16 ms·

Who Are These Economists, Anyway? (2009) [pdf]

97 points by wormold 9y ago

wormold 9y ago
I posted this because the writing is so excellent that I found it a pleasure to read.
johnnybowman 9y ago
For anyone looking for a cohesive macroeconomic theory drawing from the economists mentioned here (e.g. Minsky, Godley, and others at the Levy Institute), I highly recommended taking a gander at Modern Monetary Theory a brief overview: https://www.thenation.com/article/the-rock-star-appeal-of-modern-monetary-theory/ https://www.thenation.com/article/the-rock-star-appeal-of-mo... A not so brief overview: http://neweconomicperspectives.org/2011/06/modern-money-theory-primer-on.html http://neweconomicperspectives.org/2011/06/modern-money-theo...
- nonidentified 9y ago
  TL;DR: MMT starts by saying that governments that manage their own currencies have unlimited spending ability – they can simply create money when they need it. And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite). Then, building on that premise, MMT basically claims that nobody needs to get hurt when governments create money out of thin air. The explanations for this are pretty wonky and hard to follow, but they amount to saying that the theory generally predicts no harmful inflation of the currency. Analysis: Hasn't mankind already concluded that governments can't just create and spend money boundlessly without harming the economy and the people who constitute it? I'm looking at Argentina, Venezuela and Zimbabwe right now, where the governments have each created money to finance their spending, and people are truly suffering as a result. And those are just some contemporary examples – human history offers many more, and they're quite consistent. If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect. Radical alternative theory: Governments should be fiscally responsible, practicing balanced budgets and promoting currency stability. Outlandish, true. But it turns out that historically this has been a very winning formula. More efficient economies, less corrupt governments, fewer innocent people getting hurt.
  - RobertoG 9y ago
    >>" If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect." That is not at all what MMT says and I don't understand how an honest reader of the MMT literature would arrive to that conclusion. What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending. >> And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite) In the MMT framework, there is always demand for the currency in what taxes have to be payed. That's obviously true. That doesn't mean that inflation is not a factor. By the way, most cases of hyperinflation in history, including the infamous Zimbabwe, are due to a supply shock (http://bilbo.economicoutlook.net/blog/?p=3773 http://bilbo.economicoutlook.net/blog/?p=3773).
    - simula67 9y ago
      > What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending. I heard this story in a debate between an MMT economist and an Austrian economist Imagine a husband and wife having the following conversation : Husband : Let's go and buy a new mansion, a Lamborghini and a private jet Wife : Are you sure we have enough money to do all that ? Husband : Well, if we don't, I can always pick up my shotgun and hold up the nearby bank Wife : Are you crazy ? You could go to prison. Or get shot by the police Husband : Well, I know that. But I just wanted to point out that not having enough money was irrelevant. Going to jail or getting shot was the most important constraint from spending all that money.
      - RobertoG 9y ago
        I'm not sure that your metaphor illuminates the issue at hand.
      - hn0 9y ago
        This misses THE central point of MMT, the fundamental difference between currency issuer (souvereign authority) and currency user (households, firms, regional governments, etc).
- nabla9 9y ago
  Non-economists have tendency to look down economists when they go astray .. and then immediately jump into the most fringe and unsound theories that provide "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics.
  - RobertoG 9y ago
    We look down mainstream economists (macro) because their level of knowledge is more similar to alchemy than to physics, and because they never change their theories never mind what happens in the real world. For instance (and there are more examples), here(1) is an explanation of how commercial bank loan funds. This explanation comes from the Bank of England, who, I suppose, know a few things about the subject. This explanation, of how reality works, have nothing to do with what a mainstream macroeconomics book explain. How is that possible? Can you find some physics book that explain something that the engineers say it's not true? My personal opinion is that, at the end of the day, the problem is that economics is a political subject. Maybe the only political subject that matters, because it's about who does the work and who keep the results. So, it's not incompetence what we are dealing here, but too many different interests trying to control the narrative. (1). https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters https://www.bankofengland.co.uk/working-paper/2015/banks-are...
    - nabla9 9y ago
      I'm well aware of that paper. Where MMT goes wrong is the relevance of all this. They succumb into "banking mysticism" and assume far too large macroeconomic role to banking. Banks don’t create demand out of thin air by providing loans. While banks can create loans "out of thin air" in some extent (careful with technical details), they are limited by their reserves. Central bank controls the size of the money supply, because it is the source of bank reserves and capital requirements.
      - RobertoG 9y ago
