Ping Chen’s Comment on Paul Krugman’s article “The Conscience of a Liberal”

Ping Chen’s Comment on Paul Krugman’s article “The Conscience of a Liberal”
on the New York Times on Sept.11, 2009

http://krugman.blogs.nytimes.com/2009/09/11/mathematics‐and‐economics/?apage=3#comments
•63. September 11, 2009 12:37 pm Link

Paul, you clearly knew the policy implications of Lucas theory were wrong and Friedman’s monetary policy was weak, and the efficient market hypothesis simply useless and harmful. But you did not realize that their math models are also wrong, not because of fancy mathematics, butoversimplified or even misleading math. All the market fundamentalist including Friedman, Lucas, RBC are followers of Frisch model of noise-driven business cycles, which is a perpetual motion machine, and Frisch himself knew he was wrong since 1934.Lucas model of microfoundations was wrong because he ignored the principle of large numbers. Derivative market breakdown, becauseBlack-Scholes model is explosive in nature. Geometric Brownian motion model can be applied to stock price changes only if trading volume is near constant. The so-called efficient market hypothesishas nothing to do with market efficiency, since random noise only accounts for 30 percent of market fluctuation, the rest is nonlinear chaotic movements with clearly define persistent cycles. We published these results since 1988. Mainstream economists simply took a blind eye to all these new evidence of non-linearity, complexity, and market instability because new science of complexity cannot be “integrated”into optimization approach like Lucas did. The problem in economics is that linear thinking blocks nonlinear modeling, not too much math, but too narrow math. narrow in the sense that try to explain non-Euclidean phenomenon by Euclidean geometry. Is there any physicist would consider the Lucas model as “elegant” when his free economic agent has near zeroth degree of freedom, but even a gas particle has six degree of freedom.

Economists need re-education in math. Their math tool is time series analysis is even fall behind biologists and physician. How many physicians believe your heart beats and brain wave are purely random walk! and efficient! Just primitive math bears a fancy name. CAPM is a linear model, far detached from a nonlinear financial market.

Ping Chen, a physicist at Peking University and formerly U.Texas at
Austin, working on chaos theory of business cycle theory and nonlinear
model of asset pricing since 1984.

— Ping Chen at PKU

http://krugman.blogs.nytimes.com/2009/09/11/mathematics‐and‐economics/?apage=3#comments

Ping Chen’s comment was included in petitions for revitalizing economics

Name: Ping Chen on Sep 11, 2009

Comments: Not only the blind trust of rationality and market is wrong,the fancy math models to justify these beliefs are also wrong! Frisch model is a perpetual motion machine, Lucas model of microfoundations is representative agent in nature, which against the Principle of Large Numbers. Black-Schole model is explosive in nature. Applied mathematician in economics and finance often ignored basic constraints in physics, ecology, and history.

http://www.ipetitions.com/petition/revitalizing_economics/signatures