Michael Battalio


Friday, January 30, 2015

Discussions on Wealth (part 6): Chapter 3

This discussion on wealth is an offshoot of Serious Conversations parts 53 and 54. We are considering the book The Origin of Wealth by Eric D. Beinhocker. (I do not profit from clicks). (Ed.: we will be taking the general format of outlining the major points of the chapter and then discussing what we believe to be important or intriguing points.)

Chapter 3 is a critique of the theories in the first two chapters.  In the debate between physical scientists and economists, a great complaint by the scientists was that humans are not rational (among others).  

The point is made that simply making a correct prediction is not enough in science.  The point of a science is to explain a process.  If the prediction is correct for the wrong reasons (or luck) but the explanation obviously wrong, then you still have nothing.  This seems obvious to me, but apparently not to Milton Friedman.  

The largest assumptions in traditional economic theory are:
Perfect rationality:  people pursue self-interest in economic matters with absolute understanding of economic theory using perfect knowledge of economic variables (inflation rates and beer is the example used.)
Time:  models are instantaneous in transition from one equilibrium to another instead of linearly using time
Ignored Exogenous inputs:  economic models treated outside variables as incapable of being understood instead of trying to incorporate some of the unpredictability into the theories themselves (unemployment from 1982 jumping from 7.5 to 11% for no external reason)
Lack of positive feedback mechanisms: traditional economics assumes that processes are dominated by negative feedback and so damp out. (stock market bubbles were used as an example of positive feedback)

Traditional economics is not supported by data.  Some example where the data do not support traditional economics:
Supply and Demand:  on a large scale this law holds, but on a small “fine-grained” scale, this law almost never holds (example was a car dealership)
Law of one price:  in the idealized world exactly similar goods are the same price due to an “absence of barriers”, but in our imperfect world that is not the case  (43% differences in the price of ketchup in London)
Equilibrium requirement:  in fact the economy is always in a state of flux - settling down after each exogenous shock.  The economy never has time to enter equilibrium between shocks.
Nonrandom walks:  future stock prices are not independent of previous prices

Equilibrium is an inappropriate metaphor in economics.  He compares it to the laws of thermodynamics.  Walras built economic equilibrium theory on the first law — that is energy is conserved, meaning that the different forms of energy must reach a balance at some point.  This is where the idea of equilibrium came from and why it was so appealing.  Walras left out the second law — that entropy increases because it had not yet been fully enumerated, so the concept of closed and open systems was not available to Walras and Jevons.  Walras assumed the economy is a closed system, one that will reach an equilibrium (as in the case of thermodynamics one of maximum entropy).  The economy is actually an open system (the complex adaptive system mentioned in chapter 1).

Saturday, January 10, 2015

A letter to a congressman (part 2):

I had a chance to talk with Rep. Lamar Smith who is the Chair to the House Committee on Space, Science, and Technology. We talked about his meddling with NSF funding. I argued that politicians should not oversee science. Scientists should. But all he could do was quote the same soundbites over and over. I think there should be a scientist in chief, but that is for another discussion.
I want to reproduce a letter I wrote to Rep. Smith about an interview I saw of him on Bloomberg TV where he trotted out the same incorrect platitudes of global warming denialism. This occurred about two months ago. I do not expect a response since I am not his constituent.

Rep. Smith,
        I will be upfront. I am not one of your constituents, but as you are in a powerful position as Chair of the Committee on Science, Space, and Technology, I feel it permissible to give you an informed opinion from outside your district.
        I had the honor to speak with you when you visited students at Texas A&M on October 29. We argued at length about NSF funding; however, had I known the extent of climate change denial you have recently engaged in, I would have addressed that in my question. In a recent interview to Bloomberg TV, you said the following, “There are a lot of scientists who disagree [with the IPCC report]…. we’ve now had close to 18 years of no global warming….Nobody can explain that….[the IPCC report authors] are clearly biased.”
        To keep this short I will address only one misunderstanding. Global warming has slowed yes, but to say that there is no warming is disingenuous. The trend for temperature is still upwards, and in checking the climate record, there are several periods where the trend slows only to resume its upward march after a brief respite. These stalls can be explained by increased heat retention in the oceans, which has been measured (Balmaseda, 2013). I invite one of your staffers to read (and then summarize for you) Trenberth et al. (2014) which more fully explains the latest trends.
        I do not doubt that you will believe this to be more “bias” from liberal scientists gunning for more research money from the corrupt NSF. I would point out that large contributions from Oil and Gas companies ($94,450 in this most recent election) have been made to your campaign. Who really should be accusing who of bias? An issue as intricate as this cannot be resolved via email. I invite you or some of your staffers to again visit TAMU to speak directly to our world renown climate scientists. I would also personally welcome the opportunity to debate the nuance that seems to be lost on whomever is summarizing these reports for you.
        As I am not a constituent I do not expect a response; my only hope is that whatever staffer reads this will convey the invitation I have extended to speak with members of the Dept. of Atmospheric Science at Texas A&M (or visit any of the other great Texas universities. There is agreement among the climate scientists at all of them.) I look forward to any debate that comes of this.

Thank you.
Michael Battalio

References

Balmaseda, Magdalena A., Trenberth, Kevin E., and Källén, Erland, 2013: “Distinctive climate signals in reanalysis of global ocean heat content” Geophys. Res. Let. 40 (9) 1754-1759 doi: 10.1002/grl.50382.

Trenberth, Kevin E. Fasullo, John T., Branstator, Grant, and Phillips Adam S., 2014: “Seasonal aspects of the recent pause in surface warming”, Nature Clim. Change. 4 (10) 911-916. doi: 10.1038/nclimate2341.

 
2003-2016 Michael Battalio (michael[at]battalio.com)