Monday, October 17, 2011

Economy and Math

Economist have a very strange relationships with mathematics. They love it when it serves their purpose but when it suggest that the current economic system is a complete rubbish they conveniently disregard it. So when they look at the normal distribution and it conveniently predicts that a market meltdown is an outlier, they really love math. However, when it suggests that you cannot just print more money because 0 does not equal 1,000,000,000, they tend to disregard math because it does not help their case.

The problem with the present economic theory is that it is based on the flawed assumption that just because the mathematics of a certain hypothesis is beautiful or ease then it is necessary true. This is based on the erroneous principle called Occam's razor that the easiest explanation is the true one. This assumption works really well to refute a lot of wrong representation of reality that have too many assumptions that invalidate them but it is contradict by a fundamental part of physics theory. The math of quantum mechanics is not easier then the math of the classical mechanics, exactly the opposite, but it is the true one. Just because an explanation since complex from the point of view of ordinary human experience does not make it a priori wrong. The same holds for mathematical beauty: reality is not judged on the basis on how nice the mathematics seems, it is based on the empirical evidence that supports the math.

The problem is that there is empirical evidence that suggests that the normal distribution and the random walk theory are not applicable to the real world (i.e. you cannot really have 25 standard deviation events three days in a row and assume that the model still holds - such events are assumed to happen only once in the history of the human race) but the economist would not abandon their nice assumptions because "it does not make sense" and "it is not logical" or "it contradicts everything we have been taught by now." Well the thing with science is that sometimes everything you have been previously taught is indeed WRONG and instead of "patching" the old theory, one should start from the ground up and challenge all his assumptions.

Economy is a lot like religion: it produces dogmas in which you have to believe even when they contradict experience. The problem is that it affects the lives of all people on this planet in a way in which even the Roman Catholic church couldn't have dreamed of in the Middle Ages.

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