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Saturday 11 October 2008

ESSAY: On Empirical Economics, Faith and Myself

Empirical Economics. I have been thinking… is that, or is that not, an oxymoron? I mean… not the fact that I have been thinking… but whether or not, ‘Empirical Economics’ is a contradiction in terms?

To me ‘empirical’ are only the ‘real’ sciences: areas of knowledge which are testable using experiment and observation- where you can (most often) actually experiment, record observations, formulate hypotheses, replicate results, prove theories, predict correctly... In this sense, for me, ‘empirical’ is synonymous with ‘experimental’.

‘Empirical’, however, as meant generally in economics refers to econometric or statistical analysis of numeric data. What? Just because some measured parameters can be connected in some way to some other measured parameters; does that connection make for an ‘empirical science’?

Oh sure, numbers are important. And certainly, incomes and expenditures, profits and losses, sales and gross margins, investments and cash flows, outlays and revenues have to be measured. Planning has to be done to maximize some of those, to minimize others and to 'optimize' yet others.

It is true, also, that ultimately you need to have numbers back up whatever it is that you are claiming or examining. However, there are matters in which numbers are clean enough and relationships simple enough for us to crunch at the current level of our intellectual and computational power. Is it really so in matters of economy? Are we really capable of studying ourselves to the extent that we know exactly what to factor in and what to reject? There are far too many parameters and numbers available in this world, and almost any two sets of numbers can be used to come up with some or the other conclusion. What is critically important is whether or not; elements in the frame make for a realistic picture- one that is in concordance with a probable reality.

Does it really make sense when you start trying to ‘model’ a human being into a mere ‘consumer’ that makes only ‘rational’ choices- and try to use calculus to build a whole world around that… is that very brilliant? I am not too sure. Deep empirics of Economics sound to me like that much noise... I mean, my world-view is very informed by Physics and Philosophy: and to me, it seems like the present-day Economics pretends very hard, to be physics-of-the-human-world; while it should more properly be content with being the Philosophy-of-house-keeping-and-resources.

Since Physics is very much internalized into me, many of the contradictions and pretensions of this wannabe-Physics are becoming painfully obvious to me, while I pursue my Ph. D. in a leading Institute studying Economics. For one, as opposed to Physics, the track record of the predictive capability of Economics is pathetic. I mean, taking a short-cut, I can state that Physics predicted well enough for me to be working on this computer (earlier having assembled, repaired, sold and gotten rich on the same). On the other hand, could all the ‘empirics’ of Economics predict, let alone shelter us from the ‘interesting’ times that we are living in today?

Au contraire, it was the M.Sc.’s and Ph.D.'s in Economics that modeled the MBS's and the CDO's that are blowing up in our faces, and threatening to unwind the whole game of ‘development’ and ‘progress’, along with all the rest of that ‘shining’ business. I shudder to think what will happen when the other fancy derivatives come home to roost…

I am just appalled at the whole charade... I mean, Economics would, in my view, be much better off, if it were to gracefully accept its limitations and to keep closer to the non-absolutes of philosophy- rather than pretend to be a full, fee-paid member of the certainties club of empirical sciences. In my view, if there is one other major factor that is to blame for the current fiasco, other than human greed, it is the hubris of empirical economists!

Is it not obvious that when you study the natural world, it is not impacted by what the human beings think- and therefore, those areas can be studied ‘scientifically’ and ‘empirically’? Is it not obvious that when you try to quantitatively study human mind, human behaviour and human civilization in a non-laboratory / non-clinical setup, there will be a zillion feedback iterations, nullifying any possible mathematical correctness in the original prediction?

To me, due to the very nature of its object of study, economics can never get rid of a very substantial ‘Practitioner Effect’. I define it thus: “If practitioners have access to the observer’s prediction, which they know is certainly correct; they will prove the prediction wrong”.

Let us take an example: If the stock market players (practitioners) have access to the observer’s predictions which they know are correct; they will attempt to make use of the predictive knowledge and thus change the outcome, proving the prediction wrong.

Let us take another example: Let there be two countries- country A and country B. Let them be at war with each-other. Let there be an observer who predicts that country A will win (in terms of a stipulated measure, by a predicted margin) because of their attack strategy x, and the response y from the country B. Even if the strategies were not spelt out to the counter-party, the knowledge that the observer’s prediction is correct, will make both countries change their strategies- country B will change the response strategy since they do not want to lose; country A will also change their attack strategy, since they know that after getting to know of their impending defeat, country B is bound to change their response tactics, and thus threaten A’s certain win. Thus, the prediction can no more be certainly correct (in the measure and margin predicted).

On the other hand, irrespective of whether Messrs magnets A and B are given in writing or not, my prediction that if they face each other with their opposite poles, they will get attracted… they still will.

