Is Economics Really Just a Guess?

[kramer733]

Is economics ********?

So my friend was telling me about economics and he told me it was a lot of BS. I remembered taking a economics course in high school and to be honest, the teacher didn't really seem sure as well. He said that economics can go either way. There's no right answer but all people can do is predict. He said economists predict a lot but they all have different predictions. I don't have much say on this topic because i don't have the qualifications to say anything. Can anybody tell me if it is BS?

 

[granpa]

90% of everything is ****
http://en.wikipedia.org/wiki/Sturgeon's_Law

 

[talk2glenn]

So my friend was telling me about economics and he told me it was a lot of BS. I remembered taking a economics course in high school and to be honest, the teacher didn't really seem sure as well. He said that economics can go either way. There's no right answer but all people can do is predict. He said economists predict a lot but they all have different predictions. I don't have much say on this topic because i don't have the qualifications to say anything. Can anybody tell me if it is BS?

As far as your friend is concerned, Economics is less BS than it is irrelevant, probably like most things technical and academic.

Your friend needn't worry; the world does not depend on his understanding how it works to work. To him, things just do (there's always enough milk at the grocery store to keep him satiated enough to spout nonsense about things he clearly knows little about, for example).

Let the big kids handle the details.

 

[cesiumfrog]

Your friend needn't worry; the world does not depend on his understanding how it works to work. To him, things just do (there's always enough milk at the grocery store to keep him satiated enough to spout nonsense about things he clearly knows little about, for example).

Let the big kids handle the details.

Wow, patronising much..

Isn't the OP right, that competing schools of economics (are the current ones new classical and new Keynesian?) are contradictory on significant issues (e.g., was it the government stimulus that successfully saved Australia from recession, or would the effects of the GFC on Australia have been even milder without such action)?

As a science, economics seems to have the failing that it isn't possible to do control experiments on the real economy (too many dependent variables). But then you could say much the same for evolution theory, so I suppose that isn't necessarily a barrier to progress. I think I've heard economics criticised because the current models make assumptions such as that people are rational, which is known to be false. But that's probably no different from complaining about the idealisations employed in physics.

The single most frequent criticism of economics is growth (specifically, the ideal of optimising for growth perpetually). As far as I can tell (I have searched, does someone else know?), this argument is only repeated by those who haven't understood economics (for example, population increases and crime both enhance a common proxy measurement for growth, but most wouldn't actually prefer to have progress frozen at yesteryear's level of technology).

 

[Ivan Seeking]

So my friend was telling me about economics and he told me it was a lot of BS. I remembered taking a economics course in high school and to be honest, the teacher didn't really seem sure as well. He said that economics can go either way. There's no right answer but all people can do is predict. He said economists predict a lot but they all have different predictions. I don't have much say on this topic because i don't have the qualifications to say anything. Can anybody tell me if it is BS?

This is a bit like saying [or asking if] weather models are all BS. While it may be possible to understand the basic mechanisms that drive the weather, it is quite another thing to predict that it will start raining at 102 Main St., at 1:12 PM, on Thursday, in two weeks. Given that we can't make such accurate weather predictions, and given that even major weather systems can fool the computer models and modelers, does this mean that all of weather science is BS?

That being said, there used to be a wall street monkey that would pick stocks every year by throwing darts at a list of stock options. His picks were later compared to those of the leading investment firms. The monkey often won. It is one thing to understand basic mechanisms, but another to predict exactly when and where it will rain in a month, or a year.

 

[Galteeth]

Wow, patronising much..
As a science, economics seems to have the failing that it isn't possible to do control experiments on the real economy (too many dependent variables). But then you could say much the same for evolution theory, so I suppose that isn't necessarily a barrier to progress. I think I've heard economics criticised because the current models make assumptions such as that people are rational, which is known to be false. But that's probably no different from complaining about the idealisations employed in physics.

.

