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It's regulating itself like a poorly built skyscraper that is being regulated by gravity: collapsing. We have rules about how to build skyscrapers to keep peo

by dhimes 18y ago

It's regulating itself like a poorly built skyscraper that is being regulated by gravity: collapsing. We have rules about how to build skyscrapers to keep people from getting hurt. Why not the economy? Take what works, throw out what hurts. There has to be an incentive for people to make money, but it should be ok if it's required to be within a set of guidelines. Unfettered capitalism builds an unstable system. Unstable is bad (again, think skyscraper). Certainly, economists must have a set of rules or principles that apply here. It would be some equation with a bunch of variable coefficients. Under some values of those coefficients, the equation would have an approximate solution that is unstable, like an exponential term with an exponent that can swing from being positive to negative and back. The job of "regulations" would be to limit these coefficients. They must have that sort of thing, right? I mean, what the fuck do they do all day?

DanielBMarkham 18y ago
Yep, you would think so. But the economy is mind-bogglingly complex and nuanced, full of billions of actors who act rationally and irrationally. Lately we have computer systems thrown into the mix that move billions of dollars around without a human decision involved. The one thing economists can say is that people usually act in their own best interests. If there is a loophole to be found, people will find it. However smart the person coming up with the rules might be, those billions of people, due to the powers of chaos and sheer numbers, will always be smarter. You can't engineer billions of people like you would a skyscraper. The logical conclusion here is to that simple systems that are easy to understand (and likewise easy to understand how to game) are better than complex systems that still get gamed but nobody can easily figure out why. However there is a second camp that says that the economy is like a big science experiment: pull a rope here and see what happens over there. Sure -- things might not work as expected, but somebody has to be in charge and that's how science experiments work. After all, as you pointed out, just how difficult can it be? What do those guys do all day? The problem is that the social engineering camp always seems to have the same problem as the laissez-faire camp -- there have been panics (recessions) for as far back as we have records. So policy doesn't seem to matter that much (or if it does, we haven't hit the magic combination yet). In fact, because of the points in the first two paragraphs here, there's good evidence that the more we muck around with the economy, the worse we actually make it. There is a large and growing faction of economists that believe that the actions of the Federal Reserve (and to some extent Hoover and FDR) made the panic of 1929 into a full-blown depression -- turned something that would have taken a year or three to recover from and turned it into the biggest panic the country has ever seen. So no, economics are chaotic, not Newtonian. the laws that apply are myriad, complex, and currently non-understandable -- and they apply at the individual rather than system level. That's why economics are so much fun (or suck so much, depending on your viewpoint.) Hey -- if it were easy, everybody would be doing it.
- dhimes 18y ago
  The one thing economists can say is that people usually act in their own best interests. Actually, it appears that things are too complex for even this to be true. They may try, but it's entirely conceivable that they don't understand what is in their best interest and what endangers their future. I think I prefer to think of what I am pondering as Economic engineering rather than social engineering. It seems like a very faith-based discipline, rather than one that formulates hypotheses based on evidence: There is a large and growing faction of economists that believe that the actions of the Federal Reserve (and to some extent Hoover and FDR) made the panic of 1929 into a full-blown depression But there is also emerging talk that Jimmy Carter prevented a global disaster like the one we are facing now. Neither claim is falsifiable, so not worth much mental energy to consider. Faith-based. I think that is why I was so impressed with Greenspan's testimony before Congress where he basically said he felt like the underlying principles on which he based his understanding of the economy were incorrect (he specifically mentioned the one you did about acting in our best interest). Here was a guy in the field who was actually looking at evidence, and trying to learn. I don't know if he's correct or not, I'm no economist. I'm griping about the methods, not the principles themselves. Anyway, thanks for reading my rant.
  - DanielBMarkham 18y ago
