What Computer Science Can Teach Economics 421
eldavojohn writes "A new award-winning thesis from an MIT computer science assistant professor showed that the Nash equilibrium of complex games (like the economy or poker) belong to problems with non-deterministic polynomial (NP) complexity (more specifically PPAD complexity, a subset of TFNP problems which is a subset of FNP problems which is a subset of NP problems). More importantly there should be a single solution for one problem that can be adapted to fit all the other problems. Meaning if you can generalize the solution to poker, you have the ability to discover the Nash equilibrium of the economy. Some computer scientists are calling this the biggest development in game theory in a decade."
Hayek (Score:5, Insightful)
Hayek [wikipedia.org] showed that about 50 years ago:
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." (The Fatal Conceit, p. 76)
Unfortunately, there is a lot of designing going on right now.
Re:The problem is not an efficient algorithm (Score:4, Insightful)
The emergent intelligence of the market will likely never be able to be simulated.
A centralized model can't react in real time to factors that change by the minute or by the second like human actors can.
What was desirable to us one minute ago may no longer be desirable to us.
What was desirable one minute ago to me may have never been desirable to you!
No formula can ever quantify that value. It's subjective.
Obligatory (Score:5, Insightful)
Economics involves people. So...
"To summarize the summary of the summary: people are a problem." - Douglas Adams
Re:The problem is not an efficient algorithm (Score:5, Insightful)
I was about to say the same thing. Unlike poker, the rules of the games are altered based on the current knowledge about the state of the game. This means that as soon as someone proclaims "We know the rules of Economics!", someone else is going to look at those rules and either game them to their benefit, or rewrite them to better suit their own purpose.
Computer Scientists - and Economists - have a habit of assuming that they just need to find the proper model for human behavior, and all the problems will be solved. That's because that's how it works in a science: you assume the rules don't change in an arbitrary fashion. Humans, however, do. This makes any prediction of human behavior a statistical undertaking at best. Your success will be measured by how much better you compared to a random decision making process. At worst, the statistical anomaly completely wrecks your model - see the Black Swan Theory in Economics.
CS (Score:1, Insightful)
I take it that computer science would be the most common major among those in slashdot? This explains the libertarians commenting on health care reform.
Re:The problem is not an efficient algorithm (Score:3, Insightful)
the point is, however, that its probable that a certain product or commodity will be desirable by somebody, or even a group of somebodies, at some point in time, based on past interactions in the marketplace.
Re:No shit (Score:4, Insightful)
That's why the goal [wikipedia.org] is to dumb down the average person and limit his choices until we're at the level of a THX 1138/Brave New World society.
Not quite... (Score:3, Insightful)
No, I'd say that we're dealing here with two facets of the same problem: the unreality of Homo economicus. The classic objection to economic theory is that people don't act "rationally" in the sense that economic theory requires them to do; even when given all the information that should be necessary to make a decision, they often make an "irrational" one. The objection this sort of applied CS research brings to reinforce that is that economics not only assumes perfect rationality, but also, that "perfect information" requires that arbitrarily complex computations be performed in arbitrarily short times. This is because to have "perfect information," you must compute all of the consequences of all of the information you've explicitly seen.
In fact, I'd say that the irrationality and the computational complexity objections overlap. There's bound to be a lot of cases where the "irrational" decisions come from a failure to compute the consequences of the information that's explicitly given. (There are certainly other cases where it's not, like on the experiments where somebody is asked to split $100 between themselves and another participant, on the condition that if the other party doesn't agree with the split, neither one gets anything.)
Only works with real money (Score:5, Insightful)
Once you factor debt and fractional reserves into the picture, the game changes quite a bit. The current crisis is that the players bet WAY more than they had, and they are all afraid to call, since they secretly know that EVERYBODY is bluffing. So the game (and the stock market) keeps going up as the players trying to outbluff each other with "I'll see your billion and raise you three more". And it will keep going up until somebody has to actually put something of value in the pot.
So, this economist and... (Score:3, Insightful)
So, this economist and a computer scientist are sitting at a bar.... and these 5 girls walk in....
Wait a minute (Score:3, Insightful)
Poker is a game?
ummm (Score:2, Insightful)
Computer scientists and economists? What about the actual mathematicians?
Re:The problem is not an efficient algorithm (Score:3, Insightful)
I'm sure it's great to repeat cliche lines when it comes to economics and computer science, and I know it's super popular with the recent quant economics and stock market debacle. But it'd be kind of nice if people knew what a Nash equilibrium is in the first place. If I use a Nash equilibrium strategy, it doesn't matter *how* you change your behaviour, you can't benefit from it. Think minimax algorithm in zero-sum games.