In the Austrian school, this is one of the fundamental starting tenets. Namely, that economics has to rely on rationalism, because the empiricism that most sciences are dependent on simply can't be employed in the same way to economic questions. I'm over-simplifying a bit.

http://en.wikipedia.org/wiki/Praxeology

"Like other members of the Austrian School, von Mises rejected the use of empirical observation in the study of economics, and instead, favored the use of logical analysis. He wrote that the empirical methods used in the natural sciences cannot be applied to the social sciences because the principle of induction does not apply. In essence, von Mises believed that a theory constructed to predict how humans will act (what ends they will seek) in a "complex" situation could not arise from studying how they acted in "simple" situations. Furthermore, there are limits to how much can be learned from even a "simple situation". As a criticism to empirical studies seeking to find justification in the economic action of individuals, von Mises proposed that only the human actor knows the ends toward which he acts. Observers may try to "understand" why an actor behaved in a particular way, but this reason must be inferred from a complex set of data which can only be gathered once. Reproducible experiments are not possible because both the actor and the observer have been altered by the experiment.
To counter the subjective nature of the results of historical and statistical analysis (see Methodenstreit), Mises looked at the logical structure of human action (he entitled his magnum opus Human Action).
From praxeology, Mises derived the idea that every conscious action is intended to improve a person's satisfaction. He noted that praxeology is not concerned with the individual's definition of end satisfaction, just the way he sought that satisfaction and that individual's increase of their satisfaction by removing sources of dissatisfaction or "uneasiness".
In his theory, an acting man is defined as one capable of logical thought—to be otherwise would be to make one a mere creature who simply reacts to stimuli by instinct. Similarly, an acting man must have a source of dissatisfaction which he believes can be changed, otherwise he cannot act.
Another conclusion that Mises reached was that decisions are made on an ordinal basis. That is, it is impossible to carry out more than one action at once, the conscious mind being capable of only one decision at a time—even if those decisions can be made in rapid order. Thus man will act to remove the most pressing source of dissatisfaction first and then move to the next most pressing source of dissatisfaction. Additionally, Mises dismissed the notion that subjective values could be calculated mathematically; man can not treat his values with cardinal numbers, e.g., "I prefer owning a television 2.5 times as much as owning a DVD player."
As a person satisfies his first most important goal and after that his second most important goal, then his second most important goal is always less important than his first most important goal. Thus, the satisfaction, or utility, that he derives from every further goal attained is less than that from the preceding goal. This assumes, of course, that the goals are independent, which is not always the case—for example, acquiring the television may enable one to pursue the goal of watching a documentary on biology, which may make one decide to study biology, which opens the goal of writing a research paper, and so on.
In human society, many actions will be trading activities where one person regards a possession of another person as more desirable than one of his own possessions, and the other person has a similar higher regard for his colleague's possession than he does for his own. This assertion modifies the classical economic view about exchange, which posits that individuals exchange goods and services that they both appraise as being equal in value. This subject of praxeology is known as catallactics."

Action-axiom
The action-axiom is the basis of all praxeology, and it is the basic proposition that all specimens of the species homo sapiens, the homo agens, purposefully utilize means over a period of time in order to achieved desired ends.[9] In Human Action, Mises defined “action” in the sense of the action axiom by elucidating:
Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego's meaningful response to stimuli and to the conditions of its environment, is a person's conscious adjustment to the state of the universe that determines his life. Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement of commentary.

The action axiom, as an a priori fact, is true by definition, and any attempts to disprove it are actions that result it its validation.

 

[Galteeth]

. I think I've heard economics criticised because the current models make assumptions such as that people are rational, which is known to be false. .

http://en.wikipedia.org/wiki/Bounded_rationality

 

[Ivan Seeking]

I think I've heard economics criticised because the current models make assumptions such as that people are rational, which is known to be false. But that's probably no different from complaining about the idealisations employed in physics.

That is a bit like saying that Energy Conservation is just an idealization. People acting rationally is fundamental to existing economic models. At least, it is my understanding that this is a basic assumption common to most economic theories.

We have also seen that:

!). Companies do not always act in their own best interest - e.g. the OTC derivatives market, exotic financing for home loans.

