What are the most important unsolved problems in your field?

by on January 15, 2017 at 6:33 pm in Economics, Science, Uncategorized | Permalink

That is a request from Christina, a loyal MR reader.  It sounds like a huge question, and maybe it is, but my answer is pretty simple, which is not to say the problem is simple to solve.

Let’s say you are in Germany.  People engage in rule-following behavior, and they become quite emotionally stressed if you suggest you might break the rules in especially inappropriate ways.

Alternatively, in Naples there is more garbage in the streets, and flexibility and rigidity across a very different set of social variables.  I call that a difference in “culture,” and I am ready to accept culture as an ill-defined, question-begging term.

Now, how do differences of culture — however defined — interact with traditional economic mechanisms involving prices, incomes, and simple comparative statics?  Are those competing explanations, namely cultural vs. economic?  Ought they to dovetail nicely in some kind of broader explanation?  Or might the cultural factors in some manner be “reduced” to questions of more traditional economics?  Some combination of the above?  Something else altogether?  And, from among these and other options, what principles of differentiation rule how “culture” and “economics” will be related in a particular problem?

That to me is the most important unsolved problem in economics and indeed in social science more broadly.

feynman

1 The Devil's Dictionary of Economics & Finance January 15, 2017 at 6:44 pm

Bubbles. Credit bubbles and speculative bubbles in particular.

2 Steve Roth January 15, 2017 at 6:46 pm

Far simpler, and more fundamental:

Almost every economist thinks that spending (at least consumption spending) — transferring assets from one balance sheet to another — reduces our stock of assets, our so-called “loanable funds.”

And that saving — not-spending, not transferring assets from one balance sheet to another — somehow increases our stock of assets, or loanable funds.

It’s fundamental to the mental model that almost every economist runs in native mode in their heads. And on its very face, it makes no sense at all. Which is a big unsolved problem.

3 Nick Rowe January 15, 2017 at 7:13 pm

Steve; no we don’t. We (most of us, anyway) think that is only true if we have a sensible monetary policy that prevents recessions and booms.

4 Ray Lopez January 15, 2017 at 8:40 pm

If money is neutral, and the data shows it largely is short term and long term, what good is ‘sensible’ monetary policy?

5 Troll me January 16, 2017 at 9:41 am

In the medium term, you get things like layoffs, divorces, and losing many years of human capital buildup specific to a job, after someone leaves because they need more work right away, and then someone else has to be completely trained up.

6 The Anti-Gnostic January 16, 2017 at 1:02 pm

Money is non-neutral in the short-term. That’s why you’d like to hit the lode before anybody else does.

7 Greg January 15, 2017 at 7:31 pm

I think it makes a lot of sense. The point is that in the first case you’re consuming resources now, while in the second you are investing in building bigger capabilities to be used later, taking advantage of some form of compounding. While consumption now is fine, the economy can’t be entirely focused on consumption. It’s not about whether assets get transferred, it’s about whether they’re invested.

8 Briefling January 15, 2017 at 7:57 pm

That’s not an ‘unsolved problem’ per se. It stems from the famous macroeconomic ‘accounting identity’ that savings equals investment. If you’ve taken an introductory macro class, you’ve heard of this identity. But what they don’t tell you is that the identity is only true when you measure the value of stocks according to their book value rather than their market value. In other words it is not true at all, using natural definitions of ‘savings’ and ‘investment’.

In particular, cash transfers between households and corporations do not affect ‘savings’ as measured in the identity. As far as the identity is concerned, the amount of money households spend is completely orthogonal to ‘savings.’ Which should tell you very clearly that the identity says nothing at all about savings in the colloquial sense. The ‘savings’ it talks about is a voodoo quantity signifying nothing.

Nevertheless you see economists of every variety cite this ‘identity’ as if it meant something. They frequently argue that an increase in nominal savings rate will cause an increase in investment. They imagine, for instance, that China’s high level of business investment is directly caused by China’s high level of nominal savings. Even worse, they concoct reasons that savings ‘should’ equal investment — and this is where we start to get the behavior that you describe. Economists start from the (false) premise that savings must equal investment. Now, why might that be? The widely accepted answer — the answer that you will find in almost every introductory macro textbook — is, they are brought into equilibrium by the interest rate. If there’s a lot of household savings, there’s a lot of money to be loaned out, so interest rates go down, and investment goes up! And vice versa when savings is low.