        >>Banks don’t create demand out of thin air by providing loans. This is exactly what MMT says (and the reason of their support for fiscal policies), but not what mainstream says. See the mainstream justification for 'quantitative easing': improve the reserves of the commercial banks so they 'decide' to loan. MMT have always said that this is not how it works. Banks don't loan because they have more money, because banks don't create demand. By the way, MMT have always said also that this was not the way to go but this would not generate inflation, as some critics pointed. >>While banks can create loans "out of thin air" [..] they are limited by their reserves. My understanding is that this is not exactly true, and here MMT proves mainstream wrong again. As you say we have to be careful with the technical details. Banks don't look into how much reserves they have and, then, they decide what they are going to loan. The credit departments of banks loan whenever they think they can make a good business and then the bank search for the reserves. If they can't find enough reserves in the inter-bank market, they will go to the central bank. The central bank always will cover the commercial bank needs. What the central bank can control is how expensive it's going to be to cover those needs. The money multiplier theory is also wrong.
peterashford 9y ago
As an economics neophyte, I found this engaging, if a little beyond me. Can someone explain it in 5yo terms?
- neilwilson 9y ago
  Economists have more in common with priests than scientists.
  - fwdpropaganda 9y ago
    That's the vibe of the article, but of course it's nonsense. Economists' objective is to collect observations and use that to build predictive theories. Therefore in intent (and largely in method, depending on the area of economy) they are exactly like scientists. Whether they are successful at it or not is another question. In practice economists guess a lot, as do priests and research scientists, and many other people. (Clarification: I use here "research scientists" to distinguish them from people who have been trained as scientists but in their day-to-day don't really occupy themselves with questions with unknown answers. Of course, those people don't guess at all. They are usually either teacher/professors or engineers.)
    - cdancette 9y ago
      what's not nonsense is to view humans as rational beings, and the free market as the perfect system. What it says is that economists should include more psychology and less mathematics in their theories.
      - fwdpropaganda 9y ago
        > what's not nonsense is to view humans as rational beings, and the free market as the perfect system. > What it says is that economists should include more psychology and less mathematics in their theories. Those are some really groundbreaking ideas, I can't believe no one has thought of that before. https://en.wikipedia.org/wiki/Behavioral_economics https://en.wikipedia.org/wiki/Behavioral_economics
forapurpose 9y ago
IMHO the important question is, as consumers of expertise, how do we manage its risk? Can we predict the risk, the likelihood and/or magnitude of failures? One issue might be our standards of 'success' and 'failure' for economists and other experts. The standard probably shouldn't be, 'predict 100% of economic events accurately', though that's an ideal to strive for. IIRC, some geologists were put on trial in Italy for failing to predict an earthquake; AFAIK there's no known way to do it reliably. Is 'predict 75% accurately' realistic for economics? Too high? Too easy? Is the thing even measurable? I don't know. And when the housing market crashes, saying 'I got the other 3 predictions right' doesn't matter much to people nor is it evidence that you weren't incompetent in this case. Maybe a standard should be, 'no incorrect predictions on critical issues' (i.e., it's better to say nothing than risk being wrong), but maybe that would result in no predictions on critical issues; also, in many situations such as earthquakes, no prediction infers the null hypothesis: No earthquakes today. Regardless, likely any standard should rely on degree of error: The housing market predictions weren't off by a few percent but by orders of magnitude. Can we create a model that accurately predicts where expertise fails and its magnitude? Perhaps large errors simply occur in unstable systems which have high magnitude variation in outcomes (e.g., earthquake or no earthquake), and thus unavoidably larger errors. Also, I'd expect accuracy to correlate with (high volume of quality research + consensus). If there's consensus based on low volume of quality research, that seems ripe for failure. Based on only a little research, it was popularly said (I don't know if it was consensus of scientists) in the 1970s that there would be an ice age soon; that was wrong. Based on a mountain of research, scientific consensus accurately has predicted global warming. But I'm guessing at the factors involved in predicting the risk of expertise. Has anyone researched this?
- Rainymood 9y ago
  If you could create such a model, you'd become very rich of course if you put your money where your mouth is and you are correct. These type of contrarian investors exist (i.e. black swan investors). The problem is that their funds lose money every year, year over year, and people think they are crazy until some unforseen crisis hits and they become "prescient" all of the sudden. In game theory there is more and more research pointing towards ambiguity and how people deal with that. Ambiguity is defined as sourced of probability which are generally unknown but people still prefer one over the other. A well known example is the Ellsberg paradox [0]. In this paradox there are two turns, one contains 50 red and 50 black balls and the other contains 100 balls of unknown proportion of red/black. People often prefer to bet on the known urn (even on complmentary bets) leading to probabilistic contradictions (i.e. probabilities stop summing to one) There's also a lot of research on behavioral finance and in particular behavioral macro, these models show that even with only a small number of heterogenous agents you can create chaotic models ... The point I'm trying to make is that we, as economists create models, based on certain assumptions, that seem to work well, until they don't. [0] https://en.wikipedia.org/wiki/Ellsberg_paradox https://en.wikipedia.org/wiki/Ellsberg_paradox
michaelbuckbee 9y ago