2). Free markets are not sufficiently self regulating; that is, we cannot allow the system to suffer the catastrophic failures needed for market corrections. Financial markets must be regulated. "Too big to fail" cannot be allowed.

3). Greater economic incentives do not always produce better results
https://www.physicsforums.com/showthread.php?t=395701
.

 

[imiyakawa]

That being said, there used to be a wall street monkey that would pick stocks every year by throwing darts at a list of stock options. His picks were later compared to those of the leading investment firms. The monkey often won. It is one thing to understand basic mechanisms, but another to predict exactly when and where it will rain in a month, or a year.

Actually, such a monkey, if it did exist, and it did do what you're saying and was more profitable, is not in violation of economic theory. Efficient market hypothesis. Still, you would've needed a human to get the monkey's picks an create an idealized portfolio (minimized expected variance for given expected return).

 

[rootX]

Not all economic models are based on ideal behaviors. Imperfections are well considered. All economists are well aware of those imperfections, and that is reason for having Keynesian. Classical economics was developed before Keynesian and is based on more ideal behavior of people than Keynesian. Different models are not contradicting each other but developed considering different behaviors.

No model is perfect but they are better than having nothing.

 

[Ivan Seeking]

Actually, such a monkey, if it did exist, and it did do what you're saying and was more profitable, is not in violation of economic theory. Efficient market hypothesis. Still, you would've needed a human to get the monkey's picks an create an idealized portfolio (minimized expected variance for given expected return).

What I was referring to was in the news each year when I was a kid, but we now have a professional monkey.

Monkey Trumps Wall Street With 200 Percent Gain
Dart-Throwing Monkey Returns to Wall Street With New Picks For Year 2000
Business Wire
01/12/00, 9:41p
(Copyright ' 2000, Business Wire)


LOS ANGELES--(BUSINESS WIRE)--Jan. 12, 2000--Raven, the dart-throwing monkey with her own Web site, showed up many of Wall Street's finest with her 213 percent gain for the year.

"It's all in the wrist action," stated Raven, age six. A Web site and index have been created to monitor her performance. The Web site and the index can both be found at www.monkeydex.com.

MonkeyDex is the Internet's first index of Internet stocks picked by an actual monkey. MonkeyDex was created in January of 1999 when Raven, a six-year-old female monkey, tossed darts at a dartboard of 133 Internet-related stocks. Raven returned to Wall Street this year with a dart toss at a dartboard of 281 Internet-related stocks...

http://www.krannert.purdue.edu/faculty/rau/funny/DartThrowing.html

LOS ANGELES (CBS.MW) -- The chimpanzee won. And big. He didn't just beat all Internet and technology funds. He beat all 10,000 mutual funds. Raven the chimp is now Raven the Champ!

That's right. In the 1999 race for top performance honors, the Monkeydex -- an index of tech stocks picked with a random dart-throwing technique -- beat the best-of-the-best of all mutual funds run by America's top managers. The chimp made a monkey out of every darn "professional" money manager on Wall Street and everywhere in America...

http://www.marketwatch.com/story/paul-farrells-commentary-chimp-99-champ-makes-monkey-of-wall-street

Rationalize it away all that you wish, but I wouldn't even monkey around with an investment firm!

...that is, unless the monkey can pick one for me.

 

[Ivan Seeking]

Not all economic models are based on ideal behaviors. Imperfections are well considered. All economists are well aware of those imperfections, and that is reason for having Keynesian. Classical economics was developed before Keynesian and is based on more ideal behavior of people than Keynesian. Different models are not contradicting each other but developed considering different behaviors.

No model is perfect but they are better than having nothing.

Herd mentality?

 

[skilgannonau]

So my friend was telling me about economics and he told me it was a lot of BS. I remembered taking a economics course in high school and to be honest, the teacher didn't really seem sure as well. He said that economics can go either way. There's no right answer but all people can do is predict. He said economists predict a lot but they all have different predictions. I don't have much say on this topic because i don't have the qualifications to say anything. Can anybody tell me if it is BS?

Simple answer, no it's not bs. But ...

