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That's missing the point. Economics is treated more like thermodynamics. In thermo you have lumped parameter models (parameters like temperature and enthalpy) t

That's missing the point. Economics is treated more like thermodynamics. In thermo you have lumped parameter models (parameters like temperature and enthalpy) that are actually correct even though they dont take tiny details into account. IMHO the problem with economics is that their simple models are not over a closed system. A supply and demand curve is fine for a specific product, but it fails if you try to use it at the macro level where other factors come into play. I'd love to work on better models for the fed, with the data and experts they have.

tibbetts 5y ago
Also people working on thermodynamics get to test their models a lot, and it’s noticed when their models fail. I’m not even sure supply demand curve is good for a specific product, having spent some time around consumer packaged goods analytics. Consumer behavior around frozen pizza alone is massively complicated, never mind cleaning supplies, candy, beer, or cosmetics.
- scott00 5y ago
  I'd love to hear more about this, sounds fascinating.
  - spaetzleesser 5y ago
    Thermodynamics is always the same. People’s tastes change all the time constantly. The same person may do something different tomorrow under the same circumstances as of today.
  - kristopolous 5y ago
    For instance, lowering the price of something doesn't necessarily increase sales - it can decrease sales if say the consumer believes it's cheaper because it's an inferior product. So sometimes increasing the price is the way to go to increase sales. So the price operates in weird ways; what about other things. If the product is placed next to more expensive items it could do a number of things. For instance, it could be a decoy product and increase the sales of the adjacent item. Or perhaps the adjacent item could be a decoy product. And what about numbers? Pricing things ending in 9s perform better. Selling things at $39 tend to do better then lower numbers like $34 or $37 because of the 9. And then there's the packaging and placement itself. Tall or wide packaging of the same volume emote different signals and respond differently to prices - look at the great variety of how bottled water is packaged next time you're at the store. Then there's the quantity on a shelf at any given time. Sometimes intentionally overstocking the shelves will increase sales as consumers will take more than they need, sometimes understocking will creating anxiety that the product won't be available when needed. Depends on the product, the buyer, the conditions of the market, lots of things. Then there's the brand itself. Depending on the market you're in, a name brand can either help or hurt you. In some markets, the name brand is associated with premium pricing and poor value so it doesn't carry your product; in other markets it's just the opposite. And then there's discounts and sales. In some stores you want to never have a sale, ever. In other stores you want to barrage your shoppers with a complicated array of perpetually churning sales. And what about sales, there's an artificial price that gets advertised before the actual one; nobody is paying the higher price, so it can more or less be chosen arbitrarily. You can mark your bubblegum as 99.99% off from being $10,000, but then the illusion is broken. Instead, what sales do is they give the perception of a higher price signal through the presentation of the sale without actually charging the price. That's why when you go into clothing stores they'll say the product was $95 or whatever and what luck, through many discounts it's now only $30. Well they all sold at about $30, we know that, but the product decoy pricing itself tries to capture both worlds. This is just honestly just a tiny bit of how demand actually works. It's a vast study. The point is that people aren't mechanical rational automotons without any strategy or agency who respond to prices through unconscious reflexes. Nor do they have perfect information or maximize their utility value through arbitrarily complex deductions and always choose the most optimum outcome. Things are totally messy and the classical models are about as accurate as saying "winter brings cold weather and summer brings hot". Sure, in general. But on any specific day it's non predictive. A $10,000 pack of gum will likely perform poorly. But if you hyped the heck out of it and made it really unique, you might even sell out your inventory of that alarmingly quickly because humans are weird like that. Proof? Let me introduce you to Palessi https://m.youtube.com/watch?v=-2gaNq-rOkI https://m.youtube.com/watch?v=-2gaNq-rOkI
