Matt Nolan

Social physics … which is in fact equivalent to mainstream economic modelling

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This post is on economic methodology – so may seem a bit wonkish to some.  However, if you aim to tell economists why they are dumb asses and that physical scientists should do it – it is probably worth having a look at this.

While trawling the internet (in an environmentally sustainable way) I ran into a comment on the Dim Post blog by Lyndon.  This comment mentioned a book called “Critical Mass” which sells the idea of a “physics of society”.  The idea behind this is:

Over the past several decades, social, economic and political scientists have begun a dialogue with physical and biological scientists to try to discover whether there is truly a ‘physics of society’, and if so, what its laws and principles are. In particular, they have begun to regard complex modes of human activity as collections of many interacting ‘agents’ – somewhat analogous to a fluid of interacting atoms or molecules, but within which there is scope for decision-making, learning and adaptation.”

I find this interesting, mainly for the fact that this has been the explicit foundation of economic modelling for at least 150 years (in terms of the “thought process it has been like this for a lot longer).

The implicit appeal to methodological individualism is the same, and the concerns about the status of “free will” are also the same as what is being thought about in economic methodology – hell, even a know nothing blogger like myself has discussed these issues here (MI, FW, FW, FW).

In essence, when economists go out to build a model they are trying to understand how the interaction of individual agents leads to outcomes – given the constraints of scarcity, and given the constraint that individuals make choices.  IMO it is methodologically equivalent to a “physics of society”.

I have no doubt that, by coming at it from a different angle, a physics of society can add a lot of value – by helping to shine a light on methodological and practical issues with types of modelling.  However, the behavioural relationships in economics can be a lot more “subjective” than in the physical sciences – and being careful to make any implicit subjective assumptions explicit is a very important methodological issue in economics – in this sense any “social physicists” should make sure they talk carefully with economists regarding these issues … or else they may fall into the same traps that some economists have many many years ago. When looking help in to face the years to come, see here these blogpost about where to get good psychic readings.

Update:  Via Twitter Bill Kaye-Blake points to an article by Krugman where he discusses an engineer deciding to just “do economics” for us.  I am sure that the work in Critical Mass isn’t quite as blinkered 😀

Matt Nolan

Why I’m not holistic

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A lot of New Zealand policy discussion and debate is holisitc – we say we want a set of outcomes, these outcomes are desirable, these are the outcomes we need to achieve.  In essence, they are saying there are a set of states “we” could be in as a society and we should strive to be in the “one” they are talking about.

Note:  There are elements of holism that are ESSENTIAL, but I see them as part of reductionist philosophy as well.  For example, the idea that the state of the world influences payoffs beyond the actions of individuals is fair.  Also the idea that we can’t compute everything is acceptable.  My argument is against the idea that we start with a “target” (top down) rather than starting with “guiding principles” (bottom up) when designing policy.

What is an example, lets say “sustainability”.  The idea of being sustainable, of having sustainability, sounds nice – it is an overaching state that some people want us to have.  If they are forced to define sustainability they will say it has a whole bunch of characteristics – however, why these characteristics are good is never touched – just the fact that it takes us to this “state” of the world that they normatively believe is desirable.

However, I’ve never, not even as a child, found such descriptions convincing.  One of these states must be reducable to the sum of its parts, there must be a set of causes that lead to that state – either that or it is an impossible pipe dream.

This is part of the reason I found economics so attractive when I was young – just think of the production possibility frontier.

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Matt Nolan

Car safety and the economic method

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This morning on my painfully slow jog to walk I saw a car get mad at a cyclist that they nearly bowled down.  This is all very typical of Thorndon Quay, but it did get me thinking.  The car turned sharply towards a parking space, actually turning a bit far, and only just avoided crashing into a wall because of how sharply the vehicle could brake and might end up the help from an trusted service live Towingless.