    First, nice rant. Second -- agreed. People act in what they perceive to be their best interests. We initially made the mistake of assuming this was what was actually in their best interests, but that seems more doubtful. (Unless acting strictly based on perception of best interests is the optimal condition. Then we're back to square one.) Third -- agreed. It's to some degree faith-based. Climatology is faith-based as well, and for the same reasons. There are simply too many variables and the system is simply too huge and dynamic to be Newtonian. You get a bunch of smart guys, you make a bunch of models, and you take measurements, all the time having some "group consensus" that has as much to do with science as glow-in-the-dark watches have to do with nuclear propulsion. I've slung some code for Greenspan and the FRB BOG (Board of Governors). The people there are all highly professional and tend to focus much more on facts than theories. But even then, in my opinion, there's no science going on. It's a lot of educated guesswork. I wouldn't give up on the thought experiments such as what the Fed did during the Great Depression or what Carter might or might not have done. Thought experiments are powerful tools, and can lead to advances in science. To the degree that faith encourages creative explanations of what we don't know, it's a good thing. To the degree that it shuts out alternative answers, it's an obstacle. That's true in a lot of areas, not just economics.
jerf 18y ago
A building is intrinsically stable. I mean that in the physics sense; if the building displaces itself one centimeter to the left, the forces in the building pull it back. No part of it is intrinsically unstable. An economy has a large number of intrinsically unstable parts. As they displace from the "norm", they will displace even further. For example, the mere fact of a commodity's price going up can cause it to go up further as others react. This is intrinsically unstable. An unstable system can not run like a stable system. Jerks are mathematically inevitable. The only way to prevent it is to do one of two things: Remove all such things from the system, or create an instantaneous counter force for each of these things. Neither is possible economically. The second sounds appealing, but the thing is that it has to be instantaneous to work, and completely (inhumanly!) accurate, or it becomes simply one more destabilizing force. You can see this even in economies with no human interaction; this is the source of nature's constant ebb and flow. The only thing you can do is make things worse by convincing people that you can stop the ebb and flow of the economy, so they don't prepare, then the storm comes anyhow and is all the worse for people not being prepared.
- gravitycop 18y ago
  A building is intrinsically stable. [...] if the building displaces itself one centimeter to the left, the forces in the building pull it back. No part of it is intrinsically unstable. http://query.nytimes.com/gst/abstract.html?res=9A03EFDA1F3BE633A25757C0A9679C946596D6CF http://query.nytimes.com/gst/abstract.html?res=9A03EFDA1F3BE... January 4, 1914, Sunday [...] Several of New York City's skyscrapers are away out of plumb and have a tendency to emulate the famous leaning tower of Pisa according to the engineering department of the Building Bureau.
  - jerf 18y ago
    The "out-of-plumb" is their set-point then. No law of nature says buildings have to be straight up. If what I described didn't happen, they'd fall over, so therefore it must happen.
    - jerf 18y ago
anamax 18y ago
> It's regulating itself like a poorly built skyscraper that is being regulated by gravity: collapsing. We have rules about how to build skyscrapers to keep people from getting hurt. Why not the economy? Take what works, throw out what hurts. Since much of the problem was caused by regulation ("encouraging" bogus loans, tax preferences for fannie mae investments, "mark to market" on illiquid assets, etc), faith in regulation seems misplaced. You don't get to assume "take what works, throw out what hurts" because regulatory capture always happens. I note that the new treasury secretary didn't bother to pay SSI despite being reimbursed for it with a separate payment and signing an acknowledgement of same, the new HUD secretary didn't bother to pay taxes on "in kind" payments, and top members of the senate committee that regulates banks and mortgages still won't talk about the sweetheart mortgages that they got. "Regulation" gives us bailouts. It results in socialized risk. (Which, in some sense, is only fair. If govt is going to impose rules, why shouldn't govt pay for the consequences.)
- gravitycop 18y ago
  the new treasury secretary didn't bother to pay SSI [...] the new HUD secretary didn't bother to pay taxes on "in kind" payments What would that have to do with economic policy?
  - anamax 18y ago
    The point is that regulators are human and humans don't have the properties assumed by the "regulation will protect us" theory. If a system only works when some of the components are made of unobtanium, the system doesn't work. The current "stimulus" package is a great example. Well over half is just pumping up budgets for existing programs. Does anyone believe that those "enhanced" budgets will not become permanent? Govt regulation also reduces diversity. It says that everyone pretty much has to behave the same way. We know how that works out. Govt regulation is also political in the worst sense. Wells Fargo took a huge hit when it stayed out of the subprime mortgages. Regulators refused to let WF enage in unrelated activities (acquisitions, opening branches, etc.)because WF didn't "play ball", activities that said regulators let cooperative institutions do. Note that regulators don't take the hit.