Now… the amount of sense that this explanation does not make is truly staggering. The most central objection is that household savings do not change the amount of ‘money’ in the economy, for most definitions of money — it all ends up in a bank somewhere, anyway! So there’s no good reason that savings should directly increase the amount of money available to be loaned out. (But it is nonsensical in other ways, too.)

And what’s fascinating is that you *won’t* find this same explanation in more rigorous texts — because it makes no freaking sense! Indeed, ‘savings = investment’ is not a feature of any rigorous macro models.

But famous macroeconomists — genuinely *smart* macroeconomists, like Paul Krugman and Larry Summers — will use ‘savings = investment’ all the damn time in their non-rigorous analyses of the economy.

It is a bizarre blind spot in the profession. But it is not an ‘unsolved problem,’ it’s just, uh, rampant stupidity.

9 Garett Jones January 15, 2017 at 11:30 pm

Eating potatoes destroys assets, saving potatoes increases assets: These claims are obviously true. Eating potatoes decreases the stock of loanable potatoes, saving potatoes increases the stock of loanable potatoes. Adding accounting jargon won’t change that.

What am I missing?

10 Uribe January 15, 2017 at 11:51 pm

He thinks he can have his potato and eat it too.

11 Garett Jones January 16, 2017 at 12:48 am

+100 Potatoes

12 Barkley Rosser January 16, 2017 at 8:06 am

If the 100 potatoes were just produced then saving them increases assets but eating them leaves assets unchanged. If we are looking at an existing pile of potatoes, then consuming 100 potatoes will reduce assets, but not consuming them (saving them) will leave assets unchanged. Assets will only increase if the unconsumed potatoes are planted to grow even more than 100 potatoes. Just to be picky, :-).

13 anon January 16, 2017 at 10:07 am

Eating potatoes produces blood glocose, then work, then new assets?

14 gbz January 17, 2017 at 2:44 pm

I’m not sure i understand your question but assuming your question is if consumption decreases assets? Answer is of course No. Potatoes stock is inventory — current asset. Not fixed asset. There’s a big difference between the two. Fixed assets drive more production. inventory is just an estimate of future revenue potential. When you ‘eat’ potatoes, presumably you sold them, and earned revenue. So your inventory goes down and cash goes up. No change in fixed assets, no change in current assets and no change in total assets (of course assuming book value = market value). Said another way, having more potato stock does not help you make more potatoes, so saving potatoes does not increase fixed (production enhancing) assets.
Note: potatoes being inventory (consumables) are not ‘loanable’. inventory is consumed or stored, not loaned. There is no market anywhere for loaning inventory. that is sort of the division by zero fallacy here.

15 The Anti-Gnostic January 16, 2017 at 1:08 pm

In order to have loanable funds, somebody somewhere has to defer consumption.

Or you can print the money and lend it out. It’s worked so far.

16 Clay January 17, 2017 at 12:54 pm

I don’t really see the problem. Any spending that actually creates a liquid asset worthy of placement on a personal balance sheet is more like an investment, whereas “consumer spending” properly understood is something that doesn’t create an asset that can later be monetized and instead is converted through a one way transaction into “personal utility” or “continued survival” or whatever you want to term the necessary and desirable but ephemeral things people want to buy with their money.

I may derive utility from a restaurant meal or buying a new pair of socks, but there is effectively no market for those goods after I consume them. And in fact, in the case of most consumer products, I may actually have to pay to dispose of them. Just had a dumpster hauled away from my house today in fact.

Buying a depreciating asset is a bit more complicated – I might only consume a part of my car each year in depreciation, but I still own an asset with market value on my balance sheet. But I don’t really see a “spending problem” as a matter of economic philosophy. If you really want the columns to line up, you just need to put “utility” on your balance sheet.

17 PHW January 15, 2017 at 6:49 pm

A profoundly important question, with culture interacting with economics and law.. Below is a link to an attempt to address the cultural identity/economic optimality relationship in a way that harmonises identity with economic well-being. A small country focus but with some broader implications.

https://winsleys.wordpress.com/2016/07/30/maori-identity-and-socio-economic-development/

18 Anon January 15, 2017 at 6:52 pm

Agree with you but I’d throw genetics and IQ in there too. So the question is “how do cultural factors, genetics, and incentives contribute to observed differences in economic outcomes between countries?”

19 Dzhaughn January 15, 2017 at 10:53 pm

I’d suggest that genetics and IQ only matter through their contribution to “culture,” used in Tyler’s sense. I’d say the same with physical strength, endurance, willingness to endure discomfort, ability to communicate clearly.

