4 ms·

The easiest way to invalidate a theory is to see what predictions it makes, and to figure out where those predictions were wrong. One recent example: the choic

by ekidd 9y ago

The easiest way to invalidate a theory is to see what predictions it makes, and to figure out where those predictions were wrong. One recent example: the choice between austerity and stimulus, in the US and Europe, shortly after the 2008 downturn. Keynesian economic theory claimed that if your interest rate approached 0%, that you could no longer stimulate the economy via interest rates, but that the best way to improve the situation was for the government to create and spend money. And that doing so wouldn't cause sudden inflation. Another theory said that fiscal austerity measures and the reduction of government debt would improve the situation. This theory also suggested that the US should experience strong inflation in the years immediately following 2008. IIRC, the US government spent something like 1/3 to 1/2 the money that some Keynesian economists recommend spending on a stimulus. Other countries tried varying degrees of austerity. So to test the theory, you'd need to compare what happened in different countries. Note that this particular "Keynesian" theory does not necessarily recommend heavy government spending when the Fed interest rate is above 0%. Basically, it's only about emergency measures when ordinary economic theories have failed. For an easily-accessible version of this particular "Keynesian" theory, and why it's supposed to work, see this paper on the "Capital Hill Baby Sitting Co-op": http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coop.pdf http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coo... This is really more of parable than anything else, but it explains the logic. Tl;dr: At the government's scale, money is a weird abstraction and you can't always pretend that it works like grain or cars or other simple economic goods. Or to put it another way, if the economy gets bad enough, then everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give. I'm not qualified to comment on whether this theory is actually true. But that's how you might test it, and an explanation of why it's supposed to be useful under certain circumstances.