This last example works the way it does perhaps because the magnets have no will, comparable to mine. However, with a comparable will, power and intellect; it is not possible to predict with certainty, the behaviour of another entity, with similar will, power and intellect. If that were so, it would be possible to neatly and successfully cut a cake 6 inches in diameter with a blade which at its narrowest has a width of 6 inches.

This leads me to postulate the ‘Edge Effect’: “It is not possible to cut with an edge unless it is substantially narrower and substantially harder than the object proposed to be cut”.

Being human, how do economists propose to correctly, scientifically and empirically analyze, and predict the nature of reactions of a collection of human beings who are individually in the same, and collectively in a higher range of intellect and power than themselves?

Well, to me, economists, like the rest of us are blinded by love- love of their profession, of their discipline; and thus, can not see what they are leading the world into…

…I guess I would be thrown out of the Institute for this blasphemy. But then, this would not be the first august gathering that would be finding me a tankhaiya for a grave transgression in the realm of love!

However, while I am still here, let me probe a little further- for this perhaps, is my last opportunity to do so. Perhaps I will, eventually, find that I was grossly mistaken in my (current) understanding of empirical economics. Or perhaps, I will grow so comfortable in it that I will never entertain such dumb doubts any more. Or perhaps, I will lose my capability to ask questions of fundamental nature. That, by the dint of my then-knowledge in this field. ...Or perhaps, I will be thrown out of the Institute before any of the above occurred.

When one is thinking from within a discipline, the edifice and superstructure of that discipline become so imposing that one loses one’s ability to question the first principles on which the discipline is based. So, perhaps, the ones that can question the first principles of a discipline are only those that are largely informed by systems outside of that discipline.

I, therefore, feel that if I were to question the boundaries of relevance of economics, or the self-image of economists- the time to do that is before I get trained (and indoctrinated) into the system. This is akin to saying that the best time to critically evaluate a religion is before you convert to it... or that the best time to inspect the foundation of a structure is when the foundation is being laid- and not when the ribbon is being cut, nor when generations of workers and users have already passed through the portals of the completed grand edifice.

Let us see if this assertion can stand the scrutiny in a matter that exercises me the most: seeking the right way to live. Traditionally, that is the space which has been occupied by religion. So, allow me to spend a little bit of your precious time on expounding upon my understanding of religion.

A Detour- Classification of Faiths:

The primary way in which I classify religions (I am using the words ‘faith’ and ‘religion’ synonymously here) is through their historical conceptual structure: top-down, and bottom-up. Most religions that claim to have been given to us by God Himself, such as the Abrahamic religions (i.e., faiths that trace their lineage to the ‘Faith of Abraham’, e.g., the Christian, Islamic, Jewish, Baha’i etc. faiths) can be classified as top-down. Here, you have a ‘script’: a book or book-like body of knowledge that is God’s own word to humans- generally brought to us through a humanly-born go-between. Thus, many rules (and the basis for rest of the rules) come as given from God Himself sitting in the high heavens above; talking down to us, the denizens of this Earth.

On the other hand, you have philosophical (i.e., those based on a philosophy developed by a great thinker, e.g., Buddhism, the Taoic family of East Asian religions, etc.) and natural religions (i.e., the religions that likely developed through personification of natural phenomena, and later coalesced together to form a largely self-consistent system of faith, e.g., Hinduism, ‘pagan’, tribal religions etc.).

The philosophical religions generally do have written-down fundamentals- however they are not referred to as ‘scripted’ religions- apparently because the religion has not been ‘scripted’ for us, by God Himself, or by an emissary. The philosophy that these (philosophical) religions are based on, had originally come about due to the originating philosopher’s observations of the natural world around him; and his efforts to make sense of it. He eventually verbalized his understanding in a conceptual framework, which then became the seminal text. In this, the sense of fundamentals of the religion being based on principles inferred from the phenomena around us, such religions are bottom-up.

One can argue that the founders of the various Abrahamic religions also likely went through a similar experience. The difference, to me, lies in the claims of the adherents of the religion: when you believe that the word of the script came from a human (e.g., in case of philosophical faiths); you are that much circumspect, you use your own brain that much more- and there is always a sense of non-absoluteness which creates a very different person and society. A typical Abrahamic, on the other hand for example, is that much more certain about his own world-view: after all, he is in possession of God’s own word- unadulterated, indubitable and ‘absolutely’ absolute!

In a sense, the logic used for a Top-down world-view is deductive logic: you already have the complete set of absolute Truths (at least the ones that God, in His infinite wisdom, knew were relevant for you)- all you need to do is to deduce the right solution for a given application. God said, “Go forth and multiply” (Genesis 24:2)- so obviously, Malthusianism is that much of claptrap. God said, “…fill the earth, and subdue it; and rule over the fish of the sea and over the birds of the sky, and over every living thing that moves on the earth” (Genesis 1:28)- so obviously, Environmentalism is that much sentimentalism.

