The Amazing Inanity of an "Economics Manhattan Project" at The Edge

Ronald Bailey | December 11, 2008

Some really smart folks over at The Edge have made a really stupid proposal for an "Economics Manhattan Project." As they describe it:'

The economic crisis has to be stabilized immediately. This has to be carried out pragmatically, without undue ideology, and without reliance on the failed ideas and assumptions which led to the crisis. Complexity science can help here. For example, it is wrong to speak of "restoring the markets to equilibrium", because the markets have never been in equilibrium. We are already way ahead if we speak of "restoring the markets to a stable, self-organized critical state."

In the near-term, Eric Weinstein has spoken about an "economic Manhattan project". This means getting a group of good scientists together, some who know a lot about economics and finance, and others, who have proved themselves in other areas of science but bring fresh minds and perspectives to the challenge, to focus on developing a scientific conceptualization of economic theory and modeling that is reliable enough to be called a science.

They then proceed to make some smart, but mostly pretty stupid criticisms of economic theory. For example, they suggest much could be learned from an input/output model of the physical and energy flows of the economy. As though such a model could tell you much about the value of what is flowing through it. The Soviets tried exactly this approach with results that should be all too obvious after the fall of the Berlin Wall. It's almost as though they have never read any current economic theory.

And may Mammon help them, these naifs suggest that the development of computer climate change models might point the way for economic models:

In the longterm, there needs to be an independent, non-partisan methodology for economic and financial modeling which involves globally agreed upon standards, as in the world of climate modeling. As in that world, one can imagine an international commission of economic scientists who develop, test and benchmark economic models against each other, and against past data, so that there is a reliable understanding of what the best models are and how reliable they are for studying different kinds of problems and predicting the impacts of proposed new economic and financial regulation. This will allow new proposals for innovative financial instruments or changes in trading rules or accounting rules to be tested in an open environment using best practices to understand their results.

It is as though they think that no one has ever thought of creating an econometric model before.

In any case, commentators at The Edge have, for the most part, sensibly rejected the proposal. A few choice comments are below.

Stanford University new growth economist Paul Romer:

Imagine that fires were devastating the world's forests and you came across this manifesto:

The forest crisis has to be stabilized immediately. This has to be carried out pragmatically, without undue ideology, and without reliance on the failed ideas and assumptions that led to the crisis. Complexity science can help here. For example, it is wrong to speak of "restoring the forests to equilibrium," because forests have never been in equilibrium. We are way ahead if we speak of "restoring forests to a stable, self-organizing critical state."

Would this convince you that only complexity science can prevent forest fires?

With one tweak, this is the first paragraph from the pull-quote for this piece. All I've done is change "market" to "forest." The forest version sounds pretty implausible to me, but after a financial crisis, people seem to be drawn to the version with "markets." For example, after Citibank made some bets that turned out badly in the Latin American debt crisis of the 1980s, its CEO John Reed helped mid-wife the Economics Program at the Santa Fe Institute. He wanted the new theoretical insights about financial crises that the new complexity scientists promised. Ever since, the complexity scientists have been telling us that markets are self-organizing systems. For the life of me, I can't see how this puts us way ahead. Didn't seem to help Citibank either, which I've noticed is back in the headlines.

Then as now, a key recommendation is to recruit some "good" scientists (their modifier, not mine; see the second paragraph from the pull quote) from other fields. I guess that these outsiders are supposed to purge economics and finance of the aforementioned ideology and failed assumptions. But before we put up money for an "economic Manhattan Project," wouldn't it make sense to ask if there is any evidence to support the basic claim here--that more theory, developed by people who don't have domain experience, is the key to scientific progress in macroeconomics and finance?

Or Skeptic Magazine editor, Michael Shermer:

...imagine the futility of government bureaucrats trying to find the right price for each of the approximately 170,000 different books published each year, factoring in hardback versus paperback prices, special discounts for multiple purchases of bundled books, plus shipping specials for minimum sales and factoring in, of course, the discriminatory pricing now used in the same way the airlines price their tickets, and then imagine multiplying that process by the hundreds of thousands of different markets, industries, and businesses and it becomes crashingly clear why no top-down system could ever match the real-time sensitivity to prices provided by the bottom-up complex adaptive pricing system currently in place.

Expand the problem by many orders of magnitude and we get a sense of the breathtaking inanity of trying to control an entire economy, no matter how smart the experts in our hypothetical economic Manhattan Project may be. The economy is a product of human action, not of human design. Trying to redesign something that was never designed in the first place is futile. I vote no on an economic Manhattan Project.

