New School Economic Review

Physics envy, Paul Samuelson and Polemics

by Benjamin on October 30, 2010

A talk by MIT’s Andrew Lo makes the case that there are different types of uncertainty, not risk, and that economic modelling based on physics – quite intentionally so by Paul Samuelson it appears – are taking a set of tools that address the wrong level of uncertainty. Well sort of. Lo is clearly keen on empirical work and experiments but you get the feeling that his faith in the economic models is pretty solid too, regardless of uncertainty. He opens by complaining that government has lost its faith in markets, and closes by saying that belief model in models should be completely dependent on empirical evidence and repeated testing … Not sure what the empirics are saying about markets and their functioning?

It’s an interesting talk, well worth a look. Both for the engaging content and Lo’s stories and material from Paul Samuelson’s work as Lo and Mark Mueller trace the origins of ‘physics envy.’  The paper is here, but do ignore Lo’s odd claim to invent the term in the below talk – the idea’s been around for years… One story in Lo’s talk is from the Santa Fe institute where physicists and economists got together to discuss non-linear models and their introduction to economics. (The beginnings of the econo-physics sub-discipline). Co-organised by Kenneth Arrow and Physics Nobel prize winner Murray Gell-Mann, Murray was overheard in the corridor after the conference telling Arrow: “I thought us physicists were arrogant, but you economists…”

Hello 2010, goodbye Prof. Samuelson

by Benjamin on January 1, 2010

2010 has just about started across the world. It is 3.30pm in Delhi where I am typing, but it’s only 10pm in 2009 if you are on American Samoa (GMT -12). It is perhaps appropriate that we remember back and look forward at the same time. In the flat I am visiting in Delhi is an old issue of the Economist, which asks – “Where did our 3 Trillion dollars go?”. A special report on the banking systems failure and bail-out from the year that went. Nostalgic. The article suggests that banks will have to renew their social contract and re-think their structure. As we have seen in the last few months, relatively little reflection and none of this has come to fruition. As someone once quipped; “History has only taught us one thing: That no-one learns from History” – Amen.

2009 was also the year when a political scientist got the Nobel remembrance prize. The best quality work in economics again comes from non-economists, and in a crisis it is given to someone outside the ‘mainstream’. When Kahneman got the prize it was for an equally excellent body of work, which was read by more than just economists. When Merton and Scholes got it in 1997, they ruined the financial system. By 2001 the lesson was forgotten, I hope 2010 is not the year when the 2008-09 crisis is forgotten too, but lets see if Fama doesn’t get it next year. Then we’ll know.

Finally 2009 was the year we lost Professor Samuelson. A man who epitomized economics in the 20th century, not always for his theoretical ideas, nor for his (plaudable) approach to mathematics, but for introducing the textbook. Economics post-Samuelson became dominated by textbook instruction which for better or worse has spread economics much beyond a few specialised departments. Whether it needs re-thinking is a question posed in the latest International Review of Economics Education, but for now, lets look forward while remembering the past. In his excellent obituary in The Mint (India’s Wall Street Journal Partner), a fellow New Schooler has provided a good start to to doing just that, by remembering Prof. Samuelson. Happy New Year

Samuelson: “Look to History”

by Benjamin on June 24, 2009

Conor Clark has been interviewing Paul Samuelson for The Atlantic and the good professor, who at 94 is still very productive, had a new piece of advice for economics Graduate students:

Well, I’d say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that’s the raw material out of which any of your conjectures or testings will come.

Once that is accomplished, the recommendation is to go empirical on the past, but not necesserily in the context of a formal model.

History doesn’t tell its own story. You’ve got to bring to it all the statistical testings that are possible. And we have a lot more information now than we used to.

So that’s the new wisdom from the man who brought us the Foundations of Economic Analysis, who had this to say about that classic:

With the Foundations, I looked around for the best bicycle in town. It wasn’t perfect, but it was better than what had been assigned previously.

The interview is in two parts covering everything from Larry Summers through Mankiw, the crisis and much much more, here and here, while a tip of the hat goes to Stephen Kinsella for reading and commenting on the interviews in the first place.

Well, I’d say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that’s the raw material out of which any of your conjectures or testings will come