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Theory versus the World

I have had several exchanges recently with people, who on various financial topics, have told me that something did not happen and indeed could not happen even though we could both see that it had, and then quoted text book theory to prove it hadn’t.

I tried to ignore the irritation but to no avail. So now I have to get it off my chest.  So can I just say this – more for my equanimity than anything else:

All theories are provisional. Anyone who loses sight of that fact is a braying fool. Those who polish and worship their text book certainties are doing so because without certainties to wrap round their tiny un-enquiring minds they are afraid, or they are so happy that the lies and failed theories are making them rich and powerful so who cares about the truth.

There will always be, ‘what should have happened according to theory’ and ‘what actually did happen’. The gap between the two is the objective measure of the failure of the theory.

Look around! We were told what was supposed to happen. We are living in what did.

THAT and the still uncoiling power of the financial class and system to inflict misery, failure, impoverishment on us while becoming even richer themselves, and the “Gosh, that was a surprise!”  headless-chicken reaction of our leaders and the financial press, is the measure of their failure and OURS.

I feel a little better now. Thank you.

13 Responses to Theory versus the World

  1. Unclear January 27, 2011 at 3:47 pm #

    Did you read this article? It was in the Guardian and everything.

    Neil Gershenfeld, director of the Massachusetts Institute of Technology's Centre for Bits and Atoms wants everyone to know that "truth" is just a model. "The most common misunderstanding about science is that scientists seek and find truth. They don't – they make and test models," he said.

    "Building models is very different from proclaiming truths. It's a never-ending process of discovery and refinement, not a war to win or destination to reach. Uncertainty is intrinsic to the process of finding out what you don't know, not a weakness to avoid. Bugs are features – violations of expectations are opportunities to refine them. And decisions are made by evaluating what works better, not by invoking received wisdom."

    Glad you feel better.

  2. myopia January 27, 2011 at 5:27 pm #

    Since these people were most likely economists ask them if they predicted the global financial crisis when they say they didn't either tell them to go rethink their models or refer them to an economist who did http://www.debtdeflation.com/blogs/

  3. thrawn pop January 27, 2011 at 6:02 pm #

    The way I see it there are various economic paradigms upon which our whole system is based but which are impervious to reality. I'm thinking of things such as eternal year-on-year consumption growth or pension systems requiring ever-greater numbers of new workers making contributions.
    I would honestly like to learn that I am wrong and that these are solid premises for our future happiness… but I can't help but think of oil supplies, finite resources, environmental degradation and stagnating (at best) western salaries.

  4. Con January 27, 2011 at 6:53 pm #

    Economics work perfectly except when humans enter the equation.

  5. dah_sab January 28, 2011 at 4:26 am #

    The biggest problem with mainstream economics is their assumption that people are rational actors, who factor everything into their decision-making. Including the stock market, government debt (since it might mean future taxes,) and other things most people don't give a fig about, much less pay attention to in any detail.

    Bill Mitchell at http://bilbo.economicoutlook.net has written posts going into great detail about the poverty of mainstream theory, how it reflects not even a tiny bit of reality, yet since everyone was taught it, they soldier on, ignoring the disparity between theory & reality. It's a sad state of affairs, but not likely to change soon.

    I'm spending my time learning the basics of the US monetary system via Modern Monetary Theory at Bill's blog.

    It's not so much theory as description (and as such is unfortunately named.) Until people learn how our various monetary systems actually work, and the differences between how money works in the US or UK v. the Eurozone, we'll continue to flounder.

  6. RichGB January 28, 2011 at 8:14 am #

    There is nothing wrong with the models. The economists produce their models based on the data they have and obtain, they then tweak the parameters to obtain best-case and worse-case scenarios.

    What is wrong is how other people hold those models, often selectively, up to the light and declare them as fact. Some politicians go as far as blaming the models for their own ill-conceived policies, whilst their electorate are screaming at them that they should have used their common sense.

    A Theory has clearly defined rules that can be shown to be true by technologists, mathematicians and scientists. A Model does not need to be clearly defined and may contain variables with values determined qualitatively. This implies that the veracity of a Model is somewhat below that of a Theory.

  7. Golem XIV - Thoughts January 28, 2011 at 9:31 am #


    I agree with your sentiment – defending the use of models – they are essential. But where I take a less charitble line is when you characterize how models are made.

    If I understood you properly, you seem to take a basically Empiricist line: That models are based on data collected, which is then used to tweak the parameters until the output from the model seems to give results that look like what reality is actually doing.

    That is what I would expect of any level headed engineer whose concern is to make something that actually works well enough to be relied upon or sold.

    My argument with Economic models is that they do not appear to be made in this way. First, as you note, there have to be 'parameters in place first – in order for them to be tweaked. How were these 'parameters – the rules of the model – arrived at?

    I think you would say 'empirically', from measuring the real world problem. But economists classically do NOT build their models that way. Their models are built theologically. They start with a bunch of unproven absolutely NON empiracle assumptions and then work out what must logially happen on the basis of their asumptions. ANd that exercise in logical deduction is what they call a model.

    Working this way they produce a model, into which they feed the data and invariably produce results which bear only a fleeting and occassional resemblance to the outside world.