    - andrekandre 5y ago
      > That's why when you go into clothing stores they'll say the product was $95 or whatever and what luck, through many discounts it's now only $30. Well they all sold at about $30, we know that, but the product decoy pricing itself tries to capture both worlds. isnt that called "double pricing" and illegal in some countries? (apologies if i'm misunderstanding)
lotsofpulp 5y ago
>A supply and demand curve is fine for a specific product, but it fails if you try to use it at the macro level where other factors come into play. In what way do supply and demand curves fail at the macro level?
- tsimionescu 5y ago
  In many of the same ways they fail at the micro level as well, actually - demand is not controlled exclusively by price, elasticity is impossible to predict and changes with time, many goods are not substitutable in the way these models present them. There are more ways, I'm sure, but these immediately come to mind.
  - lotsofpulp 5y ago
    > demand is not controlled exclusively by price Is this ever claimed? Supply and demand curves intersect at the price, and so different prices will have different supply and demand curves. > elasticity is impossible to predict and changes with time, many goods are not substitutable in the way these models present them. The models may be inaccurate, but the inability to model at the macro level with current technology or knowledge does not indicate a failure of supply and demand curve movements being the causal factor of price changes.
bko 5y ago
> Rule 1: Think of the economy as being more like a cat than a washing machine. > We are victims of the post-Enlightenment view that the world functions like a sophisticated machine, to be understood like a textbook engineering problem and run by wonks. In other words, like a home appliance, not like the human body. If this were so, our institutions would have no self-healing properties and would need someone to run and micromanage them, to protect their safety, because they cannot survive on their own. > By contrast, natural or organic systems are antifragile: They need some dose of disorder in order to develop. Deprive your bones of stress and they become brittle. This denial of the antifragility of living or complex systems is the costliest mistake that we have made in modern times. Stifling natural fluctuations masks real problems, causing the explosions to be both delayed and more intense when they do take place. As with the flammable material accumulating on the forest floor in the absence of forest fires, problems hide in the absence of stressors, and the resulting cumulative harm can take on tragic proportions. [0] https://fs.blog/2012/11/learning-to-love-volatility/ https://fs.blog/2012/11/learning-to-love-volatility/
- Ieghaehia9 5y ago
  The problem with this, I think, is that it can always be used to justify volatility. E.g. economic policy after the Great Depression has kept such an event from happening again at that scale. Was there too much volatility in the early half of the 20th century, or is the economic policy that moderated the cycles just setting us up for an extreme crash to come? Any reduction of volatility could be argued to be a step away from antifragility, toward systems that can't survive on their own. But not all are; and even when they are, there may be other benefits that compensate for the loss.
  - lisper 5y ago