My favorite comment comes from Black Swan author Nassim Nicholas Taleb:

I spent close to 21 years in finance facing "scientists" in some field who show up in finance and economics, realize that economists and practitioners are not as smart as they are (they are not as "rigorous" and did not score as high in math), then think they can figure it all out.

Nice, commendable impulse, but I blame the banking crisis (and other blowups) on such "scientism".

We've seen them from all fields of study-particularly that finance pays (used to pay) a multiple of what someone can earn in the more respectable sciences. We've seen people from astrophysics, statistical mechanics, mathematical biology, pure mathematics, applied mathematics, semi-applied mathematics, probability theory, engineering, solid state physics, turbulence ... literally ever single field.

Meanwhile the most robust understanding is present among practitioners who do not have the instinct to reduce ambiguity and uncertainty that scientists have. I urge you all scientists to go take your "science" where it may work-and leave us in the real world without more problems. Please, please, enough of this "science". We have enough problems without you.

Amen.

Read the whole Economics Manhattan Project proposal and commentary here.

Hat tip to Matt Wolinsky.

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cunnivore|12.11.08 @ 5:27PM|#

Taleb's comment is kind of a cheap shot. People from other fields working in mathematical finance is definitely not to blame for the current crisis. The system was a house of cards to begin with.

Loupeznik|12.11.08 @ 5:29PM|#

"If you're so smart, then why aren't you rich?"

Warty|12.11.08 @ 5:36PM|#

People from other fields working in mathematical finance is definitely not to blame for the current crisis.

Yes it was. The other field was politics.

Douglas Gray|12.11.08 @ 5:48PM|#

There has finally been a miniscule decline in the total debt (consumer and mortgage) just recently, as people are finally curbing their spending and are beginning to save.

To set the stage for a genuine economic rebound means that this process must continue for some time. So consumer spending must keep going down for a good while prior to rebounding.

There is no need for complex science.

|12.11.08 @ 5:51PM|#

Sometimes I wish they would use Friedman economics when constructing a response to the current crisis, but then Naomi Klein tells me that's how we got in this mess to begin with. Darn

Jeff P|12.11.08 @ 5:51PM|#

And no video link to Rush's Manhattan Project...

http://www.youtube.com/watch?v=-7RaDUn7W84

Must I do everything?

|12.11.08 @ 5:52PM|#

So consumer spending must keep going down for a good while

Odd, then, that Our Masters in DC are striving so hard to convince us to do exactly the opposite.

|12.11.08 @ 5:54PM|#

And I must say that calling this endeavor the "Economics Manhattan Project" is quite apt, since actually carrying it our would be the equivalent of exploding a neutron bomb over our economy.

Tom!|12.11.08 @ 5:55PM|#

"The economy is a product of human action, not of human design."

Duh! Now I gotta rethink everything.

|12.11.08 @ 6:04PM|#

The Technocrats strike again!

I thought at least self-described intelligensia would avoid repeating the mistakes of history. That's what the "Literature Review" section of a paper is for.

|12.11.08 @ 6:06PM|#

Forget complexity scientists. We need to get some string theorists on the case.

SIV|12.11.08 @ 6:07PM|#

Please, please, enough of this "science". We have enough problems without you.

Whenever I hear the word "science" in relation to human behavior, I reach for my pitchfork and torch.

Quote guy|12.11.08 @ 6:14PM|#

"The ultimate result of shielding men from the effects of folly is to fill the world with fools."
~Herbert Spencer

|12.11.08 @ 6:27PM|#

globally agreed upon standards, as in the world of climate modeling

That's the laugh of the day.

|12.11.08 @ 6:30PM|#

Let's see... The Manhattan Project developed the most destructive technology to date.

Seems like it would be redundant. We already know how to lay an economy to waste, and our government is doing it as we speak.

-jcr

SIV|12.11.08 @ 6:36PM|#

I'm only reading it in bits and pieces so I haven't found the part where the "Economics Manhattan Project" advocates intend to get their army.

Chuck|12.11.08 @ 6:49PM|#

For example, they suggest much could be learned from an input/output model of the physical and energy flows of the economy.

Vasily Leontief already won a Nobel Prize for doing this, about 350 years ago.

And, um, most of those scientists are working in quantitative finance because they were invited in by investment firms. It's not like they suddenly got bored in their labs and decided to storm the gates of Wall Street one day.

