Wednesday, August 29, 2018

Math and Economics

Two observations on Economics

1. I recently came across a political scientist stating that he is using econometrics in his research. Well, given that econometrics is the application of statistical techniques to economics data, why did he not say he was using statistical techniques to political science data? An example of the hegemony of economics over social sciences? 

2. Paul Romer triggered the debate on mathiness in Economics. For good reason. Consider the example of maximising welfare in a specific context, say, with a policy of low income housing mandates or crop-insurance subsidy for farmers or carbon tax on industries.

It is easy to select a canonical model of a concave welfare function, take the first derivative equal to zero, and test whether second derivative is negative to arrive at the optimal welfare maximising condition. You have the policy recommendation. Never mind whether the actual (real-world) welfare function is convex, or monotonic, or with multiple maxima!

Instead, imagine the difficulty of visualising the context, identifying the different stakeholders and impact/influence pathways, assessing first the likely partial equilibrium and then the general equilibrium effects, balancing the costs and benefits, and then distilling everything together to make a policy recommendation. Can you even model this? Just constructing this model after internalising the problem and its context is itself a challenge.

No wonder, Joan Robinson famously said,
“I never learned maths, so I had to think.”

1 comment:

Anonymous said...

I am a mathematician who has always wondered how math came to be the lingua franca of economics. Strange indeed. Dani Rodrik's incisive book "Economics Rules" offers a few insights. How can a social science subject like Economics be so math-oriented? Why is the subject not as empirical as it ought to be?