Why is Economics Not A Branch of Engineering?

Refet S. Gürkaynak

Bilkent University

Mathematical tools of economics

• Microeconomics: Closer to pure mathematics

• Macroeconomics: Closer to engineering

Standard tools

• Optimal Control

• Dynamic programming

Some other examples

• Basic equation of finance:– Heat equation

• Stock prices follow Wiener processes– Jump diffusions

• Applications of wavelets in finance

• Decomposing long-term growth from business cycles:

– Band-pass filtering

• Public inferring the preferences of the policy maker from observed behavior.

– Kalman filtering

• Central bank wants to do policy but is unsure of the “model”

– Robust control

Given the similarities of tools, why is economics not a branch of engineering (or mathematics)?

Two reasons:

1. Disagreement over the positive stuff due to lack of controlled experiments.

• What does policy do?• What is the average human’s objective

function?• Does it change from culture to culture?

More importantly

2. Disagreement over normative issues.• What SHOULD policy do?

Contemporary hairy issues of economic policy.

Health policy

• Resource constraint– The world does not have enough resources to

provide the best health care for every body.– Who gets it?– How much of our resources SHOULD we

channel to health care.

Retirement issues

• Humans are living longer.– They will have to work longer because a small

working population can’t satisfy the needs of a large population.

– But people expect to retire at a certain age.

Poverty

• SHOULD the rich world look after the poor or are the poor countries poor for a reason?– Should we think about Malthusian dynamics

or is that immoral?

Globalization

• Do we care about economic efficiency only?

• Do we also care about distributional issues?

• Do national boundaries matter?

• Should they?

• Do we want all countries to be alike?

Globalization III

• Free trade is beneficial on average but it hurts some groups.– SHOULD we care?– Do we WANT to protect old ways of living?

• If so, why don’t people WANT to pay for it?

Globalization III

• The CAP in EU.– Should the French farmers be protected?– Do we want to protect an inefficient way of

life?– What about the impact on African farmers?

Economic policy is not only economic policy.

How paternalistic should economic policy be?

• Should we use taxation to discourage people from smoking?

• How about using it to discourage gun ownership?

• How about using it to discourage drinking?• How about using it to discourage people

from buying condoms? From idling at coffee houses? From spending time online?

These are public policy questions intertwined with economic policy.

Only after the policy preferences are decided can economists use their positive tools to optimally achieve those goals.

• Direct income support or price floors for Turkish tobacco producers?

The tools for answering the question are not independent of the

question itself.

• Most of economics is formulating the “right” question in a way that can be answered by mathematical tools. – That is the “art” of economics.– “Solving” the problem is the easier part.