International Law

Paul Wilmott's on Economic Theory

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Paul Wilmott has an amusing rant about financial economists, which is cruel but fair.

"My failure led me to think about economists, as opposed to economics, and they're much easier to figure out.

This is how it works.

An economist starts with a few axioms, ones that bear a vague similarity to a small part of the human condition under restricted situations and in an idealized world. (You get my drift here?)

From those axioms follows a theorem. More often than not this will be a theorem based upon rational behaviour.

That theorem gets a name.

And that's the point I identify as being the problem: The jargonizing of complex ideas based upon irrelevant assumptions into an easily used and abused building block on which to build the edifice of nonsense that is modern economics.

Small assumption by small assumption, the economist builds up his theories into useless gibberish.

By acceptance of each step he is able to kid himself he is making progress. And that's why I struggle with economics.

It is not mathematics where, barring mistakes, each step is true and indisputable and therefore you can accept it, even forget it, and move on.

And others can do the same, using everyone else's results without question.

This you cannot do in a soft science. I've mentioned this in another blog, beware of anyone talking about 'results' in finance or economics, it says more about them and their perception of the world than it does about the subject."

The building of axiom systems is often misunderstood even by those who engage in the task. The general idea is to construct a simple toy world, find an interesting phenomena, then argue that in the real world with its complexity and uncertainty, this phenomena still functions. Some of the most interesting examples of this type of modeling is to be found in Thomas Schelling's work, epecially in his book Choice and Consequences.

Full post as published by Misleading Advertising Law on January 13, 2009 (boomark / email).