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What Computer Science Can Teach Economics
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."
Polynomial time approximate, probabilistic or special case solutions to NP problems are wide spread. The problem is that real human being in economics can not be easily described by an equation - and when they can be, they quickly change their behavior based on that knowledge. What both computer scientists and economists need to learn is stop being geeks addicted to a single theory and start dealing with people.
By showing that some common game-theoretical problems are so hard that they'd take the lifetime of the universe to solve, Daskalakis is suggesting that they can't accurately represent what happens in the real world.
Hayek 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.
Here's a proof that detecting "toxic assets" is impossible (or at least NP)
Did you mount a military-grade, variable-focus MASER on an unlicensed artificial intelligence?
Meaning if you can generalize the solution to poker, you have the ability to discover the Nash equilibrium of the economy
The general solution to poker is to end the game with everyone elses money to make yourself richer. Some people have already applied this strategy to the economy.
Economics involves people. So...
"To summarize the summary of the summary: people are a problem." - Douglas Adams
That's why the goal 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.
If you have something that you dont want anyone to know, maybe you shouldnt be doing it in the first place -Eric Schmidt
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.)
Are you adequate?
Now would be a GREAT time to go alter the wikipedia articles on NP completeness and such, then watch the aftermath on slashdot as the n00bs go do their research and learn what it is for the first time!
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.
What can CS teach ECON?
How to crash routinely and have people shrug it off as normal.
For all intensive purposes, "whom" is no longer a word. That begs the question, "who cares"?
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.
But economics is not a zero-sum game. I give you $150 and you give me an hour of labor. We've both benefited by the trade.
In all but the world's oldest profession, I'm inclined to disagree.
Here's one:
Person A runs a tavern. Person B (after a few beers) drives his car into that of Person A. Person B pays $150 to Person C to fix the scratches on Person A's car. Person C uses his $150 income at Person A's tavern.
Who profited by the exchange of $150? Are all three people better off?
Here's another: Person B drinks at Person A's bar. Person A runs a farm to grow barley. The farm uses water that slightly increases (~1%) water prices for 100k other persons. Are person A and B both economically better off for their trade? (Yes). Are persons A,B, and the 100k others all better off? (They might or might not all agree, but what if their generation's children do not!). Even more interestingly, the 1% cost will manifest as slight increases in other goods. Eventually someone will be holding the hot potato...
In examples with larger populations, the zero-sum exists but is more blurry. Fundamentally, most economists seem to think that the optimal solution for a 2-person economy is optimal for an n-person economy. Well, logical induction doesn't work way! (The implication from "n" to "n+1" doesn't exist!) It is well known in Mathematics that optimizing a function with multiple variables not the same as finding the set of variables where each individually optimize the function.
I'm not saying that there isn't value to distributing tasks across people that are specialized at them. I just don't buy the argument that economics is never a zero-sum game. I think in all but the most ideal circumstances, it is indeed zero-sum game. Often the case, the true cost is hidden in the form of time. If the costs do not happen at the same time as the benefits, people only see the benefits for a long time and then lament the cost later.
I realize I may sound like the reincarnation of Marx. Well, I don't like Communism either.
Just because it can't make perfect predictions all of the time doesn't mean that it is useless. You're right, people aren't rational and random chance plays into most things. If you ever take an Econometrics class, you'll learn that predictive Econometric equations always include a random error variable.
Furthermore, in your example, I don't think that showing that people don't take the most selfish path is a "useless" finding. What they did was generate data about how people usually behave. Concepts from Psychology such as empathy and the norm of reciprocity may help to explain this behavior (and the data is capable of reinforcing these theories). The data can be used to predict how people will behave in the future. THAT is invaluable.
Despite what you say, game theory is very intriguing and Econometrics is incredibly useful. You just have to be aware of the limitations, and know how to use the tools in your toolbox effectively.
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.
I lost my sig.
Proof by obviousness isn't accepted by most peer-reviewed journals.