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Economics is clear when explaining its foundation: Markets are only as efficient as its participants are rational and fully informed. The entirety of modern eco

Economics is clear when explaining its foundation: Markets are only as efficient as its participants are rational and fully informed. The entirety of modern economics is built upon the presumption that the last two conditions are 100% true.

Dn_Ab 14y ago
True, there is a lot to be learned from behavioural economics. But neoclassiscal stuff is not all bad. The notion of bounded rationality which places limits on the rationality of people is kind of old. And in aggregrate; people, corporations in particular do tend to approximate rationality. This is why they can be 'psychopathic'.
aristidb 14y ago
No, it's based on them being true enough that other approximations are less useful models.
- wisty 14y ago
  Unfortunately, most economists don't develop other models, so the other models are very immature.
- batista 14y ago
  >No, it's based on them being true enough that other approximations are less useful models. That is, in wishful thinking. No other field has a worse prediction track record that economics.
Jabbles 14y ago
Bollocks. Abstract economic theories may be based on these assumptions but the majority of economists make a living on the fact that the market is not efficient.
- batista 14y ago
  >but the majority of economists make a living on the fact that the market is not efficient. Actually they make a killing on the fact that their are interests and money to be made based on their BS advice and predictions.
  - wisty 14y ago
    Economists rarely make predictions. Predicting stuff is hard. I think it was the RBA (or maybe the Australian Treasury) which admitted that their DSGE model was no more accurate than trend modelling in terms of it's predictive power, so they could only use it to give policy advice.
    - batista 14y ago
      >Economists rarely make predictions. Predicting stuff is hard. Oh, they do it all the time, to give "policy advice".
batista 14y ago
>Economics is clear when explaining its foundation: Markets are only as efficient as its participants are rational and fully informed. Plus even more assumptions: that participants cannot game the system (by influencing laws, abusing power or monopoly, bribing others participants, controlling public opinion by friendly or owned mass media, forming cartels, etc). Oh, and "rational" doesn't just mean "clearly thinking and clever", but also perfect calculating actors in a game-theoretic way. Oh, and there are no factors outside of direct market control, from natural disasters and resources, to foreign country policies and such. So all those hold even remotely true only in some magic unicorn land.
- tatsuke95 14y ago
  Meanwhile, an enterprise with hundreds of trained economists (read: The Fed) used this magical unicorn training and prevented the Great Recesession from becoming the Great Depression II. All using economic theory. And if it wasn't for political interference/inaction, we'd be even further ahead, thanks to them. I know people hate to hear that, and it's en vogue to rip on the field of economics, but it's true.
  - ucee054 14y ago
    Of course, the problem was also created by "hundreds of trained economists" in the first place. If geeks weren't trading MBS and selling NInJA loans as AAA rated assets to the insurance companies, would the blowup have happened? If the Fed hadn't pumped easy credit, first during the dotcom bubble, then into the housing bubble, would the blowup have happened? This is kind of like saying "Look how smart I am, I saved my leg from needing amputation after I shot myself in the foot!"
    - tatsuke95 14y ago
      >"If geeks weren't trading MBS and selling NInJA loans as AAA rated assets to the insurance companies" I think you're conflating "people who work on Wall Street" with economists. Most of the "dirtiest" of the loan originators were people with no financial education whatsoever; salesmen, and nothing more. >"If the Fed hadn't pumped easy credit, first during the dotcom bubble, then into the housing bubble, would the blowup have happened?" Yes. Blowups happen. It's the business cycle. A credit driven economy inflates until marginal borrows default, which cascades to a deleveraging. The Fed "pumped" money in the economy after the dotcom bubble because we saw some of the greatest destruction of wealth, ever, during that period. And much of the housing portion was political mandate. Admittedly, economics and the economy is a finicky patient. But contrary to popular belief, these guys are smart and know what they're doing.
pmb 14y ago
But "rational" and "fully informed" isn't enough. If I encode prices as a 3SAT problem, then your "rational" and "fully informed" person will be required to solve a (thought-to-be) too hard problem in order to do the efficient thing. Therefore, either you can solve such a problem efficiently (and P=NP) or the idea that all you need is rationality and information is false.

