Stochastic Calculus makes it to Prime Time

This quote has been making the rounds.

Arnold Kling:

My main beef with economists is that standard macroeconomics does such a poor job of describing what is going on. The textbooks models are pretty much useless. Where in the textbooks is "liquidity preference" a demand for Treasury securities? Where in the textbooks does it say that injecting capital into banks is a policy tool?

Graduate macro is even worse. Have the courses that use representative-agent models solving Euler equations been abolished? Have the professors teaching those courses been fired? Why not?

I have always thought that the issue of the relationship between financial markets and the "real economy" was really deep. I thought that it was a critical part of macroeconomic theory that was poorly developed. But the economics profession for the past thirty years instead focused on producing stochastic calculus porn to satisfy young men's urge for mathematical masturbation.

Economists ought to admit that we do not know much about what is going on today.

It is true though that these brilliant folks thought they could model economies and predict the markets. And they were pretty good. But then the infinite dimensionality of real life got in the way and even the best models looks a little handwavey. I don't think stochastic calculus will take it personally. Maybe said young men and woment could become engineers and put their urges to good use in a field where it actually works. In the class I had on stochastic calculus we didn't look at applications in macroeconomics so much as market modeling. These people who are employed to predict random movements will likely find it hard to keep their jobs when their models deviate far from the truth. We can hope they land on their feet.

It would be a positive shift to see more of the mathematically-inclined graduates pursue success in engineering fields than finance. Many agree that the financial sector has grown too large for the economy it serves. There are thousands of interesting and potentially revolutionary fields to work in. Here are twenty-three problems that DARPA finds important. I hope that more capable minds get nurtured and encouraged to take on problems like these, instead of trying to eke out another 0.1% gain for the customers of a fancy hedge fund.