Monday, February 21, 2011

Cargo Cults Not So Foreign

Jeff Hawkins argues theorizing is the essence of thought, as we observe the world through a perceived sequence of patterns, and we use these theories to guide our thoughts and behavior. An ideology is a set of ideas that constitutes one's goals, expectations, and actions. Alan Greenspan responded thusly when asked if he was driven by ideology when he was at the Fed:
Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not.

Brian Caplan noted that Maoist communists were probably the largest cargo cult the world has ever seen. They chose to mimick a few random characteristics of advanced economies, no matter how many lives it cost, specifically, steel. Since modern countries have lots of steel and backwards countries have none, the Communists strove to make a big pile of steel - or at least something that vaguely looked like steel.

the result was a system where hundreds of millions of peasants were forced to throw their perfectly serviceable iron utensils and tools into backyard furnaces to make worthless pseudo-steel sludge. Who needs knives? Modern countries have steel!

It's easy with hindsight to see these were truly misguided beliefs, focused on a correlate, not a cause, of their ultimate objective: prosperity. Yet this error underlies most wrong beliefs, as you only see correlations and infer causation based on a theory, which often is a riff on an ideology.

There's nothing wrong with estimating something based on correlates as long as you realize you are doing just that, but after a while these correlates become not merely correlated attributes, but necessary and sufficient conditions, leading to what ex-post seems like extreme naiveté. This is especially true when the idea has a large constituency, as with the idea that owning a home has myriad benefits: closer communities, an incentive-compatible savings vehicle, etc. While true at some level, special interests then use these as levers to promote self-interested and unsustainable programs because their base assumption—housing prices do not decline nationwide, housing is associated with all sorts of good socio-economic outcomes—is taken as a given, and implies the optimality of what they are proposing.

Currently the education establishment in the US currently encourages mindless credentialism based on the logic that education is correlated with expertise, so many teachers have advanced degrees in education with the pretext of having greater expertise while in practice merely producing barriers of entry to competitors. Currently many regulators are focused on leverage limits, which makes sense at some level, but if it becomes a centerpiece of financial reform it will be easily gamed and give people a false sense of comfort (strangely, while everyone agrees Value-at-Risk can be misleading and is a poor target, leverage is much more misleading but seems like a prudent pillar of reform). Currently many stupid ideas and practices are driven by Cargo Cult thinking.

I'm fascinated by epistemology because so many people talk about modern science as if it somehow is immune to cargo cult thinking. I have seen first-hand how experts focus on attributes of ideas correlated with truth, as opposed to truth itself. Consider Robert E. Lucas's Island Model of business cycles. No one thinks that is relevant to explaining business cycles anymore, and while at the time was very plausible, it was an intellectual waste of resources on the order of Greg Mankiw is mainly known for his new-Keynesian menu-cost model, which no one thinks has much relevance anymore, but it's his signature intellectual achievement, what gives his opinion gravitas. Romer's growth model, Krugman's international trade model, none of these are useful in explaining anything more than the stylized facts they were created to explain. But they have attributes just like theories of physics, with theorems and the use of logic applied to assumptions. They are considered top rate science, not because they lead to greater predictability or better policies, but rather like steel to Maoists, they contain something their objective contains, rigor, which--hopefully--will ultimately yield the economic truths we seek.


Anonymous said...

I don't have any use for excessive formalism, but I think you are mischaracterizing mainstream economics.

Not many macroeconomists out there believe that there is one single cause to "the" business cycle. The purpose of modeling is to arrange any idea in such a way that a) the existence of the effect can be empirically falsified b) understand the implications of the specification of the model and c) to communicate the underlying meaning of the mechanism.

No one believes that menu costs are the only thing that causes unemployment. But it is believed that the implications of menu costs found in Mankiw's model were important to understand. The Same is true with all the other models you mentioned. It's not so much as identifying "the" cause of something, but to understand the implications of different assumptions of how the economy operates.

Again, I don't personally agree with this type of epistemology, but calling them cargo cults misunderstands the purpose of what each of those economists were trying to accomplish.

Anonymous said...

Economic models are useful for showing that something can happen (disproving "X is impossible" type claims). As more models are developed, we get closer to proving that anything can happen. Good to know, eh?

J said...

Caplan is wrong. Chinese Communist were emulating their bigger brothers, the Russian Communists. Russian Five Year Plans were all based on industrial statistics and they were impressive. Russia's forced industrialization allowed it to produce the tanks and cannons necessary for winning WWII. Mao's backyard furnace was a bad idea like Khrushev's Virgin Lands, but no cargo cult.

Frank D. Graham said...

Theory has, at length, become so "scientific" and abstract as to intrigue the mathematicians who have taken delight in developing the concept of a kaleidoscopic and frictionless play of atomistic units in a complex and eternally unfolding equilibrium. The notion of equilibrium suggested equations; equations are prolific parents of their kind; and the game has gone on until the pages of the more esoteric economic journals have become a mass of hieroglyphics intelligible only to those who know the code. All the inconvenient freight of fact has been discarded by the more recondite practitioners until the "science" has come to move in a realm of pure abstraction useful for purposes of cerebration but of steadily declining practical importance.

Much first-rate analytical skill and much scholarly industry has miscarried because the road to academic recognition lay in the refinement of traditional technique, or in assiduous dust-gathering, with little consideration of ultimate purpose. The means have been exalted over the end, and the neophyte, compelled to show his mastery of technique, has quickly learned to love and practice it for its own sake.
This is not to deny the virtue, even the necessity, of abstract speculation or the desirability of the most catholic comprehension of the facts. It is merely to assert that these should be tools rather than ornaments and that we should never cease to ask ourselves what we want and how we propose to get it.

Frank D. Graham, 1942

AHWest said...

Good post. The reigning epistemology of finance and economics is rationalism (doesn't mean being rational, it means building conceptual castles in the air disconnected from reality). The antidote is a healthy dose of induction, meaning, formulating concepts from observations, and only building higher level concepts from already validated concepts.
A couple of good works on this:
Ayn Rand's "Introduction to Objectivist Epistemology" and "The Logical Leap, Induction in Physics" by Harriman

Anonymous said...

You must have meant to say "people talk about modern economics" not "people talk about modern science" since you followed it with 4 examples from economics. And since we all know economics is not really a science.