It has long been held that there are two kinds of economics:
- Rationalist economics: starting out with theses about philosophy, money and reality (etc) and using logic and reason to reach conclusions about the present and predictions about the future.
- Empiricist economics: starting out with data and creating mathematical models representing these data, and using these models to reach conclusions about the present, and predictions about the future.
In traditional circles, the first class tends to include the various schools of Austrian and Marxian economics, and the second class tends to include the various schools of Keynesian and Monetarist economics.
Today, I want to put an entirely new spin on empiricism in economics, by focussing away from modelling. The process of mathematical modelling is just as rationalist as using logic and reason.
Why?
Economies are nonlinear systems.
From Wikipedia:
In mathematics, a nonlinear system is a system which is not linear, that is, a system which does not satisfy the superposition principle, or whose output is not directly proportional to its input.
Effectively, a nonlinear system is one in which mathematical modelling mostly does not work. This, in a nutshell, is the reason why professional economists within the academic system, at the Federal Reserve, and within the IMF and the World Bank are often so desperately incorrect with their predictions, as we have seen so many times in the last few years.
This is because nonlinearity is a direct result of incomplete information. Any map or model built will not be an exact replica of reality, and as Benoit Mandelbrot showed tiny divergences in an unmodelled (or unknown) variable can result in a humungous variation in the output of the system (i.e., the economy).
So in dealing with nonlinearity the model always fails — sometimes by a fraction, and sometimes by a huge amount. The notion of accurate modelling was famously taken to a logical conclusion by the writer Jorge Luis Borges in On Exactitude in Science:
In that Empire, the Art of Cartography attained such Perfection that the map of a single Province occupied the entirety of a City, and the map of the Empire, the entirety of a Province. In time, those Unconscionable Maps no longer satisfied, and the Cartographers Guilds struck a Map of the Empire whose size was that of the Empire, and which coin- cided point for point with it. The following Generations, who were not so fond of the Study of Cartography as their Forebears had been, saw that that vast Map was Useless, and not without some Pitilessness was it, that they delivered it up to the Inclemencies of Sun and Winters. In the Deserts of the West, still today, there are Tattered Ruins of that Map, inhabited by Animals and Beggars; in all the Land there is no other Relic of the Disciplines of Geography.
So if accurate modelling in complex dynamical systems such as economies is effectively impossible without mapping every input what hope can there be for empiricism in economics?
We have to approach it from another angle: if it is impossible to model economies in a laboratory, through equations, or in a supercomputer, the real world must be the testing-ground for ideas.
Actors in economies should be free to experiment. Good ideas should be free to succeed, and bad ones to fail. The role of the government should be to provide a level playing field for experimentalism (and enough of a safety net for when experiments go wrong) — not pick winners or “manage the economy”. People with ideas must be able to access capital so that those ideas can be tested in the market place. If experiments go badly, that is no bad thing: it just means that another idea, or system, or structure needs to be tested. People should be free to go bankrupt and start all over again with a different mindset and different idea.
The corporatist model that most nations around the world have adopted, or fallen into (i.e. “capitalism” led by governments and large corporations) is nothing like this. Small businesses struggle to access capital. Young men and women are thrown onto the scrapheap of unemployment without a chance to develop skills, or entrepreneurial ideas, or even sell their labour, and pushed into leeching off the wealth of the nation through welfare. Large banks and corporations whose business models have failed are routinely declared “infrastructurally important” or “too big to fail” and bailed out to leech off the nation.
This is not empiricism. This is a disaster. To restore society, we must restore empiricism into economies.
azizonomics 
As true as this is and the degree to which I agree is, unfortunately, irrelevant. I alone have zero power to change the status quo. The crash of someone else’s card house is the means that gives those with ability to do what you are talking about. Can we make this change without resorting to violence as an equalizing force? I firmly believe that is why there is a perception of inaction and even tolerance by citizens. The “riots” in Greece and the UK were mild, the US Day of Rage was taken as a joke, and it looks like the EU is (possibly) about to print the Euro into oblivion anyway. Any ideas for a possible part 2 of this blog post? Maybe, just maybe one with ideas on implementation!
