Tuesday, June 03, 2008

For My Theoretical Economist Friends


Today's NY Times had a great article on the current state of physics and conceptions of the universe. It's been known since 1998 that the universe is expanding. Yet, for those of us that have read Mirowski's More Heat than Light on the history of economics and physics we know that mainstream economics (and even some non-mainstream economists) continue to base our 'science' on the conservation of energy equations from the pre-quantum physics of the 1860s.

It's now pretty clear that, for those that seek an economic science based on natural science, that a 'conservation principle' just does not hold. Of course some of us are more down-to-earth in our goals for economics, and enjoy sticking to such things as supply and demand, incentives created by, and unintended consequences of, public policy, comparative advantage and gains through trade, and the the ethical and moral dimensions of political economy and taxation. Today's article is another example of the deadendedness of overcomplicated, yet oversimplified, equilbrium-based economics. Equilibrium is part of our discipline but should not be its whole.

There is still a role for economic modeling, such as agent-based modeling to study spacially- and temporally-based economic decision-making using the incentives and behaviours we wish to study, but intertemporal dynamic optimization with a representative agent based on 19th century physics is not the model of the future. Not if we want our models to be taken seriously by the physical scientists.