Not everyday when science Nobelists get to take shots at the Economics prizewinners -- it happened this week at the Swedish embassy compound at the gathering of this year's Nobelists:
Then Martin Karplus, a Harvard University chemist, interjected, “ “What understanding of the stock market do you really have?”
Economics – “if one wants to call it a science” – seemed unable to explain the oscillations of the market, he said.
“I see these fluctuations and they make zero sense to me,” Professor Karplus declared. “Maybe they make sense to you.”
Professor Fama dismissed the question as unsophisticated, declaring its premise “factually incorrect.”
The hard scientists, more amused than chastened, turned to mocking the economists.
“You’re asking about a very fundamental question, on what the nature of life is,” James Rothman, a professor of cell biology at Yale University and one of the three newly minted laureates in medicine, told one questioner. “I don’t think there’s anyone here — even the economists – who would have an opinion on that for sure.”It's always interesting for me to see hard scientists dog economics -- I think there's a kernel of truth in there (i.e. economics does seem different than physics or chemistry), but it bothers me in the sense that someone has to think about the intersection of society and money and find some principles in there. Oh, well.
Update: It strikes me, after reading Unstable Isotope's comment, that another headline for this exchange is "Chemist Trolls Economist".
It's not like the Nobel Memorial Prize in Economic Sciences is a real Nobel prize anyway....
ReplyDeleteI don't know that anyone really thinks economics is a real science (dismal science notwithstanding). Social science, fine, but the notion that one could predict values as irrational as share price based on first principles seems impossible (despite what a legion of misinformed, but highly confident/arrogant, stock analysts would have us believe).
“I see these fluctuations and they make zero sense to me,” I wonder if Martin, the computation chemist and molecular modeler, sees the irony in his statement.
ReplyDeleteI doubt it.
Are you saying that fluctuations in conformational energies are as unpredictable, irrational and ungrounded from reality as fluctuations in the stock market? I would disagree with that.
DeleteA physicist, a chemist, and an economist are trapped on a desert island. All of them are hungry to the point of starving when a bunch of canned soup washes ashore. The physicist says, “We could drop it from the top of that tree over there until it breaks open.” Then, the chemist says, “No, no no, we could build a fire and sit the can in the flames until it bursts open!” The two squabble a bit until the economist interjects, “No, no, no. Come on, guys, you’d lose most of the soup. Let’s just assume a can opener.”
ReplyDeleteSeems like the old social science vs hard science debate. Heckling your fellow prizewinners seems like a jerk move, IMO.
ReplyDeleteYeah, it'd been nice to hear a recording to see if it was gentle teasing going on, or if it was serious deprecation.
DeleteWhoa! Karplus was doing serious deprecation. It's at 54:44: https://www.youtube.com/watch?v=KaKwh-kxYjY#t=82
DeleteI guess professors sometimes forget to leave their "Doesn't play well with others" face in the lab and in the boardroom. Alas, professorial ego and misbehavior is not incredibly surprising.
DeleteI don't think so. Fama's "efficient market hypothesis" which assumes that stock prices reflect perfect information is fundamentally flawed and should be called out for what it is (how could you possibly assume that there is no information asymmetry in market behavior?). I would recommend reading "Why Markets Fail" by John Cassidy which is one of the more balanced critiques of the "theory" that I have read.
DeletePeople are probably sketchy about social science in general because it relies a lot on statistical understanding (which not all that many people have) and statistical honesty (not letting your ideas determine the selection and factoring of data) - people know they don't know and can't tell if you're being honest so that factors in to how much weight determinations are given. Economics also seems tougher to validate - it doesn't seem like there are unambiguous experimental tests for anything (or even unambiguous signs that you're wrong). At least with computational chemistry, you can find tests for things, and get unambiguous results (they actually exist in practice).
ReplyDeleteAs a bonus, because the implications are so broad, politics tends to capture lots of economists. I read Thomas Sowell (his second economics book - the first was out), but can't trust him because he starts with the assumption that the free market cures all, which seems like assuming your premise. Paul Krugman might be another example. Political biases seem intransigent; in the absence of unambiguous data, they make lots of work hard to trust.
The problem I have with economics right now is that there's an economist for whatever political side but there seems to be very little looking back to see who was right. I know teasing out data is difficult but it would be nice to see more prominent data follow-ups.