The academic side of economics pushes towards norms like Math and Physics (that's what gets you prestige). AKA you come up with something like the Black-Scholes model and you've got yourself a Nobel Prize [1]. Which is cool, but skips over the aspects of economics related to unpredictable bags of meat buying things that are more like psychology/sociology and other "soft" sciences [2] On that note: one thing I didn't see mentioned in the article or the discussion here was prediction markets. Prediction markets are interesting as its a meeting point of the two sides. "Think your model is better? put $50 in and we'll see in a month". I really wish they were more widely used/officially accepted, but the stigma of "betting" has pretty well killed them. 1 - https://www.investopedia.com/university/options-pricing/black-scholes-model.asp https://www.investopedia.com/university/options-pricing/blac... 2 - https://xkcd.com/1520/ https://xkcd.com/1520/
- digi_owl 9y ago
  Never mind that said Nobel is the ultimate insider price, given out by the Swedish national bank and set up long after Nobel was dead.
- alimw 9y ago
  The Black-Scholes model may not be a good example; it is successfully applied by financiers on a day-to-day basis.
leroman 9y ago
For me the sad part of "economics" and their number trickeries is the unsustainable usage of natural resources. I could argue all they really did is inflate current value and allow "loaning" from future resources to boost the current economy. Global warming in this context is the (possibly too late) push back in this systems equilibrium.
- LifeLiverTransp 9y ago
  In every age those in power attracted charlatans and philosophers, to declare the kings work and world the best world there is, his doing the only plausible way and the attempt to errect a hypothesis heresy. Communism at least made itself testable, it prognosed and proposed- and thus it could fail and be held against attempts to revive it unchanged. Economics never even got to this stage- they shirk simulations and hard data for the kings funds could cease, if they would propose testable scenarios or scenario trees. Economics im afraid to admit, is less of a science, then some ideologys, who willingly submitted themselves to the killing fields of the experimental method.
  - lucisferre 9y ago
    It's ironic you gave communism as a counter example to power attracting charlatans. https://en.wikipedia.org/wiki/Lysenkoism https://en.wikipedia.org/wiki/Lysenkoism
  - Earloop 9y ago
    Poor choice words I suppose - I'd much rather be submitted to the "killing fields of the experimental method" than the actual "killing fields" of a Communist regime. https://en.wikipedia.org/wiki/Khmer_Rouge_Killing_Fields https://en.wikipedia.org/wiki/Khmer_Rouge_Killing_Fields
- mr_overalls 9y ago
  Regard for natural resources is actually a pretty mainstream idea in economics. The concepts of tragedy of the commons, public goods, pollution as a negative externality, etc. are quite well-established. https://en.wikipedia.org/wiki/Environmental_economics https://en.wikipedia.org/wiki/Environmental_economics
dpwm 9y ago
One point which I haven't seen made here is that perhaps economics is a reductionist approach to something which cannot be easily modelled in a reductionist way. Nobody here expects everything we know about Physics to become largely irrelevant tomorrow. But deep within is the assumption that the underlying models we build today will hold true tomorrow. An electron will always be an electron. Now let's look at biology: a frog today may not be a frog two-hundred years ago. Microbiologists are finding new species that simply didn't exist 50 years ago. But there's a shred of something fundamental there at the physical level: a reaction involving biological building blocks can be deemed to be as true as hundred years from now; whether or not organisms develop more stable sets of chemical reactions. Psychology and social sciences are changing because people are changing and their environment is changing. Pretty much the only thing that remains constant is that people have fundamental needs. As people become aware of cognitive biases, and more are exploited by them, suppressing them becomes not just an issue of utility but of survival. Yet somehow, we expect economics, which in many ways is the study of a very dynamic system which builds on social sciences where the underlying rules are changing and the very reductionist terms we are using are changing, to yield results which are accurate and work at all times. Can we build better macroeconomic models? Almost certainly. Will they be valid in 100 years time? That depends. If we think to Physics, Thermodynamics gives a field that seems to be universally true -- if you come up with a model that violates the second law of Thermodynamics, it's fair to say your model is wrong. It doesn't matter if you're studying distant stars or subatomic particles. At the same time its predictions are somewhat vague -- we can derive upper and lower bounds on things, and say with an almost certain degree of belief what cannot happen and use this to derive models that are consistent. We don't seem to have much like that for economics, although if we focus on resources we can clearly see there is a physical upper bound. That seems like it might be a better direction to approach the problem in than from the end were even the idea that employers employ people to create more value than the money they pay them cannot be taken to be universally true. Of course, nobody has any incentive for denying most Physics, with the exception of the 2nd law of thermodynamics -- because there is immense money to be made by charlatans promising infinite energy in exchange for lots and lots of money. Given economics deals with matters that can have direct implications for those with lots of money, we would be naive to not assume the same to have happened there.
cs702 9y ago
Mainstream macroeconomic theory -- both in its "freshwater" and "saltwater" traditions -- has become mainstream because of a variety of reasons. The OP quotes Keynes: "That it reached conclusions quite different from what the ordinary uninstructed person would expect added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority."[a] That rings true: New macroeconomic theories can become mainstream only if they earn the support (for example, by favoring the vested interests) of educational institutions, governmental institutions, and -- last but not least -- the business establishment. [a] https://ebooks.adelaide.edu.au/k/keynes/john_maynard/k44g/complete.html https://ebooks.adelaide.edu.au/k/keynes/john_maynard/k44g/co...
- deleted 9y ago
  [deleted]
ajmarsh 9y ago
Is there a rating agency for economists and their predictions?

