Matt Nolan

A quick question … and an answer

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From point 3 on this piece on Rates Blog we have the following statement:

It’s good to see the issue of free trade being debated. Frankly, it hasn’t worked for the middle classes of the developed world. They got cheap stuff, but lost their jobs.

How exactly does this make sense when during the “peak” interventions by China (in terms of their devalued currency) our unemployment rate was at record low levels …

I’ll answer, its because the idea of “taking jobs” doesn’t really make sense – they subsidised their exports, and lent the money to buy them at a low rate of interest (driving down real interest rates, and driving up borrowing).  This imbalance creates losers – the solution isn’t to copy it.

“Jobs” aren’t being created now because of uncertainty – that is the key.  We need to talk about ways that we can deal with uncertainty at the moment (if at all) – not start arbitrarily restricting trade.

Protectionism is not the way to go.  There are two types of people who want protectionism:  People like Bernard who want us to do something they believe will improve outcomes, and people like car manufacturers in Aussie who are just self-interested.  I promise you that if we go down the protectionist root route (turns out I’m illiterate, especially when writing these things at 1am), the only people that will be happy will be these car manufacturers – not society, and not many of the people asking for such measures now.

 

 

Matt Nolan

Social physics … which is in fact equivalent to mainstream economic modelling

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This post is on economic methodology – so may seem a bit wonkish to some.  However, if you aim to tell economists why they are dumb asses and that physical scientists should do it – it is probably worth having a look at this.

While trawling the internet (in an environmentally sustainable way) I ran into a comment on the Dim Post blog by Lyndon.  This comment mentioned a book called “Critical Mass” which sells the idea of a “physics of society”.  The idea behind this is:

Over the past several decades, social, economic and political scientists have begun a dialogue with physical and biological scientists to try to discover whether there is truly a ‘physics of society’, and if so, what its laws and principles are. In particular, they have begun to regard complex modes of human activity as collections of many interacting ‘agents’ – somewhat analogous to a fluid of interacting atoms or molecules, but within which there is scope for decision-making, learning and adaptation.”

I find this interesting, mainly for the fact that this has been the explicit foundation of economic modelling for at least 150 years (in terms of the “thought process it has been like this for a lot longer).

The implicit appeal to methodological individualism is the same, and the concerns about the status of “free will” are also the same as what is being thought about in economic methodology – hell, even a know nothing blogger like myself has discussed these issues here (MI, FW, FW, FW).

In essence, when economists go out to build a model they are trying to understand how the interaction of individual agents leads to outcomes – given the constraints of scarcity, and given the constraint that individuals make choices.  IMO it is methodologically equivalent to a “physics of society”.

I have no doubt that, by coming at it from a different angle, a physics of society can add a lot of value – by helping to shine a light on methodological and practical issues with types of modelling.  However, the behavioural relationships in economics can be a lot more “subjective” than in the physical sciences – and being careful to make any implicit subjective assumptions explicit is a very important methodological issue in economics – in this sense any “social physicists” should make sure they talk carefully with economists regarding these issues … or else they may fall into the same traps that some economists have many many years ago. When looking help in to face the years to come, see here these blogpost about where to get good psychic readings.

Update:  Via Twitter Bill Kaye-Blake points to an article by Krugman where he discusses an engineer deciding to just “do economics” for us.  I am sure that the work in Critical Mass isn’t quite as blinkered 😀