DeleteI suspect that macroeconomists work hard at avoiding large-scale testable predictions, or they're quite good at pointing out the key differences in conditions between reality and the testable predictions that they made.
DeleteThat said, there is a lot of solid economic data on smaller-scale policy questions (minimum wage is one, where I think the academic conventional wisdom is that the small minimum wage increases that we've seen really haven't had a significant negative effect on businesses and hiring.) (Ha! and then I go to Wikipedia to look up the classic studies on the minimum wage (Card and Krueger) and see a number of counter-studies, and counter-counter studies.)
"For every expert there is an equal and opposite expert."
DeleteHaving unambiguous and testable predictions makes it possible to not just rely on being an expert (of your political stripe) for advice. Of course, since macroeconomics depends on the (mis)behavior of lots of people (though statistics helps) and depends strongly on the particulars of implementation of any policy, this seems unlikely to happen soon.
If you can't test something in practice, though, is it really testable?
I don't agree that there aren't testable hypotheses in economics. One recent one was that health care reform would reduce full time work to part time work (<30 hrs/week). That is testable, we gather that data. The little I've seen says that so far this is not the case but this is definitely testable.
DeleteSocial science is so difficult because humans are messy reactors. Molecules are so much more predictable.
To you point regarding equal and opposite opinions, listen to this excellent Planet Money Podcast done recently about how the Nobel to Shiller and Fama is given for discoveries that are essentially opposing.
Deletehttp://www.npr.org/blogs/money/2013/11/01/242351065/episode-493-whats-a-bubble-nobel-edition
Unstable Isotope- Is the hypothesis truly testable, in a scientific way, if you can't also test the converse (seeing the result if you don't reform health care to determine what reforming health care actually changes)?
DeleteEconomics, like most social science, is difficult because you are trying to attribute an effect to a cause without actually isolating the conditional changes that might bring about that cause. You cannot design a scientifically "good" experiment because there is no isolated test system that behaves like the actual economy behaves.
In other words: economics is science without any controls.
DeleteThe presentation/talk is on Youtube:
ReplyDeletehttp://www.youtube.com/watch?v=KaKwh-kxYjY
Thank you, anon.
DeleteSome trends are predictable, with the occasional irrationally performed activity based on the goal to obtain more than others and get ahead.
ReplyDeleteIf what I've read is correct, Fama continues to deny the existence, or even the possibility of asset bubbles. Which makes me wonder: if there was a Nobel Prize for witchcraft, would the economists be in any position to mock and heckle the recipients?
ReplyDeleteThe problem is not with the science of economics. The problem is with the Nobel prize selection committee and mainstream media. When idiots like Paul Krugman are awarded a Nobel prize, it makes you think twice about the validity of the field. The three who shared it this year had conflicting theories on asset valuation.
ReplyDeleteIf you look at someone who has consistently predicted major economic events in the recent years, they are usually labeled something derogatory by the main stream media. Peter Schiff is a perfect example of this trend. He correctly predicted the housing collapse, years before it occured. Yet noone believed him. Noone wanted to believe him. Instead credit goes to moronic money printers who did not predict the housing collapse, such as our future Federal Reserve Chairwoman.
The economy will collapse. It is mathemathically impossible to sustain these 'stimulus' measures. We will default on our debt. It is just a question of how at this point. Default on the bond holders or inflate the debt away through massive money printing.
Think these past few years have been bad? The worst is yet to come. Yet noone wants to believe it, so true economic scientists are ignored and others are rewarded. Krugman won the Nobel Prize because he was telling everybody what they wanted to hear at the time. Noone cared if it was based on facts, it was popular as it is still today.
While the timing of Krugman's award was certainly a kick in the shins to the occupant of the White House (at the time), I think everyone agreed that his trade-related work was Nobel-worthy, yes?
DeleteI agree. Krugman's Nobel Prize winning work has almost nothing to do with his political proselytizing.
DeleteKrugman destroyed people's lives. He designed and caused the housing bubble. Bush sold it to the people, but it was of Krugman's design.
ReplyDeleteKrugman designed the current tech, housing, and dollar bubbles. When they pop there will be nothing left in his bag of illusions which will hide the damage he has caused the US and global economies.
