Is Economics Really Just a Guess?

[DRJB]

I think the major flaw with the field of economics is the almost apathetic shift towards shaping the study into an actuarial science instead of what society needs it to serve as. It should be an extremely desirable concentration, but it needs to evolve. I think it's relevancy lies in the ability to predict the future. Not just in terms of economies, but world functions and interactions. As a study itself, I don't know that economics can hold it's own, but I hope it will evolve into more of a field of strategic thinking instead of numbers and patterns.

 

[brainstorm]

I think the major flaw with the field of economics is the almost apathetic shift towards shaping the study into an actuarial science instead of what society needs it to serve as. It should be an extremely desirable concentration, but it needs to evolve. I think it's relevancy lies in the ability to predict the future. Not just in terms of economies, but world functions and interactions. As a study itself, I don't know that economics can hold it's own, but I hope it will evolve into more of a field of strategic thinking instead of numbers and patterns.

The problem is that too many people try to use economics as a recipe for making money, which is not what it is does. Economics is not the study of money but the study of resource and labor allocation. Money is just the medium of exchange, prices the means of raising or lowering barriers to acquisition, and revenues/income/profit the means of stimulating producers to enter the supply side. If anything, the reason why classical free market economics is having problems analyzing and predicting contemporary market activity is that too much effort is going into controlling and manipulating these market instruments instead of allowing the market to control them and analyzing and responding to the market.

 

[imiyakawa]

For example, if large numbers of people come to regard real-estate as a commodity for profit-making instead of purely as a place to get out of the weather, the real-estate market as a whole can diverge from rational supply-demand patterns that would occur in a purely rational market where people would buy or build anything to get out of the weather, using pure utility and price as a basis for selection.

Even if a million people started speculating on real estate, that doesn't mean that there will be any irrational decision making on behalf of the market participants (irrational under the economics definition). ]

 

[brainstorm]

Even if a million people started speculating on real estate, that doesn't mean that there will be any irrational decision making on behalf of the market participants (irrational under the economics definition). ]

Irrationality in real-estate is primarily the willingness to pay enormous premiums for things like curb-appeal, location, etc. Often times, people shop for houses as a general package-deal and look at their monthly payment instead of the total amount they're paying for each aspect of the property. Two similar houses could cost 90k and 150k, and a buyer will choose for the more expensive one because of some aesthetic appeal that could be achieved with the 90k property for relatively little investment. Still, the consumer's 'rationality' is that they are getting more happiness for their money and they'll only pay $100 extra per month, which may not be that big a percentage of their monthly income. So the irrationality comes from the relative scaling of value relative to the overall price of the house spread out over the course of the mortgage. This, in turn, allows companies to compete on an aesthetic basis for things like window-design, door-knobs, and other fixtures. In practice, all these fixtures are included in the monthly payment so people are basically taking a 30 year mortgage out on their door-knobs and windows, in addition to everything else. Thus, the competitive incentive is not price-competition but toward aesthetic competition for what will fetch the highest price. This is non-rational competition among housing developers/contractors, because they are not looking to minimize costs and maximize profits by putting competitive pressure on their suppliers but rather creating an incentive for inflation as higher-end fixtures become immune from being subject to price-competition.

Sure, you can spin anything as rationality if you try hard enough, but in classical economic theory, rationality means seeking more efficient production/consumption methods to reduce costs and expenditures. Consumers do this by paying attention to price as well as quality, and this in turn creates an incentive for producers to create higher quality products more efficiently so that they will be more competitive in terms of price. In a truly rationalized real estate market, all properties would be maximally renovated and priced competitively. Buyers would seek undervalued properties, even if that meant living in an unpopular location. They would buy and ugly house and renovate it rather than shopping for curb appeal. The net result would be an abundance of wonderful properties and very little opportunity to profit from their appreciation.