Or maybe you think economics influences genetics?

20 Anon January 16, 2017 at 10:12 am

IQ is correlated with success even when you look at a subpopulation in order to control for culture, so why do you think it would not be an independent factor? It probably contributes to culture too and I’m not claiming otherwise.

21 stephan January 15, 2017 at 6:55 pm

It’s hard to quantify but it seems that cooperation and reciprocity are very important. In hisbBook ” The secret of our success” Joseph Heinrich say, that experiments show that people who follow rules are better cooperators ( the canonical example is waiting for the light to turn red at 2 AM before crossing, even though there is no car around for miles)

Whence does cooperation and reciprocity, come from ? He claims from social evolution which only our kind of primates experience in the animal kingdom

How do you use this in an economic theory , I have no idea.

22 stephan January 15, 2017 at 6:58 pm

fixed the many typos

It’s hard to quantify but it seems that cooperation and reciprocity are very important. In his book ” The secret of our success” Joseph Heinrich says, that experiments show that people who follow rules are better cooperators (the canonical example is waiting for the light to turn red at 2 AM before crossing, even though there is no car around for miles)

Whence do cooperation and reciprocity, come from ? He claims from social evolution which only our kind of primate experience in the animal kingdom

How do you use this in an economic theory , I have no idea.

23 anon January 15, 2017 at 7:17 pm

+1. Human nature is related to, probably extended from, animal nature. See also monkeys who demand equal pay.

https://youtu.be/meiU6TxysCg

24 Too Late January 15, 2017 at 7:57 pm

Yes, that video explains nicely why people are so obsessed with inequality. It is a perceived loss of status that makes people feel outraged, not an actual lowering of their material well-being. Or, in other words, people are driven by their monkey brains, not by rationality.

Now, we can override our instincts. We have done it progressively with violence, we have done it much faster with homosexuality, we may never do it with other rarer behaviors such as incest or necrophilia, I wonder if we will be able to ever think rationally about inequality or race.

25 Cliff January 15, 2017 at 11:35 pm

Surely it could just be that the monkeys realize they could get a better reward?

26 stephan January 15, 2017 at 8:12 pm

Humans are much better at cooperation and social learning. Babies at 9 months of age start to point for example, indicating they want a shared experience with you. Chimps do not point things out to each other. Another example, humans have color differences between the white sclera, the colored iris and the black pupil(unlike other primates). This makes it easier to follow each other gaze while working together on tasks or communicating

27 Dismalist January 15, 2017 at 6:57 pm

Culture is endogenous! 🙂

28 Doug January 15, 2017 at 7:06 pm

Finance – Why do people trade so much? Deviating from the index is zero-sum, so any active trading must mean one of the parties is irrational.

29 derek January 15, 2017 at 7:25 pm

Where would the index come from if nobody traded?

30 Brian Donohue January 16, 2017 at 12:02 am

ding ding ding!

31 ant1900 January 15, 2017 at 10:08 pm

Check out Eric Falkenstein’s book. I think he has a pretty persuasive answer. Envy (not greed) is a significant factor.

32 Uribe January 15, 2017 at 11:31 pm

Sure, but if they didn’t trade we wouldn’t know which one.

33 Cliff January 15, 2017 at 11:36 pm

Is that a question like “Why do people compete? Any competition is zero sum and one of the parties will have to lose and is therefore irrational”

34 dan1111 January 16, 2017 at 3:27 am

It is not “like” that question, it is that exact question.

35 anon January 15, 2017 at 7:10 pm

That is a very important thing to consider. It is foundational to fields like economics.

Personally, I think there is a human nature, and some subset of it that can be considered an economic nature. That is, economics is native, but it is not all.

I sometimes wonder if individuals with an unusually strong economic nature do identify with it as a unifying principle, and migrate to the specialization for that reason. Another might choose philosophy, or psychology.

I can think of two problems with this split, and fight for the dominant explanations. One is that division probably does force investigators into a narrow view. Economists would be (are!) less likely to see panics as psychological events.

The other is that if you view things like “trust” as just an economic exchange, that might undermine a broader philosophical or psychological view of something like “trust.”

Isn’t there some data that students are less generous after econ 101? Or is that just an urban legend? (If it were true, economics as an anti-pattern?)

36 anon January 15, 2017 at 7:29 pm

Apparently it is real.