97 points by wormold 9y ago

I posted this because the writing is so excellent that I found it a pleasure to read.

For anyone looking for a cohesive macroeconomic theory drawing from the economists mentioned here (e.g. Minsky, Godley, and others at the Levy Institute), I highly recommended taking a gander at Modern Monetary Theory a brief overview: https://www.thenation.com/article/the-rock-star-appeal-of-modern-monetary-theory/ https://www.thenation.com/article/the-rock-star-appeal-of-mo... A not so brief overview: http://neweconomicperspectives.org/2011/06/modern-money-theory-primer-on.html http://neweconomicperspectives.org/2011/06/modern-money-theo...

nonidentified 9y ago
TL;DR: MMT starts by saying that governments that manage their own currencies have unlimited spending ability – they can simply create money when they need it. And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite). Then, building on that premise, MMT basically claims that nobody needs to get hurt when governments create money out of thin air. The explanations for this are pretty wonky and hard to follow, but they amount to saying that the theory generally predicts no harmful inflation of the currency. Analysis: Hasn't mankind already concluded that governments can't just create and spend money boundlessly without harming the economy and the people who constitute it? I'm looking at Argentina, Venezuela and Zimbabwe right now, where the governments have each created money to finance their spending, and people are truly suffering as a result. And those are just some contemporary examples – human history offers many more, and they're quite consistent. If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect. Radical alternative theory: Governments should be fiscally responsible, practicing balanced budgets and promoting currency stability. Outlandish, true. But it turns out that historically this has been a very winning formula. More efficient economies, less corrupt governments, fewer innocent people getting hurt.
- RobertoG 9y ago
  >>" If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect." That is not at all what MMT says and I don't understand how an honest reader of the MMT literature would arrive to that conclusion. What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending. >> And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite) In the MMT framework, there is always demand for the currency in what taxes have to be payed. That's obviously true. That doesn't mean that inflation is not a factor. By the way, most cases of hyperinflation in history, including the infamous Zimbabwe, are due to a supply shock (http://bilbo.economicoutlook.net/blog/?p=3773 http://bilbo.economicoutlook.net/blog/?p=3773).
  - simula67 9y ago
    > What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending. I heard this story in a debate between an MMT economist and an Austrian economist Imagine a husband and wife having the following conversation : Husband : Let's go and buy a new mansion, a Lamborghini and a private jet Wife : Are you sure we have enough money to do all that ? Husband : Well, if we don't, I can always pick up my shotgun and hold up the nearby bank Wife : Are you crazy ? You could go to prison. Or get shot by the police Husband : Well, I know that. But I just wanted to point out that not having enough money was irrelevant. Going to jail or getting shot was the most important constraint from spending all that money.
    - RobertoG 9y ago
      I'm not sure that your metaphor illuminates the issue at hand.
    - hn0 9y ago
      This misses THE central point of MMT, the fundamental difference between currency issuer (souvereign authority) and currency user (households, firms, regional governments, etc).
nabla9 9y ago
Non-economists have tendency to look down economists when they go astray .. and then immediately jump into the most fringe and unsound theories that provide "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics.
- RobertoG 9y ago