Rant off- my bad, Excellent post as usual.
I’d like to briefly change the subject:
How did Apple come back from the 90s? Steve Jobs explicitly said: We need to wait for the next big thing. For Steve Jobs, that was the iPod, and that was the base from which Apple came to dominate personal computing — not by trying to insert itself into an existent market, but by dominating new markets (iPod, iPhone, iPad)
I am “pricing in” a collapse of the global financial system. We can’t shift the system from the bottom, just as Apple couldn’t shift the desktop or laptop market in 2001. We have to wait for the next big thing, which is the failure of Western free-lunch capitalism through the collapse of its productive base, and high dependency on global oil, global goods, and global stability. People who believe in experimental capitalism must be prepared to seize the moment, both in terms of liquidating their precious metals holdings and buying up business and real estate, and through influencing the new political systems that will grow out of the collapse.
The Marxists will be ready with their solutions. The nationalists will be ready with theirs. The corporatists will be ready. We must be ready too.
Were you pandering to NNT with the map analogy.
http://www.weatherunderground.com/tropical is a great place to see futility in action. For any tropical storm, they’ll show the projections of about 10 models. Recently, for one, the spread was about 180 degrees, from near the Yucatan to Louisiana. I’m sure each of these models were developed by well meaning professors using government grants. I’d rather the money be spent trying to predict the best team in college football.
Countries/States should deliberately promote the experimentation. Trying out economic ideas before throwing the switch on the entire country.
I’m pandering to Borges. I think he’s an influence to both myself and NNT.
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Aziz,
Excellent post.
This may interest you:
http://www.nakedcapitalism.com/2011/09/economists-defending-the-use-of-models.html
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Another excellent post…I’d recommend the book.. “The State” [1985] written by this chap http://en.wikipedia.org/wiki/Anthony_de_Jasay who once said….
“Having gathered all power to itself, [the State] has become the sole focus of all conflict,
and it must construct totalitarian defences to match its total exposure.”
“To restore society, we must restore empiricism into economies”.
“Empiricism is a theory of knowledge that asserts that knowledge comes only or primarily from sensory experience.” http://en.wikipedia.org/wiki/Empiricism
We derive from ‘Sensory Experience’: ‘Sense-Perceptions’: OR: Perceptions ONLY: NOT KNOWLEDGE! Thus, empiricism cannot be a ‘theory of knowledge’ nor applied to economies as knowledge, and thus, any attempt, “To restore society” through, “empericism into economies” is False-Psychology” and will fail : apriori!
Knowledge comes from WHAT YOU KNOW!
Knowledge : IS : ‘A Part of Being’ : NOT Existence!
Knowledge is from MIND<Cognition, and is a RECOGNITION of suppressed MEMORIES!
Knowledge is something you RE-MEMBER or REcognize again.
Self-Knowledge is something that was KNOWN and forgot.
Knowledge is denied Reality!
Knowledge : IS : FAITH(id est, emotional fACTS, not physical ACTS).
To be an “Economic Empericist” is to confuse ‘Perceptions’ with ‘Knowledge’: OR: FACTS of EMOTIVE-Reality with sense-perceptions of Scientific Data; they are not players in the SAME Game.
Those Facts of Reality that MOVE US are our E-MOTIONS.
THEY are Whole or [W]HOLY-SELF-Truths.
We have only two EMOTIONS : “Love or fear” :.
Love is Everlastingly REAL.
Fear is a denial of LOVE, it is not REAL!
Thus, ONLY LOVE Exists!
Yet the function of Society as Country is to deny that ONLY LOVE Exists; such that, War or Division or Separation or Evil, may flourish as THE ONLY RATIONAL GLOBAL ECONOMY=Perpetual War to keep us in fear and illusions!