Before I go on, in the interest of full disclosure I major in economics so take my response in context. Personally I don’t think economics is bs on the balance of things. As a discipline it is subject to much criticism for making bs assumptions in models, accuracy of predicts, coming up with contradictory predictions, for the use of mathematics etc. etc. Those are the main criticisms.

In this post I will try to address the criticism of the economic disciplines ability to make predictions.

Economics as a discipline has been copping a lot of flak since the GFC largely because people don't understand why economists couldn't predict it. I think this is a perfectly reasonable query to have but is invalid in any case.

Firstly, As Ivan Seeking said the fact that economists fails to make accurate predictions doesn’t invalidate the discipline.

In any case you could argue the advent of the GFC shows the discipline has been better at predicting and preventing economic catastrophes. If economists could accurately obverse the symptoms of an oncoming economic crisis then either one of two things could happen. Either action can be taken that effectively prevents the occurrence of the economic catastrophe or the economic catastrophe occurs because no action is taken/action taken is ineffective/too late to anything about it. Furthermore, if economists couldn’t observe or predict an oncoming economic crisis then the crisis occurs.

Now, the GFC has been the greatest world economic crisis since the Great Depression (GD) which occurred during the 1930’s. The US economy has suffered many economic setbacks since the GD but never of the same magnitude (including the GFC). What has occurred in the US since the GD from 1987-2007 is there has been a period of sustained economic growth punctuated periodically by short recessions (known as the Great Moderation). Give this, you could argue that the knowledge gained from the economics discipline has helped prolong this period between massive economic disruptions and when they do occur the response to alleviate the damage has been more effective (since the GFC is an order of magnitude smaller than the GD).

I admit this is a cute argument not one I necessarily think is persuasive which brings me to my third point that the social phenomena that economists study is more difficult to predict than the ones in the natural world.

I’ve only recently started my education in physics but one thing that has stood out to me that is distinctly differently my studies in economics is that physics is simpler. I don’t mean this in a derisive manner, rather an observation of a property of the subject matter each discipline deals with. In physics you have basically four forces that govern the interactions in the natural world. From those four forces physicists can derive all the theorems and relations that largely explain a lot of the natural phenomena we observe.

There is no such equivalent in the social science arena. This makes the job of explaining phenomena arising from human interaction infinitely harder to model.

So going back to the GFC, the fact is the GFC isn’t something unknown to economists. Financial crises as a subset of economic crisis have been a occurrence for centuries and there are plenty of literature on the causes/process/response to financial crises. But to actually predict and prevent one from happening? The state of knowledge of economics isn’t up to that yet. Put another way if we had that knowledge we would not have any economic crisis ever anywhere in the world.

Final point on prediction, there was in fact many people who predicted the oncoming economic crisis including prominent mainstream economists. Alas, they were a very small minority.

 

[imiyakawa]

I'll just add that what caused the GFC has absolutely ZERO to do with economic models such as IS-LM, Exogenous growth model, simple AD-AS model, etc. That's an important point. Although, it does have to do with continued financial deregulation, which many economists support. Many believed that the market was self-regulating and the various instruments available diversified the risk amongst themselves until it posed no threat. Those who thought this were wrong. They underestimated the systemic (non-diversifyable) risk.

 

[Ivan Seeking]

Firstly, As Ivan Seeking said the fact that economists fails to make accurate predictions doesn’t invalidate the discipline.

I never said that it did. The point was that economics is not an exact science, so it shouldn't be treated as such.

It is true that the free market, and much of the Republican's economic platform, such as supply-side economics, have failed.

 

[Ivan Seeking]

Note that Greenspan himself admitted that he's been wrong for 40 years - this, after the economy of the world was nearly taken down by his flawed philosophy.

 

[turbo]

Note that Greenspan himself admitted that he's been wrong for 40 years - this, after the economy of the world was nearly taken down by his flawed philosophy.

