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The trouble with economics

  1. Sep 30, 2006 #1
    Is there anybody out there defending current academic economics? Anyone who finds it relevant, useful, scientific or of any kind of value?

    But please first read these two accounts.


    So many smart people combined with the peer-review-journal system can create complete nonsense. Is that in case in other fields too?
  2. jcsd
  3. Dec 28, 2006 #2


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    I am not sure that I should be defending academic economics, but it is relatively easy to show that these articles are making claims that I am not sure that they can defend against even a non-academic economist. Easy example: first article says "game theory cannot make precise predictions in repeated games." Two easy answers: (1) The precision depends on the solution concept. A Nash equilibrium is a relatively broad solution concept in repeated games, so it is not very precise. But subgame perfect equilibrium is narrower and more precise. (2) When testing the precision against experimental results, the standards that apply to economics' predictions should be the same as those that apply to, say, engineers' predictions based on physical formulas -- that's the realm of statistics. So a question one might ask is, what is a "standard" margin of error in engineering design? AFAIK, 100% is not out of the ordinary and may even be a conservative guess on my part.

    While on the subject, let us also ask the PF'ers whether physics have not arrived at a level of maturity whereby phenomena yet to be observed, or phenomena that is observable only in principle, or phenomena that in all likelihood will never be observable or observable with certainty, can be and is being modeled at the classrooms and computer labs in theoretical physics departments. Let us also ask whether a discipline such as medicine is under attack for not applying the exact modeling methods currently being used by theoretical physics.

    As for the big quote on page 5, the "new" Indust. Org. (IO) was a response to the teachings of the Chicago School (CS) (= Robert Bork et al.). To take a classic example, CS'ers advised that since everything is valued at the margin, a type conduct is observed only if the incremental value of the conduct is greater than its incremental cost. Thus, exclusive dealing is observed only if the incremental value of carrying a second (or a third) brand is less than its incremental cost. (For example, when the second brand is produced with a less efficient technology.) If so, enforcing a "no exclusive dealing" rule is economically inefficient for the society. While this is a valid conclusion under specific circumstances that the CS'ers assumed, the new IO'ers considered alternative circumstances, e.g. one where many retailers are competing against each other and the dominant manufacturer makes the following offer to each one of them: "if you sell my brand exclusively, I will give you a discount," leading to the precise conclusion that every retailer will prefer to take the offer even knowing with certainty that a second brand would have achieved a lower unit cost beyond some minimum quantity of sales. Thus, new IO'ers argued that contracts can be "gamed" by dominant firms to the detriment of more efficient competitors and of the society as a whole, and there may be circumstances under which a "no exclusive dealing" rule is desirable and justified from an economic and social point of view.
    Last edited: Dec 28, 2006
  4. Jan 1, 2007 #3


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    Alternative views about what, I wonder. I know next to nothing about economics but it sounds like these folks want economics to be scientific rather than philosophical, about what is rather than what might be.

    Well I think if you plan a journey, you should study the map to know where you might go before asking others where they do and have gone. In programming you start with 'hello world!' although no one uses a program like that. This is probably a reworking of the idea that education should be skills-based rather than giving students a good foundation.
  5. Jan 1, 2007 #4


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    The new book may provide some context or a different context to 'supply' and 'demand' or perhaps the 'motivation' behind supply and demand.


  6. Jan 20, 2007 #5
    I think all of these complaints can be best summed up in one simple question for the economist. Why should anyone care? If the first article basically says more economists should be asking themselves this, then I agree.

    I also agree that business is more useful than economics. Balance sheets, income statements, cost flows, budgeting, firm decentralization, product segmentation, investments...That's all stuff I can use and apply easily in the everyday. Where's the relevance with economics? What's learning about a market equilibrium under ideal conditions going to teach me?
    Last edited: Jan 20, 2007
  7. Jan 21, 2007 #6


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    Isn't it a more holistic view?
  8. Jan 21, 2007 #7
    You probably never lived through a period of stagflation or sky high interest rates that have crippled an economy. What good are balance sheets and income statements when you don't have a job? And if you want to think about it in terms of everyday use, I'd venture to say that microeconomics is far far more useful than something like accounting. Afterall, it is the microeconomists that maximizes profits for a company.
    Last edited: Jan 21, 2007
  9. Jan 21, 2007 #8
    Touche. The relevance of macroeconomics is noted.

    I'd venture to say that the traditional business courses like accounting are a kind of complement to economics. Profit maximization doesn't work unless we've been keeping track of what a company has been earning and spending, and what they expect to earn and spend. To use a nice metaphor from econ, microeconomics without accounting is like having the hamburger without the bun.

    My favorite quote from the first article

    He might just be trying to emphasize the point that economists should strive towards knowledge of real-world economies and real world business. I'm well aware of the problems with inductive reasoning, but is it really all that terrible a proposition in this case?
    Last edited: Jan 21, 2007
  10. Jan 27, 2007 #9


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    "An economist is someone who didn't have enough personality to become an accountant." :smile:

    One distinction thereof is how each discipline defines "cost." Typically, the notion of cost in economics includes opportunity cost, unlike the accounting notion of cost. Opportunity cost puts preferences into perspective by comparing any one choice with the next best opportunity: "In spite of the cost of living, it's still popular." -- Kathy Norris :smile: :smile:

    If accounting wasn't there, economists would probably have to invent it. But a distinction has to be kept between economic concepts and accounting concepts.
  11. Jan 29, 2007 #10
    The trouble with economics is there is money involved. Ha! Ha!
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