However, when you reach through or beyond fear, LOVE or JOY or PEACE RE-Turns!! And Thus, Only Love Exists as the Sole Motivating Force for a Peaceful Functioning Global Economy.
Fear is not Real! Fear is an Illusion!
Therefore, The only Reality in The Transformative World of our Cosmos, that is NOT an ILLUSION, are those emotions which are eternal, and that last beyond what has past, witch is LOVE or JOY or Happiness, an aspect of LOVE, to support a Peaceful Functioning Global Economy.
When our emotions are loving, or will last forever, though maybe later denied, this becomes a Part of Knowledge that can be known eternally in AWARENESS NOW!
This is Known as ADDING TO THE Kingdom or Adding to The Prime Mover or First Principle Or Creator of Creation! And :IS : IN ESSEnce : : The Second-Coming, or the Restoration of The Temple Or the Placement of Gems in Noah’s Ark.
Thus, two Paths to Knowledge Exist: One is Faith, and the other Path are from the Laws of Principle Or The Laws of One and both support a Peaceful Functioning Global Economy and not Perceptions.
Now, to ‘REstore Knowledge’, which means to Learn AGAin, to re-Member What was Real — and in that sense, and in that sense only, yes RESTORE knowledge!
REALITY WILL NEVER CHANGE; that’s why Reality is truthful; and the ONLY ‘Economic Reality’ : OR : the mot[or of ]i[nno]vation : IS : when our motivation IS Loving, When our CooPeRations are ComPassionATE, and not competitive!
“To restore society”, is merely to ‘return’, or ‘revolve’ or ‘revolt’, and to revolt is to agree with the ‘Standards of the System’, and only to Revolve them into a new top with the same ‘Standards’, and who wants THAT, the same Global Economy in new clothes?
When the ‘Global Economic Shell Game’ is no longer satisfactory, and we care not if we had a better score, Then the Transformation towards Transcendence Occurs, Simultaneous with Desire.
To transcend something is to leave both the system and the revolt BEHIND.
Transcendence not Restoration!
Our Current Dilemma is that the dominant meme from within our collective consciousness or tribe, asserts that: “Punishment is a Form of Salvation”; which means, that to save us from Collective-Country-Wide Future-Harm, we must PLAN to punish some “OTHER” Collective-‘Entity’-country tomorrow; yet if Collective-Country-Wide-Punishment is Emotionally motivated from FEAR, our Collective-Country-Wide-Innocence : IS : Really our GUILT : Masquerading as innocence, and is MIS-Placed and “Projected onto OTHERS” for our delusional safety; wherefore in Actuality, Safety is the Relinquishment of ATTACK, ‘Pacism from the East Coast of the Pacific Tribe of Peace’ : The Native Peoples.
What this means, is that our “punishment or war-making powers” are: ‘A disguised form of Personal-GUILT, and SINce we are acting from FEAR, we increase our personal-fears when we punish or act upon our war-making powers, resulting in an ever greater need for Collective-Country-Wide-Punishment of “Some OTHER”, offSETTing our increase in GUILT.
Now, as our Collective-Unconscious enlarges to contain the new fears of Personal-Guilt, this renders or tears or Causes to Split our Whole-MIND, which seeks UNITY of Purpose, and renders the IDEA of Peace, or a GLOBAL Peaceful Functioning Economy — Unacceptable to Consciousness, SINCE only a psychotic STATE can be TRUSTED! Perpetual War becomes the only Reality in insanity, and therefore the only Global Economy that can be trusted is Perpertual War to the insane!
What this does is to ensure that the dominant meme of our collective-agreed-upon-Conscious-expression never changes either, “that Punishment is a Form of Salvation”, and thus our Global-Economic-relationships to each other, stay the same, dysfunctional, and no fun, sadistically the same.
What’s needed is to understand Child-Psychology in a NUDE or NEW LIGHT, and the distortions and perversions that have rendered biologically mature adults into perverted-adolescents : psychologically : Either: Moral Cretins, Morons, and, OR, Sadists (that is, Psychopaths, with Psychopathic behaviors) – coming out as a coloring-book soon….