Greenspan and Bernanke have done their best to serve Wall Street, while screwing Main Street. They put their fingers in the wind deciding when to decrease the Fed rate another .25%, knowing all the while that they would do it to satisfy speculators, no matter what. Wall Street pundits sagely declared the the markets would decline if the Fed did not keep lowering interest rates, and the Fed chairmen polished their over-blown egos by knowing that those same pundits (and the powers-that-be in the big investment firms) were hanging on their every word. Guess what? Cheap access to taxpayer money was pure heroin to the investment firms, and they pulled out all the stops to cash in on risky investments made with that money. Just as long as quarterly profits were up and their bonuses kept ballooning, they were happy as hogs in slop.

We need some actual economists running the Fed, for a change. People who can see the value in having interest rates high enough that the banks and investment firms have to pay people fair interest rates to use their savings. Right now, aside from the FDIC insurance on my various accounts, I'd be just as well off with my money under the mattress. The Fed is stealing the ability of average people to earn fair interest, to benefit the speculators that drove our economy into the ditch.

 

[skilgannonau]

I never said that it did. The point was that economics is not an exact science, so it shouldn't be treated as such.

Ivan I think we are making the same point or this is another example that language can give to rise to ambiguity. I was referring to the following post:

This is a bit like saying [or asking if] weather models are all BS. While it may be possible to understand the basic mechanisms that drive the weather, it is quite another thing to predict that it will start raining at 102 Main St., at 1:12 PM, on Thursday, in two weeks. Given that we can't make such accurate weather predictions, and given that even major weather systems can fool the computer models and modelers, does this mean that all of weather science is BS?

In any case I would use this analogy to say that the fact that economists fail to accurately predict economic crises doesn't mean it's all bs.

 

[kramer733]

Hey thanks for replying. So if i were to minor in economics, what should i be expecting?

 

[skilgannonau]

Hey thanks for replying. So if i were to minor in economics, what should i be expecting?

Check out this link:

http://ocw.mit.edu/courses/economics/

 

[loseyourname]

No, it's not, not at all. The problem with the public perception of economics as an academic discipline is that all people ever see of it are political debates about the use of fiscal and monetary policy and the use of leading indicators to predict turns in the business cycle. Most of economics has absolutely nothing to do with these things. The study of economics simply tells us what will happen in a vacuum when you tweak one variable in a system, which is the same thing any other science does. As you make the system more complex, this information becomes less and less useful. Economic analysis can teach us that demand inelasticity leads to price discrimination when the conditions of market segmentation and imperfect competition obtain. It can teach us that efficient pricing is impossible for goods that are nonrival and nonexcludable. It gets into trouble when we try to model an entire nation as a system of econometric trend lines.

By the same token, fluid dynamics would get into some trouble trying to tell us where a bottle we throw into the ocean will end up in five months. That isn't considered a failure of physics.

 

[kramer733]

That's a really good analogy sir. Thank you.

 

[brainstorm]

Many of the most basic assumptions in economics are very logical. If people are rational, they are more likely to forego buying something at a higher price than a lower one. That is the basic logic behind the demand curve. Same goes for producers/investors with the supply curve; i.e. if the price is higher they will want to produce/sell more of it. Where economics starts to break down is when the supply and demand sides start getting strategic. This is why things like market control, monopoly/oligopoly, consumer/investor subjectivity, etc. interfere with economic predictability. Of course in reality humans are always rational to some extent and irrational/subjective/emotional as well. This is what makes complex economic predictions more of an art than a science. You can look for patterns in the subjective/emotional decision making while paying attention to rationality as well, and predict with a certain amount of accuracy what kind of market events will occur. Still, ultimately you have to recognize that there are always unseen factors that you haven't considered that could throw off your predictions to any degree. If you are the kind of person who discards anything that isn't very accurate and reliable, you would throw away economics, I think. But if you are a person who wants some insights into how human-decision making results in market prices, investment/production/consumption patterns, etc. then economics has a lot to offer you even if you'll never be able to win at stock-trading as a result.

 

[cesiumfrog]

Many of the most basic assumptions in economics are very logical. If people are rational, they are more likely to forego buying something at a higher price than a lower one. That is the basic logic[..]

