> Yes, I just said economics is harder than physics.
I'm saying that too.
> You could not be more wrong. Economists, at least those from good programs, have great quantitative training.
Which programs? Is this Ivy League PhD, econometrics stream? Or undergrad? First year physics students learn special relativity. They won't learn the advanced stuff until 3rd year, or maybe 4th, but it's still taught.
But most economics students struggle with "econometrics", which is glorified linear algebra. There's theoreticians who do understand complexity, but none of their work is likely to be widely read. There'll be a few ivory tower academics doing really hard stuff, but it doesn't enter the general body of knowledge.
It's like saying that computer programmers don't understand algorithms. Of course some do, and there's research out there if you want to find it, but generally just they kind of know that O(n) is good, and O(2^n) is bad.
And while economists are pretty good at statistics (at least, the good ones are), very few use differential equations. It's not covered in undergraduate classes, and by postgrad classes it's too late.
And while IS-LM is going out of fashion, it's just being replaced with DSGE. I can't see any appendix on differential equations in the TOC of that textbook you mention, is that because everyone already understands them, or because despite the model being called "Dynamic", it's not? I quote Solow, the guy who kind of invented it:
> I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way. I do not think that this picture passes the smell test. The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony. The advocates no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether.
Yes, economics is hard. Yes, there's smart people working on it. But by the time it filters down to teaching undergraduates or setting policy, the general attitude is "we'll assume rational behavior and a market at equilibrium, so nothing we say is going to be too controversial".
(trollish rant ahead)
I wonder what to ration of neo-classicals to quants is on Wall Street (where people actually have to make the right calls) compared to the Federal Reserve and the Treasury?
It's basic agency theory - the economists who can't handle complexity take over dumb institutions (like most universities and governments), then insulate themselves against having to learn anything they aren't comfortable with.
i realise this is a discussion about economics not finance - but i think this little story sheds some light on this. early into a job on wall street i found that the companies default risk model could be improved (against the 'training'/regression data they had already spent ages cleaning) by adding a neural network that was trained to predict the error in the model.
did they use it? no. why not? because they felt it was important that they fully understand the forces at play that cause the default rates to move in that direction. you could say that they were worried about models overfitting the data - sure, that's kinda it. but the point is the entire nature of the market can change overnight and kind of go into a different state.
so what does that have to do with economics? well i guess maybe some of the same reasoning is at stake - people who think "we're proved wrong so often we need to retreat back to just those few things we can really rely on being true" and are worried about being "too clever" with all this math stuff.
now its true that cargo cult like application of mathematical formula has been (imho) part cause for many truly dreadful economic theories. but still, they are wrong. if you don't understand the nature of far from equilibrium, complex systems, you'll never even begin to understand the forces that drive the economics of the real world.
Current mainstream economic theories underfit like crazy, that's their virtue. The problem is, they aren't based on knowledge of what actually happens, but on either a 19th century armchair philosopher's guess at what happens, or principles which have been chosen in order to create an under-fitting model.
So while they don't overfit, they also are't based on any real knowledge of the system.
It seems the other extreme is elaborate overfitting models.
Steve Keen uses fairly simple models, but tries to base them on actual reality (i.e. broad money is created by the banks, not the government, while Ben Bernanke's explanation of the Great Depression apparently focuses on M0, as he accuses the government of not minting enough coins with the gold they had in reserves, with the implicit assumption that the money would be multiplied if the government would only print it. In reality, the money was not multiplied, because the banks didn't feel like lending.)
I'm saying that too.
> You could not be more wrong. Economists, at least those from good programs, have great quantitative training.
Which programs? Is this Ivy League PhD, econometrics stream? Or undergrad? First year physics students learn special relativity. They won't learn the advanced stuff until 3rd year, or maybe 4th, but it's still taught.
But most economics students struggle with "econometrics", which is glorified linear algebra. There's theoreticians who do understand complexity, but none of their work is likely to be widely read. There'll be a few ivory tower academics doing really hard stuff, but it doesn't enter the general body of knowledge.
It's like saying that computer programmers don't understand algorithms. Of course some do, and there's research out there if you want to find it, but generally just they kind of know that O(n) is good, and O(2^n) is bad.
And while economists are pretty good at statistics (at least, the good ones are), very few use differential equations. It's not covered in undergraduate classes, and by postgrad classes it's too late.
And while IS-LM is going out of fashion, it's just being replaced with DSGE. I can't see any appendix on differential equations in the TOC of that textbook you mention, is that because everyone already understands them, or because despite the model being called "Dynamic", it's not? I quote Solow, the guy who kind of invented it:
http://econlog.econlib.org/archives/2010/07/robert_solow_on_...
> I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way. I do not think that this picture passes the smell test. The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony. The advocates no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether.
Yes, economics is hard. Yes, there's smart people working on it. But by the time it filters down to teaching undergraduates or setting policy, the general attitude is "we'll assume rational behavior and a market at equilibrium, so nothing we say is going to be too controversial".
(trollish rant ahead)
I wonder what to ration of neo-classicals to quants is on Wall Street (where people actually have to make the right calls) compared to the Federal Reserve and the Treasury?
It's basic agency theory - the economists who can't handle complexity take over dumb institutions (like most universities and governments), then insulate themselves against having to learn anything they aren't comfortable with.