The ‘Knowledge’ to be gained from learning from Scholars of Antiquities, such as “Mithridates VI or Mithradates VI (Greek: Μιθραδάτης), from Old Persian Mithradatha, "gift of Mithra"; 134 BC – 63 BC, also known as Mithradates the Great (Megas) and Eupator Dionysius”[1], is such that in the NOW of the mOMent : “NOW” : we include in our BEING, resonance factors that stimulate a Memory : of the : “Now”; and while this is difficult to explain in words, it’s not difficult to experience! SINce it comes naturally to us when we are free or liberal with life, BEING a part of our nature!
…for many, they have forgotten that the : “NOW” : is a memory, the : “NOW” : is not an event without a history, for, in the : “NOW” : includes the Memory of our Creation, and it’s this ‘KNOWLEDGE’ that has been lost or suppressed or denied, or dissociated, or repressed, and the fear of psychedelics as such, is not the bodily harm that psychedelics may arouse, per se, but the moment of recognition they offer, of what has been lost, and that’s our own memory of what has been lost, our Identity, which can only be recovered or reCollected in the Now, implying that an Economy would be “Collectivist Or Callectivist”, for the only Vocation of the Mind, is to Recall the Now, with an Economy Collecting us all into ONe Being Functioning At PeACE, yet Operationally, ONLY When Whole or Holy with all of us in ONE POT.
Let us remember that the Etymology of an Economy is from “oikos” house + -nomos manager, from nemein to distribute, manage, which means, that at our roots, an Economy is to bring us home and distribute or manage our talents, and the only talent worth pursuing, is the Vocation of the Mind, to Recall the Now, Collectively!
Now, I’m not saying that Collectives as they operate “NOW”, is what I’m asserting a ‘Collective’ : IS :.
References :
1. http://en.wikipedia.org/wiki/Mithridates_VI_of_Pontus
What a lot of words, and all over our power to reason! When a matter first comes to our attention it is through our sensitivity to its empirical properties. The sun always rises every day is a good example. But at one stage we ask ourselves why it does this and the answer involves the building of an hypothesis, theory, model — call it what you will, to help explain to our deeper minds what is exactly going on.
Phenomena in economics are no different in this respect and although our first glimpses of the subject overwhelm us with its apparent complexity, there are very well established scientific ways of overcoming this problem.My new book, for example, provides the necessary assumptions for achieving this and when you get round to understanding this approach, it becomes very obvious. Write to me at chesterdh@hotmail.com for more information and a reviewer’s e-copy for free.
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It a pity that you are not aware of how a linear theory can be made to work in a non-linear way. The way the theory is made to work is by introducing small adjustments to the numbers between “time slices” as the progress of the economy is traced. This is not hard to do in the simulations that properly and linearly represent the situation. However the models themselves have to be basically correct for the introduction of small changes, before one can claim that they work properly. Many models don’t do this and so modelling gets a bad reputation.
For this reason, what you have written about the failure to represent our macro-economy with mathematical models is not an accurate statement.
I’m always open to updating my views as I learn more.
Aziz, I have just added some comments to your prior comment maker, one Stuart Harlan Doblin | August 30, 2012, whose verbosity well exceeds his grip on how to use empirical facts to develop scientific knowledge. I fail to see how anyone can use the non-linearty of a more exact theory to disprove the linearity of a less exact one. The reason is that when one takes small enough steps in the associated simulation, the more complex theory and its non-linear equations can be temporally reduced to linear ones, where all the higher order terms have no immediate significance. Actually this is the approach used in developing the calculus, which finds application for non-linear cases too!
Oh! I forgot to mention the so-called Butterfly Effect, how the flapping of wings in LA can conjure up a storm in NY. Its certainly non-linear but what is not mentioned is that although it is possible, it is highly improbable. Since we are dealing with the averaged macro-properties of our system, this aspect does not seriously find application.
Wow, looks great John. My family always made pasta by hand, here and in Italy.
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