1. What Kind of Science Would Economics Be If It Really Were a Science?
Peter Dorman is one of those people who I agree with on the big questions but find myself strenuously disagreeing with on many particulars. So it's nice to wholeheartedly approve this piece on economics and the physical sciences.
The post is based on this 2008 paper that argues that there is no reason that economics cannot be scientific in the same rigorous sense as geology, biology, etc., but only if economists learn to (1) emphasize mechanisms rather than equilibrium and (2) strictly avoid Type I error, even at the cost of Type II error. Type I error is accepting a false claim, Type II is failing to accept a true one. Which is not the same as rejecting it -- one can simply be uncertain. Science's progressive character comes from its rigorous refusal to accept any proposition until every possible effort to disprove it has failed. Of course this means that on many questions, science can take no position at all (an important distinction from policy and other forms of practical activity, where we often have to act one way or another without any very definite knowledge). It sounds funny to say that ignorance is the heart of the practice of science, but I think it's right. Unfortunately, says Dorman, rather than seeing science as the systematic effort to limit our knowledge claims to things we can know with (near-)certainty, "economists have been seduced by a different vision ... that the foundation of science rests on ... deduction from top-level theory."
The mechanisms vs. equilibria point is, if anything, even more important, since it has positive content for how we do economics. Rather than focusing our energy on elucidating theoretical equilibria, we should be thinking about concrete processes of change over time. For example:
Consider the standard supply-and-demand diagram. The professor draws this on the chalkboard, identifies the equilibrium point, and asks for questions. One student asks, are there really supply and demand curves? ... Yes, in principle these curves exist, but they are not directly observed in nature. ...One of the best brief discussions of economics methodology I've read.
there is another way the answer might proceed. ... we can use them to identify two other things that are real, excess supply and excess demand. We can measure them directly in the form of unsold goods or consumers who are frustrated in their attempts to make a purchase. And not only can we measure these things, we can observe the actions that buyers and sellers take under conditions of surplus or shortage.
2. Beware the Predatory Pro Se Borrower!
In general, I assume that anyone here interested in Yves Smith is already reading her, so there's no point in a post pointing to a post there. But this one really must be read.
It's a presentation from a law firm representing mortgage servicers, with the Dickensian name LockeLordBissell, meant for servicers conducting foreclosures that meet with legal challenges. That someone would even choose to go to court to avoid being thrown out of their house needs special explanation; it must be a result of "negative press surrounding mortgage lenders" and outside agitators on the Internet. People even think they can assert their rights without a lawyer; they "do not want to pay for representation," it being inconceivable that someone facing foreclosure might, say, have lost their job and not be able to afford a lawyer. "Predatory borrowers" are "unrealistic and unreasonable borrowers who are trying to capitalize on the current industry turmoil and are willing to employ any tactic to obtain a free home," including demands to see the note, claims of lack of standing by the servicer, and "other Internet-based machinations." What's the world coming to when any random loser has access to the courts? And imagine, someone willing to employ tactics like asking for proof that the company trying to take their home has a legal right to it! What's more, these stupid peasants "are emotionally tied to their cases [not to mention their houses]; the more a case progresses, the less reasonable the plaintiff becomes." Worst of all, "pro se cases are expensive to defend because the plaintiff’s lack of familiarity with the legal process often creates more work for the defendant."
If you want an illustration of how our masters think of us, you couldn't ask for a clearer example. Our stubborn idea that we have rights or interests of our own is just an annoying interference with their prerogatives.
Everyone knows about bucket lists. At the bar last weekend, someone suggested we should keep bat lists -- the people whose heads you'd take a Louisville slugger to, if you knew you just had a few months to live. This being the Left Forum, my friend had "that class traitor Andy Stern" at the top of his list. But I'm putting the partners at LockeLordBissell high up on mine.
3. Palin and Playing by the Rules
Jonathan Bernstein, on why Sarah Palin isn't going to be the Republican nominee:
For all one hears about efforts to market candidates to mass electorates (that's what things like the "authenticity" debate are all about), the bulk of nomination politics is retail, not wholesale -- and the customers candidates are trying to reach are a relatively small group of party elites.... That's what Mitt Romney and Tim Pawlenty have been doing for the last two-plus years... It's what, by every report I've seen since November 2008, Sarah Palin has just not done.It's not a brilliant or especially original point, but it's a very important one. My first-hand experience of electoral politics is limited to state and local races, but I've worked on quite a few of those, and Bernstein's descriptions fits them exactly. I don't see any reason to think national races are different.
Are you telling me that [Republican Jewish Committee] board members are going to be so peeved that Sarah Palin booked her Israel trip with some other organization that they're [going to] turn it into a presidential nomination preference, regardless of how Palin or any other candidate actually stands on issues of public policy?
