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Monday, May 25, 2009

Econ 101 and Resource Depletion

We cannot easily pin down human and group decision making, yet the object acted on -- that of constrained resources -- we have a solid chance of quantifying. I really think we can make some progress understanding this and I think it has great importance for planning; I know many people believe that a collapse is a collapse and so why bother. Fine, but as long as policy forms the backbone of politics, we might as well present something something formal to our leaders besides anguish.

At one time I probably had some respect for economists, sensing that they must have brilliant theories. I once took a macroeconomics class from Walter Heller, who served as an economic advisor to both Kennedy and Johnson. Heller would show up for the lectures and say something profound (I assume, I can't remember), but mostly TA's taught the class. One TA sketched out a long equation on the chalkboard, let us ponder over it for a few seconds, and then promptly erased it. He said something to the effect, "that is the last time you will see an equation". I don't know why, but that action had always bothered me; it seemed like a resignation to failure.

Recently someone on TOD pointed to a couple of short articles by Robert Nadeau concerning the origins of economic theory in the 19th century

Short article : Long article

Nadeau asserts that not only does the formation of classical economics rely on strange analogies to physics, but that the analogies that the early economists chose came out of physics theories that nobody had verified yet. They basically consisted of vague postulations on the balance of energy existing in the "ether", in other words not the concrete Newtonian stuff that everyone agreed on, but ideas of the more abstract mysterious origins of electrical or magnetic energy that started to gain traction around that time. And to top it off, many of the early economists had strong religious beliefs and thought god had something to do with the economy (i.e. the idea of the invisible hand). This all occurred slightly before physicists like Maxwell figured out the practical formulation that has served us well. I got from Nadeau that the only perturbation to the original ideas came by way of Keynes and others who allowed that we could subtly guide economies, and this provided a not-so-invisible hand.

So, the analytic battle exists on several fronts. We have an economic theory that went down the toilet last year. We have the quants on Wall Street who have basically made a mess of the situation and caused many people to distrust any math. We have chaos believers who immediately put up red flags warning that dangers lurk in any analysis. We have other mathematicians that blow smoke by creating impressive formalisms that show purity but lack any connection to practicality. And finally we have a somewhat MEGO public that can't get interested.

I stand by the side of using practical probability and statistics and don't get cowed by the nay-sayers that say we can't and will never understand any of this. A few days ago, I found a book in my stacks called "The Earth's Dynamic Systems" written by Hamblin in 1975. This guy had definite concerns about our resources and comes across as the opposite of a cornucopian, yet he did write the following:
We basically know the extent of our mineral resources and the rates of our consumption. It is not difficult to project how long they will last.
So why is it that 30 years later, we still have no fundamental frameworks and argue over the reliability of heuristics such as HL? And still no one knows how much remains in SA reserve? Do we really believe that we can get by with back-of-the-envelope estimates alone? Yet as we look at our current predicament, a few valid theories of economics and of resource depletion dynamics certainly wouldn't have hurt.

Not online yet, but I found an interesting opinion piece in the latest Time magazine called "Excluding the Extremist" by Justin Fox. In the column he discusses the financial advice of Peter Schiff and others who don't toe the mainstream line.
"But there's a thriving line of academic research showing that including divergent opinions and models of how the world works makes groups better at solving problems"
That puts it fairly succinctly and I still think a quantitative analysis when applied to resource depletion holds promise. Unfortunately, the financial quants have given the term quantitative a bad rap.

Justin Fox has a book coming out next month called "The Myth of the Rational Market".

Bicycling takes place in the context of constant near misses