    > is the economic policy that moderated the cycles just setting us up for an extreme crash to come It's actually not that complicated. All of the complexity of the economy ultimately boils down a very simple thing: it's a mechanism that allows people to exchange current wealth (i.e. stuff) for claims on future wealth (i.e. money). As long as everyone believes that their claims on future wealth will be redeemable at some rate they consider a fair trade, everything hums along. As soon as people stop believing this, everything falls apart. What happened in 1929 was mainly a liquidity crisis, not an actual economic crisis, at least not at first. The underlying productivity of the American economy was unchanged before the crash and immediately after. But the inability of people to pay for things because of the Fed's unwillingness to loosen credit caused people to lose faith in the value of their claims on future wealth, and that caused an actual reduction in productivity over time. The same thing happened in reverse in the Weimar republic where the problem was effectively the exact opposite: inflation caused by government paying debts by (literally) printing money. (That was a little different because Weimar Germany wasn't very productive, having never really recovered from WWI, but that doesn't really change the basic conceptual simplicity of what happened in both cases.)
cblconfederate 5y ago
Thermodynamics is derived from statistical mechanics though. Economics models use too simplistic approximations of the behavior of human brains.
- sjtindell 5y ago
  As I understand there are some models in both Econ and Finance where they literally took equations from thermodynamics and just said “what if this variable represented money instead of heat”.
  - cblconfederate 5y ago
    but humans are not atoms in brownian motion. they need reliable models of human behavior informed by neuroscience/psychology
  - deleted 5y ago
    [deleted]
  - michaelscott 5y ago
    99% of models developed in open view in both fields are either generally wrong in practice or are "correct" insofar as they were correct at one point in history or set of circumstances, but have since been factored into the efficiency of the system and are no longer relevant. Thermodynamics is a nice analogy for a lot of effects in economics, but it's important not to stretch that analogy like butter over too much bread
- sprafa 5y ago
  Not even approximations - they use a bunch of assumptions, many of which don’t hold up over time, so they then proceed to invent new ones as to say “well these assumptions are obviously better” even though they will inevitably be falsified because they share the same conceptual origin error.
spaetzleesser 5y ago
I don’t think modeling can be done. Unlike thermodynamics an economy doesn’t follow reproducible natural laws. You can model some aspects but as soon as you make decisions based on the model somebody will take advantage of it and the model won’t work anymore. An economy is way more psychology than natural science.
- SantalBlush 5y ago
  I think this is a common misconception about the economy and the study of economics. Everyone who participates in the economy has some mental model of the economy. That means anyone who accepts money as payment, or takes out a loan, or opens a bank account. In their model, cash will hold its value reasonably well, interest rates won't change too dramatically, etc. There is no agnosticism when it comes to the economy, and you make decisions based on your mental model of the economy on a daily basis.
sbuttgereit 5y ago
But aside from that, in physics... We treat things like, say, all electrons as being identical. However in economics the constituent actors are not identical. Worse than that, ideas in the population can start with very few proponents and chaotically spread to very many or completely die out... On terms very difficult to measure or predict and not according to any rational basis. Treating economics as a science, much like any other social science, should be looked upon much the same as treating astrology as a science: very doubiously. No matter how sophisticated the jargon or contrived the theory, it's often no better than guessing.
onlyrealcuzzo 5y ago
It seems like macroeconomics is an N-body problem. If any one of your assumptions is off, you can be drastically wrong.
AnthonyMouse 5y ago
The real problem with predicting the economy is that models get factored in. Suppose you come up with a way to predict the stock market. You publish it. Well, it immediately stops working, because now a bunch of Wall St. guys are using your model to try to predict what will happen, and that changes the outcome. It breaks the model. Published economic models don't work because they affect the thing they model and you can't solve the halting problem.