Yup. And even more: I'll tell you that it's not petty. They're correct to do so. ... if you're a party leader, what can you do? Sure, you can collect position papers, but you know how meaningless those are going to be.... Much better, even if still risky, is assessing the personal commitment the candidates have to your group. What's the rapport like? Who has the candidate hired on her staff that has a history of working with you? Will her White House take your calls? ...
It's how presidential nominees are really chosen. ... Candidates do have to demonstrate at least some ability to appeal to mass electorates, but first and foremost they need to win the support of the most active portions of the party.
It's part of the narcissism of intellectuals to imagine politics as a kind of debating society, with the public granting authority to whoever makes the best arguments -- what intellectuals specialize in. And it's natural that people whose only engagement with politics comes through the mass media to suppose that what happens in the media is very important, or even all there is. But Bernstein is right: That stuff is secondary, and the public comes in as object, not subject.
Not always, of course -- there are moments when the people does become an active political subject, and those are the most important political moments there are. But they're very rare. That's why someone like Luciano Canfora makes a sharp distinction between the institutions and electoral procedures conventionally referred to as democracy, on the one hand, and genuine democracy, on the other -- those relatively brief moments of "ascendancy of the demos," which "may assert itself within the most diverse political-constitutional forms." For Canfora, democracy can't be institutionalized through elections; it's inherently "an unstable phenomenon: the temporary ascendancy of the poorer classes in the course of an endless struggle for equality—a concept which itself widens with time to include ever newer, and ever more strongly challenged, ‘rights’". (Interestingly, a liberal like Brad DeLong would presumably agree that elections have nothing to do with democracy, but are a mechanism for the circulation of elites.)
I don't know how far Bernstein would go with Canfora, but he's taken the essential first step; it would be a good thing for discussions of electoral politics if more people followed him.
EDIT: Just to be clear, Bernstein's point is a bit more specific than the broad only-elites-matter argument. What candidates are selling to elites isn't so much a basket of policy positions or desirable personal qualities, but relationships based on trust. It's interesting, I think it's true; it doesn't contradict my gloss, but it does go beyond it.
Preemptive response to Will B.: Yes, I know that hitting people with baseball bats is not useful or moral, and I don't encourage anyone to really do it.
ReplyDeletetest
ReplyDeleteDorman’s argument is wrong. I’m shocked that you endorse it. It’s not true that mechanism is a firmer conceptual foundation for science than is macroscopic equilibrium, nor has “real” science in practice developed on that premise. Newton’s kinematics were founded on equilibrium principles—conservation of velocity and momentum, equal and opposite reactions—with no knowledge of underlying mechanism. Thermodynamics is positively contemptuous of mechanism. When someone proposes a perpetual motion machine, physicists don’t bother investigating its mechanism, they just note that it violates the First Law’s equilibrium principle—no more energy comes out than goes in—and dismiss it.
ReplyDeleteDorman’s paper cites geology as a model “where certain general concepts (like plate tectonics) are broadly accepted, but what matters in practice is the knowledge of concrete mechanisms, such as what forces are at work in the subduction of plates or, on a more mundane level, the movement of subsurface water through various soil and rock strata. Geologists cannot give you a general theory of earthquakes, but they can describe rather accurately the process by which the force generated by plate collisions is stored and transmitted in specific formations.” This is nonsense. Plate tectonics is rock-solid, and, yes, it is a general theory of earthquakes: almost all earthquakes derive from stresses caused by moving plates. By contrast, the detailed mechanisms by which rocks store up and transmit stresses are doubtful and controversial, and predictions based on them—such as precisely when rock along a fault will rupture--notoriously inaccurate. As to whether those minutiae are “what matters” rather than tectonic equilibrium, the Japanese will say that both matter.
That’s true in economics too. Indeed, the murky Dorman paragraph about supply and demand curves that you cite shows that the distinction he draws between equilibrium and mechanism is incoherent. (Contrary to Dorman, S-D curves can indeed be observed in nature, from historical price data or geographical price differentials.) S-D curves illustrate equilibria, but they are also visual shorthand for mechanisms—cutting prices to sell off overstocks, bidding up prices in markets where where there are bans or shortages. The concept of equilibrium is useful here because it encapsulates characteristics of mechanism.
It’s perverse of you to agree with Dorman. He eschews big aggregate equilibria in favor of “simultaneous differential equations that represent mechanisms.” This is precisely—all right, vaguely—the mathematically hubristic approach, based on micro-foundations that lack realism and scaleability, that you denounced in previous postings on. Furthermore, your inconsistencies are politically motivated. When it suits you you embrace Keynesian economics, which wallows in nebulous equilibria, but when equilibria slant right you want to outlaw them.
