Posted by: Dirk | December 31, 2008

Darwin at 200

Charles Darwin would turn 200 next year. Since his species does not reach an old age like that, we are left with his writings. Following is an extract from the Beagle adventure:

[page] 336 CHILOE. Nov. 1834.

26TH.—The day rose splendidly clear. The volcano of Osorno was spouting out volumes of smoke. This most beautiful mountain, formed like a perfect cone, and white with snow, stands out in front of the Cordillera. Another great volcano, with a saddle-shaped summit, also emitted from its immense crater little jets of steam. Subsequently we saw the lofty-peaked Corcovado—well deserving the name of “el famoso Corcovado.” Thus we beheld, from one point of view, three great active volcanoes, each of which had an elevation of about seven thousand feet. In addition to this, far to the south, there were other very lofty cones covered with snow, which although not known to be active, must have been in their origin volcanic. The line of the Andes is not, in this neighbourhood, nearly so elevated as in Chile; neither does it appear to form so perfect a barrier between the regions of the earth. This great range, although running in a direct north and south line, owing to an optical deception, always appeared more or less semicircular; for the extreme peaks being seen standing above the same horizon together with the nearer ones, their much greater distance was not so easily recognised.

The volcano Osorno is the one on top of the page, by the way. A little below the story continues:

We reached at night a beautiful little cove, north of the island of Caucahue. The people here complained of want of land. This is partly owing to their own negligence in not clearing the woods, and partly to restrictions of the government, which makes it necessary before buying ever so small a piece, to pay two shillings to the surveyor, for measuring each quadra (150 yards square), together with whatever price he fixes for the value of the land. After his valuation, the land must be put up three times to auction, and if no one bids more, the purchaser can have it at that rate. All these exactions must be a serious check to clearing the ground, where the inhabitants are so extremely poor. In most countries, forests are removed without much difficulty, by the aid of fire; but in Chiloe, from the damp nature of the climate, and the sort of trees, it is necessary first to cut them down. This is a heavy drawback to the prosperity of Chiloe. In the time of the Spaniards the Indians could not hold land; and a family, after having cleared a piece of ground, might be driven away, and the property seized by

[page] 338 CHILOE. Nov. 1834.

the government. The Chilian authorities are now performing an act of justice, by making retribution to these poor Indians; giving to each man, according to his grade of life, a certain portion of land. The value of uncleared ground is very little. The government gave Mr. Douglas (the present surveyor, who informed me of these circumstances) eight and a half square miles of forest near S. Carlos, in lieu of a debt; and this he sold for 350 dollars, or about seventy pounds sterling.

The lesson from Darwin’s work is strong. First describe reality, then look for models to explain it. This is a lesson that applies for economics as well. A thorough knowledge of how the world works is the basis of good economic research. Or stated otherwise: even a mathematically correct model is of no use when it cannot explain the reality. This is a point that has been forgotten by many, I suspect. Scientific rigor does not automatically come with mathematically correct models, but depends on whether the model can explain all or a part of a real world phenomenon.

Here is a short list of theories that are mathematically correct but probably fail in the real world:

– intertemporal coordination/substitution

– Arrow-Debreu markets

– risk-calculation based on Gauss’ bell curve

– Modigliani-Miller theorem

– rational expectations

Using any of the theories/assumptions from above is probably OK, but if somebody subscribes to the whole list and takes it as a guide to the real world, his or her judgement would be deeply flawed. From my point of view, this explains a lot of the financial crisis. Every specialist accepted one of the wrong assumptions, which creates only a small error for each specialist. But for the whole system, this added up and contributed to ignorance. A classic example how microeconomic optimization ends up in macroeconomic troubles.

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