Mike Laursen|12.11.08 @ 6:51PM|#

They're gonna be really sorry when the economic Manhattan project scientifically concludes that central planning is the problem.

alittlesense|12.11.08 @ 6:56PM|#

An "Economics Manhattan Project"... does this mean you shoot two economists at each other, and hope they reach critical mass and explode?

|12.11.08 @ 7:08PM|#

shoot two economists at each other, and hope they reach critical mass and explode

If one of them was Krugman and the other one was Bernanke, it might be worth trying. Even if they don't explode, it would sure as hell be fun to watch.

-jcr

|12.11.08 @ 7:11PM|#

Two things quoted by Ronald Bailey today...

now...

As in that world, one can imagine an international commission of economic scientists who develop, test and benchmark economic models against each other, and against past data, so that there is a reliable understanding of what the best models are and how reliable they are for studying different kinds of problems and predicting the impacts of proposed new economic and financial regulation.

and earlier...

This is a pattern of warming not forecast by any of the major global climate models.

Franklin Harris|12.11.08 @ 7:22PM|#

The fatal conceit is alive and well, I see.

|12.11.08 @ 7:42PM|#

"I am become death, the destroyer of worlds!"

Travis|12.11.08 @ 8:16PM|#

"An "Economics Manhattan Project"... does this mean you shoot two economists at each other, and hope they reach critical mass and explode?"

Win.

Kolohe|12.11.08 @ 8:34PM|#

Since the output of this endeavour will be tested in Manhattan, shouldn't we call this 'The Socorro Project' for symmetry's sake?

Also for Bobby above, you may want to modify the Bhagavad Gita as:

"I am become debt, destroyer of worlds"

Jim Ancona|12.11.08 @ 11:22PM|#

Funny, it's exactly the similarity of economic modeling to climate modeling that leads to my skepticism about global warming predictions.

tarran|12.11.08 @ 11:30PM|#

Please - there is a fundamental difference between modeling the Earth's climate and human economic activity.

Economic activity is the product of human action, people making choices as to what they produce and consume. While it is possible to develop some rules of human behavior, in the end, there is no way to quantify the time preference of the population, what their tastes will be, what technologies they will invent to satisfy their wants.

On the other hand, the Earth's climate is deterministic: it is the product of millions of molecules undergoing chemical and physical reactions. These things can be modeled, in theory anyway.

One could argue that the models scientists currently use suck. However, this in no way proves that climate models are unfeasible.

|12.12.08 @ 12:37AM|#

"On the other hand, the Earth's climate is deterministic: it is the product of millions of molecules undergoing chemical and physical reactions. These things can be modeled, in theory anyway."

Actually it's no different from human action. It could be modeled perfectly if we had perfect knowledge of all of the variables. That applies equally for human behavior, or any other thing you'd like to study. Polling is a mathematical model trying to study human behavior and it works within an error range (though that range is larger than the ones claimed by polls).

That we don't have perfect knowledge nor likely ever will introduces some error into any model you'd like to run.

The models themselves when misused and abused can cause plenty of mistakes that otherwise wouldn't have been made, but the same holds true for not having the models at all. This guy seems to think economic crises didn't happen until computers got involved.

The problem is assigning certainty to a model beyond what its designers could realistically expect, based on wishful thinking, political considerations or the necessities of playing the market. That goes for both climate and financial models. That doesn't mean they haven't contributed positively to the knowledge of both of those fields. Knowing more than you did before in no way implies that you now know everything.

|12.12.08 @ 1:49AM|#

I remember hearing an old saying, back in my Wall Street days. "There are lies, damned lies, and econometric models."

-jcr

alan|12.12.08 @ 1:58AM|#

For example, it is wrong to speak of "restoring the markets to equilibrium", because the markets have never been in equilibrium. We are already way ahead if we speak of "restoring the markets to a stable, self-organized critical state."

Reminds me recent interviews of that well meaning, but mentaly challenged fella Paulson where he constantly repeated the mantra, 'market stability, market stability, we had to infuse capital to achieve market stability' to every questioned he was asked. Let me help you out, chief, market stability is a product of accurate prices, not sustained and ever rising prices that inflate the GDP numbers a goal which happens to fulfill political objectives administrations pursue to make themselves look good more than it reflects what occurs in an economy. What you are doing now increases turmoil later and makes an eventual sustained correction exponentially more difficult.

What is an accurate price, then? Well, that is whatever the highest bidder for any given product is willing to pay.

This will allow new proposals for innovative financial instruments or changes in trading rules or accounting rules to be tested in an open environment using best practices to understand their results.