    This they explain away as the result of "government meddling' which they claim is "distorting how the markets would other wise work" znd the reason their models aren't working. Thus it is reality which is at fault for not being closer to the perfect way it should be 'if all things were equal' and people would just stop messing things up.

    And of course their aasumptionis that if the market were ever not distorted THEN we would all see that it did correspond to how their model says it should have worked.

    In the mean time it never occurs to them that their models are useless and teh 'advice' they give on their basis is not only wrong but stupid and harmful.

    They stick to their models being righ tna d reality being distorted by noughty politicians and messy people. Thus they are never wrong even though their models ALWAYS are.

    Economic models are monuments to an unfounded faith not empircal attempts to model reality.

  8. IanG January 28, 2011 at 6:12 pm #

    All I can add is that the book by Nassim Nicholas Taleb has been misunderstood and misquoted and if I understand his ideas it is that we cannot base the future on the past when pure chance has such a large part to play. this is where the economics models go wrong, they think it is some immutable law of nature they are discovering when in fact it is herd behaviour and simply 'luck'.

    To get to the point, there is no way of modelling economics. I went on a course run by the LSE and they were spouting rubbish about how people would not work when benefits are too high. Knowing what it is like to be unemployed, qualified and willing and able but still rejected by agencies I was not impressed.

    The micro economics part was however interesting.

  9. dah_sab January 28, 2011 at 9:04 pm #

    Economic models are monuments to an unfounded faith not empircal attempts to model reality.

    And the faith is in the god of neoliberalism.

    Great explanation, Golem, you nailed it.

  10. wirplit January 28, 2011 at 9:33 pm #

    As that wise urbane and cutting intellect JK Galbraith said, thinking of economic theorists..

    "Faced with the choice between changing ones mind and proving
    that there is no need to do so, almost everyone gets busy on the
    proof "

    and of course…
    " In economics the majority is always wrong"

    and of course the famous dictum;

    "The enemy of conventional wisdom is not ideas
    but the march of events"

    The wry smile they give is a good cure for understandable fury

  11. Golem XIV - Thoughts January 28, 2011 at 9:41 pm #


    Each and every one of those is a gem. Thank you!

  12. RichGB January 29, 2011 at 11:22 am #

    Hi Golem

    If the models are so flawed then I think this part of Economics must be clearly separated from the other parts of the discipline, otherwise we are in danger of declaring Economics to be a useless subject, which is obviously not the case. However, you are persuading me to think of Economics more like social studies than a science.

    The more impenetrable a subject is the more mystical it seems – String Theory and Quantum Entanglement spring to mind. You don't really understand these difficult topics until you're initiated in to the upper echelons of wisdom and have acquiesced to pre-conceived ideas.

    The more you struggle the longer the pain will last. Go out on a limb with your radical ideas and you'll come back with mud on your face.

  13. Gordon January 30, 2011 at 4:45 pm #

    Economist Milton Friedman, who was the high priest of and very effective propagandist for neoliberal economics, argued in a 1953 book that, "Truly important and significant hypotheses will be found to have "assumptions" that are wildly inacurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions."

    Presumably he was happy to cross the ocean in an airplane designed by an engineer who found it easier to ignore the unhelpful effect or air resistance on fuel consumption. Or perhaps not! At any rate, he and followers armed with this thinking have played a large part in shaping the world we live in. No wonder we are in a mess.

    Once you start looking the flaws are everywhere and are fundamental. There is the fantasy of humans as rational calculators outlined by commenter dah-sab above but one of my favourites from a crowded field is 'General Equilibrium'

    Roughly this is the idea that all the zillion individual markets that comprise the global economy are individually seeking to find their equilibrium and that were it not for external forces constantly disturbing them – floods, draughts and especially government intervention – they would eventually achieve a sort of nirvana where all are at equilibrium together. This derives from a false analogy with physics as that subject existed circa 1880. If true it would indeed go much of the way towards justifying the neoliberals' position.

    But it's not true. Any system with lots of feedback loops must be a complex system and will display unstable behaviour with booms and busts and, on occasion, collapses.

    Equilibria can exist but they are only local in time and space; the system as a whole can flip to a different state where the equilibria are completely different – think ice age vs intergalcial. The system as a whole is impossible to forecast for more than a short time ahead and its evolution over time is path-dependent. Examples include the climate, ecosystems and the economy. This is the world of Lorenz's butterfly whose flap of the wing in Amazonia causes a hurricane months later in Florida.

    Another corker of a flaw is that mainstream economics has no theory of money (doh!) and believes that credit and debts do not matter at the aggregate level because they cancel out by definition.

    Well, so they do when the levels are small, but when they are large and debtors cannot pay, the system flips to a state where they certainly do matter; the debtors' problem becomes become a problem for creditors and between them they can drag down the rest of the system. Welcome to the credit crunch. Paradigm blindness on this point is why the mainstream did not see it coming.

    The best writer on this is Steve Keen, one of the few economists who did seee the Credit Crunch coming and whose modelling replicates and explains the "Great Moderation" immediately preceding the crash. His book "Debunking Economics" has a new edition coming out later this year. In the meantime his blog is recommended if slightly wonkish. Find it at:


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