An adherent to a philosophical religion might believe and actually do the same things, but will always be plagued by some or the other measure of self-doubt: after all, his logic is inductive- and as we all know, only one black-swan event is sufficient to render an inferred rule of inductive logic, invalid. Less able to deceive himself into being absolutely convinced of his own way, he is thus, way less effective in imposing or selling his way. Equally, he is much more amenable to listening to and learning alternate ways of living.

Similarly, natural religions are also bottom-up. Each of these is also based on observed natural phenomena, and an (or a set of) inferred ‘way(s)’. These religions may or may not have written texts. Often, latter day adherents may have codified some of the already existing. However, the difference lies in the primacy of the existence of practices at the time of codification of these texts (e.g., the vedas). Similarly, the religion may or may not have leading philosophers as adherents to the faith. The difference again lies in there being no identifiable seminal philosopher. These religions are primarily syncretic in nature. Also, new gods are often invented as the need is felt. Again, the natural religions do not demand, or provide that class of absoluteness, which is par for the course in the top-down religions.

When the dominant faith is bottom-up, rival faiths, if also bottom-up, are often syncretized without too much trouble (e.g., Hinduism’s absorption of Buddhism in India, Buddhism’s syncretization with Taoic systems in East Asia, etc.). Of course, if the rival faith is top-down, then the situation is more complex: those will often be tolerated, but a little less than completely happily (e.g., Hinduism’s tolerance of Islamic and Christian faiths in India, Christian and Muslim pockets in Buddhist and Taoic lands).

This is different from the situation when the dominant (or even substantially powerful, though non-dominant) faith is top-down. If the rival faiths in such cases are bottom-up, those will slowly but surely be starved of adherents through conversions to the top-down faith. Stratagems used may range from very subtle to very ham-handed in nature- however, over a long-term, the result is always the same (e.g., Christianity’s clean sweep of Europe in the early phase: Constantine till the rise of Islam; Christianity’s clean sweep of Americas, sub-equatorial Africa and pockets of Pacific since industrial revolution, and current, ongoing effort in East Asia; Islamic band from West Africa to Pakistan, and pockets further East).

If both the rival faiths (dominant and non-dominant) are top-down, then sparks fly. One of them survives, the other one is severely looked down upon, made uncomfortable, and often externed (e.g., Moors from the Iberian Peninsula; Jews from Europe; Baha’is and Ahmadiyyas from most Islamic lands etc.). The current adventures into Islamic lands by the Western (read, Christian) powers could be seen as an extension of the same rivalry which (God alone save us!) has now gone global in nature.

This conviction of an adherent to a top-down religion, when combined with power, is likely to drive him to desire a unitary system, where not just other faiths (both, top-down and bottom-up), but even other species and ecological systems must make way for eventual establishment of his (actually, in his view, his God’s, and the only ‘right’) system.

This leads me to state the ‘Conviction Effect’: “Given an equivalent or greater power, a top-downer will eventually always prevail”.

Return to the boundaries of relevance of economics:

Having shared my primary classification of faiths and some of the critical ramifications of the same, we can now look at the evidence (or lack of it) pertaining to the inability of practitioners to critically assess the boundaries of their system.

A good candidate, in my view is Islam. A top-down system of faith, it is a major carrier of Abrahamic Faiths’ flag, along with Christianity. However, the attitudes of Muslims and Christians, towards Islam, as we have already seen, are very different. And, the difference exists merely in the acceptance, or rejection of a single sentence!

The sentence in question is, ‘La ilaha ilallah, Muhammadur Rasoolallah’. Translated in English, this simple statement says: There is no god but God, and Muhammad is His messenger.

It is worth noting at this point that ‘Allah’, is not a Muslim God- just like ‘God’ is not merely a Christian God. The word Allah is the standard Arabic rendition of the word, ‘al-Ilah’- meaning, ‘The Divinity’. Arab Christians use the term to refer to ‘their’ God too. Further, this fusing of multiple words to form yet another is a fairly standard procedure in several languages, including Arabic.

Several similar examples can be quoted from other languages: e.g., in Sanskrit, ‘su’ and ‘agatam’ fuse to give us the word for welcome- ‘swagatam’. In Hyderabad, an old area, where, as I recall the story, a saint by the name Shah Ali sat by a big rock- the Shah Ali Banda- today goes by the name Shalibanda. Talking of rocks- the famous one, ‘Gibraltar’ is the fused form of ‘Jabal-ut-Tariq’- the mountain of Tariq. (Tariq ibn Ziyad was the Berber Umayyad general who led the conquest of Visigothic Hispania in 711 C.E.).