This is a perfectly sound mathematical concept, in a mathematical sense it's as true as anything else in mathematics. And this is an important and interesting result we found about it. There's no need to label anybody as "geeks addicted to a single theory". It's the same as saying that we "need to stop being addicted to believing that 1+1 equals 2 and start dealing with people".
Our applications of the theory can be more or less successful, and any application of game theory to anything as complicated as economics can only be an approximation. But there's no need to spit on this result because of that.
Re:The problem is not an efficient algorithm (Score:3, Insightful)
Even Rothbard heavily criticized Friedman (not to mention Krugman et al).
Re:Hayek (Score:1, Insightful)
Mises was probably the greatest mind ever to explore the problems of social sciences.
Bullshit! (Score:4, Insightful)
This argument echoes the exact same stupidity of the "perpetual growth" nuts that got us into this economic mess in the first place. You believe that infinite trades are possible, and that resource limitations don't apply. But even in your own example, you're talking about trading one limited resource (labor) for another (money). And yes, money is a limited resource - you can print all the money you want, but since doing so doesn't increase the amount of actual value that that money represents, all you're really doing is devaluing the existing money supply in order to redistribute the underlying value (i.e., stealing a little bit of value from everybody who's currently holding any of the existing bills, and giving the loot to someone else - usually a central bank).
Perpetual growth is nothing more than an illusion shared amongst fools. Value doesn't magically spring into existence by the mere act of trading something back and forth. Value can only be created by consuming resources. Whether that resource is energy, or some natural resource such as coal or iron, or human labor, etc, there is only a finite amount of that resource. Furthermore, many of these resource limits are things we are either already bumping into, or things that we will bump into in the foreseeable future, such as in the case of the various natural resources we've come to rely on.
Re:The problem is not an efficient algorithm (Score:1, Insightful)
I propose that we fix this incredible oversight by introducing the concept of "scarcity" to those silly economists.
Re:Only works with real money (Score:3, Insightful)
As long as people are allowed to keep extraordinary profits, the motivation is there to game whatever system is in place and this leads to a neverending race. Only strong levels of taxation (where by strong, I mean 95% taxation on all forms of personal income above a certain threshold, eg 200k) can make people reassess their own will to game the system, and thereby stop the elaborate schemes.
Roosevelt understood this when he proposed maximum wages for all during WWII, and the middle class prospered until high tax rates were dismantled a generation later.
Cart before the horse. (Score:2, Insightful)
No. This is really much simpler than you're thinking. "Growth" really just means that people, in the aggregate, obtain more or better real goods and services. Or to put it in crude terms, economic growth = people obtain more and better stuff than they used to be able to.
All the stuff about markets, currencies, banking and investment is just a set of schemes to make it possible for more stuff to be built. For example, using money instead of barter to trade makes it possible to have extremely specialized label. How many CT scans does the radiologist have to trade to the car mechanic to get the latter to fix his transmission?
You're missing the part where A and B work and produce valuable stuff that didn't exist before, get paid for it, use the money to pay the bank for the loan, and the bank's shareholders are now able to buy the stuff that A and B produced. Basically, credit is a mechanism for paying for stuff today with tomorrow's stuff. It does fall apart if there isn't enough stuff tomorrow, true.
Re:The problem is not an efficient algorithm (Score:3, Insightful)
Computer Scientists - and Economists - have a habit of assuming that they just need to find the proper model for human behavior, and all the problems will be solved.
There are two problems with that statement. First, that's not how computer scientists and economists work. Second, even if they did, how do you know they would be wrong in that assumption? I ignore here the laziness of claiming that economists would consider a mathematical model of human behavior a solution to "all" problems, including completely unrelated problem like opening a stiff door or how to wash the small of one's back while in the shower.
Re:The problem is not an efficient algorithm (Score:2, Insightful)
Re:The problem is not an efficient algorithm (Score:3, Insightful)
Fundamentally, Malthus was right. Exponential growth cannot continue indefinitely. At some point, resources will become limiting and exponential growth of human populations (and economies) will not be possible. The most extreme example of a limiting resource could be the number of atoms in the universe, but in practice, a realistic limit could very well end up being something as simple as oil.
Perhaps it is true that the assumption of constant exponential growth is a safe for the next one or few generations, but is it really prudent to base our entire civilization and way or life on such a demonstrably flawed assumption? What exactly will happen when the music stops?
-Grym
Re:Hayek (Score:2, Insightful)
Re:The problem is not an efficient algorithm (Score:2, Insightful)
That's because that's how it works in a science: you assume the rules don't change in an arbitrary fashion. Humans, however, do.
Human behavior does not change in an arbitrary fashion. Just because we can't predict something accurately doesn't mean its random or arbitrary. I mean, do you act randomly? Do you purchase products and change careers because of a coin flip? No. No one else does either. (except well, psychotics)
"We know the rules of Economics!", someone else is going to look at those rules and either game them to their benefit, or rewrite them to better suit their own purpose.
