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I appreciate your thoughtful reply. While I am making the transition to a web developer at the moment, I have a graduate degree in Economics and I have spent so

by Spyro7 15y ago

I appreciate your thoughtful reply. While I am making the transition to a web developer at the moment, I have a graduate degree in Economics and I have spent some time working in the investment industry (Main St, not Wall St). I would just like to share an alternative viewpoint with you: 1) I wouldn't think of it as "cheating the system", but I would think of it as rational self-interest. Given a set of constraints, people will optimize for the best personal outcome. 2) People maximize their utility (utility is a measure of happiness). Whether someone is honest or dishonest is nothing more than a preference input into their utility maximization functions. What this means is that if the punishment for breaking some law is exceeded by the benefits (to the individual) of doing so, then that individual will break the law. Think about how many people casually drive 5 to 10 miles over the speed limit (or 20 to 30 down here in Texas). With that said, whose dishonesty is responsible for the housing collapse: * Were the homeowners dishonest for taking on loans they could not afford to pay back? * Were the lenders and real estate agents dishonest for making the loans to the home owners? * Were the finance guys responsible for thinking that risk could be mitigated using the tools of finance? * Were the investors being dishonest for cheering on returns that were above market-average without considering the risk? Painting a market with the brushes of corruption and dishonesty does very little to advance an understanding of how the event happened and what can be done to prevent it in the future. 4) Professionals with an understanding of the financial industry were generally in favor of the bailouts. The government listened to the professionals. Goldman Sachs hires a lot of economists and finance guys, and they hire the people with the best resumes. One should hardly scream conspiracy if it turns out that some of these "cream of the crop" individuals end up working in the treasury. Statistically, the probability of it happening randomly is actually quite high. "Likewise, I think that the best economy will be produced by many mistakes, and learning from them." I completely agree with this. "One thing I am pretty sure we will learn is that no corruptible entity should ever control an economy, because corruption is always the end result. (All hail our new robot overlords :D)" There is no need for us to resort to robots. We simply have to understand that people are self-interested and build a system that channels this self-interest into outcomes that are efficient for society as a whole. "And I will just leave this here: http://en.wikipedia.org/wiki/Friedrich_von_Hayek http://en.wikipedia.org/wiki/Friedrich_von_Hayek I'm sure you have probably read up on this guy." Hayek was an amazing logician, but the application of his theories to the modern economy is unproductive. The questions that he asked have been answered by modern economics in the 50 years that have passed since he asked them. I consider myself an advocate for breaking down the wall that exists between modern economics and people that would like to increase their understanding of modern economics without being economists themselves. If you have anything that you would like to ask me about anything that I wrote above (or any of Hayek's specific points), then I would be happy to answer them (regardless of the beating that my karma takes).

