Tagged: Science

Physics Killed The Economics Star

There has been much debate recently about the failings of the discipline of economics and those who practice it. What good are any of them, the critics ask, if they could neither prevent nor foresee a financial crisis of such magnitude? Economists’ responses to this varied in tone from personal exclusion and blame shifting (everyone went digging through their pre-2009 blog posts) to honest soul-searching, also including retaliation that was as non-constructive as the initial critique.

When I personally encountered this debate, I defended the dismal science against all odds. No surprises there: I’ve invested most of my adult education in the field and learned to parrot the remarks of much more brilliant men: blame certain economists, not economics, I began. Hardly anyone in academe does forecasts at all- it is the explanation of phenomena, and not their prediction, that mainly interests economists. And the real knockout, the last refuge of the desperate: what else is there that is better, anyways?

Sociology? Political Science? Psychology? History? It seems difficult to imagine that these fields, with their embrace of complexity, could do better. These disciplines’ rejection of universal principles of behavior as a core makes quantifiable predictions even more difficult. Think of the banker, the manager, the investor, the president. This person does not want to hear about all the contextual elements, the defining minutiae of human idiosyncrasies, the complex power struggles determining the movements of economic aggregates. She wants to know if the number will go up, or if it will go down. And fast.

In this same mental exercise, the late Paul Samuelson turned in practice to mathematics and in spirit to physics. If we cannot state our assumptions and our reasoning in a rigorous manner, he said, the complexity of the issues will drown out everything in our theories but the rhetoric. And with his turning, all subsequent generations of economists marched forward – some with blind enthusiasm, some with trepidation – towards the ideal of economics as an objective, quantitative “social natural science”.

As someone who knew nothing of the emulated fields, I applauded the effort. The elephant in the room, that the object of a social science is fundamentally not the same as that of a natural one, was eventually addressed by the rise of behavioral economics with Kahneman and Tversky. In class, we reviewed contemporary approaches to the seemingly irrational behavior that threatened to wreck two centuries of work. Every day in every way, economics was getting better and better. The critics could wait a little and then be forever silenced.

But then I started reading a little about physics, or rather about its history. I read about Tycho Brahe, who developed the most advanced instruments of his day to collect data on the movements of the stars and planets. I read about his disciple, Johannes Kepler, who waited until the greedy Brahe died and then used his collected data to describe the geometric patterns within. And of course, I read about how Newton took this description of the motions of planets and developed a precise mathematical description of gravitation.

What shocked me was that none of them offered an explanatory (as opposed to a descriptive) theory for planetary motion; it would take until the 20th century (i.e. General Relativity and Quantum Mechanics) to offer explanations as to why gravity existed and thus shaped the motions of the planets. All the work before it was limited to describing the patterns in the data in increasing depth and rigor.

This wasn’t at all like what I’d learned in class. I don’t recall ever reading about any famous economist who simply dedicated himself to collecting data and describing it. Most of the theoretical papers I’d read spent little more than a paragraph in discussing anecdotal evidence, let alone focus entirely on modeling surface behavior. On the other side of a vast chasm, the empirical researchers bent over backwards to find testable implications of these theories, and often failed to confirm them. It was almost as if they weren’t on the same planet, let alone the same department.

I witnessed one of the clearest examples of this divide in the theory of international trade. It is one of the oldest branches of economics, and yet for the longest time it failed miserably to explain or predict the behavior of real-world exports and imports. The eminently rational arguments that motivated trade in the classical and modern theory- comparative advantage, factor abundance, differences in preferences – turned out to be very poor predictors of what trade flows actually look like.

It wasn’t until 1952 that an empirically successful model was proposed: Jan Tinbergen’s “Gravity” equation (an allusion to Newton’s formula). It’s argument was rudimentary: trade would increase with the GDP of trading countries, and decrease with distance and other barriers. If the simplicity of the argument was galling to theorists, its results were even more so – it explained the real world data beautifully. The empirical economists were pleased at this new available tool, and began using it to answer interesting questions about the world, while the theorists simmered.

It was offensive that such a shallow explanation of such a complex reality was preferred to the deeper models. As a student, deriving the equilibrium for Ricardian or Heckscher-Ohlin trade  was mathematically challenging and full of surprising insights, while learning about the pedestrian theory behind the “gravity” model took less than a single lecture. The rest was mostly computation and statistics, and that was a lot less fun, a lot less glamorous.

After reviewing the scientific history of gravity, however, I was ashamed of my initial reaction to this model. If I was really all for getting on the natural sciences bandwagon, then why not do it thoroughly? The minute the old theories of trade failed to make accurate and testable predictions, they should have been dismantled for whatever useful parts they had and then ditched. Instead, despite the fact that they have failed in every honest empirical test for the last 60 years, they continue to be taught and researched.

More importantly, the “gravity” model is precisely the kind of explanation to be looking for at this stage- an accurate description of the data. To accept this doesn’t mean that there aren’t deeper explanations for what it describes, just like Newton’s own law of universal gravitation did not exclude the deeper answer provided by general relativity. What it does mean is that a more humble approach – a gradual deepening of our explanations of reality- is bound to be more successful than writing theory from a vacuum. The problems we face are too urgent to allow such a broad division between the theorizing and verifying branches of the science and the ensuing lag in progress.

Admittedly, the limitations that the domain of economic research imposes are different from those of the natural sciences; laboratory experiments, the ideal environment in which to untangle these complex phenomena, are fairly recent in economics and downright  impossible for many subjects. The other source of data, the “natural experiments” sometimes provided by the real world, is impossible to control and difficult to interpret correctly. These are not, however, arguments that support the current divide between pure economic theory and empirical analysis. If anything, these limitations further motivate a more conservative approach: describe successfully, and only then attempt to explain.

I suppose it is clear that I cannot abandon my defense of economics for long. Like Samuelson, I am convinced that the only path that the discipline should follow is that of the natural sciences. Anything else is sophism, or at best a pre-Copernican notion that humans are somehow exempt from the laws  that rule the universe. However, economists must consciously beware of their tradition as speculative philosophers if they are to become scientists. It is an enormously difficult endeavor, since they must adapt the natural scientist’s method to a different and much more fickle field. But, I believe, there is no discipline that is better equipped or more urgently at task than economics.