  We look down mainstream economists (macro) because their level of knowledge is more similar to alchemy than to physics, and because they never change their theories never mind what happens in the real world. For instance (and there are more examples), here(1) is an explanation of how commercial bank loan funds. This explanation comes from the Bank of England, who, I suppose, know a few things about the subject. This explanation, of how reality works, have nothing to do with what a mainstream macroeconomics book explain. How is that possible? Can you find some physics book that explain something that the engineers say it's not true? My personal opinion is that, at the end of the day, the problem is that economics is a political subject. Maybe the only political subject that matters, because it's about who does the work and who keep the results. So, it's not incompetence what we are dealing here, but too many different interests trying to control the narrative. (1). https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters https://www.bankofengland.co.uk/working-paper/2015/banks-are...
  - nabla9 9y ago
    I'm well aware of that paper. Where MMT goes wrong is the relevance of all this. They succumb into "banking mysticism" and assume far too large macroeconomic role to banking. Banks don’t create demand out of thin air by providing loans. While banks can create loans "out of thin air" in some extent (careful with technical details), they are limited by their reserves. Central bank controls the size of the money supply, because it is the source of bank reserves and capital requirements.
    - RobertoG 9y ago
      >>Banks don’t create demand out of thin air by providing loans. This is exactly what MMT says (and the reason of their support for fiscal policies), but not what mainstream says. See the mainstream justification for 'quantitative easing': improve the reserves of the commercial banks so they 'decide' to loan. MMT have always said that this is not how it works. Banks don't loan because they have more money, because banks don't create demand. By the way, MMT have always said also that this was not the way to go but this would not generate inflation, as some critics pointed. >>While banks can create loans "out of thin air" [..] they are limited by their reserves. My understanding is that this is not exactly true, and here MMT proves mainstream wrong again. As you say we have to be careful with the technical details. Banks don't look into how much reserves they have and, then, they decide what they are going to loan. The credit departments of banks loan whenever they think they can make a good business and then the bank search for the reserves. If they can't find enough reserves in the inter-bank market, they will go to the central bank. The central bank always will cover the commercial bank needs. What the central bank can control is how expensive it's going to be to cover those needs. The money multiplier theory is also wrong.

peterashford 9y ago

As an economics neophyte, I found this engaging, if a little beyond me. Can someone explain it in 5yo terms?

neilwilson 9y ago
Economists have more in common with priests than scientists.
- fwdpropaganda 9y ago
  That's the vibe of the article, but of course it's nonsense. Economists' objective is to collect observations and use that to build predictive theories. Therefore in intent (and largely in method, depending on the area of economy) they are exactly like scientists. Whether they are successful at it or not is another question. In practice economists guess a lot, as do priests and research scientists, and many other people. (Clarification: I use here "research scientists" to distinguish them from people who have been trained as scientists but in their day-to-day don't really occupy themselves with questions with unknown answers. Of course, those people don't guess at all. They are usually either teacher/professors or engineers.)
  - cdancette 9y ago
    what's not nonsense is to view humans as rational beings, and the free market as the perfect system. What it says is that economists should include more psychology and less mathematics in their theories.
    - fwdpropaganda 9y ago
      > what's not nonsense is to view humans as rational beings, and the free market as the perfect system. > What it says is that economists should include more psychology and less mathematics in their theories. Those are some really groundbreaking ideas, I can't believe no one has thought of that before. https://en.wikipedia.org/wiki/Behavioral_economics https://en.wikipedia.org/wiki/Behavioral_economics