When I eventually snap, it will be because I have heard that damned by God phrase, 'best practices', that soul curling term favored by the banal business skirt set of America, ten thousand times too many.

|12.12.08 @ 2:26AM|#

Current mainstream economic theory is based on physics, essentially. It's funny to see these scientists advocating that economics start going to theory based on evolutionary science, which itself is based on Adam Smith.

Most of these scientists who think they can tell us something about economics are basically drowning in their ideology, hoping that somehow a different set of economic methodologies is going to lead to communism in our time. Unfortunately for them, the actual economists who are most closely aligned with the complexity vision are schools like the Austrians.

|12.12.08 @ 3:41AM|#

ed|12.12.08 @ 8:36AM|#

"Without undue ideology."

Hahahahahaha!

Fluffy|12.12.08 @ 9:38AM|#

Finance and ecnomics are not science. They make predictions that are falsified all the time because the system that is being modeled is complicated and they do not understand all of the important phenomena. They cannot understand all of the important phenomena because they cannot predict the occurance of external events that change the closed system that they are trying to model.

Those really aren't good reasons to say that economics is not a science. The record of physicists is one of ongoing failure, and their predictions are falsified all the time. Why is the rate of expansion of the universe speeding up? No one has any idea, and every model of cosmology we had up until a few years ago said that shouldn't happen.

By the argument you're presenting here, Newton was not a scientist because his predictions failed, because he did not understand all the phenomena he was dealing with, and because there were factors outside of his model[s] that he knew nothing about. That doesn't seem right.

I think that what really keeps economics from being a science is that the nature of human societies prevents it from being studied as an end in itself, and not as a means to political argument. Even if it were possible to conduct a "Manhattan Project" for economics [and I don't think it is] it would be a waste of time, because certain conclusions would be rejected out of hand regardless of the arguments or evidence presented. I would reject a rehashed communism model if that was the conclusion, no matter how nicely it was dressed up by a bunch of "scientists". OTOH, I'm sure if the evidence pointed to state-sponsored central banking as being fundamentally flawed, that conclusion would also be rejected as not being among the set of acceptable conclusions. And so forth.

|12.12.08 @ 10:11AM|#

Stand Back!

I'm going to try Science!

Neu Mejican|12.12.08 @ 10:16AM|#

Fluffy,

You aren't really comparing the success of predictions in physics to those in economics.

The difference is stark. Economics makes predictions that do not improve upon basic intuitions based on folk psychology.

Physics makes predictions that are falsified when the numbers are off by nano-seconds.

Physics has made progress in understanding the topics under scrutiny, economics, not so much.

A nice discussion
http://leiterreports.typepad.com/blog/2004/10/is_economics_a_.html

Now, in fairness to economics, it should be noted that all experimentally confirmed laws of physics and chemistry involve ceteris paribus clauses, often in the form of ad hoc "phenomenological" factors. It is only in the rarefied atmosphere of pure theoretical physics that one encounters universal, exceptionless laws. That economic laws include ceteris paribus clauses is not then, per se, worrisome.

What is worrisome, however, is that in economics "ceteris paribus" does not serve as a placeholder for, e.g., phenomenological factors that simply do not admit of quantification. Rather, it serves primarily as an excuse for predictive weakness. The details on what constitute "normal conditions" and the like (i.e. the cetera) never seem to be forthcoming. Scientific laws, to repeat, need not be "strict" in the Davidsonian sense of specifying with precision all the parameters of the boundary conditions that fall under the "ceteris paribus" clauses. But over time genuine scientific research programs are distinguished by their ability to at least approximate or approach strictness, even if they never realize it. The "progress" of economics over the last century gives little reason for thinking it is moving in this direction.

|12.12.08 @ 10:27AM|#

I have done some research in applications of complexity modeling in economics and finance particularly in studying market microstructure, and am currently working on a paper I hope to get published sometime during the next year. Complexity modeling is very good at explaining economic phenomenon and helping us understand them, but is horrendous when attempting to use them as predictors or controllers. The evolution in the model is highly dependent on how the model is set up. This makes it useful for understanding siuations that we have created based on our criteria. In many ways complexity modeling in economics owes a lot to Hayek's spontaneous order and information theories. It is valid and has many uses in understanding events that have happened. But it lacks the capabilites to do anything approaching even a tiny fraction of what an "Economics Manhattan Project" would require, and even that assumes that the models are deterministic, which may hold for complexity models in the natural sciences, but NOT in the social sciences.