Say you need to buy replacement windscreen wipers for your first time. The store has three options: $8, $13 or $33. None of the brand names are familiar to you. The packets are approximately equally rife with buzzwords and devoid of relevant quantitative measures. There are additional complexities (such as the options of three brands of replacement blades instead or in the future). Because of the opportunity cost of the time it would take you to properly study the ramifications of each option (on how well they improve the all-weather driving experience, and on how long they last), a fully informed decision is unfeasible (if it was even possible), so you're going to choose solely based on price.

Are you really going to risk taking the cheapest option?

 

[brainstorm]

Say you need to buy replacement windscreen wipers for your first time. The store has three options: $8, $13 or $33. None of the brand names are familiar to you. The packets are approximately equally rife with buzzwords and devoid of relevant quantitative measures. There are additional complexities (such as the options of three brands of replacement blades instead or in the future). Because of the opportunity cost of the time it would take you to properly study the ramifications of each option (on how well they improve the all-weather driving experience, and on how long they last), a fully informed decision is unfeasible (if it was even possible), so you're going to choose solely based on price.

Are you really going to risk taking the cheapest option?

First, you would expect that in a rational free market with open access to information, consumers would create an easily accessible database, preferably accessible via cell-phone, that reports which brands of goods are of inferior quality. Those goods, then, would quickly go out of business.

Also, if producers acted purely according to free market rationalism, there would be multiple supply-firms with the same quality product and those firms would compete to lower their costs to undercut their competitor and gain market-share in that way. If part of cost-cutting involved seeking new, less expensive materials, the firm would test the materials before utilizing them because it would not want to lose sales by getting the reputation of having an inferior-quality product.

Usually I buy the least expensive brand and I rarely have quality problems. There are exceptions, however, and in those cases I shop for the least expensive (most competitive) brand of the product with satisfactory quality. Still, how many people are irrational enough to buy the more expensive product as a prayer that the quality will be good? I have certainly been guilty of this in the past but it is basically a response to fear that the market is filled with inferior quality products. In a rational free market with free information exchange (good information - not misinformation), that shouldn't happen.

BTW, what's your point? That economics should start modeling rationality as consumers purchasing the highest priced products to avoid low quality? Wouldn't the demand and supply curves then slope in the same direction?

 

[cesiumfrog]

First, you would expect that in a rational free market with open access to information, consumers would create an easily accessible database, preferably accessible via cell-phone, that reports which brands of goods are of inferior quality.
[...]
Still, how many people are irrational enough to buy the more expensive product as a prayer that the quality will be good? I have certainly been guilty of this in the past but it is basically a response to fear that the market is filled with inferior quality products. In a rational free market with free information exchange (good information - not misinformation), that shouldn't happen.
[...]
BTW, what's your point?

The idealised market you imagine might be nice, but that's not pertinent to the question of whether the actual real-life market conforms with the mainstream economic theories or not.

My example wasn't hypothetical, I was just relating what I did last weekend. I chose the middle price, reasoning that the cheapest option would be produced using lower quality rubber and thus be more likely to fall apart disproportionately soon. Based on previous experience of cheap goods falling apart and of longer satisfaction with goods that at first appeared expensive. And like you say, we all do this at least some of the time. After all, that's why woolworths sells the same milk with two or three different labels (each label at a different price, each selling in comparable quantities). It flies in the face of textbook economic theory, but it's how the real world actually is.

But I was merely critiquing your post, not trying to make my own point, those were in post #4 of the thread. Should I trust the Keynesians or their opponents? And, please do tell me, why is there so much debate and widespread criticism specifically of economic growth?

 

[brainstorm]

It flies in the face of textbook economic theory, but it's how the real world actually is.

But I was merely critiquing your post, not trying to make my own point, those were in post #4 of the thread. Should I trust the Keynesians or their opponents? And, please do tell me, why is there so much debate and widespread criticism specifically of economic growth?

The fact is that rational economic behavior promotes the discipline of the invisible hand, which itself rewards rational behavior and punishes irrationality by constraining revenues. This is why so many people want rational economic behavior to be a fiction, both in theory and in practice. If people irrationally spend extra money on products and brands they hope will be better quality, or because they believe that budgeting hurts the economy and eliminates jobs, etc. If they "buy American" even when it costs more to do so because they want to see more local jobs created, etc. All these relatively irrational consumer behaviors promote higher revenues for businesses. So OF COURSE business interests promote any form of irrational spending possible by whatever means.