tibbetts 5y ago

Also people working on thermodynamics get to test their models a lot, and it’s noticed when their models fail. I’m not even sure supply demand curve is good for a specific product, having spent some time around consumer packaged goods analytics. Consumer behavior around frozen pizza alone is massively complicated, never mind cleaning supplies, candy, beer, or cosmetics.

scott00 5y ago
I'd love to hear more about this, sounds fascinating.
- spaetzleesser 5y ago
  Thermodynamics is always the same. People’s tastes change all the time constantly. The same person may do something different tomorrow under the same circumstances as of today.
- kristopolous 5y ago
  For instance, lowering the price of something doesn't necessarily increase sales - it can decrease sales if say the consumer believes it's cheaper because it's an inferior product. So sometimes increasing the price is the way to go to increase sales. So the price operates in weird ways; what about other things. If the product is placed next to more expensive items it could do a number of things. For instance, it could be a decoy product and increase the sales of the adjacent item. Or perhaps the adjacent item could be a decoy product. And what about numbers? Pricing things ending in 9s perform better. Selling things at $39 tend to do better then lower numbers like $34 or $37 because of the 9. And then there's the packaging and placement itself. Tall or wide packaging of the same volume emote different signals and respond differently to prices - look at the great variety of how bottled water is packaged next time you're at the store. Then there's the quantity on a shelf at any given time. Sometimes intentionally overstocking the shelves will increase sales as consumers will take more than they need, sometimes understocking will creating anxiety that the product won't be available when needed. Depends on the product, the buyer, the conditions of the market, lots of things. Then there's the brand itself. Depending on the market you're in, a name brand can either help or hurt you. In some markets, the name brand is associated with premium pricing and poor value so it doesn't carry your product; in other markets it's just the opposite. And then there's discounts and sales. In some stores you want to never have a sale, ever. In other stores you want to barrage your shoppers with a complicated array of perpetually churning sales. And what about sales, there's an artificial price that gets advertised before the actual one; nobody is paying the higher price, so it can more or less be chosen arbitrarily. You can mark your bubblegum as 99.99% off from being $10,000, but then the illusion is broken. Instead, what sales do is they give the perception of a higher price signal through the presentation of the sale without actually charging the price. That's why when you go into clothing stores they'll say the product was $95 or whatever and what luck, through many discounts it's now only $30. Well they all sold at about $30, we know that, but the product decoy pricing itself tries to capture both worlds. This is just honestly just a tiny bit of how demand actually works. It's a vast study. The point is that people aren't mechanical rational automotons without any strategy or agency who respond to prices through unconscious reflexes. Nor do they have perfect information or maximize their utility value through arbitrarily complex deductions and always choose the most optimum outcome. Things are totally messy and the classical models are about as accurate as saying "winter brings cold weather and summer brings hot". Sure, in general. But on any specific day it's non predictive. A $10,000 pack of gum will likely perform poorly. But if you hyped the heck out of it and made it really unique, you might even sell out your inventory of that alarmingly quickly because humans are weird like that. Proof? Let me introduce you to Palessi https://m.youtube.com/watch?v=-2gaNq-rOkI https://m.youtube.com/watch?v=-2gaNq-rOkI
  - andrekandre 5y ago
    > That's why when you go into clothing stores they'll say the product was $95 or whatever and what luck, through many discounts it's now only $30. Well they all sold at about $30, we know that, but the product decoy pricing itself tries to capture both worlds. isnt that called "double pricing" and illegal in some countries? (apologies if i'm misunderstanding)

lotsofpulp 5y ago

>A supply and demand curve is fine for a specific product, but it fails if you try to use it at the macro level where other factors come into play. In what way do supply and demand curves fail at the macro level?

tsimionescu 5y ago
In many of the same ways they fail at the micro level as well, actually - demand is not controlled exclusively by price, elasticity is impossible to predict and changes with time, many goods are not substitutable in the way these models present them. There are more ways, I'm sure, but these immediately come to mind.
- lotsofpulp 5y ago
  > demand is not controlled exclusively by price Is this ever claimed? Supply and demand curves intersect at the price, and so different prices will have different supply and demand curves. > elasticity is impossible to predict and changes with time, many goods are not substitutable in the way these models present them. The models may be inaccurate, but the inability to model at the macro level with current technology or knowledge does not indicate a failure of supply and demand curve movements being the causal factor of price changes.

bko 5y ago

> Rule 1: Think of the economy as being more like a cat than a washing machine. > We are victims of the post-Enlightenment view that the world functions like a sophisticated machine, to be understood like a textbook engineering problem and run by wonks. In other words, like a home appliance, not like the human body. If this were so, our institutions would have no self-healing properties and would need someone to run and micromanage them, to protect their safety, because they cannot survive on their own. > By contrast, natural or organic systems are antifragile: They need some dose of disorder in order to develop. Deprive your bones of stress and they become brittle. This denial of the antifragility of living or complex systems is the costliest mistake that we have made in modern times. Stifling natural fluctuations masks real problems, causing the explosions to be both delayed and more intense when they do take place. As with the flammable material accumulating on the forest floor in the absence of forest fires, problems hide in the absence of stressors, and the resulting cumulative harm can take on tragic proportions. [0] https://fs.blog/2012/11/learning-to-love-volatility/ https://fs.blog/2012/11/learning-to-love-volatility/