The problem at this point is few people love true rational economics when the result of it is deflation and unemployment. They would rather have a non-rational economy that generates more jobs and money, even if that means greater inefficiency and resource waste. People don't want to be free as much as they want to go to work at a job, socialize with colleagues, have everything taken care of for them while they're at work, and be able to define themselves during their leisure time by their status derived from social valuation of relative positions in a division of labor. This is what allows for class-differentiation and the ability for some people to become quite wealthy and not have to work at all, while many other people can have relatively easy jobs that pay pretty well. Then, those people can spend their income on all the various services and leisure opportunities available to them, which yet other people work to provide - often not because they desire such work but because it is the only thing they can get and of course they have to make a great deal of money to afford a fraction of the lifestyles enjoyed by the wealthy and middle-class with the relatively easy managerial jobs.

 

[skilgannonau]

Even if a million people started speculating on real estate, that doesn't mean that there will be any irrational decision making on behalf of the market participants (irrational under the economics definition). ]

Agree. If expectation of prices is up then not irrational to join in even if you believe the market is a bubble. The point being you get out before the bubble bursts. Hence, if everyone expects the bubble to burst then the best strategy for each person is to get out which results in a self-fulling prophecy.

Rationality is one of the more
misunderstood and misconstued economic concepts.

 

[brainstorm]

Agree. If expectation of prices is up then not irrational to join in even if you believe the market is a bubble. The point being you get out before the bubble bursts. Hence, if everyone expects the bubble to burst then the best strategy for each person is to get out which results in a self-fulling prophecy.

Rationality is one of the more
misunderstood and misconstued economic concepts.

The very fact that people can analyze the market and determine that there is a "bubble" of generalized appreciation/inflation expanding in a certain sector already creates irrational economic activity. Ok, it is rational to want to make money but approaching a commodity purely in terms of potential profit short-circuits the true economic rationality of producing and distributing commodities to fulfill utilitarian demand.

I read that the original bubble-burst commodity was tulip bulbs in medieval Europe. Farmers figured out that tulips were popular among the wealthy and middle class and started growing them in droves. When the market got flooded, the price crashed and people lost their shirts. The reason this happened is because the demand for the bulbs was not based on any actual utilitarian need for them. People just saw them as a way to make money so they tried to buy them cheap and sell them for more.

Flipping houses is the same. When real estate markets are expanding, people see properties as commodities to be bought and resold for more. When more people want properties to resell at a profit than people who want them to actually inhabit or otherwise use, the market becomes totally about speculating on other people's speculation.

So, sure it is rational to want to make money on someone else's interest in making money. But is it rational to think that economic growth and prosperity can be built purely on profiteering transactions? No, things have to be produced and used. I.e. there has to be utilitarian value, not just commodity-exchange value.

Further, the more profit people try to extract from rational utilitarian production/distribution, the more sluggish the utilitarian economy becomes. Why? Because every transaction for something with utilitarian value gets weighted down with all sorts of other revenue-interests, which drives up prices and discourages transaction volume. So, for example, if every washing machine sold carries in its price a high profit-rate for the shareholders of numerous companies, as well as high management salaries, taxes, etc. the price of the washing machine will be driven quite high and less washing machines will be sold as a result.

The problem is from an environmental standpoint of resource-conservation, do we really want people to be buying a new washing machine whenever they want just because they can afford it?

 

[skilgannonau]

The very fact that people can analyze the market and determine that there is a "bubble" of generalized appreciation/inflation expanding in a certain sector already creates irrational economic activity. Ok, it is rational to want to make money but approaching a commodity purely in terms of potential profit short-circuits the true economic rationality of producing and distributing commodities to fulfill utilitarian demand.

I'm sorry to say this but that's not how economists define rationality. Some behaviour may be 'irrational' according to some normative definition as you've pointed out a number of times, however, rationality when used by economists describes a set of technical assumptions/axioms used when constructing models.

You can look up any rigorous micro textbooks and they will usually have the definition in the beginning of the chapter choice theory or something like that. In Walter Nicholson's 'Microeconomic Theory' the definition is at the start of chapter 3: preferences and utility.

 

[brainstorm]

I'm sorry to say this but that's not how economists define rationality. Some behaviour may be 'irrational' according to some normative definition as you've pointed out a number of times, however, rationality when used by economists describes a set of technical assumptions/axioms used when constructing models.

