Wednesday, July 22, 2009

Economics in crisis

I am in ATL for the past 3 weeks and bored out of my mind. Thank god I got a trip to NYC tomorrow to work on OpenRemote a bit. Meanwhile I browse the economic commentary. There is a great article this morning in the FT about Economics in crisis. Read it, it is short and sweet and touches upon many of the topics explained in the "dummies" series.

The gist of the argument is that there are two camps, Ricardians and Keynesians. They disagree on basic problems facing our economy. The debate, including pro-eminent Nobel prize winners, has degenerated in schoolyard name calling without much progress being done on "the truth".

I agree, this does not look good. Whenever, in software development, I would see flaring arguments go up, I knew that 80% of the time the issue at end was irrelevant because unknown. Meaning when there is no "right or wrong" yet, because we just don't know what it is or because it doesn't matter.

So the root cause for me is one of ignorance, or rather lack of knowledge by the composite body of economists. Speaking of bodies, I share the view that economics is a discipline that borrows from mathematics, psychology and more importantly biology. Studying complex systems does not match well with black and white answers to mind-models.

Mathematics has the luxury of being exact. That means a high degree of correlation of opinion around a "theorem". The theorem is either right or wrong, you can get a long time to "get it" but it is binary. Physics is also pretty binary. Physicists agree on Gravity, Quantum mechanics. But make no mistakes there is plenty of disagreement on stuff not known.

But the state of knowledge around policy impact, monetary impact, and the mathematical equations that can describe money as a dynamic entity in time is not that advanced. There isn't a clear model for what happened in the past 2 years and what needs to be done, if anything, going forward. There is plenty of research, but this feels like a young field, witness the disagreements.

Economics might be a field where quorum sensing could be interesting. There is good and bad in all models. The article does a good job of parsing it. We are dealing with a live body (the economy) and the impacts of our actions go through so many channels we cannot fathom the dynamics backing it. So a practitioners approach is needed. Take biology, the field "guardians" are doctors in the hospital sense, not the PhD sense. Math PhD are running computer simulations all day long, playing with the dynamic equilibriums to research new ideas which they then feed to the "doctors" for clinical trials eventually.

Economics as a discipline will evolve, a new consensus needs to emerge. Quorum sensing is something we all do. Increased communication via press/blogs is good. I certainly didn't know squat until 2 years ago. I also believe that this current crisis is making super-stars of certain economic figures (Krugman, Taleb, Roubini, Bernanke etc) and it will energize the field.

But I am with the author on the gist of the argument: for the field to evolve there needs to be some humility to unify what are, after all, under-developed and partial representations of the economic world. It is an exciting time to be in it. Nothing boring here.


Lisa said...

It's so amazing to see you on this blog! Wow! I knew you'd be an absolute rock star one day! Give me an email sometime to catch up if you would like. I am in AZ with my Husband and kids. By the way....this is Lisa Somerville. I guess this is about 20 years later! Mallorca? ASU in Tempe? I agree about your blog, by the way.

Somerville House said...
I didn't give you my email before. I told John Paul (my brother) to read your blogs especially because he's in the financial arena. Do you remember little JP? Anyway, hope to hear from you at some point.