Could Economics be any more wrong?

[M.D. Holloway]

Could Economics be any more wrong?

Of what little I know about economics, it would seem as though most all models are predicated around a logically way in which commerce runs and people save and/or spend. It is the social science that studies the production, distribution, and consumption of goods and services.

I guess the most famous is the Keynesian economic theory:

It derives from John Maynard Keynes, in particular his book The General Theory of Employment, Interest and Money (1936), which ushered in contemporary macroeconomics as a distinct field The book focused on determinants of national income in the short run when prices are relatively inflexible. Keynes attempted to explain in broad theoretical detail why high labour-market unemployment might not be self-correcting due to low "effective demand" and why even price flexibility and monetary policy might be unavailing. Such terms as "revolutionary" have been applied to the book in its impact on economic analysis.
Keynesian economics has two successors. Post-Keynesian economics also concentrates on macroeconomic rigidities and adjustment processes. Research on micro foundations for their models is represented as based on real-life practices rather than simple optimizing models. It is generally associated with the University of Cambridge and the work of Joan Robinson New-Keynesian economics is also associated with developments in the Keynesian fashion. Within this group researchers tend to share with other economists the emphasis on models employing micro foundations and optimizing behavior but with a narrower focus on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of the models, rather than simply assumed as in older Keynesian-style ones.

The Chicago School of economics is best known for its free market advocacy and monetarist ideas. According to Milton Friedman and monetarists, market economies are inherently stable if left to themselves and depressions result only from government intervention Friedman, for example, argued that the Great Depression was result of a contraction of the money supply, controlled by the Federal Reserve, and not by the lack of investment as Keynes had argued. Ben Bernanke, current Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression Milton Friedman effectively took many of the basic principles set forth by Adam Smith and the classical economists and modernized them, in a way. One example of this is his article in the September 1970 issue of The New York Times Magazine, where he claims that the social responsibility of business is “to use its resources and engage in activities designed to increase its profits…(through) open and free competition without deception or fraud.” This is tantamount to Smith’s argument that self interest in turn benefits the whole of society

The problem is, people do not act like these models when it comes to unemployment, spending or saving. So why is it we place such importance on a non-science that has never been an indicator and in recent incidents have actually hurt our economy? When is ecomonics ever going to look towards social psychology? Is it?

[jyl]

It does, increasingly, incorporate behavioural concepts.

[jluetjen]

Originally Posted by LubeMaster77

Of what little I know about economics,

I think that you hit the nail on the head right off the bat. Economics is not a trivial subject since in encompasses facets of psychology, finance, and math, especially statistics. From talking with people, I don't get a sense that most even understand the concepts and ramifications of the famous supply and demand curves. It gets quite a bit more complex when you get into micro- and macro- economic situations and eventually quite a bit more sophisticated when you get to higher level stuff like gaming theory. One of the underlying constants that I've observed about economics from top to bottom is the systems and affects will change and evolve as a result of the intelligent creature (specifically us) who is being analyzed.

So you can push the throttle over and over again on a car and reliably observe that the engine speed goes up. If you were to repeatedly apply a stimulus (let's leave BHO out of this for a moment) of some sort to an economic system, you would discover that the results would change with every application, and in fact the system might "learn" what you are doing and actually anticipate the application of a stimulus -- resulting in the reaction happening even without a stimulus, or of no reaction happening at all.

Good economists are like good engineers -- very smart. The problem is that there are quite a few of both groups who are essentially worthless, and it can be difficult for the laymen to tell the difference between the two.

[tabs]

economic theory is just that THEORY....a pseudo science..made up of mumbo jumbo...veritable witch docotrs casting spells and sticking pins in voodoo economy charts

[jwasbury]

I studied some economics in pursuit of my business school degree. Your basic Macro and Micro 101 courses. It was interesting, I 'got' it, and I got a good grade.

My cousin earned a Phd in economics and I looked over his thesis. I couldn't even make sense of the 'executive summary' let alone the entire document. That thing was so full of calculus and statistics that my eyes burned.

In then end, no amount of calculus can make sense of the unfathomable behavior of us humans.

[TheMentat]

Originally Posted by jluetjen

I think that you hit the nail on the head right off the bat. Economics is not a trivial subject since in encompasses facets of psychology, finance, and math, especially statistics. From talking with people, I don't get a sense that most even understand the concepts and ramifications of the famous supply and demand curves. It gets quite a bit more complex when you get into micro- and macro- economic situations and eventually quite a bit more sophisticated when you get to higher level stuff like gaming theory. One of the underlying constants that I've observed about economics from top to bottom is the systems and affects will change and evolve as a result of the intelligent creature (specifically us) who is being analyzed.

So you can push the throttle over and over again on a car and reliably observe that the engine speed goes up. If you were to repeatedly apply a stimulus (let's leave BHO out of this for a moment) of some sort to an economic system, you would discover that the results would change with every application, and in fact the system might "learn" what you are doing and actually anticipate the application of a stimulus -- resulting in the reaction happening even without a stimulus, or of no reaction happening at all.

