Wednesday, September 18, 2013

Economics vs Engineering

I like reading Noah Smith's blog. But on Wednesday, he tried to compare economics to engineering. He wrote:

Just as some engineers study computers and others study nuclear reactors, some economists study taxes, other study financial markets, and still others study how psychological biases should change the design of policy. So to use the chaos in financial markets as a reason to discredit all of economics is analogous to discrediting all of engineering on the count of a Fukushima disaster.
There were two major nuclear catastrophes to choose from. He picked the wrong one. Not only that, engineering in general is nothing like economics at all. Let me try to explain:

The Chernobyl disaster would have been a much better pick, because from what we know, the Fukushima Daiichi plant did exactly what it was supposed to do. It was designed to withstand  accelerations of 0.45 g at three of the six reactors. The Tohoku earthquake caused up to 0.56 g on the reactor buildings. Still the reactors 1,2, and 3 underwent an automatic emergency shut down, safely. The other three were not online. The same thing happened at all nuclear power plants and even conventional ones, so external power was not available anymore.

The plant was designed to also withstand a tsunami of up 5.2 m. In engineering that means that the buildings need to be located well above that level. In fact the buildings were located 10 m above sea level. Additionally, after research showed that tsunamis could reach higher peaks, additional generators were installed on even higher ground; but the wiring for those remained in the turbine buildings. Had that not been the case then the catastrophe could possibly been prevented.

It was the following tsunami which reached 14 m above sea level, almost three times as high as specified in the design documents. For all we know it did not directly damage the reactors. It knocked out the generators in the turbine buildings and the wiring there, which caused the pumps to stop working. No pumps - no cooling. The rest is history.

This is something completely different to what happened during the financial crisis. The havoc which began in 2008 was not caused by a massive external event. It was the result of a deregulation experiment, performed on a black box. Economist pretended to have understood the system; and claimed that a basically completely unregulated (shadow) banking sector would yield positive economic results. The euro had deprived many EU countries of the ability to use fiscal policy as a crisis response. It became a proxy gold standard, which prevented any possibility that the crisis countries in the South could devalue their currencies and the attempt to due so via deflation caused a depression in these countries that is nowhere near from over.

This is why Chernobyl would have been a much better example since just like the Great Recession its root cause was an experiment on a not thoroughly understood black box gone wrong. We now know that graphite tipped control rods were the main cause for the disaster. The experiment was supposed to test if turbine rotation after shut down could provide the power needed for the 30 seconds until the diesel generators were up to full power in case external power failed. At the end (for unknown reasons) a fast shut down of the reactor was performed, which meant that all control rods were driven into the reactor. Instead of reducing the reactor power the graphite - which is a moderator - caused a local power spike which damaged the reactor itself; and prevented the control rods from moving any further. Graphite was also the moderator used for the reactor, which unlike water, remained in place and the chain reaction could speed up even more. This resulted in the thermal output reaching 30 MW - ten times more than under normal operation; and ultimately in the explosion of the containment vessel.

But this brings us to the key difference between economics and engineering. There is no engineer that will declare that a reactor with a graphite moderator and graphite tipped control rods should  be located in an area with heavy earthquakes and below the sea level. But, this is exactly what is happening in economics. In Europe everybody of importance is defending austerity 8even know pretending that it has been a success) and the euro. In the US the crazy party Republicans still believes that deregulation is the way to go. No major attempts were undertaken to get the banking system under control. The chain reaction between the banks in Spain, Greece, and  Italy, the government budget and austerity has not been stopped. The design flaws in the euro have not been tackled at all. The actors are emotionally invested in what must be considered a believe system and not science. If we only make work less secure then we will see so much more investment. Why? Because prophesy says so.

Engineers in all fields know that all calculations are flawed. In engineering the multiplicators for safety are always larger than one, because unlike in economics the goal of engineering is not to pretend that e.g. Greece can be saved if only the multiplicators are low enough. Engineers always look at a worst case scenario. Yes, mistakes happen (and they can have horrible consequences) in engineering, too, but these always result in an improvement of the state of the art. No engineer would demand that von Mises be used because Tresca was too conservative. Just in case some are confused I am not talking about the von Mises who wrote:

 It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history.
 All hail Fascism for Lebensraum im Osten proves their best intentions and they saved Europe. No, I am talking about his less crazy brother Richard, who actually contributed to real science in a meaningful way. Economics is not science. It will never be. Yes, there are some economists that work in a scientific way to improve the state of the art, but nobody listens to them. Economics should not be even considered social science as long as some can reinterpret failure to make it look like success, and for the most part get away with it, like the OECD, the European Commission, and the German Finance Minister are currently proving. Tepco also tried to do that in Fukushima. The company has rightly lost all credibility, now.

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