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Unlikely Friendships – Part I – Mathematical Economics

February 10, 2022
Reading Time: 5 minutes

Math with Physics, Math with computer, Math in Engineering or even Commerce or Accountancy. All well known combination of subjects. But unknown to most of us, Math does have some unlikely and not so well known friendships. And that is what our new series is about – Combinations of Math that you never knew existed.

First in the series is Math with Economics or call it Mathematical Economics. Traditionally labelled a humanities subject, it is usually taken up by commerce students. But here, our student contributor Anush Hariharan introduces us to the Math – Economics combo. Anush, a student of ‘BSc Economics’ loves his Math as much as his Economics. His passion is evident as he talks about the rare combination, explaining the reason for its existence, its many subdivisions and how it helps add another dimension to the usual applications of the subject.

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Economics and Statistics

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Economics is the study of how people use time and material resources to improve their own well-being. It is is the study of how one’s economic decisions affect other in society. The study of Economic behavior of an individual is called Microeconomics. The bedrock assumption is that human behavior is motivated by self-interest. Economics says that only people’s ‘Economic’ decisions are motivated by self-interest. It also studies the effect that the policies of the government have on the decisions we make in life, and also the impact of one’s economic decisions on the Economy.

For many years, and even today, many study Economics in the form of theories put forward by people to explain certain economic phenomenon. Each of these theories have some assumptions on which they all operate. All of these assumptions are too ideal and cannot be reflected in reality. Yet, many governments and corporations make decisions based on these theories.

According to many, the great breakthrough came when Paul Samuelson, the Nobel Laureate from MIT, introduced the use of mathematics in economics or call it as Mathematical Economics. This allowed the theories to be represented by mathematical formulas and graphs and could not only help is explaining those theories by also help to easily predict what was going to happen.

Another huge tool was Statistics, which allowed people to correlate policy decisions to outcomes. And this is where, the catch was. For a long time, it was believed that raising the minimum wage or increasing government spending would cause loss in the productivity and lead to higher unemployment. But sometimes the Statistics said otherwise. Were there other reasons that lead to higher employment when the minimum wage was raised? If so what was it?

Now, you had a problem, the theory had a flaw, it had an exception, or worse yet, it was completely wrong all along. You may create graphs, and yes they can be very accurate mathematical tools. But you have to create a graph using an equation. In Physics, we usually created an equation by balancing two opposing forces to ensure balance and symmetry. In Economics, we can say that equations can be used to cancel out input and output. But where do you get those equations from?

Econometrics, is a field of economics that looks at data to determine causality. It uses correlation between different data sets and related variables to try and ascertain economic behavior

Brikbeck, at the University of London was the first one to introduce the course of Economics, Mathematics, and Statistics at the Undergraduate level. I guess it’s safe to say that my college(St. Joseph’s College, Bangalore) got the idea from them.

The use of Statistics is usually considered a post graduate application of economics, but today it is finding it’s way into lower levels of education due to it’s popularity and it’s use in the marketplace.

Professor Ron Smith, who heads the department of Economics, Mathematics, and Statistics at the Brikbeck says that “Statistics gives one power to argue with the Economist.” Which I find very interesting because if an Economist proclaims A to be the cause of B and says that the net effect will be C. If a statistician observes that the data points to the net effect D, he has some way to disagree with and challenge the ideas of the Classical Economist, and the Economist is forced to come up with answers that explain the data.

All of this is very good, as open dialogue encourages progress and understanding of any subject, but recently the trend has been an extreme use of Statistics and a rejection of other factors.

The reason that this has become so is because Econometrics has higher value in the job market when compared to Classical Economics where one could only expect to land up with employment in the academic field.

Economics is not a real science. In my college we have four courses in Economics, three of which have History, Sociology, Industrial Relations, and Political Science along with Economics. My course, which is Economics, Mathematics and Statistics comes in the ‘Science’ category while the other three come under the humanities. People like to joke that this course is like a middle child, neither here nor there.

In my opinion, it should not be here or there. You can study Mathematics independently. For studying Statistics, you need Mathematics. For studying Economics, you need Mathematics and Statistics, so now you know which subject is the dependent one. Even after all of these are taken into account, Economics is not a Science. It is not universal. It does not have any law that can determine supply, demand and output of two time periods or two geographic locations in the same time period accurately. Societies change, Location Changes, Production Changes, Technology Changes, and sometimes, with luck the Monetary Policy is able to keep up with all these changes.

The greatest challenge is to to find out what caused something to take place and to predict the best course of action to pursue in order to to tackle future hurdles, and this can only be done with a degree of certainty. Theory has had to take a back seat to Applied Economics. This is a good step, but we cannot ignore what kind of thinking gave rise to Theory in the first place, it was the observation of people and the times they had lived in.

Mathematics may be infallible, but in Economics it may appear to make ambiguous or false claims look authentic. Even Statistics can also lead to a wrong conclusion, if we use tools of correlation that are weak. Despite its uncertainty, it’s flaws, its little progress, Economics continues to be taught to students all across the globe, in the hope that one day it will become a Science and that it would explain some of the things that it wanted to.

In my view, this will never be possible, unlike Physics, where we seek to unify different forces, in Economics, you will always have something different and some variation of each of those things to try to help us understand the world of production where there is a scarcity of resources. In the end, I can only conclude by saying one thing, don’t believe that anything one person says will factually true, be open to change, because change is the only constant.

What do you think?

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