The problem is, what happens when all this irrational spending and money-making grows into an irrational invisible hand, which it arguably has? At that point, you need more and more money flowing in all directions to sustain the consumer lifestyles and business models that have become habitual. These entail a good deal of waste, as waste is the natural companion of irrationality. You even get people arguing that irrationality and waste are the prerogative of the free market and even it's raison d'etre.

Keynesianism and its opponents are, imo, two sides of the same coin. Keynesianism promotes spending during recession to stimulate sleeping spending, but it also promotes taxation during periods of high GDP growth, which disciplines the growth and prevents inflation and irrational spending, etc. You would think that the opponents of Keynesianism would be against stimulus but they're not in most cases. They are just for eliminating the taxation during the economic boom. That way they can keep and spend more of the money they are making at that time.

Imo, Keynesianism fails to check long-term economic growth in a way that prevents wasteful irrational economic behaviors from becoming habitual. People and businesses get used to a certain stable level of cash flow and they fail to seek highly innovative ways of reducing their costs and changing their practices to achieve ever higher levels of efficiency. If they would be motivated to do this, I think we would see radical cultural evolution with people working and living with practically no resource-consumption to speak of. This would seem like poverty by current standards, but health care and other economic resources would be developed and managed in a way that people would enjoy high levels of prosperity despite highly rationalized and efficient economic goods and services.

If all you care about is preserving the cultural-economic status quo, then either Keynesian or anti-Keynesian approaches will do, I think. The only difference with anti-Keynesian ones is that you get lower taxes during periods of growth.

 

[cesiumfrog]

Is there any truth to the claim that the economy needs to always maintain its average rate of growth above a certain level merely to avoid some kind of self-collapse?

http://www.eveoftheapoc.com.au/Downloads/TheFatalTrap.htm

 

[skilgannonau]

@cesiumfrog: I briefly looked at that article and I have to say it is a pretty terrible article. The points the author makes is so convoluted I don't see the logical connection between most of the arguments he makes. What I think he is trying to say is that because the supply of money is tied to debt (which is a false premise since the central bank, i.e. government, prints money which then can be exchanged for goods and services; not necessarily debt) and economic growth is lower than the interest charged by banks on debt borrowed the debt/gdp ratio will rise so that debt exceeds income (ie gdp) and therefore economies will 'somehow' collapse. That's his main argument from what I can gather.

There is so many problems with the assertions he makes that I will only point out a couple of things:
- The author confuses 'stock' with 'flow'. global debt may be greater than global income but that's because income is a flow while debt is a stock. global wealth on the other hand is always going to be greater than global debt because we can keep on creating wealth in perpetuity (which i will explain in a later point).
- the author claims that economies will somehow collapse as the debt to income ratio becomes bigger. No logical connection. Don't know what else to add on this point.
- Money is ultimately created by government. Money is not tied to debt and money is not income either. Income is the quantity of goods and services that an economic agent produces. So a country can print as much 'money' as it wants but it will not get richer because income is dependent on the production of goods and services;
- Goods and services are produced from two things: labour and capital. Thus my earlier point that wealth can be produced in perpetuity as long as we have labour and capital.

and i can keep on going except like I said there is so much wrong with that article it's not funny. The least mean thing I can say about the article is that it is ignorant to the extreme.

cesiumfrog there are many things wrong with economics but not by the claims in that article. Furthermore, while there are problems within the discipline that doesn't make it useless. On the contrary there is no other discipline that is better able to tackle the issues dealt within economics. If there was, then historians, anthropologist, lawyers, sociologist, physicist instead of economists would be dealing with those issues.

In fact, I dare say the ignorance displayed by the author of that article is an argument for more education in economics for the layperson and some people should definitely not be allowed near an keyboard or the internet.