forapurpose 9y ago

IMHO the important question is, as consumers of expertise, how do we manage its risk? Can we predict the risk, the likelihood and/or magnitude of failures? One issue might be our standards of 'success' and 'failure' for economists and other experts. The standard probably shouldn't be, 'predict 100% of economic events accurately', though that's an ideal to strive for. IIRC, some geologists were put on trial in Italy for failing to predict an earthquake; AFAIK there's no known way to do it reliably. Is 'predict 75% accurately' realistic for economics? Too high? Too easy? Is the thing even measurable? I don't know. And when the housing market crashes, saying 'I got the other 3 predictions right' doesn't matter much to people nor is it evidence that you weren't incompetent in this case. Maybe a standard should be, 'no incorrect predictions on critical issues' (i.e., it's better to say nothing than risk being wrong), but maybe that would result in no predictions on critical issues; also, in many situations such as earthquakes, no prediction infers the null hypothesis: No earthquakes today. Regardless, likely any standard should rely on degree of error: The housing market predictions weren't off by a few percent but by orders of magnitude. Can we create a model that accurately predicts where expertise fails and its magnitude? Perhaps large errors simply occur in unstable systems which have high magnitude variation in outcomes (e.g., earthquake or no earthquake), and thus unavoidably larger errors. Also, I'd expect accuracy to correlate with (high volume of quality research + consensus). If there's consensus based on low volume of quality research, that seems ripe for failure. Based on only a little research, it was popularly said (I don't know if it was consensus of scientists) in the 1970s that there would be an ice age soon; that was wrong. Based on a mountain of research, scientific consensus accurately has predicted global warming. But I'm guessing at the factors involved in predicting the risk of expertise. Has anyone researched this?

Rainymood 9y ago
If you could create such a model, you'd become very rich of course if you put your money where your mouth is and you are correct. These type of contrarian investors exist (i.e. black swan investors). The problem is that their funds lose money every year, year over year, and people think they are crazy until some unforseen crisis hits and they become "prescient" all of the sudden. In game theory there is more and more research pointing towards ambiguity and how people deal with that. Ambiguity is defined as sourced of probability which are generally unknown but people still prefer one over the other. A well known example is the Ellsberg paradox [0]. In this paradox there are two turns, one contains 50 red and 50 black balls and the other contains 100 balls of unknown proportion of red/black. People often prefer to bet on the known urn (even on complmentary bets) leading to probabilistic contradictions (i.e. probabilities stop summing to one) There's also a lot of research on behavioral finance and in particular behavioral macro, these models show that even with only a small number of heterogenous agents you can create chaotic models ... The point I'm trying to make is that we, as economists create models, based on certain assumptions, that seem to work well, until they don't. [0] https://en.wikipedia.org/wiki/Ellsberg_paradox https://en.wikipedia.org/wiki/Ellsberg_paradox

michaelbuckbee 9y ago

The academic side of economics pushes towards norms like Math and Physics (that's what gets you prestige). AKA you come up with something like the Black-Scholes model and you've got yourself a Nobel Prize [1]. Which is cool, but skips over the aspects of economics related to unpredictable bags of meat buying things that are more like psychology/sociology and other "soft" sciences [2] On that note: one thing I didn't see mentioned in the article or the discussion here was prediction markets. Prediction markets are interesting as its a meeting point of the two sides. "Think your model is better? put $50 in and we'll see in a month". I really wish they were more widely used/officially accepted, but the stigma of "betting" has pretty well killed them. 1 - https://www.investopedia.com/university/options-pricing/black-scholes-model.asp https://www.investopedia.com/university/options-pricing/blac... 2 - https://xkcd.com/1520/ https://xkcd.com/1520/

digi_owl 9y ago
Never mind that said Nobel is the ultimate insider price, given out by the Swedish national bank and set up long after Nobel was dead.
alimw 9y ago
The Black-Scholes model may not be a good example; it is successfully applied by financiers on a day-to-day basis.

leroman 9y ago

For me the sad part of "economics" and their number trickeries is the unsustainable usage of natural resources. I could argue all they really did is inflate current value and allow "loaning" from future resources to boost the current economy. Global warming in this context is the (possibly too late) push back in this systems equilibrium.