Ieghaehia9 5y ago
The problem with this, I think, is that it can always be used to justify volatility. E.g. economic policy after the Great Depression has kept such an event from happening again at that scale. Was there too much volatility in the early half of the 20th century, or is the economic policy that moderated the cycles just setting us up for an extreme crash to come? Any reduction of volatility could be argued to be a step away from antifragility, toward systems that can't survive on their own. But not all are; and even when they are, there may be other benefits that compensate for the loss.
- lisper 5y ago
  > is the economic policy that moderated the cycles just setting us up for an extreme crash to come It's actually not that complicated. All of the complexity of the economy ultimately boils down a very simple thing: it's a mechanism that allows people to exchange current wealth (i.e. stuff) for claims on future wealth (i.e. money). As long as everyone believes that their claims on future wealth will be redeemable at some rate they consider a fair trade, everything hums along. As soon as people stop believing this, everything falls apart. What happened in 1929 was mainly a liquidity crisis, not an actual economic crisis, at least not at first. The underlying productivity of the American economy was unchanged before the crash and immediately after. But the inability of people to pay for things because of the Fed's unwillingness to loosen credit caused people to lose faith in the value of their claims on future wealth, and that caused an actual reduction in productivity over time. The same thing happened in reverse in the Weimar republic where the problem was effectively the exact opposite: inflation caused by government paying debts by (literally) printing money. (That was a little different because Weimar Germany wasn't very productive, having never really recovered from WWI, but that doesn't really change the basic conceptual simplicity of what happened in both cases.)

cblconfederate 5y ago

Thermodynamics is derived from statistical mechanics though. Economics models use too simplistic approximations of the behavior of human brains.

sjtindell 5y ago
As I understand there are some models in both Econ and Finance where they literally took equations from thermodynamics and just said “what if this variable represented money instead of heat”.
- cblconfederate 5y ago
  but humans are not atoms in brownian motion. they need reliable models of human behavior informed by neuroscience/psychology
- deleted 5y ago
  [deleted]
- michaelscott 5y ago
  99% of models developed in open view in both fields are either generally wrong in practice or are "correct" insofar as they were correct at one point in history or set of circumstances, but have since been factored into the efficiency of the system and are no longer relevant. Thermodynamics is a nice analogy for a lot of effects in economics, but it's important not to stretch that analogy like butter over too much bread
sprafa 5y ago
Not even approximations - they use a bunch of assumptions, many of which don’t hold up over time, so they then proceed to invent new ones as to say “well these assumptions are obviously better” even though they will inevitably be falsified because they share the same conceptual origin error.

spaetzleesser 5y ago

I don’t think modeling can be done. Unlike thermodynamics an economy doesn’t follow reproducible natural laws. You can model some aspects but as soon as you make decisions based on the model somebody will take advantage of it and the model won’t work anymore. An economy is way more psychology than natural science.

SantalBlush 5y ago
I think this is a common misconception about the economy and the study of economics. Everyone who participates in the economy has some mental model of the economy. That means anyone who accepts money as payment, or takes out a loan, or opens a bank account. In their model, cash will hold its value reasonably well, interest rates won't change too dramatically, etc. There is no agnosticism when it comes to the economy, and you make decisions based on your mental model of the economy on a daily basis.

sbuttgereit 5y ago

But aside from that, in physics... We treat things like, say, all electrons as being identical. However in economics the constituent actors are not identical. Worse than that, ideas in the population can start with very few proponents and chaotically spread to very many or completely die out... On terms very difficult to measure or predict and not according to any rational basis. Treating economics as a science, much like any other social science, should be looked upon much the same as treating astrology as a science: very doubiously. No matter how sophisticated the jargon or contrived the theory, it's often no better than guessing.

onlyrealcuzzo 5y ago

It seems like macroeconomics is an N-body problem. If any one of your assumptions is off, you can be drastically wrong.

AnthonyMouse 5y ago

The real problem with predicting the economy is that models get factored in. Suppose you come up with a way to predict the stock market. You publish it. Well, it immediately stops working, because now a bunch of Wall St. guys are using your model to try to predict what will happen, and that changes the outcome. It breaks the model. Published economic models don't work because they affect the thing they model and you can't solve the halting problem.