All your postings on scientific methodology have been ill-considered, self-contradictory and wrong. Good science—all science--encompasses theory and experiment, micro-models and empirical aggregates, equilibrium and dynamic mechanism. The notion that error in economics comes from doing the wrong kind of science is false because there’s only one kind of science—the honest testing of theory through observation. The problem with economics as a science isn’t faulty epistemology, it’s simply that people violate that principle by ignoring or willfully distorting evidence that refutes their theory.
I suppose I should reply to such a vitriolic criticism.
ReplyDelete1. I pass on thermodynamics. I know little of physics, and my argument is based on what I regard as the potentially cognate sciences whose objects of study are contingent, complex, etc.
2. I appreciate the pun about plate tectonics, but Boisvert inadvertently reinforces my claim: there exists no general, top-down theory that explains/predicts individual earthquake events. We certainly know the general mechanism, but the behavior of specific formations ("doubtful and controversial") is surely what the Japanese would have like to have known. My larger point is that a knowledge of some mechanisms, or some aspects of them, is meaningful even in the absence of the complete specification (predictive model) that economic methodologists typically demand.
3. I would dispute Boisvert about S&D curves. His examples assume no variation in underlying parameters across time or samples. A "true" set of S&D curves would apply to a particular population at a particular moment. Where do we see these? But we do see the effects of excess demand and supply all the time: inventory accumulations and decumulations, price responses, etc.
4. I agree that Keynesian economics should not be founded on equilibria. There is no evidence, in fact, that Keynes himself envisioned this approach, although he ecumenically welcomed equilibrium-ists (like Hicks) into the fold. Keynesianism, in my view, should seek to identify and measure macro mechanisms (like balance sheet and effective demand shocks), while adhering (as we all must) to the identities (not equilibria) that define market economies.
@Peter Dorman.
ReplyDelete1. It’s not just thermodynamics and Newtonian kinematics. In astronomy, Kepler’s discovery of elliptical orbits advanced an equilibrium—that’s what an orbit is—without knowledge of the mechanism that produced elliptical orbits. Evolutionary biology grew upon the concept of Malthusian equilibrium, and equilibrium principles like “arms races” are prominent in ecology, genetics, etc. Equilibria like Le Chatelier’s principle play a prominent role in chemistry. Equilibria are at the center of studies of physiology and metabolism. Equilibrium principles reside at the heart of every scientific field without exception, economics included; your claim that they are peripheral to the “real business” of science, the elucidation of mechanism, is as wrong as can be.
2. On geology. Plate tectonics is not really an equilibrium principle—it’s just a big mechanism, so I’m not sure why you’ve placed it in opposition to geological mechanism. (Although the cyclic balance between mid-ocean eruption and continental subduction does give it an equilibristic tenor.) And, again, I insist that tectonics is indeed a general theory of quakes, even if it can’t predict their exact place and time. Darwinian theory can’t predict where or when mutations arise; does that mean evolution is not a general theory of biological change? No geological micro-mechanism can predict quakes either, and probably none can because they are too chaotic. (The only man to have successfully predicted an earthquake was a Maoist official who relied on reports of agitated animals.) Here’s what tectonics can predict: subduction zones are prone to earthquakes, and need to have their infrastructure fortified. The Japanese already did that because of their history. But recent geological studies, prompted by tectonics theory, have shown the Cascadia subduction zone off the Pacific Northwest coast, which has been completely quiet in historical times, to be prone to magnitude 9 monster quakes and tsunamis. Geologists are therefore raising a cry to better quake- and tsunami-proof the region. That’s a predictive triumph for tectonics theory with crucial policy implications.
@Peter Dorman
ReplyDelete3. On S-D curves. I guess it’s hard to expose an unvarying group of people instantaneously to a wide range of prices on a single commodity. (Although I bet with careful experimental design—different shops with similar foot traffic in demographically similar neighborhoods selling the same item on the same day at different prices—you could get pretty close.) But aren’t there good real-world approximations—surging gas or food prices, say? (Maybe those are bad examples since people are always foolishly alleging occult market manipulations there.) And aren’t there lots of examples of stable long-term prices that suggest an S-D equilibrium? Yeah, historical data and geographical differentials aren’t perfect, but are they really useless? Experimental science always wrestles with confounding variables; you can’t get a “true” chart of Newtonian trajectories because there’s always friction, but you can still demonstrate their validity to an excellent approximation. You’re making a strong claim of the impossibility of extracting from data meaningful correlations between supply and demand and price, and I don’t buy it. And just as a matter of mathematical continuity, equilibria pretty much have to exist somewhere between regimes of price instability and supply-demand imbalance.
