Monday, September 7, 2009

Number crunching & rational actors in political science

I've critiqued economists who believe in purely rational actors and markets, but this is not to critique number crunching in general. Indeed, a recent NYT Magazine article on an NYU political scientist is quite tantalizing. An article by Clive Thompson titled "Can Game Theory Predict When Iran Will Get the Bomb?" focuses on the work of Bruce Bueno de Mesquita, who trained at Michigan and developed his ideas based on the work of William Striker at Rochester University. Bueno de Mesquita claims quite a track record forecasting events using an acute analysis of the players in the decision-making and an analysis of their levels of interest and commitment and power. Also, he uses a theory of coalitions. It seems that this works very well. I must say that I'm happy to learn that Bueno de Mesquita doesn't make forecasts by percentages: it either happens (his particular forecast) or it doesn't.

I was very interested to learn that he interviews players and learns as much about them as possible before making any predictions (i.e., feeding data into his proprietary program). Thus, a very human element remains. It appears that a computer can perform calculations of coalitions and run scenarios that no single human mind could manage. So be it. But how does one filter out "the passions"? I can understand that reason and interests sort themselves out over the long run, but the passions can hit like a sudden summer thunderstorm: brief but forceful. Perhaps those are the forecasts that don't work out--or that suffer from the random event. Query: how would his prediction about approval of a health care reform bill be affected by Ted Kennedy's death? (Apparently forecasting Clinton's effort was a miss for him.) So, in the end, I admire the work but I still believe that we can go wrong placing too much emphasis on the predictable based on induction. Too many Black Swans swim around in reality ready to appear out of nowhere.

Krugman on contemporary economists & thier big disagreement

Paul Krugman in the NYT today asks a very interesting question: “How Did Economists Get It So Wrong?” Krugman argues that in addition to lax regulation by Washington and reckless risk taking Wall Street, faulty thinking in academia also contributed to the crisis. He recounts that a growing but weakly grounded meeting of minds between Keynesians (or Neo-Keynesians) and Classical economists (updated via Milton Friedman). Indeed, he posits a difference between fresh water (Chicago orbit) and saltwater (coastal schools) economists. He recounts that even the monetarist Friedman didn’t deny the ability of the government spending to boost the economy; rather, he argued that this could be handled more effectively via monetary policy. Like the successors of many a genius, his disciples took it too far. Some Chicago economists argue that we have high unemployment because people don’t want to work! Wow, nuts.

Krugman takes the problem deeper, and posits two shortcomings of classical free market economics: the belief that humans are constantly making rational decisions and its corollary, that economists can create precise mathematical models to predict behavior because things like bubbles just don’t exist. How can someone believe that humans are always rational? It allows that math to work, but beautiful equations do not necessarily square with reality. It comes back to the point that you can start with any faulty premise and use logic (and beautiful math) to arrive at just about any crackpot conclusion. Don’t the economists who believe in perfectly rational humans and perfectly operating markets know about other economists like Herbert Simon (satisficing), Daniel Kahneman, and Vernon Smith, not to mention to spate of younger researchers, who publish in the area of behavior economics (given a shout-out by Krugman) and human decision-making? Also, Eric Beinhocker in The Origin of Wealth (a book I’ve dipped into but need to read in full) describes the economy as a complex system, and he very effectively critiques the shortcomings of neo-classical economics. Of course, there is also Nasim Taleb, a veritable holy warrior against contemporary economics based in part on ancient skepticism.

All this makes my glad that I trained in history and political science and resisted the invitation to become an economics major (okay, the math had a lot to do with it, I admit). But in history and political science, you can crunch number and perform mathematical analysis, but in the end, you are constantly reminded that you’re dealing with irrational human beings: people motivated by reason, passions, and interests—and not necessarily in that order!