opinions on "axiomatic economics."
The following is an edited version of a note I sent to a father who's
worried about his son being seduced by "axiomatic economics" (as
exemplified by his planning to take geometry in preparation). He
blames the economic melt-down of 2008 on axiomatic economics.
Since I haven't read Aguilar's article on axiomatic economics, I
can't criticize it. However, I have some points that may help.
1) ... studying axiomatic economics (if the name means what it says)
might _help_ your son's academic career, with the emphasis on
_academic_. Most academic economists love mathematics, perhaps because
it's impenetrable to old fogies such a myself (or at least to most of
us). Knowing fancy math -- and being able to use it -- is a way of
proving one's chops with younger economists, too. However, as stressed
below, mathematics totally idealizes the world, missing on all of the
gray areas and rough edges. So even if it helps one's academic career,
the math almost never helps make the world a better place. Most of it
is what I think of as "inside baseball," a matter of academic
economists talking to each other and almost never impinging on
discussions in the real world.
2) If your son wants to be on the cutting edge of mainstream
economics, I'd recommend experimental or behavioral economics. It
actually involves an effort to be scientific, e.g., testing
economists' theories and axioms using experiments, surveys, field
studies, and the like. It turns out, for example, that experiments
indicate that we're not all greedy bastards! A small minority are, of
course. (Many of this minority are economics majors. Partly it's the
type of people who attracted to the field; partly, it's a matter of
conditioning and the expulsion of the "good eggs" from the field.)
Experimental economics has its limits, but it's highly superior to
If experiments aren't your son's interest, I recommend econometrics.
It's mathematical but still tries to be oriented toward the real
3) There's nothing wrong with studying geometry. It encourages clear
thinking. I'm afraid that most students I run into (or try to teach)
these days don't understand clear thinking, so they'd benefit from
4) Axiomatic economics (with the same caveat as before) is like
geometry. It's extremely logical, based on clear premises. However,
when we turn to the real world, axiomatic thinking of any sort has the
same flaws as geometry. That is, there are no perfect circles, planes,
triangles, or squares in the real world. Geometry and other abstract
forms of thinking can only be approximations of the real world, since
they are necessarily abstract. And of course, if the axioms are
incorrect (or merely first approximations of being correct), no amount
of logical thinking will come up with conclusions that fit the real
world exactly. It's the old computer science slogan: garbage in,
5) I beg to differ. Axiomatic thinking is _not_ what caused the
economic meltdown. On the superficial level, what caused the meltdown
was the fact that "financial engineers" took the mathematical models
that had been spun out as the gospel truth (so that we see
abominations such as the "collateralized debt obligation"). But they
were not. At best they were first approximations (that had been
developed based on experience during much calmer financial times).
The key reason why the investment managers accepted these model-based
"assets" was that they felt they could get away with it. The
politicians, the government regulatory agencies, and the bond rating
organizations had been swept up in the same speculative euphoria that
had swallowed the financiers and so turned a blind eye or even
encouraged the speculative bubble. The financiers expected the
government to bail them out -- and in fact, that's what happened!
Somehow these big institutions have a lot of political influence and
can convince the politicians that they're too big to fail. Money
Even then, the Wall Street melt-down wouldn't have caused the
melt-down of the economy of the U.S., Ireland, Iceland, etc., if so
many people hadn't been so _leveraged_ (deep into debt) and if the
housing sector hadn't been involved in a massive bubble. I wouldn't
blame excessive leverage and the housing bubble on mathematics. To the
extent that axiomatic economics played a role, it's because its
practitioners were divorced from the world that the rest of us have to
live in. There's a cult among my fellow macroeconomists surrounding
something called DSGE (don't ask), which uses a lot of math but turns
out to say absolutely nothing about the housing bubble or the crash.
To their credit, some are trying to figure out what to do instead.
Thanks for giving me a chance to preach.
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your
own way and let people talk.) -- Karl, paraphrasing Dante.
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