justforFranz 9y ago
And as we saw, despite claims from worry warts like Ron Paul, and from gold advertisers playing pump 'n dump, there was no inflation in the US to speak of. Throughout The Great Recession government bond prices remained high - which allowed the US to continue borrowing & spending without being reigned in by financial markets.
- pishpash 9y ago
  There is an enormous amount of asset inflation, and future inflation is just "stored" there.
  - AlexCoventry 9y ago
    Do you mean inflation in financial instruments and other investment vehicles?
  - jasode 9y ago
    Exactly. The following phenomenon are all related: - the record-breaking auction prices of art pieces (Picasso, etc) at Christie's & Sothebys - the vast pools of money chasing late-stage tech startups driving up late-round valuations, - the increase in student loans for college students driving up tuition prices outpacing "official" inflation metric There's also "shrinkflation"[1] which is a form of inflation but does not count in CPI calculations. Also, many homeowners complained that their house insurance went up 20+ percent even though they don't live in a hurricane or flood zone. The pundits saying there's no inflation seem to only look at the flawed CPI statistic. If the Fed's quantitative easing creates $4 trillion in new money, that has to show up somewhere in the economy. (Unless _everybody_ coordinates to hide all $4 trillion in a mattress to negate its effect.) If citizens are seeing a reduction in purchasing power in real terms, you have inflation happening. [1] https://en.wikipedia.org/wiki/Shrinkflation https://en.wikipedia.org/wiki/Shrinkflation
    - alethiophile 9y ago
      See also, the related phenomenon of a company introducing a new, notionally superior product line at a higher price than the original, then somewhat later discontinuing the original, while never reducing the price of the new one. This results in the cheapest available product becoming more expensive, without this appearing in inflation statistics. I have the most exposure to this in the realm of medical products. A family member has Type I diabetes, and so must continually buy insulin and blood testing supplies as an everyday expense; several times, he has been forced to switch products (between varieties of insulin, from purely chemical test strips to ones with an electronic reader, &c.) by the discontinuance of the older product. The new one is always much more expensive, and never reduces in price to match the old; this has resulted in a significant increase in his expenses for these supplies, despite nothing ever occurring that would appear in inflation statistics.
gpickett00 9y ago
It depends what time scale you're looking at. If you consider the US government's reaction to the events of 2008 a success because the stock market is high right now and unemployment is low, that would be misleading if the effects take an even longer timeframe to show themselves. The Austrian economists would argue that what happened in 2008 was a breakdown of the fiat monetary system and that the responses were just bandaids. In the longer-term view, when you look at shifts in power and rising and falling of empires, 2008 could be the first of many massive shocks to the economy.
ChuckMcM 9y ago
This is what I was going to say, but I'll put it in stronger terms; The only way to invalidate a theory is to take it's prediction, and prove it false. This is called falsification. Economics is a challenging area to have theories because it is really really hard to run experiments. As a result you have to use existing choices and try to identify what the theory predicts, then walk forward in time to see if that prediction was accurate or inaccurate. It is really hard to do because humans tend to want things to succeed and can unconsciously add or subtract data points that move them closer to 'prove' or 'disprove' depending on what they want. Eliminating that bias is very difficult. On a related note, we're also due for an ice age based on historical cycles. However as systems change and the balances within them shift, it can be difficult to see which variables force the cycle and which merely enhance it. Easy to see an enhancer as a major force when it isn't. So back to business cycles; there are four outlier economic events which I think can provide some insights into what may or may not happen in the next decade. These are (in chronological order) The dissolution of the USSR in the 80's, Japan's meltdown in the 90's, the misnamed "Mortgage crisis" of 2009, and the collapse of the Venezuelan economy in 2015. Each of these events share a common thread of state controls and markets being ripped apart by events. I don't think we have yet learned all we need to learn from them.
- pm90 9y ago
  How does the Venezuelan crisis affect the World Economy, though? AFAIK they are neither well integrated into global trade and finance (Japan and US), nor do they have so many people as to cause a serious change in the labor market (USSR).
  - ChuckMcM 9y ago
    In both the USSR and Venezuela cases we've seen a complete separation of meaningful feedback and controls in the regulation arm and the market itself. In both cases multiple markets emerged that where nominally independent (black, grey, sanctioned, and unsanctioned) which created ways for capital to flow that had previously been impossible. In both cases there appears to be tremendous looting of GDP into the market accounts of a smaller wealthy elite. To the extent that the wealth of a nation empowers its governance, the rise of oligarchs creates a nominally stable power structure that is disassociated with GDP development. To me, this appears to structurally favor wealth creation for the oligarchs over GDP creation for the economy. What I observe is that the rapid shift of materially significant (from a GDP perspective) wealth from the general market to a much smaller number of market 'maskers' on a sovereign state basis, has an attenuating effect on systemic controls and other market damping systems. So looking at how business cycles happen in a system where more and more interacting economies are less market driven and more exploitation driven is, again in my non-professional opinion, might shed some light on how the cycles will evolve.
Houshalter 9y ago
>everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give Ideally the restaurant would lower wages until fewer people want to work there, and lower prices until people want to eat there. Decreasing the value of money feels like a dirty hack that benefits the richest at the expense of everyone else. Remember before we adopted these policies recessions used to be really short.

by ekidd 9y ago

justforFranz 9y ago

And as we saw, despite claims from worry warts like Ron Paul, and from gold advertisers playing pump 'n dump, there was no inflation in the US to speak of. Throughout The Great Recession government bond prices remained high - which allowed the US to continue borrowing & spending without being reigned in by financial markets.

