Porphyrogenitus

If one is going to go after sacred cows, one should really go after sacred cows. Most of the people in our society who get credit for "going after sacred cows" are just going after unfashionable ones. At least ones that are unfashionable in the circles they want to appeal to. We live in a world of iconodules posing as iconoclasts.

Friday, April 16, 2010

Modeling

A really good comment by "Shane" that I'm posting here to retain:

According to the about page, this group holds mathematical modeling in high esteem. A central idea being that the mind itself, individually and, by extension, groups of minds, can be mathematically described and modeled.

I would be interested to hear how one claims to correlate the results of a model to the workings of the mind. It sounds to me more like the result of industrious researchers mixed with computing power which is sufficient for the task of repeatedly tweaking a complex model until the product resembles an observed reality. Afterward, chosen variables can be modified singularly or in groups, such that some brilliant claim or conclusion can be drawn from the model.

With this confidence in the ability of science to model the mind, true believers must disdain the claim that economic modeling for management purposes is a useless endeavor. After all, the economic model is a layer above the internal mind modeling claims made here. From this starting point, one could never expect a fair analysis of the Austrian theory.

So much could be said on this; what shall I choose.

First, I recognize that Mises made some claims which, particularly when analyzed outside the purely academic context, are a reach. However, the minutia which are used by a purist to discover and articulate baseline ideas with words, which can only be symbols of ideas at best, are not where I find value in the school of thought. I am more interested in the practical and applicable knowledge that is the fruit and product of the analysis, which happens to be solid because the originators were willing to rigorously test their assertions, seeking ways to describe and model the theory.

Yes, I said model. The idea of choosing a narrow, purpose oriented term like "happiness" is designed to create and sustain resources for an intellectual model. It is to select a fairly useful term, while stripping away the baggage that distorts its purpose in the model; which is akin to isolating a variable mathematically.

Additionally, the claim that the Austrians make, which must be hard to swallow here, is that a mathematical model is useless in the field of economic prediction for the purpose of successfully managing an economy. The problems with this concept of modeling are really quite simple.

A model will not incorporate all variables. If a model incorporated all variables and each had values, it would become a copy of reality. If it is a copy of future events, then it is unbounded by time. In addition, there is the question of whether the model "knows" the future, or is describing a potential reality. If only a potential reality, then the information is useless unless the information about actions can be disseminated, but this dissemnination process would then have to be incorporated into the model, which would then be distorted. If anyone disagreed, the modeled decisions would have to be applied by force... Where does this lead and where does it end?

All variables are not known.

If all variables were known, which they cannot be, their present and subsequent values in the model cannot be known, because the values are subject to human action; i.e. individual choice at a point in time based on concurrent conditions (which are unknown variables having unknown values).

Models produce averages, which are then conceived to be the answer for each actor, which is irrational. The model itself doesn't actually claim that all actors will enjoy the average results, and yet the results are rendered, communicated and applied as averages.

Even if a model were able to incorporate all known variables, apart from an active system on the ground which can actually control a variable that the model incorporates, moving the variable would be a fruitless exercise, other than for curiosity sake.

Models are owned by men, who pursue their own "happiness". They will have an agenda. If the model has any use for wielding influence, it will be applied through a system. The goal will be to use a system to enrich the players in the process, which then reduces the model to a tool of manipulation and theft.

Therefore, we find that modeling in economics, as a method of managing an economy, is futile. However, modeling the effects of a controlled variable at play in the system, is quite attainable. The Austrian theory of the business cycle is described in part by this sort of modeling.

The Austrian theory clearly describes the mathematical effects of currency manipulation. These effects lead to a boom bust cycle, which we have observed repeatedly. The ability to control the variables of money quantity and the distribution of new money, enables economists to "model" the effects. In the economists' arrogance or disdain for the producers, they see themselves as managers of a system, when in fact they are simply pillagers who have successfully created a pillaging system with the aid of central banking and coercive government intervention.

Therefore, the presuppositions in the Austrian School provide a foundation for communicating that models cannot be created to successfully manage an economy. A model that is used to describe productivity in a genuinely free market without government intervention, would be useless. The outcomes would reduce to things like the industriousness and ingenuity of the actors.

A "brilliant" model is only attainable and useful when there is the ability to control the system by way of unavoidable force applied to the producers. When that case is exists, we find that the power to act in this way is always used oppressively.

Our monetary system is Keynesian and Keynes wrote about the destructive effect of inflation at least as early as 1919.

"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

The Economic Consequences of the Peace, John Maynard Keynes, 1919

The point is missed when the Austrian effort to articulate presuppositions is attacked on the grounds that they are presuppositions.

Evidently the claim being made here, by implication, is the presupposition that the actual economy can be modeled. But that has never happened. Listen to Greenspan explain how the "housing boom" was neither predicted by the models nor anticipated by him or his staff. Either the model was useless, even with the control of currency and positive law, or the system was used to pillage, or both.

The role of an economist should be to observe and describe the economy, not attempt manage it. The Austrians understand this role and acknowledge that certain things cannot be known at all, and that other things cannot be known or controlled, unless accompanied by violation of the rights of the individual.

Mises and other Austrian economists sought a way to put into words why, in actual reality, a successful controlling model has never been created and cannot be created. Quibbling over presuppositions, which happen to be supported by experience and evidence, as a basis for discrediting the Austrian Theory is weak thinking indeed.
Of course I also liked this part of another comment:
Anyway, "Austrian economics" includes Hayek, who holds up very well indeed by today's standards of argument in epistemology and methodology.