LifeLiverTransp 9y ago
In every age those in power attracted charlatans and philosophers, to declare the kings work and world the best world there is, his doing the only plausible way and the attempt to errect a hypothesis heresy. Communism at least made itself testable, it prognosed and proposed- and thus it could fail and be held against attempts to revive it unchanged. Economics never even got to this stage- they shirk simulations and hard data for the kings funds could cease, if they would propose testable scenarios or scenario trees. Economics im afraid to admit, is less of a science, then some ideologys, who willingly submitted themselves to the killing fields of the experimental method.
- lucisferre 9y ago
  It's ironic you gave communism as a counter example to power attracting charlatans. https://en.wikipedia.org/wiki/Lysenkoism https://en.wikipedia.org/wiki/Lysenkoism
- Earloop 9y ago
  Poor choice words I suppose - I'd much rather be submitted to the "killing fields of the experimental method" than the actual "killing fields" of a Communist regime. https://en.wikipedia.org/wiki/Khmer_Rouge_Killing_Fields https://en.wikipedia.org/wiki/Khmer_Rouge_Killing_Fields
mr_overalls 9y ago
Regard for natural resources is actually a pretty mainstream idea in economics. The concepts of tragedy of the commons, public goods, pollution as a negative externality, etc. are quite well-established. https://en.wikipedia.org/wiki/Environmental_economics https://en.wikipedia.org/wiki/Environmental_economics

dpwm 9y ago

One point which I haven't seen made here is that perhaps economics is a reductionist approach to something which cannot be easily modelled in a reductionist way. Nobody here expects everything we know about Physics to become largely irrelevant tomorrow. But deep within is the assumption that the underlying models we build today will hold true tomorrow. An electron will always be an electron. Now let's look at biology: a frog today may not be a frog two-hundred years ago. Microbiologists are finding new species that simply didn't exist 50 years ago. But there's a shred of something fundamental there at the physical level: a reaction involving biological building blocks can be deemed to be as true as hundred years from now; whether or not organisms develop more stable sets of chemical reactions. Psychology and social sciences are changing because people are changing and their environment is changing. Pretty much the only thing that remains constant is that people have fundamental needs. As people become aware of cognitive biases, and more are exploited by them, suppressing them becomes not just an issue of utility but of survival. Yet somehow, we expect economics, which in many ways is the study of a very dynamic system which builds on social sciences where the underlying rules are changing and the very reductionist terms we are using are changing, to yield results which are accurate and work at all times. Can we build better macroeconomic models? Almost certainly. Will they be valid in 100 years time? That depends. If we think to Physics, Thermodynamics gives a field that seems to be universally true -- if you come up with a model that violates the second law of Thermodynamics, it's fair to say your model is wrong. It doesn't matter if you're studying distant stars or subatomic particles. At the same time its predictions are somewhat vague -- we can derive upper and lower bounds on things, and say with an almost certain degree of belief what cannot happen and use this to derive models that are consistent. We don't seem to have much like that for economics, although if we focus on resources we can clearly see there is a physical upper bound. That seems like it might be a better direction to approach the problem in than from the end were even the idea that employers employ people to create more value than the money they pay them cannot be taken to be universally true. Of course, nobody has any incentive for denying most Physics, with the exception of the 2nd law of thermodynamics -- because there is immense money to be made by charlatans promising infinite energy in exchange for lots and lots of money. Given economics deals with matters that can have direct implications for those with lots of money, we would be naive to not assume the same to have happened there.

cs702 9y ago

Mainstream macroeconomic theory -- both in its "freshwater" and "saltwater" traditions -- has become mainstream because of a variety of reasons. The OP quotes Keynes: "That it reached conclusions quite different from what the ordinary uninstructed person would expect added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority."[a] That rings true: New macroeconomic theories can become mainstream only if they earn the support (for example, by favoring the vested interests) of educational institutions, governmental institutions, and -- last but not least -- the business establishment. [a] https://ebooks.adelaide.edu.au/k/keynes/john_maynard/k44g/complete.html https://ebooks.adelaide.edu.au/k/keynes/john_maynard/k44g/co...

deleted 9y ago
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ajmarsh 9y ago

Is there a rating agency for economists and their predictions?