You can look up any rigorous micro textbooks and they will usually have the definition in the beginning of the chapter choice theory or something like that. In Walter Nicholson's 'Microeconomic Theory' the definition is at the start of chapter 3: preferences and utility.

I don't have any textbooks on hand, but you can look at what is meant by rationality in terms of how supply and demand curves and their interaction work. When you make referential claims like this without explicating actual reason, it closes the discussion. If you have a particular definition or reason for conceptualizing rationality a certain way, you should post that for discussion. Instead, your post makes reference to textual sources without referring to any actual reason or argumentation.

That may be a rational tactic if you're trying to win an argument without being right, but it's unreasonable. Do these contextualizations of "rationality" and "reason" defy formal disciplinarity as well?

 

[DRJB]

This is the problem with economics. You guys look at it with too much of a technical focus, that limits you. That may sound vague but, man, I just don't have the energy to pinpoint through all of your arguments.

In economics, technicality leads to a glorified interpretation. A bad lawyer. Innovative application leads to advancement.

 

[skilgannonau]

I don't have any textbooks on hand, but you can look at what is meant by rationality in terms of how supply and demand curves and their interaction work. When you make referential claims like this without explicating actual reason, it closes the discussion. If you have a particular definition or reason for conceptualizing rationality a certain way, you should post that for discussion. Instead, your post makes reference to textual sources without referring to any actual reason or argumentation.

That may be a rational tactic if you're trying to win an argument without being right, but it's unreasonable. Do these contextualizations of "rationality" and "reason" defy formal disciplinarity as well?

Wooh. Touched a nerve.

You've read my preceding post before my last post so you will know i was agreeing with imikayawas comment that your example doesn't imply irrationality. You replied and i then provided further support for my own comment. I'm sorry if you disagree with the definition but I'm only pointing out rationality isn't used in the context you are using it in. I'm not giving an opinion I'm merely stating a fact of how rationality is defined in economics. You've given examples of behaviour you believe is 'irrational'. Fair enough. But that's a normative position not a positive one.

Btw I don't believe any mainstream economic textbook would describe demand and supply curves and their interaction in terms of rationality (the economic definition anyway).

@DRJB: By technicality I'm assuming you mean mathematics. You can do economics without mathematics in the same you could do physics without mathematics. The question is do you really want to try to do either without it?

I also think it is too much a generalisation that economists focus too much on technique. The content and methods in economic academia have been widely applied in the real world (not always with positive outcomes).

 

[brainstorm]

I'm sorry if you disagree with the definition but I'm only pointing out rationality isn't used in the context you are using it in. I'm not giving an opinion I'm merely stating a fact of how rationality is defined in economics. You've given examples of behaviour you believe is 'irrational'. Fair enough. But that's a normative position not a positive one.

Yes, it does touch a nerve when ppl use pretentious-sounding language to provide an unreasoned citation of an entire field as if they have the capacity to circumscribe all possible expressions of economic thought. Any field, economics included, is an open-critical discourse of conceptual meanings and the possible expressions that can emerge from engaging them reasonably. You're implying that a discourse is a closed field of precedents that define the field until new expressions are "allowed in" to the field.

Btw I don't believe any mainstream economic textbook would describe demand and supply curves and their interaction in terms of rationality (the economic definition anyway).

That's all economic concepts are is expressions of rationality. Supply is the rational tendency to produce more of something when you can get a higher price for it. Demand is the rational tendency to buy less of something as the price goes up. Diminishing marginal utility reflects the tendency of things to be valued more in scarcity than in relative abundance, also rooted in rationality. I'll be happy to discuss more examples like this.

@DRJB: By technicality I'm assuming you mean mathematics. You can do economics without mathematics in the same you could do physics without mathematics. The question is do you really want to try to do either without it?

You can operationalize things, measure them, and attempt to make explanations and predictions using the numbers you have crunched. It's not a bad or essential method, just one that is available among others. Ultimately, economics is not an exact science though because there is subjectivity involved in operationalizing units and selecting some units for measure over others. In other words, the interpretive art of constructing models is the basis for quantification or qualitative analysis, as when modeling any other real system.