Does Studying Economics Breed Greed?

37 Jake W. January 17, 2017 at 1:00 am

One of my favorite economics professors from college used to joke about this. He’d ask the class which option they thought was more accurate, (A) Studying economics turns people into assholes; or (B) Assholes study economics. Then he’d point to a particularly loud-spoken know-it-all, for example, and say something like, “I think we all know which category he falls under.” Good times.

Obviously, self-selection exists. However, for the students who do become more greedy, for instance, after studying economics, I wonder how lasting the newfound greed lasts. I’ll be it’s short-lived. You take an economics class; you kind of enjoyed it; you learned a bit about utility maximization; and you become a bit greed/self-centered after the class.

I’ll bet students like that revert back to their natural state within a short period of time, say 6 months (max) after the class.

38 Nick Rowe January 15, 2017 at 7:21 pm

Ordoliberalism (the culture that is Germany):
https://www.youtube.com/watch?v=e0OUld2X51g

39 genauer January 15, 2017 at 8:25 pm

The real performance on the German autobahn looks like that:

Amazing German Fire Truck Easing its Way Through Highway Traffic

https://www.youtube.com/watch?v=20NkR3VU5uU

Just keep your racist Canadian slander to yourself

https://www.youtube.com/watch?v=B3h2Rw1mHew

40 DK January 15, 2017 at 7:26 pm

The three biggest ones in biology:
– Protein folding problem
– Exact mechanism of origin of life
– Nature of consciousness

41 anonymous January 15, 2017 at 7:34 pm

or, summed up in one, what percentage of what can reasonably be known about biology do we know? Much harder than 1 and “2”, just as hard as 3.

42 stephan January 15, 2017 at 7:56 pm

I would add aging. Is conciousness really a problem in biology or in philosophy?

43 anon January 15, 2017 at 8:25 pm

The ancients recorded a good working understanding of consciousness, but biologists and technologists are a long way from putting it in a bottle.

44 DK January 15, 2017 at 8:52 pm

Aging is not a fundamental problem. Only people who do not understand biology think that it is. There are many different mechanisms of aging and all of them get down to random evolutionary choices. It is super interesting and of course very important to work them out in excruciating detail but there is nothing truly fundamental about it – nothing that we really just don’t have any idea about.

Consciousness is definitely a biological problem – which is not mutually exclusive with it being a philosophical one.

45 stephan January 15, 2017 at 9:37 pm

Modern biological theories of aging (Note)
Jin, K.
Aging and Disease, 8001 Redwood, Blvd., Novato, CA, United States

Abstract
Despite recent advances in molecular biology and genetics, the mysteries that control human lifespan are yet to be unraveled. Many theories, which fall into two main categories: programmed and error theories, have been proposed to explain the process of aging, but neither of them appears to be fully satisfactory. These theories may interact with each other in a complex way. By understanding and testing the existing and new aging theories, it may be possible to promote successful aging.

How does a theory of programmed aging falls under random evolutionary choice ?

46 DK January 16, 2017 at 3:43 am

“How does a theory of programmed aging falls under random evolutionary choice ?”

Naturally. Like I said, it only takes someone who understands biology and evolution. That, typically, does not apply to various MD/PhDs like Kunlin Jin who keep thinking that only a single all-encompassing mechanism can be “fully satisfactory”.

47 stephan January 16, 2017 at 6:07 pm

@DK Can you point to a paper or source that expounds on your theory of aging. Also do you consider Aubrey de Grey an expert in this field ? Thanks in advance

48 dan1111 January 16, 2017 at 3:29 am

Ageing is a fundamental problem of medicine, though.

49 DK January 16, 2017 at 3:36 am

For sure. But so are pneumonia and diarrhea.

50 Keith January 15, 2017 at 8:18 pm

Nature vs nurture for most traits is a big one too

51 anonymous January 15, 2017 at 8:33 pm

Biology is a big deal, speculation wise. Your basic octopus is more fully conscious than most of us when we are not quite fully conscious — anesthetized or very fatigued. Ditto for dogs, crows, pigs, boars, long-lived birds, pike, and almost all marine mammals, inter alia, not to mention God knows how many giant squids, both here and on other plausible planets. Think of your dumbest dream -maybe taking the 12th grade end of semester test again 20 years later with the exact same stakes but with no idea that everyone in the dream is now 20 or 30 years older but they are just not telling you about that. Think that dogs and crows don’t have dreams almost like that, not to mention even the dumber amongst giant squids, both here and on the roughly one or two potentially billion observable planets with oceans?