This is, I think, an incomplete view on what "the rules" of economics would be should we find them. A true "rule" of economics would be like a law of nature. There would be no possibility of changing it. The "rule" here is not a regulatory system, its a model which explains behavior. Knowledge of the model could itself be a parameter of the model. The "rule" might also be incredibly abstract, more of a mathematical framework than a specific model. There is no reason to think its somehow impossible. Those who claim "X" is impossible have a poor track record.
This makes any prediction of human behavior a statistical undertaking at best.
All predictions are statistical, its just that for many things the probabilities fall very near 1 or very near 0. Induction cannot induce itself etc. The fundamental problem with this pervasive idea that human behavior cannot be usefully modeled is that its not based on anything. People say "its too complicated." Yeah, it is now. But that's not good evidence that the problem is somehow intractable. "Too hard" does not mean "impossible." Not knowing something also doesn't mean its possible. If you're going to assert impossibility, you need to come up with a proof of its impossibility. I am sure you can think of some examples where something was though to be impossible for no good reason and was proven to be not only possible, but eventually became mundane.
Re:Psychonomics (Score:3, Insightful)
I think in all but the most ideal circumstances, it is indeed zero-sum game.
I think it should be palpably obvious that the obvious is true, from a simple examination of the world around you, and of history. If the economy (let's use the right term, economics is an area of study) of the world as a whole is a zero sum game, then wealth in the world could not consistently increase. And yet, for 100's of years, wealth has consistently increased, and has done so for virtually everyone in most economies. The common man in every significant economy of the world has generally enjoyed improved longevity, health, and material well being over his peer a hundred years ago (with the admitted exception of peoples that were conquered/colonized/displaced by foreign settlers). The major exceptions to this observation I think would be the inhabitants of countries where a non-market economy or non-functional market economy exists, such as North Korea and Somalia, or soviet russia, back in the day.
It's a falsehood, in my view, to attribute this to simple extraction of the Earth's minerals and to posit that growth must stop because peak oil is upon us or ??? While past extractive industries certainly were the source of some fortunes (Rockefeller, Weyerhauser, for example), the majority of modern fortunes come from some value added activity that is not focused on simple extractions. Rupert Murdoch, Bill Gates, Larry Ellison all run mega businesses that have created wealth through organization of capital, people, and knowledge. I think it's a mistake to think that there is necessarily some end to the pattern we have seen repeated throughout modern history.
That said, Shumpeter observed that improvements in efficiency due to any innovation suffers a declining return over time, so we could reasonably expect the current software and computer business paradigms to slow in their progress. But growth need not stall.
Re:The problem is not an efficient algorithm (Score:3, Insightful)
It's still a zero sum game in terms of the resources. Pretending it's not is exactly why the economic system is so damn broken.
That's not a useful way to look at an economic system. My value and whether I can fulfill my desires is not a function of how many tons of tin I use up or slaves I control. Plus, it's worth mentioning that we have more resources now than we did a century ago. Our knowledge (a typical good that doesn't depend on available resources) has grown allowing us to access resources that we couldn't access earlier.
Re:No shit (Score:3, Insightful)
And the best strategy for the shooter is to place the ball in the corner where the goalie can't reach it even if guesses the right side. The only problem with this strategy is that it increases the risk of missing the goal entirely, which not only losses the 50-50 chance but is also extremely embarrassing. So the optimal strategy is only valid for really good shooters.
And we are not even covering the options of feints, but game theory of feints gets silly. Is is feinting for real or is he feinting to make me think he is feinting, or is he feinting to make me think he is only feinting to make me think he is feinting? or...
Re:Psychonomics (Score:2, Insightful)
Two points here:
Re:Psychonomics (Score:2, Insightful)
Labor
This is the resource that you are missing in your equation. Combined with time, we have a vast amount of this resource to draw on. Wealth is never created from thin air though. We may think we have large amounts of virtual wealth, like credit, but its all worthless unless its backed by real wealth. If a person doesn't have a job to pay off their debt and doesn't have the physical wealth to cover the debt, a good bit of the stated value of that debt doesn't exist.
Creating value - super simple example (Score:4, Insightful)
Value can only be created by consuming resources. Whether that resource is energy, or some natural resource such as coal or iron, or human labor, etc, there is only a finite amount of that resource.
Wrong.
Simplified example: Let us assume you require 2 tons of rock to build a home. Then somebody teach you to build a better home from 1 ton of rock.
Now you have 1 spare ton of rock and a better home. Obviously, we have created value.
Economics is not about measuring the total amount of resources on earth. In the end, it is about efficiency, trading work and resources to always make more efficient use of resources.
Improved efficiency = Satisfying needs of more people with the same amount of resources = value.