Coming back to ‘La ilaha…’, the first part of the statement commits you to a belief in a unitary God; and the second part to the emissariat of Muhammad. Once you cross that chasm, there is no holding back your belief- since if (a) there is God, (b) there is no god other than God and finally (c) Muhammad is His prophet- then one would really have to be raving mad, or perhaps utterly evil, to do anything other than what God has commanded (through Muhammad, of course).

Christians, like Muslims, themselves claimants to the pre-existing Faith of Abraham, refuse to accept this claim made by the Muslims. (Muslims, playing the same game, refuse similar legitimacy to Baha’is, for example).

The reason seems simple to me- once inside a system, you can not afford to examine the first principles (or the fundamental presumptions) of the system that gives you moral legitimacy, livelihood, status or any of the other critical necessities of life.

Thus I guess, economists find it very difficult to examine any possibility of reducing their ‘empirical science’ to a non-empirical branch of knowledge: it could then be considered a part of ‘wishy-washy’ humanities, or merely the ‘theoretical-bit-of-practical’ commerce or ‘intellectual’ business / political administration.

‘Be that as it may’, as an esteemed ex-boss of mine would remark, what I need to really figure out is whether there is sufficient play available in this institute for me to pursue my brand of learning.

And what is my brand of learning?

I guess, that requires me to turn the day’s scalpel on myself… however ineffectively or impractically (recall: Edge Effect)… Analyzing myself, I can say that I am primarily an ‘ab-initio’ person: a person given to examining the theoretical underpinnings of any system; looking at the explicit and implicit first principles or initial presumptions on which the system is based; and then, the deductions there-from. As for the superstructure, I do enjoy its beauty- but refuse to be completely lost in merely its intricacies, (in)consistencies and applications.

I guess I am one of those rare persons that have, primarily, a Brahma-Saraswati nature: I must create; I must learn, I must unearth, I must know. I am always the happiest when I am doing something new- something that has never been done (perhaps, merely because no intelligent and capable person thought it was worth doing), or is only currently beginning to get done. I am willing to look impractical, foolish, out-of-touch-with-real-world; if only that allows me to walk a path full of new knowledge and discoveries.

Contrary to that, most people that I know, have a Vishnu-Lakshmi nature. They prefer to make the better, best. They work the established norms, and are happy with the (very difficult, though) small changes that are possible to be made, in an established paradigm. Not that I do not like preserving the good that I see around me; and not that I do not fancy greater wealth and status- just that if for the same effort, I can create something new (which may even be useless, as most new things eventually are)- I would do that. I guess I am a lohaar, and not a sunaar!

Thus, empirical fitment of some available data, to some less-examined aspect of some existing model in some involved sub-branch of economics, is not something that I can salivate looking forward to. The question then literally begs to be asked: why in the blazes then, did I choose to join a Ph.D. course? I guess, because I had these romantic notions about the folks with Ph.D. being the repository of ultimate knowledge. And the notion that by working for and getting a Ph.D., I will substantially improve my understanding of the first principles of the world, and of life.

Will I?

Irrespective of whether I will or will not, it remains a mystery to me as to why I should be studying Economics as an empirical science. This especially, in view of the fact that I find that view of this branch of learning, flawed. However, no person has ever changed his religion because someone else did not find his system's primary assumptions belief-worthy. No economist is therefore likely to be swayed by my blotches of ink above. It remains my responsibility therefore, to figure out whether the path to Ph. D. through this Institute will lead me to advancing my learning or merely to my getting indoctrinated.

While you dear reader, if you have no interest in Economics (empirical, or otherwise) and are completely flabbergasted by the mess above, may want to merely mull over these two, simple questions for me:
  1. If Economics is as much of an empirical science as it is made out to be (especially at my Institute), why could it not predict the ongoing Panic and Meltdown of the Worldwide Financial System, before it hit us?
  2. And if Economics is not so much of an empirical science (that it can predict even such earth-shaking events), then why is it being taught as an empirical science? (Would we be any worse off simply praying to Poseidon, or Fortuna?)
My worry, dear reader, is this: am I wasting my time, or worse, in the guise of being educated, losing my ability to learn, and getting indoctrinated instead? If so, I must do a Houdini... Pronto!


All ‘effects’, classifications, hypotheses and writing is my own; as also all the mistakes. I am not aware of including anything here that in my view will hurt anyone’s feelings. If, despite that I have unwittingly upset you, kindly forgive me- these are only my opinions. And I hope you will extend the right to having an opinion to me, despite my being a witless idiot.


- owais

This is first being published on this page.

1 comment:

sarah said...

I liked this post very much as it has helped me a lot in my research and is quite interesting as well. Thank you for sharing this information with us.

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