Neu Mejican|12.12.08 @ 10:37AM|#

ZH,

So you are saying that economics is, essentially, a descriptive science like taxonomy or archeology.

"Here is a precise description of what happened, what things look like now."

"Here is a precise catalog of the types of events/agents that exist."

Yeah?

The fact that the basic elements in a model of the complex system that is the economy are themselves complex systems makes economic modeling (at least) an order of magnitude more difficulty to a task like modeling the climate.

Of course, in either complex system, understanding how it works is a long way from being able to control its behavior. With economics, the fact that an understanding of how the system works would itself change the system again makes economics an order of magnitude less controllable.

Yadda yadda...should write so much before coffee.

NM Copyeditor|12.12.08 @ 10:38AM|#

Shouldn't write so much, that is.

NM Copyeditor|12.12.08 @ 10:39AM|#

also...

"an order of magnitude more difficult than..."

Fluffy|12.12.08 @ 10:47AM|#

You aren't really comparing the success of predictions in physics to those in economics.

Actually, I'm not. What I'm doing is critiquing a criticism of economics as a science which boils down to, "Up until now, attempts to determine the truth using economics as a science have failed". That's also true of physics and every other branch of science. Failure after failure after failure.

Physics has made progress in understanding the topics under scrutiny, economics, not so much.

And I think that we should encourage further progress in both. We don't do that by saying, "If you get the answer wrong, and if the task seems very large relative to the tools you have to bring to bear, you're not a scientist." That would mean that Kepler wasn't a scientist. Or Protagoras. Or Ptolemy. Etc.

|12.12.08 @ 11:19AM|#

Neu Mejican,

You understood most of what I am trying to say, at least as far as using complexity modeling. In all the social sciences complexity methods are horrendous when used predictor, at least to the level of precision required by the "Economics Manhattan Project." It can be used as a predictor, but only for generalities with certain assumptions, which is the same problem all modeling methods share in all the social sciences. Economics as a whole can be used as predictor, but again only for certain generalities under certain assumptions. That does not mean economics and complexity modeling are not useful, but that its usefulness is far greater in understanding past events and their causes than predicting the future. The greater our understanding of past events, the better we get at predicting future events, but since we are dealing with people and not molecules, things change over time and every situation is different and we adapt based on what our understanding of previous situations implies, so any predictions we could make would only be generalities with assumptions. This holds for all the social sciences, not just economics. And many economists do agree with this.

TallDave|12.12.08 @ 7:10PM|#

And may Mammon help them, these naifs suggest that the development of computer climate change models might point the way for economic models:

Oh dear God no.

TallDave|12.12.08 @ 7:11PM|#

That's also true of physics and every other branch of science. Failure after failure after failure.

Exactly right. Every failure brings us closer to the truth.

This Little Piggy Went to Mark|12.13.08 @ 1:39AM|#

Easy to explain: too many variables to control for. That is why economics is a social science and not a pure science.

The market does what geniuses cannot. I think that is why intellectuals hate market economics, generally speaking.

Little Piggy|12.13.08 @ 1:54AM|#

ZH, good on you for trying to understand markets. I think it is the one place where people act honestly although certainly NOT rationally. That I believe is the problem with economic models and why social sciences are not pure sciences. There is no box to check to indicate a bevioural sidetrack and even if such a box were provided, it hardly checks against dishonesty.

The market however is blind and cares less for integrity. It is blind and it is aggregate. Minutae matter not. Determination of aggregates of minutae are academic. Hence academics dislike markets. If there is a God it is a market.

This Little Piggy Had None|12.13.08 @ 2:08AM|#

And so some piggies have none for whatever reason. It's sad, but we all see it and some of us understand it and accept it and others either don't understand it or understanding it do not accept it and so devise schemes to subvert it. And there are repercussions for the latter that are probably not perceived by its perpetrators or they are and are justified. That is what the struggle is all about, I guess.

This Little Piggy Cried Wee We|12.13.08 @ 2:18AM|#

And so one can always call for bail out. When markets are discredited, call for the bailout. Ironically, the bailout will be factoredinto the new market. Markets never fail. Markets will exist in even the most planned economy. They will show in such instances how inept such a planned economy is, and they will price things we buy cheaply, rather exorbitantly. But the market will always exist.

Neu Mejican|12.15.08 @ 2:20PM|#

little piggy.

I think that is why intellectuals hate market economics, generally speaking....Hence academics dislike markets.

Wrong.

Where do you get your odd view of intellectuals/academics?

Folk wisdom is great, but deeper understanding often requires careful, sustained study.

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