Good economists are like good engineers -- very smart. The problem is that there are quite a few of both groups who are essentially worthless, and it can be difficult for the laymen to tell the difference between the two.

Pretty much nailed it...

I would add, that I've usually thought that the smartest people in any discipline are able to relate most of the subject matter that they deal with in a way that a relatively clever lay-person can understand.

[Bill Douglas]

It amazes me that these guys spend so much time at university, get paid so much, and get it so wrong.

[RWebb]

It probably is a pseudo-science in the sense that the systems observed are very difficult to perform experiments on. I lump it with ecology and climatology as a "complex science." Obviously, psychology is in there too.

Keynsian approaches AFAIK, are more or less the origin of modern economics; you next get Uncle Milty and the Chicago school; right now it is what jyl mentioned, "behavioral economics." This last one muddies the fine theoretical waters of the first two, b/c it assumes that psychology messes up rational choice.

In any field, it is always easier to model things when they are at equilibrium and in a steady-state. That always gets done first. Later, people start to explore transient behavior. Generally, simplicity in a model is at odds with reality, i.e. increased precision. It's hard to get both...

[jyl]

Economics is, IMO, arguably the most challenging and difficult of all the sciences, because the systems are incredibly complex, human psychology is involved, and there is almost no way to do controlled experiments.

The analogy to meteorology is too forgiving. It is as if each molecule in the atmosphere had emotions and motivations.

The market is an interesting part of the economy in which the players are both participants and at the same time observers making bets on the actions of the participants.

[tabs]

Economics is like Astrology..

[blk911]

I personally think Friedman was exactly right. A free market economy, free of government intervention would tend toward an equilibrium (Adam Smith's Invisible Hand Theory). Problem right now is a direct result of government intervention, namely liberal democrats forcing Fannie Mae and Freddie Mac to so loosen mortgage credit standards as to induce an abnormal and unsustainable amount of economic growth. Remember Adam Smith's Invisible Hand? Supply and demand will always spring back to an equilibrium level. When prices are more than a free market will bear, prices collapse until they are at a level to again attract demand sufficient to fuel additional supply efforts. Combine the intrusion of government with the avarice and greed of some out of control speculators on Wall Street and you have the present mess thank you very much. Even today, our government continues to introduce unwanted and unwarranted intervention that in the long run will make the current sitution look like a day at the park. If you want to scare yourself silly, just google weimer republic

[jyl]

The US economy was actually much less stable in the late 1800s and early 1900s.

Refer to this thread The Economy, In Charts

There is a chart of YOY chg in US industrial production since the early 1900s, and a chart of inflation (CPI) since the late 1800s.

You can see that both of these very long-term charts show much more volatility during the period before the middle of the 20th century, than in the period from roughly WW2 to present.

The present recession actually looks rather modest, compared to the busts in the first period.

I think most would agree that in the late 1800s and early 1900s, there was substantially less government regulation than there is today. There was also no Federal Reserve and no "automatic stabilizers" built into the economy.

[941MXVET]

Economist are never wrong, as long as they can revise their estimates!

[JeremyD]

Just remember : the reason that economists are placed on this earth is to make weathermen look good.

(Majored in economics & finance)

[RWebb]

Originally Posted by blk911

...would tend toward an equilibrium (Adam Smith's Invisible Hand Theory). ...

- yes, that's the theory -- see my remarks re equilibrial theories above.

Here is what Keynes said (paraphrase) when someone mentioned that in the long run the economy would tend toward an equilibrium:

"Yes, but in the long run, we shall all be dead."


And that is why we need regulatory agencies in this area. They act like the shock absorbers (dampers) on your car -- they dampen out the highs and lows just like on a clock pendulum or any other driven harmonic system. Of course, here the system is vastly more complex and can produce extremely complex behavior - you might try Googling "stable limit cycles" and see what pops up.

[RWebb]

BTW - Richard Posner was on Charlie Rose tonight - he was saying that neither the Bush nor the Obama admin.s had any real plan for what happened.

He is an appellate fed. judge (7th Cir.) brilliant, conservative, and THE authority on economics and the law.

[jyl]

The stock market is as close to a completely free market as you'll find today. Participants buy and sell as they wish, with virtually no constraints from govt rules, and the sole goal is to make money. Yet, the stock market exhibits plenty of volatility and bubble/bust behaviour. Both at the overall market level, and all the way down to individual stocks. While a fairly small amount of the volatility can be attributed to changes in govt regulation of the real economy, most of the market's volatility is not due to that. There are plenty of equilibrium theories for the market - and they don't work, at least not within practicably useful time periods.

[sithot]

Although Geitner as much as admitted that they (the government) prop up buying on low-volume days. The government is screwing with things they should stay the hell out of. Rarely admitted but well known.
Free economy my ass.

Tom

[oilonly]

Modern economics is today is completely reliant on the state borrowing from the incomes of our childrens,childrens. grandchildrens fetuses to make the math work. You take it from there to decide if it is legit.

[jyl]

Do you have a link?

Although Geitner as much as admitted that they (the government) prop up buying on low-volume days. The government is screwing with things they should stay the hell out of. Rarely admitted but well known.

Free economy my ass.



Tom