by dhimes 18y ago

DanielBMarkham 18y ago

Yep, you would think so. But the economy is mind-bogglingly complex and nuanced, full of billions of actors who act rationally and irrationally. Lately we have computer systems thrown into the mix that move billions of dollars around without a human decision involved. The one thing economists can say is that people usually act in their own best interests. If there is a loophole to be found, people will find it. However smart the person coming up with the rules might be, those billions of people, due to the powers of chaos and sheer numbers, will always be smarter. You can't engineer billions of people like you would a skyscraper. The logical conclusion here is to that simple systems that are easy to understand (and likewise easy to understand how to game) are better than complex systems that still get gamed but nobody can easily figure out why. However there is a second camp that says that the economy is like a big science experiment: pull a rope here and see what happens over there. Sure -- things might not work as expected, but somebody has to be in charge and that's how science experiments work. After all, as you pointed out, just how difficult can it be? What do those guys do all day? The problem is that the social engineering camp always seems to have the same problem as the laissez-faire camp -- there have been panics (recessions) for as far back as we have records. So policy doesn't seem to matter that much (or if it does, we haven't hit the magic combination yet). In fact, because of the points in the first two paragraphs here, there's good evidence that the more we muck around with the economy, the worse we actually make it. There is a large and growing faction of economists that believe that the actions of the Federal Reserve (and to some extent Hoover and FDR) made the panic of 1929 into a full-blown depression -- turned something that would have taken a year or three to recover from and turned it into the biggest panic the country has ever seen. So no, economics are chaotic, not Newtonian. the laws that apply are myriad, complex, and currently non-understandable -- and they apply at the individual rather than system level. That's why economics are so much fun (or suck so much, depending on your viewpoint.) Hey -- if it were easy, everybody would be doing it.

dhimes 18y ago
The one thing economists can say is that people usually act in their own best interests. Actually, it appears that things are too complex for even this to be true. They may try, but it's entirely conceivable that they don't understand what is in their best interest and what endangers their future. I think I prefer to think of what I am pondering as Economic engineering rather than social engineering. It seems like a very faith-based discipline, rather than one that formulates hypotheses based on evidence: There is a large and growing faction of economists that believe that the actions of the Federal Reserve (and to some extent Hoover and FDR) made the panic of 1929 into a full-blown depression But there is also emerging talk that Jimmy Carter prevented a global disaster like the one we are facing now. Neither claim is falsifiable, so not worth much mental energy to consider. Faith-based. I think that is why I was so impressed with Greenspan's testimony before Congress where he basically said he felt like the underlying principles on which he based his understanding of the economy were incorrect (he specifically mentioned the one you did about acting in our best interest). Here was a guy in the field who was actually looking at evidence, and trying to learn. I don't know if he's correct or not, I'm no economist. I'm griping about the methods, not the principles themselves. Anyway, thanks for reading my rant.
- DanielBMarkham 18y ago
  First, nice rant. Second -- agreed. People act in what they perceive to be their best interests. We initially made the mistake of assuming this was what was actually in their best interests, but that seems more doubtful. (Unless acting strictly based on perception of best interests is the optimal condition. Then we're back to square one.) Third -- agreed. It's to some degree faith-based. Climatology is faith-based as well, and for the same reasons. There are simply too many variables and the system is simply too huge and dynamic to be Newtonian. You get a bunch of smart guys, you make a bunch of models, and you take measurements, all the time having some "group consensus" that has as much to do with science as glow-in-the-dark watches have to do with nuclear propulsion. I've slung some code for Greenspan and the FRB BOG (Board of Governors). The people there are all highly professional and tend to focus much more on facts than theories. But even then, in my opinion, there's no science going on. It's a lot of educated guesswork. I wouldn't give up on the thought experiments such as what the Fed did during the Great Depression or what Carter might or might not have done. Thought experiments are powerful tools, and can lead to advances in science. To the degree that faith encourages creative explanations of what we don't know, it's a good thing. To the degree that it shuts out alternative answers, it's an obstacle. That's true in a lot of areas, not just economics.