52 Dan January 15, 2017 at 8:12 pm

Sounds a bit like what Hume was going for.

53 Joëll January 15, 2017 at 8:30 pm

I claim no originality in saying that, of course, but in my field, without any doubt, the Riemann Hypothesis.

54 Perovskite January 15, 2017 at 8:31 pm

Aren’t you just talking about a multi-factor utility function with different weights? IE culture is a vector weighting certain utility factors (income, health, leisure, education, food, order, proximity to family, art, military), possibly risk aversion weights, discount horizon, etc.

55 Yaleocon January 15, 2017 at 8:36 pm

I don’t think this is the “most important question /in/ economics”. I think this important question /is/ economics. If we solved it, what would be left to learn in the field? Solving that question would mean finding a solution to behavioral economics on both the micro- and macro-economic scales.

I mean, heck–if you solved this question, you’d also solve most of politics along the way, even when it comes to seemingly non-economic “social issues” (an ill-defined category anyway, any political issue is importantly social).

So, I guess calling it the most important question in econ is accurate–but only in the technical sense that the most important question in physics is “all of the unsolved questions in physics, concatenated.”

56 anon January 15, 2017 at 8:43 pm

I love the question as well, but as I say, I think the problem to be solved is “human nature and its impacts” and that economics only slices at it.

BE takes a bigger slice, but I think stops short, say, of the science of human happiness.

57 Yaleocon January 15, 2017 at 8:52 pm

Out of curiosity, why do you say that economics doesn’t concern itself with happiness? It most definitely concerns itself with preference, and makes heavy use of “indifference curves” which imply rankings of utility. Insofar as individuals choose what makes them happy, the study of that happiness falls under the auspices of economics.

Obviously, if one takes a view of happiness as distinct from utility (as in, perhaps, that of a eudaimonist), then economics can’t help you with human happiness, since the question becomes heavily value-loaded. However, econ still hands you all the tools and descriptive truths necessary to societally maximize those values once you’ve picked your favorite value theory.

58 anon January 15, 2017 at 8:58 pm

I read economists like Thaler and Shiller, and I read psychologists like Ariely and Gilbert, and I still see a gap between them.

… and I am being called for dinner. More later.

59 zztop January 16, 2017 at 8:50 am

The dinner problem.
Actually, not a problem. Was hungry anyway.

60 anon January 16, 2017 at 9:54 am

I think Ariely and Gilbert are more comfortable talking about conflicting human desires, and conflicting notions of happiness and satisfaction.

I think economics is perhaps still hobbled by that idea that humans must always be seeking one thing, and all those conflicting desires can be normalized in that way.

I don’t think utility is happiness, or expected life satisfaction, or any other single thing.

If worry that you are a few pounds overweight and you choose the cheesecake anyway, I think you do so for very animal reasons, more than human reasons, far more than economic reasons.

61 anon January 16, 2017 at 10:17 am

It is possible that you “choose” that cheesecake because unthinking organs in your gut want it. Then you may make up cognitive justifications for your actions, or even economic ones. To seem the master of your actions, your future ..

Again this is not to deny that humans can act in an abstract, cognitive, or economic way .. but I think it is clear that it is a mode, and we are not in that mode all the time.

62 The Anti-Gnostic January 16, 2017 at 12:28 pm

I think “solving” economics in that sense would mean solving scarcity. So long as time, matter, and energy are finite, we will always have economics.

I do wonder if we are approaching “post-scarcity,” as near as the physical laws of the universe will allow.

63 Becky Hargrove January 15, 2017 at 8:41 pm

Two: Better means to complete wealth creation cycles at the outset, for a wider range of product than what presently takes place. Also, ownership options for product with fixed scarcities (linked to time and place) which provide incentive to increase their output, instead of leaving it in static formation.

64 Ray Lopez January 15, 2017 at 8:43 pm
65 Becky Hargrove January 15, 2017 at 8:50 pm

Thanks for the link. The equity premium puzzle is important for establishing wealth reciprocity at the outset.

66 Alain January 15, 2017 at 11:18 pm

Ray, that’s a great link.

67 anon January 16, 2017 at 10:42 am

Perhaps economics needs to accept that there will never be a “Unified Models of Human Biases” because the biases are the result of internal tensions that vary within the individual and over time.

Can I find the best prices at a supermarket? How hungry am I?

