory power. But it doesn’t matter if the person doing this calls herself a physicist or an economist. She is really just a mathematician — but a particularly useless one.

As I indicated before, this is somewhat defensible with regards to high energy physics and cosmology. These fields are already largely mystical. But in economics — a subject that is supposed to be above all useful — this is just madness.

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