To the Editor:
The article “The Interdisciplinary Quest for New Ideas in Economics” (James Case, SIAM News, July/August 2013) reports unanimity among attendees at the Perimeter Conference “that economic theory is inadequate.” In such statements, it is never clear to me for what purpose an adequate theory is required.
Markets relate to society essentially as useful parasites justified by the hypothesis that well-informed, self-interested agents will act to redistribute wealth in ways that benefit society at large. From a societal standpoint, these benefits are the sole purpose of markets, and provide the only context in which notions of theoretical adequacy make any sense. But from the viewpoint of market traders, the purpose of markets is simply to enable profit-making, with only lip service paid to social benefit; from this perspective, the notion and purpose of adequacy become very different.
The differences can be expressed mathematically, and one important distinction is that market activity today has both low-frequency and high-frequency components. The low frequencies are perceptible by humans and are therefore able to make their way through the feedback loops that bring general benefit. The high frequencies exist only as noise in the computer, and it is hard to see how they bring benefit to anyone but the nimblest of traders.
If the multidisciplinary “Manhattan Project” that was described is ever launched, I hope that the team will include thermodynamicists who appreciate that energy may exist in various forms, not all of them equally able to perform useful work. The stage would then be set to pose the questions: What can markets do? What can they not do?
Phil Roe is a professor of aerospace Engineering at the University of Michigan.
Reply:
If the proposed multidisciplinary effort is ever launched, it will doubtless include a thermodynamicist. I suspect that it will fail anyway, for a whole host of reasons! — James Case