I have not much love of Krugman, but you've gone a bit far, no?
DeleteI think you give Krugman far too much influence over the Fed, considering he's never even been on staff there.
If I were to suggest blame for the housing bubble, it would have to go to the American homeowner, securitizers of mortgages, Alan Greenspan (no lover of Krugman, either!), and the US' zoning regulations/property tax structure.
CJ: Prof. Krugman's all the prediction with regard to all aspects of economy post 9/11 were all borne by the facts! The history is just too kind to Mr. Alan Greenspan, the darling of Ms. Ann Rand (Somewhere I read that she wanted Mr. Greenspan to be her philosophical successor!).
DeleteA Krugman quote from 2002, quoted from "The Real Crash" p 40, pardon the typos.
ReplyDelete"A few months ago the vast majority of business economists mocked concerns about a "double dip," a second leg to the downturn. But there were a few dogged iconoclasts out there most notably Stephan Roach at Morgan Stanley. As I've repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.
The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after borught on by irrational exuburence. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset the moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."
Any economist that pretends that high debt, consumerism can solve economic slowdowns should not be positions of power such as media outlets and influencers of those in high places....
ReplyDeleteIf an average American was asked if they would try to solve a problem of a lost job by racking up credit card debt hoping that it would stimulate the economy enough for someone to hire them, they would be disgusted. To do so with the largest economy in the world should be understood to be poor policy. To feed the American people lies through the media to perpetuate the group think which allows it to happen should be criminal. Just ask all the media folks who were intimidated during the last election.
It's odd (well, not really, I know what kind of ideology motivates you) that you choose to call out Krugman, perhaps one of the only economists to have been proven mostly correct in the last five years, while idolizing Schiff -- one of many whose prediction of hyperinflation and other such calamities have never come to pass.
ReplyDeleteGoogle "Schiff was right"... You'll see his track record and quite a few fools who asserted that 'housing always goes up'. Look back at his predictions of the debt ceiling this past October. So many prominent economists and banks were sure that the taper would begin. Didn't happen, just as Schiff predicted.
ReplyDeleteSchiff is wrong about some things though, perhaps the most important for his career.... Converting his predictions to tangible benefits. Gold has been dropping in spite of the massive inflation. Schiff is wrong about this. The important piece missing from his assertion is that those who control the world supply of a limited good control the price. Who has (or perhaps had?) the largest gold reserve? The USA. This is why gold is suppressed against the dollar. Schiff either doesn't see this, or thinks he has enough investors that he can wait out endless price controls.
I read "Crash Proof" in either 2007 or 2008, I don't remember which. A lot of it made sense, but the predictions of impending hyperinflation were really over the top.
DeleteWhat bothers me the most about Schiff is that if Euro Pacific Capital had a great track record, he'd be trumpeting it more than I seem to be able to hear.
"...in spite of the massive inflation." Massive inflation? Where? By what definition? I feel like you are playing semantic games here. Yes, the money supply is higher (deliberately, obviously), but prices have for the most part not followed suit. Thus there is no meaningful "massive inflation". Incidentally, Krugman (for instance) has an explanation for this that doesn't require assuming shadowy government manipulation.
DeleteMassive inflation:
ReplyDeleteHousing anywhere which foreign buyers may find nice to live and/or visit.
http://www.bubbleinfo.com/2013/11/19/at-or-above-peak-pricing/
Fewer goods per pack of consumer goods needed for daily life.
$10/hr for McDonald's employees
Loss of affordable health care for many
Increase in tuition yet no jobs for those with college degree(s)
Where is all this deflation some economists warn about? It is there but not anywhere which shows that the average American is doing better:
Entertainment
Televisions
DVDs
These are all things which have been disrupted by other cheaper technologies OR consumers can no longer afford to buy as frequently.
Let them eat iPads!
DeleteRent is another big inflationary item. Lots of investors are buying up large amounts of rental units hoping to get rich quickly.
ReplyDeleteIf you don't like Schiff, Wiedemer has made similar correct predictions without being an obsessive gold bug.
ReplyDeleteKarplus's question was absolutely right and Fama simply dodged it with some technical gobbledegook. Not only do economists fool everyone into thinking that their theories have predictive power but they cannot even respond to a simple question with a simple answer.
ReplyDelete