68 Victoria Wilson January 15, 2017 at 8:46 pm

I believe there is an answer to this question: What is the model that allows us to evaluate and account for how cultural rules and norms generate increases or decreases in material and physical well-being? I predict that it has been kept so well hidden, perhaps ironically, due to cultural and social norms. In order to ‘see’ the model many of the familiar economic definitions for, say, labor, value, ownership, freeriding, rationality… will require conversion to broader understandings. But I have no doubt that numerical values will be readily calculated for efforts exerted to fulfill cultural expectations.
Proper identification of the players in this economic system is a good place to start. A culture implies the standards within a group, and so we need to understand what constitutes this economic entity: the group. Arthur F Bentley offered “there is no group without its interest. An interest, as the term will be used here, is the equivalent of a group.” The individual has no meaning in the group, there is no freeriding as there are no individuals. The group is the actor and the benefactor of the economic activity.

69 derek January 15, 2017 at 11:05 pm

Indeed. So in the Eurozone, the question of why when Germany lent enormous amounts of money to the Greeks they would have trouble paying it back is unanswerable in economics but pretty obvious to anyone else.

Or Taleb’s “he has never gotten drunk with Russians;” as an indication of lack of understanding.

70 Victoria Wilson January 16, 2017 at 8:55 am

In order to better see how economic value plays out I would suggest looking at groups that have been around for a least a generation if not longer. But your instinct to single out an individual of a group and regard their particular outcome is the exact bias I referred to; that we dwell in the individual. Then we claim that the outcome is not rational and denounce failed markets.

71 The Anti-Gnostic January 16, 2017 at 12:48 pm

Markets don’t “fail.” We may not prefer the outcome, just like we would prefer that lions not eat baby elephants, but they don’t fail.

What is the model that allows us to evaluate and account for how cultural rules and norms generate increases or decreases in material and physical well-being?

The globe is your Petri dish. Where are people leaving; where do people want to go. Islam, polygamy and cousin marriage are dystopic.

72 Normal January 17, 2017 at 10:06 am

To know if markets fail, one has to define success. If success means providing the lowest possible price to consumers, then markets fail often.

73 Mark Thorson January 15, 2017 at 10:29 pm

How does the brain work? By the time we get to something resembling an answer, the question might not make any sense. It might be like asking “How does a city work?”.

74 Gulic January 15, 2017 at 10:58 pm

I think economics has more elementary unsolved problems. The current generation of macroeconomic theory based on dynamic stochastic general equilibrium has not been able to respond to discoveries in behavioral economics and psychology that undermine the foundations of these models (e.g. preference reversals). The greatest unsolved problem in economics is how to replace DSGE models.

75 Steve Z January 16, 2017 at 12:03 am

Economics is a system of deduction aimed at generating the most efficient production & allocation of scarce resources over time. Efficiency is defined with respect to “utility” or “value.”

“Culture” is a set of beliefs, ideas, etc. (memes) that influence the beliefs, values, etc. of a people. For culture to “stick,” it must have some utility in adjudicating between the competing preferences of people, in recurring conflicts. Also, a culture which leads to a greater production of wealth, or otherwise confers an evolutionary advantage, is more likely to persist & grow in influence.

Culture and economics are therefore mutually interacting super- and subtrata. Economics itself is a part of culture, and it enculterates the people who are aware of it to become more like homo economicus. That is why cute behavioral economics results produced in experiments on naive participants evaporate after repeated play.

Because economics is, in fact, the “best” culture, it is a fair assumption that, given enough time, the larger culture with the best memes for conveying economic reasoning in a way that simple folk can understand will dominate.

76 Thanatos Savehn January 16, 2017 at 2:01 am

Law: What is the essence of Evidence?

77 Normal January 17, 2017 at 10:09 am

Science, Engineering: What is the essence of Evidence?

Some progress made by Judea Pearl, but still an open question.

78 Roger Barris January 16, 2017 at 4:04 am

Very good point about economics. But isn’t this a taboo? Will this question ever be adequately addressed if we are not allowed to talk about it honestly? Because it raises questions at more than just the level of nations. Sub-cultures within countries also exist and have explanatory power.

