Source: Suresh Fernando
Have you ever wondered why physics works and financial theory and economics do not? One might remember the story of Long Term Capital Management, a hedge fund that ‘blew up’ and that required a $3.6 billion bailout. This, in itself, is not that startling given the number and scale of bailouts that we have been witnessing. What is more interesting is that LTCM had two Nobel prize winners on its board of directors. What is wrong with this picture? There are two possibilities; there is something faulty with the criteria for selection and distribution of Nobel prizes or there is something faulty with the structure of ‘knowledge’ in the domains of finance and economics. Let’s focus on the latter…
That this kind of debacle can take place is revealed the distinction between Truth and Relevance. One interpretation of Truth is as the pursuit of knowledge for its own sake. In this context, it is possible to reach the pinnacle of the profession without any understanding of the underlying causal relations within the domain actually operate… without being able to connect ‘knowledge’ to what is Relevant in the world.
Relevance takes, as its first principle, functional utility. Domains of inquiry need to serve a purpose…
What is physics and why does it work? Let’s begin by noting three properties:
It describes a domain of inquiry that encompasses all ‘physical’ phenomena
It restricts itself to phenomena that can be physically observed or can be measured
It focuses on establishing causal relations… the result of which makes it possible to predict claims, falsify others etc… this is what science is!
All domains of inquiry that aim to call themselves science must aim at the above. Any deviation from the above results in the domain being no more than narrative construction… possibly a very interesting story, but a story nonetheless.
Economics is a classic example of this. Does anyone actually believe any of the predictions made by economists (especially those that work for banks)? Does anyone even bother to read what their monthly forecasts are? Are they ever right? Economics is not science… not even pseudo science… Why is this?
The Structure of Theories
In order to understand the structure of domains of inquiry, we need to more closely examine the structure of theories… A theory, loosely speaking, can be understood as a set of elements that are contained within a domain that are connected by a set of relations… The more precise these relations the better… If the relations are mathematical that is best! By way of example, classical mechanics, holds that E=mc2… This suggests a mathematical relationship between energy, mass and the speed of light describing a domain of objects encompasses all of matter and energy states (electrons, neutrons, magnetism, electricity etc). This relationship is so precise that it can describe potential states in the future that can be tested… This is why this is scientific… it provides for the possibility of prediction…
The Scope of the Domain of Inquiry… are boundaries justified?
Another important feature of physics is that it provides models for all objects in the universe… it sets its boundary as all objects within the universe… and aims to identify said objects.
In contrast, other pseudo-sciences, focus their attention of subsets of ‘everything’… Psychology focuses on the activity of the human mind and subpersonal states… Economics on identifying causal relations amongst human agents in a ‘economic system’… relative to a ‘monetary system’… etc… You can already see that the domain of inquiry is not so clear…
Why is the scope of the domain of inquiry important? Well, let’s consider the case of psychology… It attempts to understand how the mind works and how this impacts behaviour, moods, and so on… It does so by, presumably, starting with the assumption (at least since the time of Freud) that sub-personal states are at play. What it, of course, does not examine with precision is the impact of the role of society, groups etc play on the human subject…
It assumes a boundary… an artificial boundary…
If an artificial boundary for the domain is set, it is not possible to properly understand all the interactions at play… We cannot get a complete picture of what we are looking at and therefore we will not be able to effectively establish causal relations… and therefore we cannot have knowledge that is scientific.
A Few Thoughts on Hierarchical Theory Integration
What can we do about this? One possibility is to describe, let’s say, three levels of description; the individual, small groups (localized interaction patterns where people are present in relation to each other), large groups/discourses (nation states, religions… etc). The next step would be to define the elements of the domain of all of these theories with a consciousness of the other theories such that we define certain elements in the domain that are common to more than one theory. We could, for example, utilize the notion of observable action within the theory of an individual (the primary focus of which would be to understand what makes people tick from an sub-personal perspective). Action would describe observable behaviour that is the end result of the internal forces that bring to bear on the activity of an individual. We could simultaneously use observable action as an input to a theory of small group interaction… We could develop a theory of group interaction that starts from a perspective of peoples’ observation of the behaviour of others.
In defining concepts that are present in two theories, you build a bridge between the two worlds.
As it stands, this is missing. There is no doubt that human psychology has a large role to play in our behaviour as ‘economic agents’, the two domains of inquiry speak totally different languages and therefore operate independently from each other. This leads to an imperfect understanding of the domain and an inability to understand the domain sufficiently to establish causal relations.
On the Evolution of the Structure of Knowledge… it’s all discourse
As Foucault has pointed out, all knowledge claims are claims to power… and in that sense arbitrary. If we think about things at level of abstraction, there is nothing intrinsically different from the way that Freud, through sheer brilliance and perseverance, constructed the discourse of psychology from the way that Christ constructed the discourse of Christianity… discourse is discourse is a form of narrative…
If we want/expect more from our narratives…. If we want domains of inquiry that are relevant, we had better start establishing criterion for relevance and holding the domains of inquiry to task!
The Spirit of the Times calls for us to rethink the way that or discourses are structured… to not let them evolve contingently as a result of the brilliance on an individual perspective…
It is time to begin with the end in mind… to recognize that we need a science of human interaction that explains why we are in the mess we are in… Only if we have such an understanding is there any real hope of righting the ship.
The first step is to understand the contingency of the structure of our ‘knowledge’ and our current domains of inquiry… There is nothing preventing us from looking at things differently… Not searching for Truth, per se, but starting the quest with higher expectations…
Knowledge and Truth for their own sake is not enough… We need to frame our inquiry with the expectation that we can do better… must do better…
This is the sense in which domains of inquiry must be relevant!