4. On Keynes. You’ve pulled back to the softer line of “My larger point is that a knowledge of some mechanisms, or some aspects of them, is meaningful even in the absence of the complete specification (predictive model) that economic methodologists typically demand.” I’ll say Amen to that, whatever it means. It’s great to investigate mechanisms of accumulation and decumulation and price response and effective demand shocks; those all sound like worthy research programs. Why do they preclude thinking about equilibria that give us powerful ways to conceptually organize the mechanisms we observe? It’s enlightening to know that mechanisms tend toward equilibrium—and when they don’t, that’s even more enlightening! Maybe Keynes understood that. He probably didn’t welcome equilibrists out of pure ecumenism, but rather because he realized that dismissing an entire mode of reasoning out of hand is absurd. Your proper complaint seems to be simply that economists tend to disguise identities—i.e. definitions—as empirically validated equilibrium relationships without ever bothering to empirically validate them. That’s a legitimate point, but you’ve conflated it with an untenable binarist antagonism between equilibrium principles and mechanism that confuses more than it clarifies.
I can’t help detecting a political dimension in all this. Mainstream economists like equilibria because they want to believe that a market economy is self-correcting. Left economists hate equilibria because they want to believe that a market economy is not self-correcting and requires state intervention to stay on the rails. I share the latter inclination, but I don’t think the case can be made on epistemological grounds—that way lies error and incoherence.
All your postings on scientific methodology have been ill-considered, self-contradictory and wrong.
ReplyDeleteWow. Still, in the scientific spirit I have to acknowledge you might be right -- not in your specific criticisms of Dorman, which I'm not really convinced by -- but on the meta point that I shouldn't be posting about methodology. Concrete analysis of the concrete situation, as the man said. Methodology is probably almost always better performed, than talked about.
On the substance-
First, Dorman's article makes two points, one about mechanism rather than equilibrium, and the other about prioritizing avoiding Type I errors rather than Type II errors. You don't mention that -- does that mean you think it's right? Because it seemed like an important point to me, that I hadn't seen put so clearly before. So that makes the essay worthwhile in my mind, even if all your criticisms are correct.
On the mechanisms vs equilibrium question, I'll have some replies for you (and Peter D., who I'm delighted to see commenting here) shortly, inshallah.
@Josh:
ReplyDeleteOn Type I errors vs. Type II errors. If I understand him, Dorman is arguing that scientific progress depends more on not accepting wrong answers (Type I errors) than it does on not missing the right answer (Type II errors.) I think that’s a false opposition. Sherlock Holmes got it wrong: once you’ve ruled out all the impossible explanations, what’s left over isn’t necessarily the improbable right answer; quite often, nothing at all is left over and you have to go back to the drawing board. In science, theory proposes and observation disposes; creative theorizing to imagine the right answer is just as important as rigorous observational testing to winnow out the wrong answers. So science doesn’t progress simply by eliminating Type I errors. You’ve got to do battle with Type II errors as well—they don’t award Nobel prizes for disproving someone else’s bad idea. To emphasize Type I over Type II errors is therefore pointless and sterile.
The invidious distinction Dorman draws between equilibrium and mechanism is another false opposition. What it misses is that equilibristic and mechanistic reasoning are two sides of the coin: most equilibrium statements in science are valuable because they concisely and powerfully synthesize the workings of mechanism and guide our search for undiscovered mechanisms that underly equilibrium. That is certainly true of the S-D curve; it not only posits an equilibrium, it spotlights the dynamic mechanisms of price adjustment, bidding and supply management that arise in response to shortage or glut. That’s why econ students do not, in fact, ask the professor whether S-D curves really exist; because they conceptually unify a diversity of real-world economic mechanisms, students find them intuitively appealing. The equilibrium-vs.-mechanism opposition is no more useful in geology. Dorman argues that we need to look at mechanisms if we want to understand quakes. In fact, geologists think of quakes as events that restore equilibrium by dispelling stress caused by tectonic mechanisms; here again, equilibrium principles stimulate and guide investigations of mechanism.
Josh, I feel that your methodology posts have harped on such false oppositions. It’s fine to provisionally criticize a specific application of a methodology to a specific problem. You go beyond that by urging economists to abandon certain methodologies on the basis of epistemological arguments that don’t withstand hard scrutiny. (Then you sometimes rehabilitate those methodologies in subsequent posts when you’ve moved on to a new methodological whipping-boy. For example, you now seem to be endorsing Dorman’s project of investigating foundational micro-mechanisms by modeling them with differential equations, which is the sort of approach you strongly criticized in previous posts.) You and Dorman buttress your arguments by citing other scientific disciplines where your prefered methodological orthodoxy supposedly reigns. But such claims are wrong because scientists don’t recognize the false methodological oppositions you draw.
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