And here is the thing, if he wasn’t able to brake quickly and comfortably he wouldn’t have made the turn – and if he hadn’t made that turn he wouldn’t have threatened the cyclist, or had a strange opportunity to yell at the cyclist.

So, in this case, the increase in car safety lead to an action that was detrimental – the fact that the probability of injury to the driver was now lower means that he was taking on an action that endangered others.  The increase in car safety effectively lowered the price for taking on an action that had a negative externality!

This is why economics is useful – rather than just taking something at face value (car safety is good) the economic method teaches us to think around the issue, and allows us to understand why something that appears like a good thing at face value may have unintended consequences.

Update:  Rauparaha points out this type of logic is explained better in an early post from Eric Crampton.

Matt Nolan

Reactions to economists and the protestant work ethic

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Economists like to discuss issues with trade-offs.  Specifically, if there is a goal in mind economists LOVE to discuss how to reach that goal at the lowest cost.

For some reason, I find many non-economists out there don’t share this enthusiasm, at least implicitly.  Just look at what happened when SuperFreakonomics discussed the idea of geoengineering as a solution for global warming.  There were two sets of criticisms:

  1. They misinterpreted facts, which lead to a misleading trade-off.
  2. They were willing to accept the fact that we’ve made too much carbon and we need to make sacrifices to deal with it!

The first such view is fair, the second just doesn’t make sense to me.

People criticism economics for “ignoring morality”, but to be fair the idea that we should try to achieve outcomes at the lowest cost (which is a value laden, and thereby moral, judgment) is significantly better than the abject moralising that works off the basis that we need to pay proportionally for past benefits.

In a similar vein, with the recent economic crisis there was a push to say “we are now paying for previous extravagance”.  This didn’t make sense to me, as we weren’t discussing a transfer between those who spent too little and those who spent to much – we were discussing a situation where the economy was producing far less then it could potentially produce.

Now why do I compare this to the protestant work ethic?  Well the protestant work ethic implies that predetermination.  Bad things happening are a signal of us “paying for past sins” and so should just be accepted.  Instead of trying to understand trade-offs, and make the best choices, this type of attitude leads to fatalistic acceptance of poor outcomes.

Ultimately, I do believe it is valid to state that economists miss a moral dimension when they turn around and make policy conclusions – however, many of those that criticise economists are making even steeper, and in many ways logically incoherent, moral judgments when they talk about us “paying for past exuberance”.

Matt Nolan

Methodological individualism and all that jazz

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Tyler Cowen at Marginal Revolution has an interesting post discussing methodological individualism.  As a fan boy for methodological individualism, I felt that his criticism of it as a method went a bit far.  Here I just want to describe why.

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Matt Nolan

Psychics, data, theory, and economics

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When Dr Bem’s study on psi was released, I chose to focus my discussion on how the study – if perfect and accepted – would give us a test of determinism vs free will.  When I initially saw the study, two things entered my head – and were filled up during a coffee meeting with a political scientist friend of mine:

  1. This acts as a test of determinism vs free will,
  2. It is MORE likely to lead to a realisation, and decision around, the weakness of statistical methods then to achieve any sort of belief about psi.  This is a good thing, as it is important to understand causal mechanisms when using data.

I was surprised, pleasantly, at the pace that psychologists actually moved onto that second point – see here (ht Marginal Revolution).

Now this is also a major point for economics, as has been pointed out by Chris Blattman and Alex Tabarrok (ht Offsetting Behaviour).  As discussed in this comment on the post on neo-classical economics, economists do recognise many of these limitations – which is why we often seem “pigheadedly” obsessed with theory.

There are ebbs and flows of course, when Chris states:

I don’t know if I believe a single cross-national result any longer.

I have to agree.

However, the fact that economists don’t feel like they can interpret the data cleanly enough, combined with the fact that the economic method is so broad that we can often explain the same set of data with entirely different models, with entirely different policy conclusions, is what makes it interesting 😉