 

[brainstorm]

- Goods and services are produced from two things: labour and capital. Thus my earlier point that wealth can be produced in perpetuity as long as we have labour and capital.

This is true at an obvious level. But what about the fact that once people start exchanging labor and capital for money, people start trying to exchange one commodity for another? This was the issue that I wondered about when houses were being bought for 1million, renovated, and sold for 5million. What can be done with that 4million in profit? For it to be spent, doesn't 4million extra worth of goods and services have to be produced? If they aren't, then doesn't the price of existing goods and services have to increase to a point where supply and demand curves fix the shortage?

If that happens, and inflation occurs, as it did with gas prices; fuel-cost driven inflation is accompanied by shrinking revenues as everyone tries to prevent their bottom-line from suffering due to increased costs. Now the solution has been to fiscally stimulate more revenues, but what happens when that money once again drives up demand for fuel and causes another fuel-cost inflation? Sure, Obama's logic that a stimulated economy would invest in fuel-conserving technological and economic reforms, but have they happened? Can the economy do more with less fuel now than it could in 2004?

I don't mean to suggest this is Obama's fault because it's not. It's the fault of everyone who thinks that if they can just get their cash-flow up, everything will go back to the way it was when things were good. There's just no recognition of the need to create sustainable economic practices as a means to avoiding bust/boom cycles. People just do anything to get the thing booming again and then when it busts they try to make sure someone else has to suffer instead of themselves.

 

[doodle_sack]

This topic is currently in debate (though no one cares to debate about it!). It's quite confusing, for instance, everyone is aware of harvard university, their master degree in economics (part of their phd) is called A.M Economics(historic style of writing M.A Economics), which states economics is an art. But, if you ask the harvard economists, they themselves will have different opinion about this issue.

What I think is, taking into consideration the serious developments in the field and their incorporating of advanced math subjects makes me think, they are all in the serious process of making it a science field, but they named it science for the most obvious reason that it can't be named as BS(A) Economics!

But seriously, guys I think there is a flaw in prediction everywhere!

 

[Evo]

Also it is the only 'science' where you can say that your observations were results of actions of invisible people.

You need to provide serious academic articles that back up your position. Otherwise, please do not post if you have nothing of value to contribute.

 

[RufusDawes]

You need to provide serious academic articles that back up your position. Otherwise, please do not post if you have nothing of value to contribute.

http://economistsview.typepad.com/e...e-systemic-failure-of-academic-economics.html

http://www.debtdeflation.com/blogs/wp-content/uploads/papers/Dahlem_Report_EconCrisis021809.pdf

I am sure there are many more articles which point to the complete and utter failings of academic economics.

 

[skilgannonau]

'Academic economics' has had failings and will continue to have failings. I don't know of any discipline has been right about everything (or even some things) first time round.

The fact that economics has failed to make accurate predictions doesn't invalidate it as a discipline. Put another way if you didn't have economics are there any other discipline that is better able to explain the phenomena that economics tries to explain?

 

[brainstorm]

'Academic economics' has had failings and will continue to have failings. I don't know of any discipline has been right about everything (or even some things) first time round.

The fact that economics has failed to make accurate predictions doesn't invalidate it as a discipline. Put another way if you didn't have economics are there any other discipline that is better able to explain the phenomena that economics tries to explain?

Economics only fails, imo, to the extent that people are capable of acting non-rationally. The reason why it doesn't completely fail is because people aren't capable of acting COMPLETELY non-rationally. Most people are acting rationally in a variety of ways at any given moment. The problem is that the non-rational parts of their decision-making processes make their rationality more unpredictable in its consequences.

When the non-rationality is totally unique individual behavior, it doesn't throw off economic analysis much. What throws off economics is when there are trends of non-rational or semi-rational behavior, especially when these become institutionalized in ways that cause people to take them for granted and respond rationally to them.

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.

Economics works really well to predict the results of a perfectly competitive free market situation where production and consumption are maximally rational. It's when subjective, emotional interest into into the mix, and especially when these become widespread and patterned as trends and institutions that economic analysis fails to predict behavior and economic consequences, imo.

 

[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'.