December 30, 2014

The happy end of distortion

Comment on Lars Syll on  'Mainstream macroeconomics distorts our understanding of economic reality'


The outstanding characteristic of physicists/engineers is that they clearly see the green cheese assumptionism of economics. Here is the key scene:

“The physicists were shocked at the assumptions the economists were making ― that the test was not a match against reality, but whether the assumptions were the common currency of the field. I can just see Phil Anderson, laid back with a smile on his face, saying, ‘You guys really believe that?’“The economists, backed into a corner, would reply, “Yeah, but this allows us to solve these problems. If you don't make these assumptions, then you can't do anything.”And the physicists would come right back, “Yeah, but where does that get you ― you are solving the wrong problem, if that's not reality.” (Waldrop, 1993, p. 142)

And physicists/engineers draw the correct conclusions:

“When Phil Anderson first heard about the theory of Rational Expectations in the famous 1987 Santa Fe meeting, his befuddled reaction was: You guys really believe that? He would probably have fallen from his chair had he heard Milton Friedman’s complacent viewpoint on theoretical economics: In general, the more significant the theory, the more unrealistic the assumptions. Physicists definitely want to know what an equation means in intuitive terms, and believe that assumptions ought to be both plausible and compatible with observations. This is probably the most urgently needed paradigm shift in economics.” (Bouchaud, 2009, pp. 7-8)

But then physicists/engineers walk straight into the wood, that is, they apply what they have learned in their respective courses, that is, they resort to sheer toolism. See my comment 'Yes, listen to the Econophysicists' on this blog.

This is how marginalism, chaos theory, complexity theory, and recently the Schrödinger equation came to economics. Thus, it was physicists/engineers who messed the whole thing up in the first place (Mirowski, 1995).

For the undistorted three-dimensional view of supply and demand on the product market, see here.

And for the successful methodological shift from two-dimensional supply-demand-equilibrium to the correct market paradigm see (2014); it is hard stuff for physicists/engineers who cling to the notes of their introductory courses.

Egmont Kakarot-Handtke

Bouchaud, J. P. (2009). The (Unfortunate) Complexity of the Economy. Econo-
Physics Forum, 0904.0805: 1–9. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper
Series, 2517242: 1–29. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Waldrop, M. M. (1993). Complexity. London: Viking.