79 Jim Dallas January 16, 2017 at 4:52 am

Hi Tyler,
The Diamond Age by Neil Stephenson (SF), is the best speculation I’ve read on a world where you join a culture rather than a nation-state (neo-Victorians, distributed federation etc.) and how this could work. I think in a modern world we could opt-in to cultures we desire (and qualify for) regardless of genetics or nationality, and they will have different internal rules and economic benefits -this has always been true to some extent (traders, puritans, homesteaders, explorers, modern lawyers and bankers), but may become more explicit – It’s like joining a church/franchise/company/nation state all in one.

Economically my guess is it’s about restricting your future options (or increasing penalties) as a trade-off for greater trust & lower transaction cost/deviation for areas you care about e.g. in Austria I can sleep well but can’t mow the lawn at midnight; in some ways it may link back to victorian (or confucian etc..) self-denial ( plus hypocrisy) – how much do you trade current freedom of action/expression for predictable conformity. This probably changes with the time – e.g. different pay-offs applied to Attila the Hun , vs Imperial naval Britain vs gold-rush California vs. golden era China or Japan

(PS – If you haven’t read the book – do, but possibly skip the Turing Machine explanations which have dated. Snow Crash introduced the concept, but imho Diamond Age is better)

80 Jim Dallas January 16, 2017 at 5:07 am

So the specific economic benefits for a culture ought to reflect the ethics/ core beliefs of that culture and could be measured – some (possibly specious) guesses would be lower price variation and more consistent quality in Germany, higher quality aesthetic visual and gastronomic environment in Italy, increased social mobility/ entrepreneurism in US, lower cost of following a religious life in a heavily religious country etc.

81 londenio January 16, 2017 at 6:03 am

What happened to the Cowen Law about all statements about interests rate being wrong? A good general question about interest rates seems like a better defined problem that is still not solved.

82 Hadur January 16, 2017 at 9:28 am

How am I the first person to answer with the principal-agent problem!

83 The Anti-Gnostic January 16, 2017 at 10:09 am

I’m failing to see the great, unsolved problem here. People in Munich have different preferences than people in Naples due to a combination of genetics, geography, culture, habits, etc. The principles by which economists explain outcomes and make predictions remain the same. There’s no such thing as a uniquely German or Italian economics any more than there’s a uniquely German or Italian physics.

84 Marshall O'Moore January 16, 2017 at 10:12 am

The most important unsolved problem in economics is technological change. It drives every single macroeconomic model as the “shock” component, but if the prevailing hypothesis of secular stagnation is true, then technological change has a deeper structure that we have been ignoring. Technological change is clearly endogenous to the economic climate and firm decisions therein. Multiple boom and busts of the business cycle have been explained/perhaps-caused by technological leaps and bounds, but economists are unable to say anything of any consequence about it. The incredible poverty of economic literature around human creativity and productive output is absolutely mind boggling.

85 A Definite Beta Guy January 16, 2017 at 10:53 am

What current research exists? Hopefully someone has studied this, or the field as a whole must not consider it a problem….

86 Chris Wegener January 16, 2017 at 12:03 pm

I would propose the inverse of Tyler’s question: “Or might the cultural factors in some manner be “reduced” to questions of more traditional economics? ”

Where does the belief that “economics”, or at least its current invocation, have any meaningful predictive or descriptive power about reality and the behavior of people in any cultural milieu. This ties in with previous comments about the understanding of brain function as defined by consciousness. Until this is understood better any attempts to define human behavior will fail.

How does the “rational” mind interact with the “emotional” mind? Which has primacy and which controls the unconscious mind?

Further how will we learn to truly understand how other people think? How will we learn to understand how we think?

So far the closest analogy to human behavior I can see is to watch all public interactions and image that you are watching primates in clothes.

87 anon January 16, 2017 at 12:12 pm

I believe MR has reported on testosterone levels affecting economic behaviors in a number of ways. Is this just a curiosity, a comedic interlude, or a stake through the heart of “humans are economic beings?”

I lean toward the later, as described above. Humans can do economics, obviously, but imperfectly, and not all the time.

88 jorod January 16, 2017 at 2:30 pm

Are inequalities necessarily inequities? How can government make a few people better off without making lots of people worse off? Is perfection necessary to be happy?

89 Barkley Rosser January 16, 2017 at 5:15 pm

Well, actually Feynman’s quote is relevant for econ, with turbulence including both macro fluctuations and certainly those pesky bubbles, among other things (says the old chaotician).

90 Scoop January 16, 2017 at 5:58 pm

“Even as a kid I was bored by the circus I saw at Madison Square Garden, relative say to watching Fischer vs. Spassky on TV. ”

If there is a more convincing way to write, “my cultural tastes are so unique that they are useless in explaining or understanding my fellow man”, I have never read it.