 

[DRJB]

Not necessasarily mathematics or statistics, but the approach. I think there is value in the numbers game, after all you have to PROVE things work in a repeatable way, but I often find the conclusions of economists very manufactured. Like A+B+C= R when F. I find it doesn't leave very much room for new market factors. Take into consideration the market bundle! That's first year economics. How many years did it actually take before the price of a VCR was actually removed from the bundle that was used to determine cost of living?

I suppose that's my real issue with it. The academia. Once again, it has its place, but its position shouldn't over-ride or hinder advancement, either theoretically or in real-time. The attitude towards decision-making in economics is often too beaurocratic. The majority of economists opinions (in my personal opinion) reflect them as factory-produced business students who have an aptitude for math and aren't allowed to take risks.

 

[brainstorm]

Not necessasarily mathematics or statistics, but the approach. I think there is value in the numbers game, after all you have to PROVE things work in a repeatable way, but I often find the conclusions of economists very manufactured. Like A+B+C= R when F. I find it doesn't leave very much room for new market factors. Take into consideration the market bundle! That's first year economics. How many years did it actually take before the price of a VCR was actually removed from the bundle that was used to determine cost of living?

These kinds of generalizations based on observed patterns of analytical instruments are helpful critical guidelines, but ultimately each detail of each specific analytical procedure in a given application is subject to variability of fit between the model and reality. It is too convenient for analysts to assume that a given analytical instrument or procedure is valid because it is generally accepted or otherwise passes for valid. Ultimately there is no substitute for critical reasoning at the level of direct application.

I suppose that's my real issue with it. The academia. Once again, it has its place, but its position shouldn't over-ride or hinder advancement, either theoretically or in real-time. The attitude towards decision-making in economics is often too beaurocratic. The majority of economists opinions (in my personal opinion) reflect them as factory-produced business students who have an aptitude for math and aren't allowed to take risks.

This kind of language sounds like market-buzz analytics where people talk fast to sell fast. I don't know if there is "a place" for it or not because I don't structure the universe into times and places of belonging. Truth progresses through critical analysis of practical applications. We can talk about it forever from a meta position and never verify any validity or invalidity of anything.

 

[DRJB]

You're missing my point. A lot. Besides, this thread was originally asking if economics was viable as a study. I am contributing to that. It is being seriously derailed by a few contributers.

 

[skilgannonau]

This is my last post on the matter of rationality (in this forum anyway).

Having re-read the flow of posts I believe I should’ve qualified my statement of economic definition of rationality to be the neo-classical definition of rationality and in my previous posts where I have referred to economics I actually mean mainstream/neoclassical economics (http://en.wikipedia.org/wiki/Neoclassical_economics" is a wikipedia entry on neoclassical economics). I guess when this thread was referring to economics I just assumed we were all referring to the same thing, that is neoclassical economics. I don’t have any experience in the any of the schools of economics outside of neoclassical so I don’t know how rationality is defined in the other schools.

http://en.wikipedia.org/wiki/Rational_choice_theory" is a wikipedia entry on the neoclassical definition of rationality for the benefit of anyone frequenting this thread.

I think it’s important to make it explicit which ‘economics’ that is being referred because the various school of thoughts have differing methodology and theories on any particular subject matter and we can’t really have constructive discussion if we’re referring to fundamentally different concepts. I think it is also important to point out that ‘neoclassical economics’ is the predominant school of economics and most of the policies being applied in the real world are based on the theories provided by this school and therefore criticisms being labelled at ‘economics’ is usually referring to the neoclassical school of thought.

That's all economic concepts are is expressions of rationality. Supply is the rational tendency to produce more of something when you can get a higher price for it. Demand is the rational tendency to buy less of something as the price goes up. Diminishing marginal utility reflects the tendency of things to be valued more in scarcity than in relative abundance, also rooted in rationality. I'll be happy to discuss more examples like this.

You can derive demand curves and supply curves from the assumption of neoclassical rationality but I haven't yet read anywhere where people describe demand and supply curves interacting in terms of rationality. I guess what I mean is we don't usually say 'that demand/supply curve is rational' or 'the shift in demand/supply curve is rational'.