jerf 18y ago

A building is intrinsically stable. I mean that in the physics sense; if the building displaces itself one centimeter to the left, the forces in the building pull it back. No part of it is intrinsically unstable. An economy has a large number of intrinsically unstable parts. As they displace from the "norm", they will displace even further. For example, the mere fact of a commodity's price going up can cause it to go up further as others react. This is intrinsically unstable. An unstable system can not run like a stable system. Jerks are mathematically inevitable. The only way to prevent it is to do one of two things: Remove all such things from the system, or create an instantaneous counter force for each of these things. Neither is possible economically. The second sounds appealing, but the thing is that it has to be instantaneous to work, and completely (inhumanly!) accurate, or it becomes simply one more destabilizing force. You can see this even in economies with no human interaction; this is the source of nature's constant ebb and flow. The only thing you can do is make things worse by convincing people that you can stop the ebb and flow of the economy, so they don't prepare, then the storm comes anyhow and is all the worse for people not being prepared.

gravitycop 18y ago
A building is intrinsically stable. [...] if the building displaces itself one centimeter to the left, the forces in the building pull it back. No part of it is intrinsically unstable. http://query.nytimes.com/gst/abstract.html?res=9A03EFDA1F3BE633A25757C0A9679C946596D6CF http://query.nytimes.com/gst/abstract.html?res=9A03EFDA1F3BE... January 4, 1914, Sunday [...] Several of New York City's skyscrapers are away out of plumb and have a tendency to emulate the famous leaning tower of Pisa according to the engineering department of the Building Bureau.
- jerf 18y ago
  The "out-of-plumb" is their set-point then. No law of nature says buildings have to be straight up. If what I described didn't happen, they'd fall over, so therefore it must happen.
  - jerf 18y ago

anamax 18y ago

> It's regulating itself like a poorly built skyscraper that is being regulated by gravity: collapsing. We have rules about how to build skyscrapers to keep people from getting hurt. Why not the economy? Take what works, throw out what hurts. Since much of the problem was caused by regulation ("encouraging" bogus loans, tax preferences for fannie mae investments, "mark to market" on illiquid assets, etc), faith in regulation seems misplaced. You don't get to assume "take what works, throw out what hurts" because regulatory capture always happens. I note that the new treasury secretary didn't bother to pay SSI despite being reimbursed for it with a separate payment and signing an acknowledgement of same, the new HUD secretary didn't bother to pay taxes on "in kind" payments, and top members of the senate committee that regulates banks and mortgages still won't talk about the sweetheart mortgages that they got. "Regulation" gives us bailouts. It results in socialized risk. (Which, in some sense, is only fair. If govt is going to impose rules, why shouldn't govt pay for the consequences.)

gravitycop 18y ago
the new treasury secretary didn't bother to pay SSI [...] the new HUD secretary didn't bother to pay taxes on "in kind" payments What would that have to do with economic policy?
- anamax 18y ago
  The point is that regulators are human and humans don't have the properties assumed by the "regulation will protect us" theory. If a system only works when some of the components are made of unobtanium, the system doesn't work. The current "stimulus" package is a great example. Well over half is just pumping up budgets for existing programs. Does anyone believe that those "enhanced" budgets will not become permanent? Govt regulation also reduces diversity. It says that everyone pretty much has to behave the same way. We know how that works out. Govt regulation is also political in the worst sense. Wells Fargo took a huge hit when it stayed out of the subprime mortgages. Regulators refused to let WF enage in unrelated activities (acquisitions, opening branches, etc.)because WF didn't "play ball", activities that said regulators let cooperative institutions do. Note that regulators don't take the hit.