91 Scoop January 16, 2017 at 6:01 pm

How on earth did the blog switch posts after I hit submit on a comment?

92 Isaac S Kotlicky January 16, 2017 at 6:29 pm

I’m… A bit surprised by this.

Culture is easily integrated into behavioral econ models of decision making. Fundamentally, culture provides the basic set of preferences an individual is predisposed to. For example, the German in your example might place more value on consistency while the Italian places value on novelty. This would lead to observable changes in behavior, ask other things equal. This could also be seen in purchasing preferences, where the “consistent” individual makes the same economic choices while the “adventurous” one might make erratic or riskier choices.

93 Arun Ezhutachan January 17, 2017 at 8:16 am

If Culture is a ‘rule set’, it requires resources to re-transcribe itself. Depending on the preferences of the set of agents, and the weightage given to each agent, ceteris paribus, ‘rule sets’ can be ranked according to their cost of implementation. Presumably, because of hysteresis effects, radical changes in the rule set will have a higher short term cost so ‘Culture’ will appear to be sticky- i.e. what is being observed will have a viscous property. Yet, as incentives change, some agents are going to be making more radical changes in their behaviour than others- this is like kinetic energy in turbulent flow.

Imagine two shallow basins with running taps next to each other. One has a smooth flow, the other a turbulent flow and thus more ‘splashback’ causing some water to join the basin with the smooth flowing tap. At the margin, what is happening is ‘exit’ from a turbulent ‘culture’- i.e. one whose rule-set’s ‘viscosity’ (i.e. incentive compatibility) is less- to the culture whose rule-set is better aligned with the underlying fitness landscape.

Another way to think of Culture is through the prism of mimetics. At one time, Gabriel Tarde’s theory of mimetics (basically the notion that low status people imitate high status people) was a serious competitor to Durkheim’s structural functionalism. Mimetics is ‘cheap, small and out of control’. If it propagates randomly, and the resources used to re-transcribe rule sets are inelastic in supply, it will get channelised in a manner predicted by positive economics. In particular, marginal analysis will be on a secure footing. The outcome, however, would not be some sort of Samuelson type homogenization and restoration of ergodicity, but rather a bunch of Tiebout models- i.e. people migrating to the place with the rule-set which rewards rather than punishes the externalities they value.
I suppose ‘turbulence’ is an open problem and will remain so for the foreseeable future, but what about an approach to the culture vs rationality approach which uses cellular automata to model mimetics?
If Economists give equal weight to ‘regret minimization’ rather than just ‘utility maximisation’ there could be a way to operationalize a distinction between ‘profit seeking’- i.e. recombination of factors of production to yield an expected outward shift of the production possibility frontier- from ‘rent seeking’- i.e. staking a claim on a proportion of what is produced. We could have a bunch of simulations with mixed populations governed by varying types of mimetic rules and see which best fits with what is observed. This may give us some insight into how to improve outcomes in a manner which is both ‘economic’ and ‘sociological’ or ‘culturally sensitive’. This may be useful, if only in a negative way.
As a matter of fact, a lot of Development work has tried to change ‘mimetics’- and, in general, proved to be a waste of time or worse. Actually enforcing rational changes in the rule set, on the other hand, does work. ‘Broken windows’ policing does work. Identifying ‘pre-delinquent’ kids and getting them mentored by ex-Gang bangers probably doesn’t.
Still, it would be great if Amartya Sen gave up his wicked ways and took to ‘scaring kids straight’. By kids, obviously, I mean Rahul Gandhi.

94 Yoav January 17, 2017 at 9:08 am

Well, in my field, I would say how we can keep moore’s law alive?
Or more specifically, how we can get performance from all those shiny new transistors when denard scaling stopped?

95 KevinH January 17, 2017 at 11:59 am

I think that’s a great answer of course. Mine would have been ‘when and how are 1 million $1 transactions different than a single $1million transaction’

And I think both have more or less the same broad answer ‘non-linear network effects’. If econ wants to be the ones to answer this, they need to up their game on topology, networks, and ditch multiple-linear-regression as a meaningful form of analysis.

When they do, they will get a lot of very important questions in the bargain such as ‘what is the value of the internet’ and ‘what do economies look like with high automation’

I certainly don’t know the answer to all those questions, but I’m pretty sure which door they are behind.

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