Dn_Ab 14y ago

True, there is a lot to be learned from behavioural economics. But neoclassiscal stuff is not all bad. The notion of bounded rationality which places limits on the rationality of people is kind of old. And in aggregrate; people, corporations in particular do tend to approximate rationality. This is why they can be 'psychopathic'.

aristidb 14y ago

No, it's based on them being true enough that other approximations are less useful models.

wisty 14y ago
Unfortunately, most economists don't develop other models, so the other models are very immature.
batista 14y ago
>No, it's based on them being true enough that other approximations are less useful models. That is, in wishful thinking. No other field has a worse prediction track record that economics.

Jabbles 14y ago

Bollocks. Abstract economic theories may be based on these assumptions but the majority of economists make a living on the fact that the market is not efficient.

batista 14y ago
>but the majority of economists make a living on the fact that the market is not efficient. Actually they make a killing on the fact that their are interests and money to be made based on their BS advice and predictions.
- wisty 14y ago
  Economists rarely make predictions. Predicting stuff is hard. I think it was the RBA (or maybe the Australian Treasury) which admitted that their DSGE model was no more accurate than trend modelling in terms of it's predictive power, so they could only use it to give policy advice.
  - batista 14y ago
    >Economists rarely make predictions. Predicting stuff is hard. Oh, they do it all the time, to give "policy advice".

batista 14y ago

>Economics is clear when explaining its foundation: Markets are only as efficient as its participants are rational and fully informed. Plus even more assumptions: that participants cannot game the system (by influencing laws, abusing power or monopoly, bribing others participants, controlling public opinion by friendly or owned mass media, forming cartels, etc). Oh, and "rational" doesn't just mean "clearly thinking and clever", but also perfect calculating actors in a game-theoretic way. Oh, and there are no factors outside of direct market control, from natural disasters and resources, to foreign country policies and such. So all those hold even remotely true only in some magic unicorn land.

tatsuke95 14y ago
Meanwhile, an enterprise with hundreds of trained economists (read: The Fed) used this magical unicorn training and prevented the Great Recesession from becoming the Great Depression II. All using economic theory. And if it wasn't for political interference/inaction, we'd be even further ahead, thanks to them. I know people hate to hear that, and it's en vogue to rip on the field of economics, but it's true.
- ucee054 14y ago
  Of course, the problem was also created by "hundreds of trained economists" in the first place. If geeks weren't trading MBS and selling NInJA loans as AAA rated assets to the insurance companies, would the blowup have happened? If the Fed hadn't pumped easy credit, first during the dotcom bubble, then into the housing bubble, would the blowup have happened? This is kind of like saying "Look how smart I am, I saved my leg from needing amputation after I shot myself in the foot!"
  - tatsuke95 14y ago
    >"If geeks weren't trading MBS and selling NInJA loans as AAA rated assets to the insurance companies" I think you're conflating "people who work on Wall Street" with economists. Most of the "dirtiest" of the loan originators were people with no financial education whatsoever; salesmen, and nothing more. >"If the Fed hadn't pumped easy credit, first during the dotcom bubble, then into the housing bubble, would the blowup have happened?" Yes. Blowups happen. It's the business cycle. A credit driven economy inflates until marginal borrows default, which cascades to a deleveraging. The Fed "pumped" money in the economy after the dotcom bubble because we saw some of the greatest destruction of wealth, ever, during that period. And much of the housing portion was political mandate. Admittedly, economics and the economy is a finicky patient. But contrary to popular belief, these guys are smart and know what they're doing.

pmb 14y ago

But "rational" and "fully informed" isn't enough. If I encode prices as a 3SAT problem, then your "rational" and "fully informed" person will be required to solve a (thought-to-be) too hard problem in order to do the efficient thing. Therefore, either you can solve such a problem efficiently (and P=NP) or the idea that all you need is rationality and information is false.