iand 15y ago
"There is no need for us to resort to robots. We simply have to understand that people are self-interested and build a system that channels this self-interest into outcomes that are efficient for society as a whole." Here's the difficulty that Hayek was pointing out in his book Road to Serfdom. Who gets to decide what the right outcomes are and whether they are efficient?
- Spyro7 15y ago
  "Who gets to decide what the right outcomes are and whether they are efficient?" Whether or not an outcome is "right" is subjective, and is more in the field of law and philosophy than economics. Whether or not an outcome is efficient for society does not need to be determined as it can be measured. An outcome is efficient for society if it makes at least one individual better off without leaving any other individuals worse off. (This is Pareto efficiency). Of course in the real world, there will almost always be winners and losers with any policy change. The solution is thus to make sure that the total net benefits of any policy change is positive. The net benefits are the benefits (both implied and explicit) of a policy minus both the costs of doing the policy and the costs of potential gains that could have been had by pursuing alternative policies. Both the costs and the benefits should be aggregates that include the costs and the benefits to all parties affected by a policy. One thing that I think is worth thinking about when you look at recent developments in the markets is this. From the time period of roughly the 1950s to roughly the 1980s this form of detailed cost-benefit analysis was popularly employed by both governments and private companies. (I am not actually this old, but I have heard this story multiple times from economists considerably more seasoned than me). Unfortunately, starting in the 1980s, a more expedient form of cost-benefit analysis that focuses mostly on the immediate costs and benefits to the organization conducting the analysis began to dominate. This type of analysis was championed by the finance and accounting oriented economists that began to spring up at around this time. (Disagreement over this and other issues led to university economics departments around the nation dividing from business departments and finding a new home - and less funding - with the liberal arts and social sciences.) It is expensive and time-consuming to conduct a thorough impact analysis, so I can understand why the more academic approach would fade away in favor of something more expedient. However, I think that a lot of the recent problems we see in governance can be traced to this fast-food economic analysis: * Lack of investment in infrastructure? - Well, this report on my desk says that it will be expensive to fix those roads and the ones we have now seem to be holding up just fine * Internet providers want to throttle bandwidth based on its source? - Makes sense, according to this report on my desk providing bandwidth obviously costs money - why not charge for it? * A tax on transactions? - Well, this report on my desk says that would make it more expensive to trade stocks - there's no way this could be beneficial. While the right answers to many of these questions can be found either in economic journals or by speaking with an independent consultant, policymakers rarely have the enthusiasm for a topic to dive so deeply. I hope that soul-searching due to the financial meltdown brings the old approach back in favor. It is sorely missed.

by Spyro7 15y ago

iand 15y ago

"There is no need for us to resort to robots. We simply have to understand that people are self-interested and build a system that channels this self-interest into outcomes that are efficient for society as a whole." Here's the difficulty that Hayek was pointing out in his book Road to Serfdom. Who gets to decide what the right outcomes are and whether they are efficient?

Spyro7 15y ago
"Who gets to decide what the right outcomes are and whether they are efficient?" Whether or not an outcome is "right" is subjective, and is more in the field of law and philosophy than economics. Whether or not an outcome is efficient for society does not need to be determined as it can be measured. An outcome is efficient for society if it makes at least one individual better off without leaving any other individuals worse off. (This is Pareto efficiency). Of course in the real world, there will almost always be winners and losers with any policy change. The solution is thus to make sure that the total net benefits of any policy change is positive. The net benefits are the benefits (both implied and explicit) of a policy minus both the costs of doing the policy and the costs of potential gains that could have been had by pursuing alternative policies. Both the costs and the benefits should be aggregates that include the costs and the benefits to all parties affected by a policy. One thing that I think is worth thinking about when you look at recent developments in the markets is this. From the time period of roughly the 1950s to roughly the 1980s this form of detailed cost-benefit analysis was popularly employed by both governments and private companies. (I am not actually this old, but I have heard this story multiple times from economists considerably more seasoned than me). Unfortunately, starting in the 1980s, a more expedient form of cost-benefit analysis that focuses mostly on the immediate costs and benefits to the organization conducting the analysis began to dominate. This type of analysis was championed by the finance and accounting oriented economists that began to spring up at around this time. (Disagreement over this and other issues led to university economics departments around the nation dividing from business departments and finding a new home - and less funding - with the liberal arts and social sciences.) It is expensive and time-consuming to conduct a thorough impact analysis, so I can understand why the more academic approach would fade away in favor of something more expedient. However, I think that a lot of the recent problems we see in governance can be traced to this fast-food economic analysis: * Lack of investment in infrastructure? - Well, this report on my desk says that it will be expensive to fix those roads and the ones we have now seem to be holding up just fine * Internet providers want to throttle bandwidth based on its source? - Makes sense, according to this report on my desk providing bandwidth obviously costs money - why not charge for it? * A tax on transactions? - Well, this report on my desk says that would make it more expensive to trade stocks - there's no way this could be beneficial. While the right answers to many of these questions can be found either in economic journals or by speaking with an independent consultant, policymakers rarely have the enthusiasm for a topic to dive so deeply. I hope that soul-searching due to the financial meltdown brings the old approach back in favor. It is sorely missed.