pishpash 9y ago
There is an enormous amount of asset inflation, and future inflation is just "stored" there.
- AlexCoventry 9y ago
  Do you mean inflation in financial instruments and other investment vehicles?
- jasode 9y ago
  Exactly. The following phenomenon are all related: - the record-breaking auction prices of art pieces (Picasso, etc) at Christie's & Sothebys - the vast pools of money chasing late-stage tech startups driving up late-round valuations, - the increase in student loans for college students driving up tuition prices outpacing "official" inflation metric There's also "shrinkflation"[1] which is a form of inflation but does not count in CPI calculations. Also, many homeowners complained that their house insurance went up 20+ percent even though they don't live in a hurricane or flood zone. The pundits saying there's no inflation seem to only look at the flawed CPI statistic. If the Fed's quantitative easing creates $4 trillion in new money, that has to show up somewhere in the economy. (Unless _everybody_ coordinates to hide all $4 trillion in a mattress to negate its effect.) If citizens are seeing a reduction in purchasing power in real terms, you have inflation happening. [1] https://en.wikipedia.org/wiki/Shrinkflation https://en.wikipedia.org/wiki/Shrinkflation
  - alethiophile 9y ago
    See also, the related phenomenon of a company introducing a new, notionally superior product line at a higher price than the original, then somewhat later discontinuing the original, while never reducing the price of the new one. This results in the cheapest available product becoming more expensive, without this appearing in inflation statistics. I have the most exposure to this in the realm of medical products. A family member has Type I diabetes, and so must continually buy insulin and blood testing supplies as an everyday expense; several times, he has been forced to switch products (between varieties of insulin, from purely chemical test strips to ones with an electronic reader, &c.) by the discontinuance of the older product. The new one is always much more expensive, and never reduces in price to match the old; this has resulted in a significant increase in his expenses for these supplies, despite nothing ever occurring that would appear in inflation statistics.

gpickett00 9y ago

It depends what time scale you're looking at. If you consider the US government's reaction to the events of 2008 a success because the stock market is high right now and unemployment is low, that would be misleading if the effects take an even longer timeframe to show themselves. The Austrian economists would argue that what happened in 2008 was a breakdown of the fiat monetary system and that the responses were just bandaids. In the longer-term view, when you look at shifts in power and rising and falling of empires, 2008 could be the first of many massive shocks to the economy.

ChuckMcM 9y ago

This is what I was going to say, but I'll put it in stronger terms; The only way to invalidate a theory is to take it's prediction, and prove it false. This is called falsification. Economics is a challenging area to have theories because it is really really hard to run experiments. As a result you have to use existing choices and try to identify what the theory predicts, then walk forward in time to see if that prediction was accurate or inaccurate. It is really hard to do because humans tend to want things to succeed and can unconsciously add or subtract data points that move them closer to 'prove' or 'disprove' depending on what they want. Eliminating that bias is very difficult. On a related note, we're also due for an ice age based on historical cycles. However as systems change and the balances within them shift, it can be difficult to see which variables force the cycle and which merely enhance it. Easy to see an enhancer as a major force when it isn't. So back to business cycles; there are four outlier economic events which I think can provide some insights into what may or may not happen in the next decade. These are (in chronological order) The dissolution of the USSR in the 80's, Japan's meltdown in the 90's, the misnamed "Mortgage crisis" of 2009, and the collapse of the Venezuelan economy in 2015. Each of these events share a common thread of state controls and markets being ripped apart by events. I don't think we have yet learned all we need to learn from them.

pm90 9y ago
How does the Venezuelan crisis affect the World Economy, though? AFAIK they are neither well integrated into global trade and finance (Japan and US), nor do they have so many people as to cause a serious change in the labor market (USSR).
- ChuckMcM 9y ago
  In both the USSR and Venezuela cases we've seen a complete separation of meaningful feedback and controls in the regulation arm and the market itself. In both cases multiple markets emerged that where nominally independent (black, grey, sanctioned, and unsanctioned) which created ways for capital to flow that had previously been impossible. In both cases there appears to be tremendous looting of GDP into the market accounts of a smaller wealthy elite. To the extent that the wealth of a nation empowers its governance, the rise of oligarchs creates a nominally stable power structure that is disassociated with GDP development. To me, this appears to structurally favor wealth creation for the oligarchs over GDP creation for the economy. What I observe is that the rapid shift of materially significant (from a GDP perspective) wealth from the general market to a much smaller number of market 'maskers' on a sovereign state basis, has an attenuating effect on systemic controls and other market damping systems. So looking at how business cycles happen in a system where more and more interacting economies are less market driven and more exploitation driven is, again in my non-professional opinion, might shed some light on how the cycles will evolve.

Houshalter 9y ago

>everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give Ideally the restaurant would lower wages until fewer people want to work there, and lower prices until people want to eat there. Decreasing the value of money feels like a dirty hack that benefits the richest at the expense of everyone else. Remember before we adopted these policies recessions used to be really short.